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& Analysis
Subject Code C30103
Approach : Concepts & Problem Solving
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Unit - 1
FINANCIAL ACCOUNTING AND ANALYSIS
Course Aim:The aim of accounting is to provide theinformation that is needed for soundeconomic decision making. The main purposeis to provide information about firm’sperformance to external parties such asinvestors, creditors, bankers, researchersand Government Agencies. It has become animportant part of young people’s educationand citizens in various roles in the societiesand businesses of all types.
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Unit I: Introduction to Accounting:Importance, Objectives and Principles, Accounting Concepts and conventions,Accounting Standards (Basics) and The Generally Accepted Accounting Principles(GAAP), Double Entry System–Recording of Business Transactions–Classification of
Accounts–– Accounting cycle.
Unit – II The Accounting Process:
Overview, Books of Original Record; Journal and Subsidiary books,ledger, Trial Balance, Classification of Capital and RevenueExpenses, Final Accounts with adjustments (Simple Problems).
Unit III: Issue & Redemption of Shares and Debentures -Entries for Issue& Redemption of shares& Debentures, Issueof shares &Debentures at Discount and premium- Forfeitureof shares. Depreciation - Depreciation concept– Depreciationof Fixed Assets -Methods of depreciation– Straight LineMethod, Written down Value Method.
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Unit IV: Financial Analysis-I: Analysis and interpretation of financial statements-Horizontal Analysis and Vertical Analysis of CompanyFinancial Statements. Preparation and analysis ofCash Flow Statement and Funds Flow Statement.
Unit V: Financial Analysis-II: Ratio Analysis- Liquidity, Leverage, Solvency andProfitability Ratios – Du Pont Chart -Limitations ofFinancial Statements.
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Unit - 1
COURSE OUTCOMES
Course Aim:• Prepare financial statements in accordance
with GAAP with excel Application.• Analyze general purpose of financial
reports.• Valuation of shares and fixed assets.• Formulate Statements of cash and fund
flows using balance sheet.• Analyze financial statements to identify
problems areas in business.
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What is Accounting?Why Does it Exist?
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1-10Prepared by Dr A Kotishwar, MBA, CMECET
⚫ Bookkeeping is the mechanical and repetitive processof recording financial transactions and keepingfinancial records.
⚫ Bookkeeping is a small part of accounting.⚫ Accounting includes the design of an information
system that meets user’s needs.⚫ Accounting goals are the analysis, interpretation, and
use of information.
Accounting versus bookkeeping
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SYSTEMS OF ACCOUNTING
⚫ Cash System of Accounting⚫ Accrual System of Accounting
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Accounting
A system providing quantitative information,primarily financial in nature, about economic entitiesthat is intended to be useful in making economicdecisions.
Define accounting, identify business goals andactivities, and describe the role of accounting inmaking informed decisions
Although historical in nature, it is useful only if future decisions are impacted by it.
Accounting
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Accounting
The definition given by the American Institute ofCertified Public Accountants (‘AICPA’)
“ the art of recording, classifying andsummarizing in a significant manner and interms of money, transactions and events whichare, in part at least, of a financial character andinterpreting the results thereof ”.
Accounting
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Accounting
⚫ Accounting is an art.⚫ It involves recording, classifying and
summarizing.⚫ It records transactions in terms of money.⚫ It records only those transactions and events
which are of financial character.⚫ It is the art of interpreting the results
Accounting
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Accounting
Today’s accountant focuses on the ultimateneeds of decision makers who use accountinginformation, whether those decision makers areinside or outside the business
Accounting
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Accounting
⚫ Keeping Systematic Records⚫ Protecting and Controlling Business
Properties (no unauthorized use or disposal of any assets
or property belonging to the firm,)⚫ Ascertaining the Financial Position of the
Business⚫ Facilitating Rational Decision Making
Functions of Accounting
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Accounting
⚫ Accounting information is expressed in termsof money:
⚫ Accounting information is based on estimates:⚫ Accounting information may be biased: (fixed or
diminishing )
⚫ Fixed assets are recorded at the original cost:⚫ managerial performance as profits can be
manipulated
Limitations of Accounting
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Accounting as an Information System
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Business Goals, Activities, andPerformance Measures
⚫ A business is an economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners.
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Business Goals
ProfitabilityA business must take in enough money to pay all the costs of doing business, withenough left over as profit for the owners to want to stay in the business.
LiquidityA business must have enough cash available to pay debts when they are due.
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Management
Human Resources
Taxing Authorities
Labor Unions
Regulatory Agencies
Marketing
Finance
Investors
Creditors
Customers
Internal Users
External Users
Who Uses Accounting Data
Users and Uses of Financial Information
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Questions Asked by Internal Users User
1. Can we afford to give our employees a pay raise?
Human Resources
2. What price for our product will maximize net income?
3. Which product line is most profitable?
4. Is cash sufficient to pay dividends to the stockholders?
Marketing
Management
Finance
Users and Uses of Financial Information
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Questions Asked byExternal Users User
1. Is the company earning satisfactory income?
Investors
2. How does Disney compare in size and profitability with Time Warner?
3. Will United Airlines be able to pay its debts as they come due?
Investors
Creditors
Users and Uses of Financial Information
.
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Business Goals and Activities
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All businesses are involved in three types of activity —
◆ financing,
◆ investing,
◆ and operating.
Business Activities
The accounting information system keeps track of the results of each of these business activities.
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Two primary sources of outside funds are:
1. Borrowing money
◆ Amounts owed are called liabilities.
◆ Party to whom amounts are owed are creditors.
◆ Notes payable and bonds payable are different type of liabilities.
2. Issuing shares of stock for cash.
◆ Payments to stockholders are called dividends.
Business Activities
.
Financing Activities
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Investing Activities
Purchase of resources a company needs to
operate.
◆ Computers, delivery trucks, furniture, buildings, etc.
◆ Resources owned by a business are called assets.
Business Activities
.
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Operating Activities
Once a business has the assets it needs,
it can begin its operations.
◆ Revenues - Amounts earned from the sale of products
(sales revenue, service revenue, and interest revenue).
◆ Inventory - Goods available for sale to customers.
◆ Accounts receivable - Right to receive money from a
customer,in the future, as the result of a sale.
Business Activities
.
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Operating Activities
◆ Expenses - cost of assets consumed or services used.
(cost of goods sold, selling, marketing, administrative,
interest, and income taxes expense).
◆ Liabilities arising from expenses include accounts
payable, interest payable, wages payable, sales taxes
payable, and income taxes payable.
◆ Net income – when revenues exceed expenses.
◆ Net loss – when expenses exceed revenues.
Business Activities
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ConceptsThese are Assumptions
ConventionsThese are Trends
The Entity ConceptDual Aspect Concept
.Money Measurement Concept.Going Concern Concept
Periodicity ConceptAccrual Concept
The Matching ConceptCost Concept
Consistency: Disclosure:
Conservatism: Materiality:
Accounting PrinciplesGenerally accepted accounting principles
(GAAP)
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Monetary unit assumption: ⚫ only transaction data expressed in terms of money can be
included in the accounting records
Example: employee satisfaction and percent of international employees are not transactions that should be included in the financial records.
Monetary unit
Customer Satisfaction
Percentage of International Employees
Salaries paid
Should be includedin accounting records
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GOING CONCERN concept
Enterprise will continue in operation long enough to carry out its existing objectives.
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⚫ Revenue recognition principledictates that revenue should berecognized in the accountingperiod in which it is earned.
⚫ When a sale is involved, revenue is recognized at the point of sale.
REVENUE RECOGNITION concept
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Basic Accounting Concepts
⚫ The Entity ConceptA business is an artificial entity distinct from its owners.
⚫ Money Measurement ConceptEach transaction and event must be expressed in monetary
terms.⚫ Going Concern Concept
It means that the entity is going to be continue unless it is liquidated.
⚫ Periodicity ConceptIt helps to measure the performance of business.
⚫ Accrual ConceptIt suggests that incomes and expenses should be recognized
as and when they are earned and incurred.The Matching Concept
It suggests that revenue earned in an accounting year is offset or matched with all the expenses incurred during the same period.
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convention’ denotes custom or tradition or
practice ⚫ Consistency:⚫ Disclosure:⚫ Conservatism: (Examples: Making provisions for bad
debts in respect of doubtful debts.)⚫ Materiality:
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