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Financial Accounting

&
Analysis
Foundation course II
Course Introduction

• Financial accounting is called the language of the business.

• It deals with the preparation of the financial statements .

• Need of financial analysis & tools.


Financial Accounting

• Definition
The process of identifying, measuring and communicating
economic information to permit informed judgments and
decisions.

• Accounting is the language of business

• Users of Financial information


Objectives of Accounting
• To maintain the systematic records of the business

• To ascertain the operational profit or loss of the business

• To present the financial position of the business

• To provide the financial information to the various users

• Effective Corporate Governance


Quiz time

……………………involves interpreting the business results

• Management
• Finance
• Accounting
• None of the given options
Quiz time

Transparency in recording of accounting events at one hand


facilitates sustainable growth and at another hand facilitate
……………. (Choose the most appropriate one)

• Effective Corporate Governance


• Identifying profit or losses
• Assessing financial position
• Consistency in operations
Nature and Scope of Financial Accounting

Financial Accounting as a Service Activity

Financial Accounting as a Profession

Financial Accounting as Language of


Business

Financial Accounting as Science and Art

Financial Accounting as Information System


Management Accounting

Management Accounting
The process of identification, measurement, accumulation,
analysis, preparation, interpretation, and communication of
information used by management to plan, evaluate and control
within an entity and to assure appropriate use of and
accountability for its resources.

• Management accounting uses the financial data provided by


financial accounting by the management of an organisation
to improve the efficiency.
Financial Accounting, Management Accounting
Points Financial Accounting Management Accounting

Accounting principles It follows the Generally Accepted It is not bound to follow the
Accounting Principles (GAAP) or Generally Accepted Accounting
International Financial Reporting Standards Principles (GAAP)
(IFRS).
Audit Independent Auditors certifies and There are no independent audits
expresses their opinion on the FS. verifying the information.

Unit of measurement The financial information is usually Besides, monetary units,


expressed in monetary terms. This is to management accounting uses
help in making comparisons between measures such as machine
different data. hours, labour hours, product
units, etc. for the purpose of
analysis and decision making.
Reporting purpose Report is about the company as a whole. ( Management determines the
contents of a report and its
format. Reports are prepared
only when management believes
the benefit of using the report
exceeds the cost of preparing
the report.
Quiz time

……………… focuses on internal transactions with a detailed


view of analysis

• Financial accounting
• Management Accounting
• Cost Accounting
• None of the given option
Financial Accounting and Cost Accounting
Points Financial Accounting Cost Accounting
Primary users of information investors, creditors, credit rating management
agencies and regulatory agencies.

Objective financial performance and financial determination of cost in order to


position of an organisation. control cost and take relevant
decisions.
Format highly specific in their format and In this, reports are prepared using
content, as mandated by either the format specified by
GAAP or IFRS. management
Content of report It contains an aggregation of the It contains both financial and
financial information recorded operational information.
through the accounting system. Operational information is collected
from a variety of sources that are
not under the direct control of the
accounting department.
Analysis of costs and profits It presents the profit/loss incurred It provides detail of cost incurred
by an organisation as a whole. and profit earned from each job,
product, process, contracts, etc.
separately.
Recording of data It records historical data. Cost accounting collects and
presents the budgeted data. It
includes both historical and
estimated cost data.
Quiz time

………………..is service activity being intangible in nature

• Patent
• Copyright
• Cost
• Financial accounting
Basic Accounting Concepts/Assumptions
Basic Accounting Concepts/Assumptions

Concept Defined As
Separate Entity A business is treated as a separate unit or entity from the owners or the
Concept stakeholders.

Cash and In cash basis of accounting, revenue is recognised when cash is received,
Accrual Concept whereas the expense is recognised when cash is paid.

In the accrual concept of accounting, revenues or expenses are recorded


when they are earned or incurred, and not when cash is paid or received
by an organisation
Basic Accounting Concepts/Assumptions

Concept Defined As
Matching The expenses incurred on earning the revenues should be recognised
during the accounting period in that time period and not in the next or
Concept
previous time period in order to reach accurate net income figure.

Double Entry According to this concept, there are the two aspects of every business
Accounting transaction, namely Debit (Dr) and Credit (Cr) entries.
System
Basic Accounting Concepts/Assumptions

Concept Defined As
Money Measurement Only those transactions and events would be recorded in the
books of accounting that are financial or monetary in nature.

Going Concern Going concern concept is based upon the assumption that an
organisation would not be ceased or liquidated in the immediate
future, and continues to operate for an indefinite period.
Basic Accounting Concepts

Concept Defined As
Historical Cost According to the historical cost concept, the assets are measured
as per the price paid (cost incurred) to acquire them.

Accounting Period Accounting period refers to the period for which an organisation
evaluates its financial position. It covers the profit earned or loss
incurred by the organisation for a particular duration that is
represented in the income statement.
Basic Accounting Concepts
Concept Defined As

Conservatism Financial transactions are recorded in the books of accounting by taking into
consideration all prospective losses and ignoring all prospective profits. This
concept is based on the conservative approach.

Realisation This concept states that an organisation should determine the time when
revenues are earned and expenses are incurred. The accountant should
record the business transactions only when it is realised.

Consistency According to this concept, the practices and methods of accounting remain
constant in different accounting periods. Therefore, the financial information
of one period can be compared to another.

Materiality According to this concept, the main basis of accounting should be material
facts. It emphasises the inclusion of only the important details of the material
and ignoring the insignificant details
Quiz time

Every transaction has double effects……

• Separate legal entity concept


• Double entry Concept
• Matching Concept
• None of the given option
Quiz time

If an asset is purchased today it should be depreciated over its


useful life, according to…… .

• Separate legal entity concept


• Double entry Concept
• Matching Concept
• None of the given option
Quiz time

According to ………………..If a firm pays personal expense of


owner, it is treated as receivable from the owner

• Entity Concept
• Going Concern Concept
• Accrual Concept
• None of the given option
Quiz time

Expenses are recorded as and when paid ……….

• Cash concept
• Going Concern Concept
• Accrual Concept
• None of the given option
Quiz time

……….concept records credit sales as well

• Cash concept
• Going Concern Concept
• Accrual Concept
• None of the given option
Quiz time

If Mr. A purchased machinery today, he will record the same at


its cost of acquisition and not at the market price as on date,
according to…… .

• Accrual concept
• Historical cost concept
• Matching Concept
• None of the given option
Advantages of Financial Accounting

Maintaining Business Records

Preparing Financial Statement

Comparing results
Providing information to
interested groups
Providing legal evidences

Helping in decision making


Limitations of Financial Accounting

• It focuses only on financial transactions or events while


ignoring the non-monetary items.
• It leads to wrong conclusions if the assumptions of
accounting data are inaccurate.
• It obtains biased information from the accountant if he/she
willingly makes inappropriate estimations.
• It shows fixed asset at a particular cost, which would
depreciate over time. Hence, there is a significant difference
between the original cost at which assets were purchased
and the current replacement cost.
• It provides accounting information on a yearly basis only,
while the information can also be required for a shorter
duration.
Quiz time

Select appropriate accounting concept involved in the


following :

Managers skill is not recorded-


• Matching.
• Money measurement
• entity
• consistency
Expenses charged to profit and loss account includes a charge
for outstanding expense-
• Matching.
• Money measurement
• entity
• consistency
Which of the following reflects application of prudence-
• Making adjustment for prepaid expense at the year end

• charging depreciation
• Recognising credit sales
• taking into account foreseeable loss
Questions

Identify the assumption violated and discuss how the


company should deal with the same

• L& T added four additional weeks to its fiscal year so that it


could make its income look strong ,past years were 52
weeks
• CEO of the group purchased a printer for personal use and
charged it to the company's account .
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Thank You