Financial Reporting

and Analysis

Financial Reporting
& Analysis
 Auditor
Latin word ‘Audire’ means ‘To hear’.
Financial Reporting
& Analysis
ACCOUNTING IS THE WHO SHOULD KNOW WHY ACCOUNTING IN
LANGUAGE OF ACCOUNTING? MBA?
BUSINESS

What is
Accounting?

THE MBA OATH AND ACCOUNTING

FINANCIAL REPORTING INFORMATION AND
ECONOMIC DECISIONS

Financial Reporting
& Analysis
 • Merchandising organizations (Purchases
fi n i s h e d p r o d u c t s a n d r e s e l l s t h e m t o c o n s u m e r s
e . g . Wa l m a r t )

• Manufacturing organizations (a business that

Understanding u s e s p a r t s , c o m p o n e n t s , o r ra w m a t e r i a l s t o
p r o d u c e fi n i s h e d g o o d s )

business • Service organizations (a business that earns

organizations revenue by providing intangible products, those

that have no physical substance)

Business organizations are cash generating-

cum-dispensing machines

Financial Reporting
& Analysis
 Forms of business organizations
• S o le Pro p ri eto rshi p -

• Par t ne rshi p -

• Co mp any -

• L imi te d Li ab i l ity Par t nershi p -

Financial Reporting
& Analysis
Forms of business organizations

Sole proprietorship :

These fi rms are owned by one person, usually the individual who
has day-to-day responsibility for running the business.

Sole proprietorships own all the assets of the business and the
profi ts generated by it

Advantages –

• Easiest and least expensive form

• Profi ts from the business fl ow-through directly to the owner ’s

personal tax return

• Business is easy to dissolve.

Accounting context

Case 1 : Mr.A started a business with an investment of

Rs.10000/- af ter one year business has 15000 in cash and owes
3000/- in unpaid bills. Mr.A has no personal cash or debt.

Case 2 : Mr.B started a propreitership business with an

investment of Rs 10000/-. Af ter a month the business has 15000
in cash and owes Rs 20000/- in unpaid bills. Mr.B has personal
cash Rs 8000/- and no personal debt.
Forms of business organizations

Pa r t n er s h i p :

• Tw o o r m o r e p e o p le s h a r e o w n e r s h ip o f a s i n g l e b u s i n e s s .

• L ike p r o p r ie to r s h ip s , th e law d o e s n o t d i s ti n g u i s h b e tw e e n t h e b u s i n e s s a n d
it s o w n e r s .

• T h e Pa r t n e r s s h o u ld h ave a le g a l a g r e e m e n t th a t s e t s f o r t h h o w d e c i s i o n s
w ill b e m a d e , p r o fi t s w ill b e s h a r e d , d is p u t e s w i l l b e r e s o l ve d

Ad va n t a g es –

• r e la t ive ly e a s y to e s t a b lis h

• t h e a b ility to ra is e f u n d s m ay b e in c r e a s e d .

• p r o fi t s f r o m t h e b u s in e s s fl o w d ir e c t ly t h r o u g h t o th e p a r t n e r s ’ p e r s o n a l t a x
r e tu r n .
Accounting context

Case 1 : Mr A and B started a equal partnership with an

investment of 10000 each. Af ter two months the business has
25000 in cash and 18000 in unpaid bills. Neither A nor B has
unpaid bills

Case 2 : Mr C and D started a equal partnership with an

investment of 10000 each. Af ter three years the business has
25000 in cash and 30000 in unpaid bills. C and D has personal
cash of 5000 each and have no personal debt
Forms of business organizations

C o m p a ny :

A C o m p a n y i s c o n s i d e r e d b y l a w t o b e a u n i q u e e n t i t y, s e p a r a t e a n d a p a r t f r o m t h o s e w h o o w n
it.

It can be taxed; it can be sued; it can enter into contractual agreements.

The owners of a corporation are its shareholders

Advantages :

S h a r e h o l d e r s h a v e l i m i t e d l i a b i l i t y f o r t h e c o r p o ra t i o n’s d e b t s o r j u d g m e n t s
a g a i n s t t h e c o r p o ra t i o n .

Shareholders can only be held accountable for their investment in stock of the
company but not personally liable.
Accounting context

Case 1 : Mr D and E started a company with agreed share

capital of Rs.10000. they contributed Rs 8000 each. After one
year the company has 25000 in cash and 18000 in unpaid bills.
Neither D nor E has personal cash or debt.

Case 2 : Mr F and G started a company with agreed share capital

of Rs 10000/-. Af ter two months the business has 25000 in cash
and Rs 30000/- in unpaid bills. Mr F and G have personal cash of
Rs 5000/- each and have personal debt.
Legal Formalities of a
company

Memorandum of Association

Articles of Association

Certifi cate of incorporation

Financial Reporting
& Analysis
Financial Accounting & Management
Accounting

• Financial accounting is the • Management accounting is

preparation and the preparation and
communication of fi nancial communication of fi nancials
information for use and other information to
primarily by those outside help managers plan and
the enterprise. control operations.

• Reports the performance of

enterprise management to
its owners
Financial Reporting &
Analysis
Users of Investors – Should I buy, sell or hold the shares
of the company?
Accounting
Lenders – can my borrower pay the principal and
Information interest on time?

Analysts and advisers – Will the investment

#Relevant News discussion
yield good returns?

Managers – How is my business per forming

relative to my competitor?

Financial Reporting
& Analysis
 Users of Employees and trade unions – how much increase in
wages and bonus can my employer aff ord?
Accounting Suppliers and trade fi nanciers – Will my customer be a

Information major source of business?

Customers – Is my supplier a reliable and competitive

source?

Government and regulator y authorities – is a business

evading tax?

Financial Reporting The public – does a business exploit local suppliers,

& Analysis
small business or labour?
 What leads to fraud and unethical
accounting?
- Accomplishing enterprise objectives
Fraud and
- Weak internal control systems
Ethical - Performance based remuneration

Issues in tempts
- Stock based incentive methods :
Accounting induce managers to boost market
prices of shares
- E.g.Wells fargo, 2011
- B o o k i n g i n c o m p l e t e o r fi c t i t i o u s s a l e s

- Improperly deferring current expenses

- M a k i n g u n wa r ra n t e d c h a n g e s i n a c c o u n t i n g
policies
Cash Vs
Mercantile
System
Accounting
concepts &
conventions
For accounting purposes, an
“organisation” is treated as a
separate entity from the
“owners” or “stakeholders”.

1. Entity
concept
This concept helps in keeping
private affairs of the owners
and stakeholders separate
from the business affairs.
All entities own certain assets. Such assets are
acquired through contributions of those who
have provided the funds for the purpose.

2. Dual
Funds are made available either through the
Aspect or
surpluses of the entity or loans or payables. In
a sense, such providers of funds are claimants
to the assets. Accounting
Equivalence
At any point in time, the assets will be equal
to the claims. Since the claims on the assets
could be those of “outsiders” (i.e. liabilities) or
Concept
“owners” (i.e. capital, reserves, etc.), it results
in the accounting equation: Assets = Own
Funds + Liabilities
 3. Going Concern Concept

It is as per this concept, that the

It is assumed that the organization will accountant does not take into
continue for a long time, unless and consideration the market value of the
until it has entered a state of assets while valuing them, irrespective
liquidation. of whether the market value is higher
or lower than the book value.
Every transaction is recorded in terms of
money.

Events or transactions that cannot be

4. Money
expressed in terms of money are not recorded
in the books of accounts. Measurement
Concept
Receipt of income, payment of expenses,
purchase and sale of assets, etc., are
monetary transactions that are recorded in
the books of accounts.
An asset is ordinarily recorded at the price
paid to acquire it, i.e., at its cost and this
cost is the basis for all subsequent
accounting for the asset.

5. Cost
Concept
The cost concept does not mean that the
asset will always be shown at cost
 6. Accounting Period Concept

An accounting period is the Although the “going concern”

interval of time at the end of which concept stresses the continuing
the financial statements are nature of the entity, it is necessary
prepared to ascertain the financial for an organization to review how
performance of the organization. it is performing.
 7. Accrual Concept
U n d e r t h e c a s h s y s t e m o f a c c o u n t i n g , t h e r e ve n u e s a n d
e x p e n s e s a r e r e c o r d e d o n l y i f t h e y a r e a c t u a l l y r e c e i ve d
o r p a i d i n c a s h , i r r e s p e c t i ve o f t h e a c c o u n t i n g p e r i o d t o
which they belong.

But under the accrual concept, occurrence of claims and

obligations in respect of incomes or expenditures, assets
o r l i a b i l i t i e s b a s e d o n h a p p e n i n g o f a ny e ve n t , p a s s a g e o f
t i m e , r e n d e r i n g o f s e r v i c e s , f u l fi l l m e n t ( p a r t i a l l y o r f u l l y )
of c o n t ra c t s , diminution in va l u e s , e t c ., are recorded
e ve n t h o u g h a c t u a l r e c e i p t s o r p a y m e n t s o f m o n e y m a y
n o t h a ve t a ke n p l a c e .
 • Convention of disclosure

• Convention of materiality
Conventions • Convention of consistency

• Convention of conservatism