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Financial Accounting:A Managerial Perspective

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Fourth Edition

Prepared by

R. NarayanaswamyIndian Institute of Management Bangalore

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Chapter 1

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Accounting and Economic Decisions

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Understanding Business Organizations

Merchandising organizations Manufacturing organizations

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Business organizations as cash

dispensing machines

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What is Accounting

Accounting is the language ofbusiness

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Why accounting in MBA?

The MBA Oath and financial

reportingAccounting information and

economic decisions

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Users of Accounting Information

Investors Lenders

Analysts

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Managers Employees and trade unions

Suppliers and trade financiers

Customers Government and regulatory authorities

The public

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Financial Accountingand Management Accounting

Financial accounting Management accounting

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Accounting Measurement Assumptions

Reporting entity Going concern

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Periodicity

Money measurement

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Generally Accepted Accounting

Principles and the AccountingEnvironment, continued

Institutions that influence IndianGAAP Ministry of Corporate Affairs

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Securities and Exchange of India Institute of Chartered Accountants of India

Income Tax Department

Reserve Bank of India Insurance Regulatory and DevelopmentAuthority

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Generally Accepted Accounting

Principles and the AccountingEnvironment, continued

Institutions that influence IndianGAAP, continued Comptroller and Auditor-General of India

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International Accounting StandardsBoard

International Federation of Accountants

International Organization of SecuritiesCommissions

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Generally Accepted Accounting

Principles and the AccountingEnvironment

Accounting standards and policies Accounting standards

Accounting standard-setting arrangements

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Accounting po icies Converging IGAAP with IFRS

IGAAP

IFRS Ind AS

Principles or rules?

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Forms of Business Organization

Sole proprietorship Partnership

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Listed

Public

Private

Limited liability partnership Legal formalities for a limited

company

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The Corporate Organization

Shareholders Board of directors

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Independent directors

Chief executive officer

Chief financial officer Controller

Treasurer

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Accounting, Capital Market andCorporate Governance

Raising capital The lemons principle and the problem

of adverse selection

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Signalling quality Moral hazard

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The Accounting Equation

Economic resources = ClaimsAssets = Liabilities + Equity

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Liabilities: owe

Equity: residual interest

Analyzing the effect of transactions

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Financial Statements

Profit and loss account Statement of retained earnings

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Cash flow statement

Interrelationship among the financial

statements

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Fields of Accounting Activity

Public accounting Auditing

Forensic accounting

Tax services

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anagemen a v sory serv ces

Bankruptcy

Small business services

Private accounting Management accounting

Internal auditing

Information systems

Government accounting

Not-for-profit accounting

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Accounting as an Academic Discipline

Academic research areas inaccounting: e.g.Accounting and stock prices

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Benefits of disclosure Usefulness of accrual and cash

Selection of accounting methods and

disclosure levels Predicting future profits from past profits

Disclosure and managerial behaviour

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Fraud and Ethical Issues in Accounting

What leads to fraud and unethicalaccounting?

Fraud-hit com anies: e. .

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Satyam Enron

World Com

The Satyam case

Resolving ethical dilemmas