M. Anil Kumar, Department of Humanities, Social Sciences and Management, National Institute of Technology-Karnataka 1

ACCOUNTING AND FINANCIAL MANAGEMENT This course is designed to introduce students to the principles, concepts, and applications of financial accounting and management This course presents the underlying framework and concepts of Financial Accounting in the context of how accounting fits into the overall business environment of contemporary society. Financial accounting is the basic means of recording and reporting financial information in a business. You will learn how accounting functions as an information development and communication system that supports economic decision making and provides value to entities and society. You will discover the uses and limitations of financial statements and related information and apply analytical tools in making both business and financial decisions. 2

In Financial Management students are introduced to concepts and tools that enable them to think critically about the financial opportunities and challenges faced by an organization. They learn how to use financial statements such as balance sheets, income statements, and statements of cash flow. They prepare budgets, analyze investment options, and determine the best means of financing business endeavors. They discover ways of assessing both the return and the risk involved in a firm's financial decisions. The focus of this course is on solving practical business problems similar to those encountered in the workplace. 3

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-Elements of management accounting-I.M. Pandey, Vikas publishing house -Financial Management-Khan & Jain, TMH Publications - Financial Management-Prasanna Chandra, TMH Publications - Financial Management policy- Van Horne James C., Prentice Hall of India - Management Accounting 4th edition-Anthony & Alkinson, Robert S. Kalpan & S. Mark Young, Ther Robert Kalpan Series in Management Accounting 5

The Need for Accounting A transaction is any event that affects the financial position of an organization and requires recording. 6

Introduction Accounting - a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements Financial accounting - focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies 7

ACCOUNTING Accounting is the language of business. The affairs and the results of the business are communicated to others through accounting information, which has to be systematically recorded and presented. 8

9 In 1494, the first book on double entry. The author was an Italian friar, Luca Pacioli. His impact on accounting was so great that five centuries later, accountants from around the world gathered in the Italian village of San Sepulcro to celebrate the anniversary of the book's publication.

Identifies Records CommunicatesRelevant Reliable Comparable Importance of Accounting Accounting is a system that information that is to help users make better decisions. 10

Identifying Business Activities Recording Business Activities Communicating Business Activities Accounting Activities 11

Why Accounting Informational requirement of a number of stakeholders in the business Internal Stakeholder Owners Management Employees External Stakeholders Government/ Tax department Investors Banks/Lenders Suppliers/Creditors NGOs/ Industry associations Researchers Accounting is the tool for providing financial information to various stakeholders 12

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Users of Accounting Information External Users Lenders Shareholders Governments Consumer Groups External Auditors Customers Internal Users Managers Officers Internal Auditors Sales Staff Budget Officers Controllers 14

Users of Accounting Information External Users Financial accounting provides external users with financial statements. Internal Users Managerial accounting provides information needs for internal decision makers. 15

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Financing activities provide necessary funds to start a business and expand it after it begins operating. Investing activities provide valuable assets required to run a business. Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management. 17

Financial and Management Accounting The major distinction between financial and management accounting is the users of the information. Financial accounting serves external users. Management accounting serves internal users, such as top executives, management, and administrators within organizations. 18

Opportunities in Accounting Financial Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation Managerial General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Taxation Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans Accounting-related Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers CBI investigators Market researchers Systems designers Merger services Business valuation Entrepreneurs 19

Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Generally Accepted Accounting Principles Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Used in comparisons across years & companies. 20

Business Entity Forms Sole Proprietorship Partnership Corporation 21

Assets Liabilities & Equity Accounting Equation Liabilities EquityAssets = + 22

Land Equipment Buildings Cash Vehicles Store Supplies Notes Receivable Accounts Receivable Resources owned or controlled by a company Assets 23

Taxes Payable Wages Payable Notes Payable Accounts Payable Creditors claims on assets Liabilities 24

Owners claim on assets Dividends Contributed Capital Retained Earnings Equity 25

Liabilities EquityAssets = + Expanded Accounting Equation Revenues Expenses Common Stock Dividends_ + _ Retained Earnings Liabilities EquityAssets = + 26

Transaction Analysis Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock (1) 20,000$ 20,000$ 20,000$ -$ -$ -$ -$ 20,000$ 20,000$ = 20,000$ Manu invests $ 20,000 cash to start the business in return for stock. 27

Transaction Analysis Purchased supplies paying $1,000 cash. Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock (1) 20,000$ 20,000$ (2) (1,000) 1,000$ 19,000$ 1,000$ -$ -$ -$ 20,000$ 20,000$ = 20,000$ 28

Transaction Analysis Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock (1) 20,000$ 20,000$ (2) (1,000) 1,000$ (3) (15,000) 15,000$ 4,000$ 1,000$ 15,000$ -$ -$ 20,000$ 20,000$ = 20,000$ Purchased equipment for $15,000 cash. 29

Transaction Analysis Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock (1) 20,000$ 20,000$ (2) (1,000) 1,000$ (3) (15,000) 15,000$ (4) 200 1,000 1,200$ 4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$ 21,200$ = 21,200$ Purchased Supplies of $200 and Equipment of $1,000 on account. 30

M. Anil Kumar, Contact: 9916028219 e-mail: anil.hm13f05@nitk.edu.in 31