JS

Financial Accounting and Analysis

Introduction & Course Methodology

Shankar Jaganathan

March 6, 2011
Your Familiarity with
Financial Accounting JS
• State your familiarity with Financial Accounting

– Educational exposure or work experience

• Your Objective in this course

1. Build a strong foundation

2. Build depth

3. Build expertise

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Financial Accountancy:
The Structure JS

Analysis & Interpretation

Financial Statements

Bookkeeping

3
Our Focus in this Course
JS
Knowledge Used in
Classified
Synthesizing New path Level of Knowledge

Evaluating Alternatives
1. Awareness
Analyzing Situation 2. Familiarity
3. Working knowledge
Applying Principles 4. Expert knowledge

Understanding Concepts
Remembering Facts
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 Depth of Coverage JS
Working Expert

Sl no Topics Awareness Familiarity knowledge Knowledge

1 Accounting concepts      

2 Accounting Principles & Conventions      

3 Double entry bookkeeping      
4 Accounting Standards and IFRS      
Preparing financial statements: Balance
sheet, Profit & Loss account and Cash
5 Flow statements      

Ratio analysis:
a.Dupont analysis and Altman Score
b.Challenges of ratio analysis: period
6 comparisons and comparative analysis      
7 Cost accounting systems      
Specific requirements for equity
8 investors      
Specific purpose analysis for equity
investment, long term lending and short
9 term lending      

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Financial Accounting & Analysis
-Topics JS
1. Introduction
• Course content, methodology and evaluation method
• Bookkeeping, Accountancy and Financial Analysis defined
2. Accounting concepts, conventions & Double entry
• Accounting concepts, Conventions, Double entry accounting
& Accounting equations
3. Financial Statements
• Balance Sheet, Profit and Loss Account & Cash Flow
Statements
4. Accounting Standards
• Rationale, Specific Standards, IFRS-Concept &
Implementation
5. Ratio Analysis or Comparative view
• Dupont Analysis, Altman Score, Valuation Based Ratios
6. Accounting for Internal decision making
• Cost accounting and management accounting systems
7. Specific Purpose Analysis
• What to analyze and when, Consolidation of Accounts
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Our Course Objectives JS
• At the end of the course, you would be

1. Familiarity with accounting concepts, principles and

conventions
2. Working knowledge to prepare financial statements from a trial
balance
3. Working knowledge of ratio analysis to determine the financial
health and profitability of a business concern from its financial
statements
4. Awareness of requirements in the accounting standards and
IFRS
5. Basic knowledge of the special needs of an equity investor and
the operating management

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 Reading for the Course JS
• Must Read during the course -
1. One Annual Report of
 Indian Sensex Company &
 US Company / European Company

2. Important Accounting Standards

- AS 2 on Valuation of inventory
- AS 3 on Cash Flow Statements
- AS 6 on Depreciation accounting
- AS 9 on Revenue recognition
- AS 10 on Accounting for Fixed Assets
- AS 21 on Consolidated Financial Statements
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 Reading for the Course JS
Basic Book:
1. Introduction to Financial Accounting –any book in
our library
Reference Book
1. Corporate Disclosures 1553 – 2007, The Origin
of Financial and Business Reporting by
Shankar Jaganathan –Chapters 2 to 5
2. Financial Accounting by Belverd E Needles Jr. &
Marian Powers
3. Financial Shenanigans by Howard Schilit
4. The Number by Alex Berenson
5. Arthasastra by Shamasastri
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 Methodology JS
Methodology
- Each one to identify one company from the
Sensex companies and get their annual report
which will be used as reference in the class
- Bring the annual report to the next class
Class plan
- 3 topics covered each day
- Each topic for 75 minutes
- A presentation on an identified topic from each
of you in teams of 2 each (10-15 minutes)
- Presentation, Discussion and Conclusion
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 Evaluation JS
Scoring pattern
- Individual project 20
- Class presentations /Participation 10
Group Project – in groups of 3 each 20
- Written test –short answers 25
- Written test –long answers 25
Total 100

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 Class projects JS
• Individual project
– Journalize accounting entries & prepare financial statements
from a trial balance for a company
• Prepare a list of 20 different types of journal entries that will be used in
the company that you have picked
• Prepare a balance sheet and profit and loss account statement for a
company

Due date: April 9th 2011

• Team project –team of 3 members
– Evaluate the performance of two companies in the same industry to decide
which is a better company and why? Look at it from the angle of both equity
investor and a lender

Due date: Last Class 12

Any Questions / Clarifications JS

• Can we start?

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Accounting as it Evolved JS
• Phase 1: Recording events –track performance, avoid disputes

• Phase 2:From Bookkeeping to Accounting -Summarization

• Phase 3:Double Entry System of Accounting

• Phase 4: GAAP & Accounting Standards

• Phase 5: IFRS or A Global Accounting Standard

Phase 1 and Phase 2 we will cover Today 14

Phase 1: The Birth:
Accounting JS
• 30,000 years old bone found with 55 notches in
batches of 5
////
• Found by Dr.Karl Absolon in 1937 in Czechoslovakia
‘People using these bones were fearsome hunters, and
for each kill, they would score another mark onto
their tally stick… They had also invented the first
elements of accounting, since what they were
actually doing was writing numbers in the simplest
notation know.’
Georges Ifrah, in The Universal History of Numbers

Record Transactions – To Track Performance 15

Phase I: Early Accounting Systems
JS
Mesopotamian period –(Code of Hammurabi)
Use of calculi & bulla to record transactions between the
shepherds and the flock owner
• Scribe –to write transaction and ensure they complied
with the code
• Parties signed by using ‘Seals’ their personal signature
• Used primarily in temples (for commercial transactions)
and in markets
• Primarily used for recording Sale and Loan

Record Transactions to Avoid Disputes 16

Early Accounting System: Greece
JS
Ancient Greece
• Used public accountants to manage Public
Finance.
• Accountants selected through lots
• Used primarily by the Government and Banks
(run in temples by the temple authorities)
• Concept of Budget and time period (an year as a
measurement concept)

Concept of Money Measure, Budget and Time Period 17

Early Accounting System: Roman
JS
Ancient Rome
• Accounting Records kept by heads of families
• Adversaria –day book & codex accepti de expensi, the
ledger
• Distinction between records for daily updating and
periodic summarization

Bookkeeping and Accounting Separated 18

Early Accounting System: India
JS
Ancient India (Arthashastra)
• Deals extensively with Public Finance
• Refined summarization: 7 heads of Revenue identified –
Income from Crown Agricultural property, from State Controlled
Activity, Taxes, Trade, Fees and Service charges,
Miscellaneous and Fines
• Expenditure classified into 11 heads –Worship and Charity,
Palace, Administration, Foreign Affairs, Maintenance,
Manufacturing, Labor charges, Defence, Cattle, Forest and
game sanctuary and Consumables
• Period and Entity recognized: Income classified into Current
Income, Transferred Income (from another year or department)
& Miscellaneous Revenue
Accountancy Refined with Summarization 19
Accounting before Double entry accounting
JS
Ancient India (Arthashastra)
• Format for maintaining Accounts prescribed
• Format for Accounts covering Date, Narration,
relevance of Accounting period and Classification in
place
• Qualities of Accountant and Auditor defined
• System of Audit in Place with penalty for default
• System of Annual Budget
• 40 ways of embezzlement identified

A System of Accountancy Defined 20

Single Entry accounting:
Charge –Discharge method JS
• Used in Royal / Feudal Systems of Europe
• The superior charged the subordinate with a responsibility
– To collect taxes
– For custody of materials
– For use of resources
• The subordinate discharges his responsibility by
– Completing the job
– Accounting for the balance
– Reporting the expenses / losses incurred
• In early companies at each Annual General Meeting after
the Directors presented the accounts the shareholders
gave a discharge

This system was called the Charge-discharge system of accounting 21

 Accounting Today JS
Accounting: Financial Management
Math: Physics

Accounting defined as “The art of recording,

classifying and summarizing in a significant manner
and in terms of money transactions and events which
are in part at least, of a financial character and
interpreting the results thereof.” American Institute of
Certified Public Accountants

Like Math, Accounting Is Used in Multiple Domains 22

Accounting –The Different Flavors JS
External /Investor Reporting

Cost Management
Accounting Accounting

Financial Accounting

We will cover some of this in the next 8 weeks 23

 Financial Accounting & Analysis
-Topics JS
1. Introduction (March 6)
• Course structure, methodology and evaluation
• A brief history of accountancy
2. Accounting concepts, conventions & Double entry (March 12)
• Accounting concepts, conventions, Double entry accounting &
Accounting equations
3. Financial Statements (March 19)
• Balance Sheet, Profit and Loss Account & Cash Flow Statements
4. Important Accounting Standards (March 26)
• Need for Accounting Standards and key standards
5. Ratio Analysis or Comparative view (April 2)
• Intra-industry, Inter-industry and Specific purpose analysis
6. Accounting for Internal decision making (April 9)
• Cost accounting and management accounting systems
7. Accounting for Equity Markets (April 13)
• Share premium, EPS, Book value, Bonus issue, Stock split, US
GAAP and IFRS
8. Project Presentation (April 24)
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The Next Class JS
1. Each one select one Sensex company
– Ensure that the same company is not selected by others

2. Two members in the class: To go though their annual

report and share its different sections: Explain the
relevance of the different sections for a banker

Others: Please Identify Questions that you want answered in the next
class

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JS

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