Financial statement and its types and its users Accounting concepts and conventions

1. Application
based activityFINANCIAL ACCOUNTING FOR MANAGERS

2. Presented by:
Mayank Adhauliya
Kratika Parpayani
Kanchan Sharma
Sharukh Khan
Vanshika Khandelwal

3. What do you mean by the
financial statements of a
company and how these
financial statements can be
helpful for internal and
external users of a company

4. What are Financial
Statements?
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• Financial statements are reports prepared by a company’s
management to present the financial performance and position
at a point in time.
• A general-purpose set of financial statements usually includes
a balance sheet, income statements, statement of owner’s equity,
and statement of cash flows.
• These statements are prepared to give users outside of the
company, like investors and creditors, more information about
the company’s financial positions.

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6. Four Types of Financial
Statements
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7. 1. Statement of Financial
Position
Statement of Financial Position, also known as the Balance Sheet,
presents the financial position of an entity at a given date. It is
comprised of the following three elements:
• Assets: Something a business owns or controls (e.g. cash,
inventory, plant and machinery, etc)
• Liabilities: Something a business owes to someone (e.g. creditors,
bank loans, etc)
• Equity: What the business owes to its owners. This represents the
amount of capital that remains in the business after its assets are
used to pay off its outstanding liabilities. Equity therefore
represents the difference between the assets and liabilities.

8. 2. Income Statement
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Income Statement, also known as the Profit and Loss
Statement, reports the company's financial
performance in terms of net profit or loss over a
specified period. Income Statement is composed of
the following two elements:
• Income: What the business has earned over a period
(e.g. sales revenue, dividend income, etc)
• Expense: The cost incurred by the business over a
period (e.g. salaries and wages, depreciation, rental
charges, etc)
Net profit or loss is arrived by deducting expenses
from income.

9. 3. Cash Flow Statement
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Cash Flow Statement, presents the movement in cash and bank
balances over a period. The movement in cash flows is classified
into the following segments:
• Operating Activities: Represents the cash flow from primary
activities of a business.
• Investing Activities: Represents cash flow from the purchase and
sale of assets other than inventories (e.g. purchase of a factory
plant)
• Financing Activities: Represents cash flow generated or spent on
raising and repaying share capital and debt together with the
payments of interest and dividends.

10. 4. Statement of Changes in
Equity
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Statement of Changes in Equity, also known as the Statement of
Retained Earnings, details the movement in owners' equity over a
period. The movement in owners' equity is derived from the
following components:
• Net Profit or loss during the period as reported in the income
statement
• Share capital issued or repaid during the period
• Dividend payments
• Gains or losses recognized directly in equity (e.g. revaluation
surpluses)
• Effects of a change in accounting policy or correction of accounting
error

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12. Internal Users of Accounting
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Following are the 3 types of internal users and their information
needs:
1. OWNERS
2. MANAGERS
3. EMPLOYEES

13. OWNERS
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• Owners need to assess how well their business is performing.
• Financial statements provide information to owners about
the profitability of the overall business as well as individual
products and geographic segments.
• Owners are also interested in knowing how risky their business is.
• Accounting information helps owners in assessing the level of
stability in business over the years and to what extent have changes
in economic factors affected the bottom line of the business.
• Such information helps owners to decide if they should invest any
further in the business or if they should use their financial resources
elsewhere in more promising business ventures.

14. MANAGERS
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• Managers need accounting information to plan, monitor and make
business decisions.
• Managers need to allocate the financial, human and capital resources
towards competing needs of the business through the budgeting process.
• Preparing and monitoring budgets effectively requires reliable accounting
data relating to the various activities, processes, products, services,
segments and departments of the business.
• Management requires accounting information to monitor the performance
of business by comparison against past performance, competitor analysis,
key performance indicators and industry benchmarks.
• Managers rely on accounting data to form their business decisions such as
investment, financing and pricing decisions.

15. EMPLOYEES
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• For the employees operating in the finance department, using
accounting information is usually part of their job description. This
includes for example preparing and reviewing various financial
reports such as financial statements.
• Employees are interested in knowing how well a company is
performing as it could have implications for their job security and
income.
• Many employees review accounting information in the annual
report just to get a better understanding of the company’s business.
• In recent years, the increase in number of shares and share options
schemes for employees particularly in startups has fostered a greater
level of interest in accounting information by employees.
• Moreover, potential employees are also interested to learn about the
financial health of the organization they aspire to join in the future.

16. External Users of Accounting
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Following are the 8 types of external users and their information
needs:
1. INVESTORS 7.AUDITORS
2. LENDERS 8.PUBLIC
3. SUPPLIERS
4. CUSTOMERS
5. TAX AUTHORITIES
6. GOVERNMENT S

17. INVESTORS
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• Investors need to know how well their investment is
performing. Investors primarily rely on the financial statements
published by companies to assess the profitability, valuation
and risk of their investment.
• Investors use accounting information to determine whether an
investment is a good fit for their portfolio and whether they
should hold, increase or decrease their investment.

18. LENDERS
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• Lenders use accounting information of borrowers to assess their
credit worthiness, i.e. their ability to pay back any loan.
• Lenders offer loans and other credit facilities on terms that are based
on the assessment of financial health of borrowers.
• Good financial health is indicated by the borrower’s ability to pay its
liabilities on time, high profitability, substantial securable assets and
liquidity.
• Poor liquidity, low profitability, lack of assets that can be secured
and an inability to pay liabilities on time demonstrate poor financial
health of borrowers.
• On a lighter note, borrowers can only get a loan from lenders if they
can prove that they don’t need the money.

19. SUPPLIERS
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• Just like lenders, suppliers need accounting information to
assess the credit-worthiness of its customers before offering
goods and services on credit.
• Some suppliers only have a handful of customers. These
customers could be very large businesses themselves. Suppliers
need accounting information of its key customers to assess
whether their business is in good health which is necessary for
sustainable business growth.

20. CUSTOMERS
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• Most consumers don’t care about the financial information of its
suppliers.
• Industrial consumers however need accounting information
about its suppliers in order to assess whether they have the
required resources that are necessary for a steady supply of
goods or services in the future. Continuity in supply of quality
inputs is essential for any business.

21. TAX AUTHORITIES
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• Tax authorities determine whether a business declared the
correct amount of tax in its tax returns.
• Occasionally, tax authorities conduct audits of the tax returns
filed by businesses in order to verify the information with the
underlying accounting records.
• Tax authorities also cross reference accounting information of
suppliers and consumers in order to identify potential tax
evaders.

22. GOVERNMENT
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• Government ensures that a company's disclosure of accounting
information is in accordance with the regulations that are in
place to protect the interest of various stakeholders who rely on
such information in forming their decisions.
• Government defines and monitors accounting thresholds such
as sales revenue and net profit to determine the size of each
business for the purpose of ensuring that it complies with the
relevant employee, consumer and safety regulations.

23. AUDITORS
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• External auditors examine the financial statements and the
underlying accounting record of businesses in order to form an
audit opinion.
• Investors and other stakeholders rely on the independent
opinion of external auditors on the accuracy of financial
statements.

24. PUBLIC
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General public may also be interested in accounting information
of a company. These could include journalists, analysts,
academics, activists and individuals with an interest in
economic developments.

25. Analyse the relevancy of all
Accounting Concepts and
Conventions and their
treatment in accounting
statements in detail.
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26. ACCOUNTING CONCEPTS
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•Accounting concepts define the assumptions
on the basis of which financial statements of
a business entity are prepared.
• Concepts are those basic assumptions and
condition which form the basis upon which
the accountancy has been laid.

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• Business entity concept: A business and its owner should be treated
separately as far as their financial transactions are concerned.
• Money measurement concept: Only business transactions that can be
expressed in terms of money are recorded in accounting, though records of
other types of transactions may be kept separately.
• Dual aspect concept: For every credit, a corresponding debit is made. The
recording of a transaction is complete only with this dual aspect.
• Going concern concept: In accounting, a business is expected to continue
for a fairly long time and carry out its commitments and obligations. This
assumes that the business will not be forced to stop functioning and
liquidate its assets at “fire-sale” prices.
• Cost concept: The fixed assets of a business are recorded on the basis of
their original cost in the first year of accounting. Subsequently, these assets
are recorded minus depreciation. No rise or fall in market price is taken
into account. The concept applies only to fixed assets.

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• Accounting year concept: Each business chooses a specific time period to
complete a cycle of the accounting process—for example, monthly,
quarterly, or annually—as per a fiscal or a calendar year.
• Matching concept: This principle dictates that for every entry of revenue
recorded in a given accounting period, an equal expense entry has to be
recorded for correctly calculating profit or loss in a given period.
• Realisation concept: According to this concept, profit is recognised only
when it is earned. An advance or fee paid is not considered a profit until
the goods or services have been delivered to the buyer.

29. ACCOUNTING CONVENTIONS
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• An accounting convention refers to common practices which are
universally followed in recording and presenting accounting information
of the business entity. Conventions denote customs or traditions or usages
which are in use since long. To be clear, these are nothing but unwritten
laws. The accountants have to adopt the usage or customs, which are used
as a guide in the preparation of accounting reports and statements. These
conventions are also known as doctrine.

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• Conservatism is the convention by which, when two values of a
transaction are available, the lower-value transaction is
recorded. By this convention, profit should never be
overestimated, and there should always be a provision for
losses.
• Consistency prescribes the use of the same accounting
principles from one period of an accounting cycle to the next, so
that the same standards are applied to calculate profit and loss.
• Materiality means that all material facts should be recorded in
accounting. Accountants should record important data and
leave out insignificant information.
• Full disclosure entails the revelation of all information, both
favourable and detrimental to a business enterprise, and which
are of material value to creditors and debtors.