Financial Reporting:

What is Accounting?
Accounting is mainly about measuring.
Information system which identifies, measures, evaluates and reports financial
information to external users to take economic decisions.
Government – compliance of laws and reporting standards, tax calculation,
employment
Creditors: Banks, financial institutions, Individuals
Investor – shareholders
Employees
Customer and suppliers
External Vs internal Users:
External users: the one who do not take active part in decision making, this is the
reason that employees are considered to be external users.
Internal users: it includes management and financial accounting
Management accounting: it means creation of internal reports to take decisions,
there is no rule to prepare these reports as it is for the internal use
Financial Accounting: It is made with compliance of standards as these are used by
the external users as well.
IFRS: International Financial Reporting standards (applied in more than 120 countries
including India)
Reports:
Annual Reports
1. Balance sheet
2. Income statement
3. Cash Flow Statement
4. Notes of Accounts
5. Statement of changes in Equity
Balance sheet:
Asset- liabilities = Equity (it depicts the worth of the company)
Income Statement: Profit/loss of the company
 Cash flow statement: Inflows/outflows of cash (it depicts the liquidity of the
company)
Distinguishes cash in different activities: operating, investing, financing
The most important is operating activities as it shows the flows of cash in day to
day activities.
When u purchase inventory, it will be recorded as the part of COGS only when it
will be sold, till then it will remain the part of inventory.
Operating activities need to be positive
Methods to prepare cash flow statement:
Direct method: it is a time-consuming method. This is the reason that 99%
companies use indirect method.
These are two methods to determine cash flow from operations.
Depreciation is a non-cash expense found in income statement
Cash flow statement:
Net Profit/Loss
+ Depreciation Expense
-/+ any gain or loss from sale of long-term asset
-/+ change in working capital
 Change in account receivable (-) when increases
 Change in inventory (-)
 Change in Accounts payable (+) (it means postponing the payment)
Cash flow from operating Activities
IFRS (It was also known as International Accounting Standards (IAS))
If listed companies are using standards then capital market will become more
efficient as there will be rise in international transactions and will also increase the
credibility.
It will increase the quality and will ensure comparability of reports across countries.
It will increase objectivity and integrity and will reduce the risk and cost of capital for
investors.
Difference Between US GAAP Vs IFRS
US GAAP: Rule based Standard (75%)
IFRS: Principle Based standard (Majority)
Leasing: companies rent an asset
Reports should be relevant and should provide faithful representation, only that
information should be recorded which fulfil these both characteristics.
In order to be useful information should be comparable, verifiable, comprehensible
and should have timeliness.
IAS 16 Long-term tangible assets: (not changed with ifrs)
Tangible assets:
Physically touched, used for production or for rental purposes or for administrative
purposes, used for more than one year, can be measured.
In case of real estate building is considered to be inventory and forms the part of
other standards.
Recognition Criteria: Company can record its tangible asset in its balance sheet if:
1. Future economic benefits are expected to flow from it (Probable benefits –
certain) (in case the benefits are uncertain the cost of asset will not be in
balance sheet, it will be part of the income statement)
2. Reliably Measurable
Measurements at Recognition: cost will be (purchase price+ any cost directly
attributable to asset + estimated future dismantling cost)
Measurement after acquisition: 1. Cost model 2. Revaluation Model
Non-Monetary Exchanges:
Fair value: value at which two independent parties exchange assets at arm’s length
transaction.
Goodwill will arise only at the time of acquisition and mergers
Loss will be recorded in whatever cases
Underpayment is gain in income statement
Overpayment is asset in balance sheet as goodwill