Post on 04-Jul-2015
Financial Reporting and Control
Introduction toFinancial Reporting
Understanding Business Organisations
Provide Goods and Services to earn Profit
Types and forms of business organisations
Cash Machine
Accounting as the language of business
Importance of Information
What is Accounting?
Identifying
Measuring
Communicating
EconomicInformation
to various
Users for Making
Decisions
Definition of Accounting
“The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.”
—American Accounting Association (AAA)
Internal and ExternalUsers of Accounting Information
Internal Users -
Management
CreditorsCurrent
andPotentialOwners
Government and Regulatory
Agencies
Suppliers
Employees and TradeUnions
FinancialAnalysts
Banks Customers
Public
Accounting Information System
What is an AIS?
A system is a set of two or more interrelated components that interact to achieve a goal.
Systems are almost always composed of smaller subsystems, each performing a specific function supportive of the larger system.
An accounting information system (AIS) consists of:� People� Procedures� Data� Software� Information technology
3 Basic Functions of AIS
1. Collecting and processing data about the organization business activities efficiently and effectively
2. Providing information useful for decision making
3. Establishing adequate controls to ensure that data about business activities are recorded and processed accurately and to safeguard both that data and other organizational assets
Basic Subsystems in the AIS
1 The expenditure cycle: involves activities of buying and paying for goods or services used by the organization.
2 The production cycle: involves activities converting raw materials and labor into finished goods.
3 The human resources/payroll cycle: involves activities of hiring and paying employees.
Basic Subsystems in the AIS
4 The revenue cycle: involves activities of selling goods or services and collecting payment for those sales.
5 The financing cycle: involves activities of obtaining necessary funds to run the organization, repay creditors, and distribute profits to investors.
Basic Subsystems in the AIS
ExpenditureCycle
HumanResources
ProductionCycle
RevenueCycle
FinancingCycle
General Ledger & Reporting System
How An AIS Can Add ValueTo An Organization
An AIS adds value...– by providing accurate and timely
information so that five primary value chain activities can be performed more effectively and efficiently. This is done by:– improving the quality and reducing the costs
of products or services.
How An AIS Can Add ValueTo An Organization
An AIS can…– improve efficiency.– improve decision making capabilities.
– increase the sharing of knowledge.
A well-designed AIS can also help an organization profit by improving the efficiency and effectiveness of its supply chain.
The Value Chain
The ultimate goal of any business is to provide value to its customers.
A business will be profitable if the value it creates is greater than the cost of producing its products or services.
The Value Chain
An organization’s value chain consists of nine interrelated activities that collectively describe everything it does.
The five primary activities consist of the activities performed in order to create, market, and deliver products and services to customers and also to provide post-sales services and support.
The Value Chain
Primary Activities
InboundLogistics
OutboundLogistics
Operations
Marketingand Sales
Service
The Value Chain
The four support activities in the value chain make it possible for the primary activities to be performed efficiently and effectively.
The Value Chain
Support Activities
Infrastructure
HumanResources
Technology
Purchasing
The Value System
The value chain concept can be extended by recognizing that organizations must interact with suppliers, distributors, and customers.
An organization’s value chain and the value chains of its suppliers, distributors, and customers collectively form a value system.
The Supply Chain
Raw Materials Supplier
Manufacturer
Distributor
Retailer
Consumer
Information and Decision Making
What is information? The term data refers to any and all
of the facts that are collected, stored, and processed by an information system.
Information is data that has been organized and processed so that it is meaningful.
Information and Decision Making
Characteristics of Useful Information
Understandable
Verifiable
TimelyRelevant
Reliable
Complete
Value of Information
The value of information is the benefit produced by the information minus the cost of producing it.
Information and Decision Making
What is decision making? Decision making involves the following
steps:1 Identify the problem.2 Select a method for solving the problem.
3 Collect data needed to execute the decision model.
4 Interpret the outputs of the model.
Information and Decision Making
5 Evaluate the merits of each alternative.6 Choose and execute the preferred solution. Decisions can be categorized in terms of the
degree of structure that exists
Decision Structure
Structured decisions are repetitive, routine, and understood well enough that they can be delegated to lower-level employees in the organization.
An example is:� Extending credit to customers.
Decision Structure
Semi-structured decisions are characterized by incomplete rules for making the decision and the need for subjective assessments and judgments to supplement formal data analysis.
An example is:� Setting a marketing budget for a new
product.
Decision Structure
Unstructured decisions are nonrecurring and non routine.
An example is:� Choosing the cover for a magazine.
Decision Making Process
Recognize dilemma
Identify interested parties / associated
variables
List alternatives and Evaluate
Select best alternative
Decisions Made with Financial /Accounting Information
Invest??
Borrow??
Sell stocks or bonds??
Build new plant??
Add new product line??
Start new business??
Loan ??Extend credit??
The Future of AIS
The Internet makes strategy more important than ever
Enterprise resource planning (ERP) systems are a recent development that integrate all aspects of a company’s operations with its traditional AIS.
The important point underlying ERP systems is the need for and value of cross-functional integration of financial data and other non financial operating data.
What is Accounting?
Identifying
Measuring
Communicating
EconomicInformation
to various
Users for Making
Decisions
Assumptions underlying measurement
EconomicEntity
CostPrinciple
GoingConcern
MonetaryUnit
TimePeriod
Economic Entity Concept
Each entity has its own books, records and financial statements that are separate from owners
No intermingling of personal and business assets and liabilities or income and expenses
BusinessBooks &Records
Owners’Books &Records
Cost Principle
Record assets at cost paid to acquire them
Continue to value assets at historical cost until sold
More objective than market value
Going Concern
Assume business will continue indefinitely into the foreseeable future
Justifies use of historical cost
Monetary Unit
How we measure (e.g. U.S. dollar, Japanese yen, Mexican peso, etc.)
Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements
Time Period Assumption
Assumes it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year)
Necessary to provide users with financial results on a timely basis
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Generally Accepted Accounting Principles
Generally Accepted Accounting Principles known as GAAP are the commonly understood and accepted conventions, rules and procedures for gathering, organizing, and reporting the financial history of an organization.
Generally Accepted Accounting Principles
Generally GAAP applies to one or more of
the following three broad areas:
� Accounting Valuation � Recognition
� Disclosure
Generally Accepted Accounting Principles
Accounting Valuation - GAAP helps to
specify the value of the items reported. It provides guidance and restrictions on the accounting values used in the financial statements.
Generally Accepted Accounting Principles
Recognition – How should an item be treated in the accounting records? Should an item be treated as an asset or an expense? For instance, does an advertising campaign have future benefits?
Generally Accepted Accounting Principles
Disclosure – The act of providing information about the organization and construction of its accounting reports. GAAP requires the disclosure of measurement methods, assumptions, etc., that add to the information content of the annual report.
DCA
Institutional Context
IASB
SEBI
ICAI
IFA
Indian GAPP RBI
ITA CAG
Ethical Dilemmas
Conflicting GAAP rules
Pressure to make choices not in best
interests of company,employees, and
stockholders
No specificGAAP rules
Biased information
or fraud
“Aggressive”accounting
practices
Pressure to compromise
acctg procedures
Personalresponsibilitiesand obligations
Ethics Decision-Making Model
Recognize dilemma
Identify interested parties
List alternatives
Select best alternative
Likely to occur when considering decision about accounting methods or disclosures and:
• There are conflicting rules
• There are no clear GAAP
• Fraud or other questionable actions have occurred
Ethics Decision-Making Model
Recognize dilemma
Identify interested parties
List alternatives
Select best alternative
For each group (management, shareholders, investors, auditor, creditors, employees), identify potential:
• Benefits
• Harm
• Rights / claims
• Conflicting interests
• Responsibilities
Ethics Decision-Making Model
Recognize dilemma
Identify interested parties
List alternatives and evaluate
Select best alternative
Which alternative provides:
• The most useful and timely info?
• The most reliable info?
• Info that most accurately represents what it claims?
• Info that is free from bias?
Ethics Decision-Making Model
Recognize dilemma
Identify interested parties
List alternatives and evaluate
Select best alternative
Which alternative best provides decision makers with:
• The most relevant info?
• The most reliable info?
• The most accurate info?
• The most neutral info?
The Accounting Equation
Assets = Liabilities + Owners’ Equity (or Stockholders' Equity)
Creditors'Claims
to Assets
Owners'Claims
to Assets
EconomicResources
= +
Examples:CashAccounts receivableInventory
Accounts payableNotes payable
Capital stockRetained earnings
Financial Statements
Financial Statements� Balance Sheet� Income Statement� Statement of Cash Flows
Financial Statements
The financial statements are part of a comprehensive financial report referred to as the annual report.
Balance Sheet
Shows relationship between assets liabilities and equities--on a particular date (i.e., point in time).
Assets and liabilities and stockholders' equity must balance.
Balance Sheet
Assets – A probable future economic benefit
obtained by entering into a transaction. The
resources owned by the business.
Liabilities – The probable future sacrifice of
economic benefits arising from an entity’s
obligation to transfer assets or provide services for
a past transaction. Creditors claims on total assets
(obligations or debts of the business).
Balance Sheet (continued)
Stockholders' Equity – The difference
between an entity’s assets and liabilities.
The owners’ claim on total assets.
Income Statement
Reports success or failure of the
company's operations during the period.
Summarizes all revenue and expenses for period--month, quarter, or year. If revenues exceed expenses, the result is a net income. If expenses exceed revenue, the result is a (net loss).
Income Statement (continued)
Revenues – increases in net assets resulting from an entity’s operation over a period of time.
Expenses – decreases in net assets resulting from an entity’s operation over a period of time.
Net Income - the excess of revenues over expenses.
Cash Flow Statement
The Cash Flow Statement - describes the flow of cash into and out of an organization during an accounting period. These flows are classified in three categories:
Operating activities – The change in cash resulting from actions intended to generate net income.
Investing activities – The change in cash resulting from actions taken to acquire or dispose of productive company assets.
Cash Flow Statement (continued)
Financing activities – The change in cash resulting from payments to or receipts from suppliers of money to the firm (e.g., common shareholders or debt holders).
Other Elements of Annual Reports
Management Discussion and Analysis
Notes to Financial Statements
Auditor's Report
Management Discussion and Analysis
Covers three aspects of a company: � liquidity - ability to pay near-term
obligations� capital resources - ability to fund
operations and expansions� results of operation - profitability and
efficiency
Notes to Financial Statements
Provide additional information not included in body of statements
Does not have to be numeric
Examples:� Description of accounting policies or
explanation of uncertainties and contingencies
� Company statistics (e.g., market share,
percentage of international sales, etc.)
Auditor's Report Auditor, a professional accountant who
conducts an independent examination of the financial accounting data presented by a company.
Auditor gives an unqualified opinion if the financial statements present the financial position, results of operations, and cash flows in accordance with GAAP.