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Page 1: Introduction to frc

Financial Reporting and Control

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Introduction toFinancial Reporting

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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

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What is Accounting?

Identifying

Measuring

Communicating

EconomicInformation

to various

Users for Making

Decisions

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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)

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Internal and ExternalUsers of Accounting Information

Internal Users -

Management

CreditorsCurrent

andPotentialOwners

Government and Regulatory

Agencies

Suppliers

Employees and TradeUnions

FinancialAnalysts

Banks Customers

Public

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Accounting Information System

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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

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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

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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.

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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.

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Basic Subsystems in the AIS

ExpenditureCycle

HumanResources

ProductionCycle

RevenueCycle

FinancingCycle

General Ledger & Reporting System

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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.

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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.

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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.

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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.

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The Value Chain

Primary Activities

InboundLogistics

OutboundLogistics

Operations

Marketingand Sales

Service

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The Value Chain

The four support activities in the value chain make it possible for the primary activities to be performed efficiently and effectively.

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The Value Chain

Support Activities

Infrastructure

HumanResources

Technology

Purchasing

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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.

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The Supply Chain

Raw Materials Supplier

Manufacturer

Distributor

Retailer

Consumer

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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.

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Information and Decision Making

Characteristics of Useful Information

Understandable

Verifiable

TimelyRelevant

Reliable

Complete

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Value of Information

The value of information is the benefit produced by the information minus the cost of producing it.

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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.

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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

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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.

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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.

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Decision Structure

Unstructured decisions are nonrecurring and non routine.

An example is:� Choosing the cover for a magazine.

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Decision Making Process

Recognize dilemma

Identify interested parties / associated

variables

List alternatives and Evaluate

Select best alternative

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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??

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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.

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What is Accounting?

Identifying

Measuring

Communicating

EconomicInformation

to various

Users for Making

Decisions

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Assumptions underlying measurement

EconomicEntity

CostPrinciple

GoingConcern

MonetaryUnit

TimePeriod

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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

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Cost Principle

Record assets at cost paid to acquire them

Continue to value assets at historical cost until sold

More objective than market value

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Going Concern

Assume business will continue indefinitely into the foreseeable future

Justifies use of historical cost

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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

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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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4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

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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.

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Generally Accepted Accounting Principles

Generally GAAP applies to one or more of

the following three broad areas:

� Accounting Valuation � Recognition

� Disclosure

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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.

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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?

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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.

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DCA

Institutional Context

IASB

SEBI

ICAI

IFA

Indian GAPP RBI

ITA CAG

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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

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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

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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

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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?

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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?

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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

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Financial Statements

Financial Statements� Balance Sheet� Income Statement� Statement of Cash Flows

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Financial Statements

The financial statements are part of a comprehensive financial report referred to as the annual report.

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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.

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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).

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Balance Sheet (continued)

Stockholders' Equity – The difference

between an entity’s assets and liabilities.

The owners’ claim on total assets.

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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).

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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.

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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.

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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).

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Other Elements of Annual Reports

Management Discussion and Analysis

Notes to Financial Statements

Auditor's Report

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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

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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.)

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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.


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