Financial Accounting:

A Managerial Perspective
Fifth Edition
Prepared by
R. Narayanaswamy
Indian Institute of Management Bangalore

1 April 2014

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Chapter 1
Accounting, Markets, and
Governance

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Understanding Business Organizations

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Merchandising organizations
Manufacturing organizations
Service organizations
Business organizations as cash
generating-cum-dispensing
machines

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Business Organizations

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What is Accounting

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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
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The Accounting Information System

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Users of Accounting Information

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Investors
Lenders
Analysts and advisers
Managers
Employees and trade unions
Suppliers and trade financiers
Customers
Government and regulatory authorities
The public
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Financial Accounting
and Management Accounting

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Financial accounting
Management accounting
How do they differ?

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Accounting Measurement Assumptions

Reporting entity
Going concern

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Historical cost

Periodicity
Money measurement

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Generally Accepted Accounting

Principles and the Accounting
Environment

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Generally Accepted Accounting

Principles and the Accounting
Environment

Accounting standards and policies

Converging IGAAP with IFRS

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Accounting standards
Accounting standard-setting arrangements
Accounting policies
IGAAP
IFRS
Ind AS

Principles or rules?
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Forms of Business Organization

Sole proprietorship
Partnership
Limited company

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Listed
Public
Private

Limited liability partnership

Legal formalities for a limited
company
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The Corporate Organization

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Accounting, Capital Market and

Corporate Governance

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The lemons principle and the problem

of adverse selection
Signalling quality
Moral hazard and corporate
governance

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The Accounting Equation

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Economic resources = Claims

Assets = Liabilities + Equity
Assets: own
Liabilities: owe
Equity: residual interest
Analyzing the effect of transactions

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Financial Statements

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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
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What do Accountants Do?

Public accounting

Private accounting

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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
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Accounting as an Academic Discipline

Illustrative research areas

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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
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Fraud and Ethical Issues in Accounting

What leads to fraud and unethical

accounting?
Fraud-hit companies: e.g.

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Satyam
Enron
WorldCom

The Satyam case

Resolving ethical dilemmas
Whistle-blowing
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End of Chapter 1
Accounting, Markets, and
Governance

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