Ch01 5th Ed Narayanaswamy Financial Accounting

Financial Accounting: A Managerial Perspective Fifth Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore 1 April 2014 © PHI Learning Private Limited New Delhi 1 Chapter 1 Accounting, Markets, and Governance 1 April 2014 © PHI Learning Private Limited New Delhi 2 Understanding Business Organizations



1 April 2014 Merchandising organizations Manufacturing organizations Service organizations Business organizations as cash generating-cum-dispensing machines © PHI Learning Private Limited New Delhi 3 . Business Organizations 1 April 2014 © PHI Learning Private Limited New Delhi 4 . What is Accounting




1 April 2014 Accounting is the language of business Who should know accounting? Why accounting in MBA? The MBA Oath and financial reporting Accounting information and economic decisions © PHI Learning Private Limited New Delhi 5 . The Accounting Information System 1 April 2014 © PHI Learning Private Limited New Delhi 6 . Users of Accounting Information








1 April 2014 Investors Lenders Analysts and advisers Managers Employees and trade unions Suppliers and trade financiers Customers Government and regulatory authorities The public © PHI Learning Private Limited New Delhi 7 . Financial Accounting and Management Accounting


1 April 2014 Financial accounting Management accounting How do they differ? © PHI Learning Private Limited New Delhi 8 . Accounting Measurement Assumptions

Reporting entity Going concern


1 April 2014 Historical cost Periodicity Money measurement © PHI Learning Private Limited New Delhi 9 . Generally Accepted Accounting Principles and the Accounting Environment 1 April 2014 © PHI Learning Private Limited New Delhi 10 . Generally Accepted Accounting Principles and the Accounting Environment
Accounting standards and policies



Converging IGAAP with IFRS



1 April 2014 Accounting standards Accounting standard-setting arrangements Accounting policies IGAAP IFRS Ind AS Principles or rules? © PHI Learning Private Limited New Delhi 11 . Forms of Business Organization


Sole proprietorship Partnership Limited company




1 April 2014 Listed Public Private Limited liability partnership Legal formalities for a limited company © PHI Learning Private Limited New Delhi 12 . The Corporate Organization 1 April 2014 © PHI Learning Private Limited New Delhi 13 . Accounting. Capital Market and Corporate Governance


1 April 2014 The lemons principle and the problem of adverse selection Signalling quality Moral hazard and corporate governance © PHI Learning Private Limited New Delhi 14 . The Accounting Equation





1 April 2014 Economic resources = Claims Assets = Liabilities + Equity Assets: “own” Liabilities: “owe” Equity: “residual interest” Analyzing the effect of transactions © PHI Learning Private Limited New Delhi 15 . Financial Statements






1 April 2014 Statement of profit and loss Statement of retained earnings Balance sheet Cash flow statement Statement of retained earnings How are the financial statements interrelated? Preview of financial statement analysis © PHI Learning Private Limited New Delhi 16 . What do Accountants Do?
Public accounting






Private accounting




1 April 2014 Auditing Forensic accounting and risk management Tax services Advisory services Bankruptcy Small business services Management accounting Internal auditing Information systems Government accounting Not-for-profit accounting © PHI Learning Private Limited New Delhi 17 . Accounting as an Academic Discipline
Illustrative research areas







1 April 2014 Accounting and stock prices Benefits of disclosure Usefulness of accrual and cash Reporting losses faster than gains Selection of accounting methods and disclosure levels Predicting future profits from past profits Disclosure and managerial behaviour Executive pay and financial performance © PHI Learning Private Limited New Delhi 18 . Fraud and Ethical Issues in Accounting

What leads to fraud and unethical accounting? Fraud-hit companies: e.g.





1 April 2014 Satyam Enron WorldCom The Satyam case Resolving ethical dilemmas Whistle-blowing © PHI Learning Private Limited New Delhi 19 . Markets. and Governance 1 April 2014 © PHI Learning Private Limited New Delhi 20 .End of Chapter 1 Accounting.