Fincaial management

1. chapter- 1
Introduction to advanced financial accounting
• This Study Note includes:
• Framework of Accounting
• US GAAP
• International Accounting Standards
• International Financial Reporting Standards
• Standard, IFRS and US GAAP

2. Framework of Accounting
• Introduction
• Most of the world’s work is done through organizations-groups of people
who work together to accomplish one or more objectives. In doing its
work, an organization uses resources- labor, materials, various services,
buildings, and equipment. These resources need to be financed, or paid for.
• To work effectively, the people in an organization need information about
the amounts of these resources, the mean of financing them and the
results achieved through using them. Parties outside the organization need
similar information to make judgments about the organization.
• Accounting is a system that provide such information.

3. Meaning of Accounting
• The Committee on Terminology set up by the American Institute of
Certified Public Accountants formulated the following definition of
accounting in 1961:
• “Accounting is 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.

4. Meaning of Accounting con…
• The process of accounting starts by first identifying the events and transactions
which are of financial character and then be recorded in the books of account.
• This recording is done in Journal or subsidiary books, also known as primary
books. Every good record keeping system includes suitable classification of
transactions and events as well as their summarization for ready reference. After
the transaction and events are recorded, they are transferred to secondary
books. i.e. Ledger.
• In ledger transactions and events are classified in terms of income, expense,
assets and liabilities according to their characteristics and summarized in profit &
loss account and balance sheet.
• Essentially the transactions and events are to be measured in terms of money.
Measurement in terms of money means measuring at the ruling currency of a
country, for example, rupee in India, dollar in the U.S.A. and like.

5. Objectives and Functions of Accounting
• The main objectives are Systematic recording of transactions,
Ascertainment of results of recorded transactions and the financial
position of the business, providing information to the users for
rational decision-making and to know the solvency position. The
functions of accounting are Measurement, Forecasting, Decision-
making, Comparison & Evaluation, Control, Government Regulation
and Taxation

6. Accounting principles
• Accounting principles must satisfy the following conditions:
• 1. They should be based on real assumptions;
• 2. They must be simple, understandable and explanatory;
• 3. They must be followed consistently;
• 4. They should be able to reflect future predictions;
• 5. They should be informational for the users.

7. Accounting conventions
• Accounting conventions emerge of accounting practices, commonly
known as accounting, principles, adopted by various organizations
above a period of time. These conventions are derived by usage and
practice. The accountancy bodies of the world may change any of the
convention to improve the quality of accounting information.

8. Fundamental Accounting Assumptions
• The Financial Statements are prepared with the following three
Fundamental Accounting Assumptions.
They are Going Concern, Consistency & Accrual.
Accounting Standard 1 describes them as follows:
• Going Concern: The enterprise is normally viewed as a going concern, that
is, as continuing in operation for the foreseeable future.
• Consistency It is assumed that accounting policies are consistent from one
period to another.
• Accrual Revenues and costs are accrued, that is, recognised as they are
earned or incurred (and not as money is received or paid) and recorded in
the financial statements of the periods to which they relate.

9. Limitations of Accounting
• The Financial Statements as the name states, accounts only for the
items that can be measured by Money.
• There are lots of items that money cannot measure but still are the
most valuable assets for the enterprise, like Human Resources, which
the Financial Statements does not depict.
• The language of accounting has certain practical limitations and,
therefore, the financial statements should be interpreted carefully
keeping in mind all various factors influencing the true picture.

10. Financial Statements
• Financial statements form part of the process of financial reporting.
• A complete set of financial statements normally includes a balance
sheet, a statement of profit and loss (also known as ‘income
statement’), a cash ow statement and those notes and other
statements and explanatory material that are an integral part of the
financial statements.

11. Users and Their Information Needs
• The users of financial statements include present and potential
investors, employees, lenders, suppliers and other trade creditors,
customers, governments and their agencies and the public.
• They use financial statements in order to satisfy some of their
information needs. These needs include the following:
• (a) Investors. The providers of risk capital are concerned with the risk
inherent in, and return provided by, their investments. They need
information to help them determine whether they should buy, hold
or sell.
• They are also interested in information which enables them to assess
the ability of the enterprise to pay dividends

12. Users and Their Information Needs
• (b) Employees. Employees and their representative groups are interested in
information about the stability and profitability of their employers. They are also
interested in information which enables them to assess the ability of the
enterprise to provide remuneration, retirement benefits and employment
opportunities.
• (c)Lenders. Lenders are interested in information which enables them to
determine whether their loans, and the interest attaching to them, will be paid
when due.
• (d) Suppliers and other trade creditors. Suppliers and other creditors are
interested in information which enables them to determine whether amounts
owing to them will be paid when due.
• Trade creditors are likely to be interested in an enterprise over a shorter period
than lenders unless they are dependent upon the continuance of the enterprise
as a major customer.

13. • (e) Customers. Customers have an interest in information about the
continuance of an enterprise, especially when they have a long-term
involvement with, or are dependent on, the enterprise.
• (f) Governments and their agencies. Governments and their agencies
are interested in the allocation of resources and, therefore, the
activities of enterprises. They also require information in order to
regulate the activities of enterprises and determine taxation policies,
and to serve as the basis for determination of national income and
similar statistics.

14. The Objective of Financial Statements
• The objective of financial statements is to provide information about
the financial position, performance and cash flows of an enterprise
that is useful to a wide range of users in making economic decisions.

15. Qualitative Characteristics of Financial
Statements
• Qualitative characteristics are the attributes that make the information provided
in financial statements useful to users. The qualitative characteristics are
• Understandability
• • Relevance
• • Reliability
• • Comparability.
• • Faithful Representation
• • Substance Over Form
• • Neutrality
• • Prudence
• • Completeness

16. International Accounting Standards
• The International Accounting Standard Board (IASB) was formulated and began in operations in
2001. The objective of IASB is as follows
• “Committed to developing, in public interest, a single set of high quality, global accounting
standards that require transparent and comparable information in general purpose financial
statements”
• The IASB is selected, overseen and funded by the International Accounting Standards Committee
(IASC)
• Foundation, consisting of 22 trustees. The responsibility of the trustees, besides others include,
• • Appointment of members of the IASB and Standards Advisory Council and the IFRIC
• • Monitoring the IASB’s effectiveness and adherence to its due process and consultation
procedures
• • Establishing and maintaining appropriate financing arrangement
• • Approve of the budget for the IASC Foundation and
• • Responsibility for constitution changes.

17. Accounting Standards
• Accounting standards are written , policy documents issued by expert
accounting body or by Government or other regulatory authorities
covering the aspects of recognition, measurement, treatment,
presentation and disclosure of accounting transaction in the financial
statement.
• The main purpose of formulating accounting standard is to
standardize the diverse accounting policies with a view to eliminate to
the extent possible the incomparability of information provided in
financial statements and add reliability to such financial statements.

18. ADVANTAGES Accounting Standards
• 1. It provides the accountancy profession with useful working rules.
• 2. It assists in improving quality of work performed by accountant.
• 3. It strengthens the accountant’s resistance against the pressure
from directors to use accounting policy which may be suspect in that
situation in which they perform their work.
• 4. It ensures the various users of financial statements to get complete
crystal information on more consistent basis from period to period.
• 5. It helps the users compare the financial statements of two or more
organizations engaged in same type of business operation.

19. Accounting Standards
• Accounting Title of Accounting Standard
• Standard No.
• AS-1 Disclosure of Accounting Policies
• AS-2 Valuation of Inventories (Revised)
• AS- 3 Cash Flow Statements (Revised)
• AS-4 Contingencies and Events (Occurring after the Balance Sheet Date)
• AS-5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
• (Revised)
• AS-6 Depreciation Accounting
• AS-7 Construction Contracts (Revised)
• AS- 8 Accounting for Research and Development (stands withdrawn after introduction of AS-26)

20. Accounting Standards cont..
• AS-9 Revenue Recognition
• AS-10 Accounting for Fixed Assets.
• AS-11 The Effect of Changes in Foreign Exchange Rates (Revised)
• AS-12 Accounting for Government Grants
• AS-13 Accounting for Investments
• AS-14 Accounting for Amalgamations
• AS-15 Employee Benefi ts (Revised)
• AS-16 Borrowing Cost
• AS-17 Segment Reporting
• AS-18 Related Party Disclosures
• AS-19 Leases
• AS-20 Earnings Per Share

21. Accounting Standards cont..
• AS-21 Consolidated Financial Statements
• AS-22 Accounting for Taxes on Income
• AS-23 Accounting for Investment in Associates in Consolidated Financial Statements
• AS-24 Discontinuing Operations
• AS-25 Interim Financial Reporting
• AS-26 Intangible Assets
• AS-27 Financial Reporting of Interests in Joint Venture
• AS-28 Impairment of Assets
• AS-29 Provisions, Contingent Liabilities and Contingent Assets
• AS-30 Financial Instruments: Recognition and Measurement
• AS 31 Financial Instruments: Presentation
• AS 32 Financial Instruments: Disclosures

22. Chapter questions
• 1. Define meaning of accounting?
• 2. What are objectives of accounting?
• 3. What are functions of accounting?
• 4. What are Accounting conventions?
• 5. What are three Fundamental Accounting Assumptions?
• 6. What is Limitations of Accounting?
• 7.what are ADVANTAGES Accounting Standards?