introduction to frc
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- 1. Financial Reporting and Control
2. Introduction toFinancial Reporting 3. Understanding Business OrganisationsProvide Goods and Services to earn ProfitTypes and forms of business organisationsCash MachineImportance of InformationAccounting as the language of business 4. What is Accounting?Identifyingto MeasuringEconomicvarious Information Users forMaking DecisionsCommunicating 5. Definition of Accounting The process of identifying, measuring,and communicating economicinformation to permit informedjudgements and decisions by users ofthe information. American Accounting Association(AAA) 6. Internal and External Users of Accounting InformationCurrentCustomersBanksandCreditorsPotentialOwners InternalPublicUsers -Financial ManagementAnalysts SuppliersEmployees andGovernment and Trade Regulatory Unions Agencies 7. Accounting Information System 8. What is an AIS? A system is a set of two or more interrelatedcomponents that interact to achieve a goal. Systems are almost always composed ofsmaller subsystems, each performing aspecific function supportive of the largersystem. An accounting information system (AIS)consists of:PeopleProceduresDataSoftwareInformation technology 9. 3 Basic Functions of AIS1. Collecting and processing data about the organization business activities efficiently and effectively2. Providing information useful for decision making3. 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 10. Basic Subsystems in the AIS1 The expenditure cycle: involves activities ofbuying and paying for goods or services usedby the organization.2 The production cycle: involves activitiesconverting raw materials and labor intofinished goods.3 The human resources/payroll cycle: involvesactivities of hiring and paying employees. 11. Basic Subsystems in the AIS4 The revenue cycle: involves activities ofselling goods or services and collectingpayment for those sales.5 The financing cycle: involves activitiesof obtaining necessary funds to run theorganization, repay creditors, anddistribute profits to investors. 12. Basic Subsystems in the AISFinancingExpenditure HumanCycleCycleResourcesGeneral Ledger & Reporting SystemProduction RevenueCycle Cycle 13. How An AIS Can Add Value To An Organization An AIS adds value... by providing accurate and timelyinformation so that five primary valuechain activities can be performedmore effectively and efficiently. Thisis done by: improving the quality and reducing the costsof products or services. 14. How An AIS Can Add Value To An OrganizationAn AIS can improve efficiency. improve decision making capabilities. increase the sharing of knowledge. A well-designed AIS can also helpan organization profit by improvingthe efficiency and effectiveness ofits supply chain. 15. The Value Chain The ultimate goal of any business isto provide value to its customers. A business will be profitable if thevalue it creates is greater than thecost of producing its products orservices. 16. The Value Chain An organizations value chain consists ofnine interrelated activities thatcollectively describe everything it does. The five primary activities consist of theactivities performed in order to create,market, and deliver products andservices to customers and also toprovide post-sales services and support. 17. The Value Chain Primary ActivitiesInboundOutboundOperationsLogisticsLogistics Marketing Service and Sales 18. The Value Chain The four support activities in thevalue chain make it possible for theprimary activities to be performedefficiently and effectively. 19. The Value Chain Support ActivitiesInfrastructure TechnologyHuman Purchasing Resources 20. The Value System The value chain concept can beextended by recognizing thatorganizations must interact withsuppliers, distributors, andcustomers. An organizations value chain andthe value chains of its suppliers,distributors, and customerscollectively form a value system. 21. The Supply ChainRaw MaterialsSupplierManufacturer Distributor RetailerConsumer 22. 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. 23. Information and Decision MakingCharacteristics of Useful Information Relevant TimelyReliableUnderstandable CompleteVerifiable 24. Value of Information The value of information is the benefitproduced by the information minus thecost of producing it. 25. Information and Decision Making What is decision making? Decision making involves the followingsteps:1 Identify the problem.2 Select a method for solving the problem.3 Collect data needed to execute the decisionmodel.4 Interpret the outputs of the model. 26. Information and Decision Making5 Evaluate the merits of each alternative.6 Choose and execute the preferred solution. Decisions can be categorized in terms of thedegree of structure that exists 27. Decision Structure Structured decisions are repetitive,routine, and understood well enoughthat they can be delegated to lower-level employees in the organization. An example is:Extending credit to customers. 28. Decision Structure Semi-structured decisions arecharacterized by incomplete rules formaking the decision and the need forsubjective assessments and judgmentsto supplement formal data analysis. An example is: Setting a marketing budget for a new product. 29. Decision Structure Unstructured decisions arenonrecurring and non routine. An example is:Choosing the cover for a magazine. 30. Decision Making Process Recognize dilemmaIdentify interestedparties / associated variablesList alternatives andEvaluate Select best alternative 31. Decisions Made withFinancial /Accounting InformationAdd new Invest?? product line??Borrow??Build new plant?? Loan ??Extend credit??Start new business?? Sell stocks or bonds?? 32. The Future of AIS The Internet makes strategy moreimportant than ever Enterprise resource planning (ERP)systems are a recent development thatintegrate all aspects of a companysoperations with its traditional AIS. The important point underlying ERPsystems is the need for and value of cross-functional integration of financial data andother non financial operating data. 33. What is Accounting?Identifyingto MeasuringEconomicvarious Information Users forMaking DecisionsCommunicating 34. Assumptions underlying measurement EconomicCostEntity PrincipleTimePeriod Going MonetaryConcern Unit 35. Economic Entity Concept Each entity has its own books, recordsand financial statements that areseparate from owners No intermingling of personal andbusiness assets and liabilities orincome and expensesOwners Business Books & Books &Records Records 36. Cost Principle Record assets at cost paidto acquire them Continue to value assets athistorical cost until sold More objective than marketvalue 37. Going Concern Assume businesswill continueindefinitely into theforeseeable future Justifies use ofhistorical cost 38. Monetary Unit How we measure (e.g. U.S.dollar, Japanese yen,Mexican peso, etc.) Assumes economic measureis relatively stable; noadjustment for inflation madein financial statements 39. Time Period Assumption Assumes it is possible to break up anentitys earnings in discrete timeperiods (a month, quarter, year) Necessary to provide users withfinancial results on a timely basis 123 45678910 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 40. Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principlesknown as GAAP are the commonlyunderstood and accepted conventions,rules and procedures for gathering,organizing, and reporting the financialhistory of an organization. 41. Generally Accepted Accounting Principles Generally GAAP applies to one or more of the following three broad areas:Accounting ValuationRecognitionDisclosure 42. Generally Accepted Accounting Principles Accounting Valuation - GAAP helps tospecify the value of the items reported. Itprovides guidance and restrictions on theaccounting values used in the financialstatements. 43. Generally Accepted Accounting PrinciplesRecognition How should an item betreated in the accounting records? Shouldan item be treated as an asset or anexpense? For instance, does anadvertising campaign have future benefits? 44. Generally Accepted Accounting PrinciplesDisclosure The act of providinginformation about the organization andconstruction of its accounting reports.GAAP requires the disclosure ofmeasurement methods, assumptions, etc.,that add to the information content of theannual report. 45. Institutional ContextDCA IASBIFAIndianSEBIGAPPRBIICAI ITA CAG 46. Ethical DilemmasConflictingGAAP rules Pressure to makePressure tochoices not in bestcompromise interests of company,acctg proceduresemployees, andstockholdersPersonal responsibilities and obligations Aggressive No specificaccounting GAAP rules practices Biased information or fraud 47. Ethics Decision-Making ModelLikely to occur whenRecognize dilemmaconsidering decision aboutaccounting methods or Identify interesteddisclosures and: parties There are conflicting rules There are no clear GAAPList alternatives Fraud or other questionableactions have occurredSelect best alternative 48. Ethics Decision-Making ModelFor each group (management,Recognize dilemmashareholders, investors, auditor,creditors, employees), identify Identify interestedpotential: parties Benefits HarmList alternatives Rights / claimsSelect best alternative Conflicting interests Responsibilities 49. Ethics Decision-Making ModelRecognize dilemmaWhich alternative provides: Identify interested The most useful and timely partiesinfo? The most reliable info?List alternatives and Info that most accurately evaluaterepresents what it claims? Info that is free from bias?Select best alternative 50. Ethics Decision-Making ModelRecognize dilemmaWhich alternative best Identify interestedprovides decision makers partieswith: The most relevant info?List alternatives and evaluate The most reliable info? The most accurate info?Select best alternative The most neutral info? 51. The Accounting EquationAssets = Liabilities + Owners Equity (or Stockholders Equity)EconomicCreditors OwnersResources = Claims+Claimsto Assetsto AssetsExamples:CashAccounts payable Capital stockAccounts receivable Notes payableRetained earningsInventory 52. Financial StatementsFinancial StatementsBalance SheetIncome StatementStatement of Cash Flows 53. Financial StatementsThe financial statements are part of acomprehensive financial report referred toas the annual report. 54. Balance Sheet Shows relationship between assetsliabilities and equities--on a particular date(i.e., point in time). Assets and liabilities and stockholdersequity must balance. 55. Balance Sheet Assets A probable future economic benefitobtained by entering into a transaction. Theresources owned by the business. Liabilities The probable future sacrifice ofeconomic benefits arising from an entitysobligation to transfer assets or provide services fora past transaction. Creditors claims on total assets(obligations or debts of the business). 56. Balance Sheet (continued) Stockholders Equity The difference between an entitys assets and liabilities. The owners claim on total assets. 57. Income Statement Reports success or failure of thecompanys operations during the period. Summarizes all revenue and expenses forperiod--month, quarter, or year. Ifrevenues exceed expenses, the result is anet income. If expenses exceed revenue,the result is a (net loss). 58. Income Statement (continued) Revenues increases in net assetsresulting from an entitys operation over aperiod of time. Expenses decreases in net assetsresulting from an entitys operation over aperiod of time. Net Income - the excess of revenues overexpenses. 59. Cash Flow StatementThe Cash Flow Statement - describes the flowof cash into and out of an organization during anaccounting period. These flows are classified inthree categories:Operating activities The change in cashresulting from actions intended to generate netincome.Investing activities The change in cashresulting from actions taken to acquire ordispose of productive company assets. 60. Cash Flow Statement (continued)Financing activities The change in cashresulting from payments to or receiptsfrom suppliers of money to the firm (e.g.,common shareholders or debt holders). 61. Other Elements of Annual Reports Management Discussion and Analysis Notes to Financial Statements Auditors Report 62. Management Discussion and AnalysisCovers 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 63. Notes to Financial Statements Provide additional information not included inbody of statements Does not have to be numeric Examples:Description of accounting policies orexplanation of uncertainties andcontingencies Company statistics (e.g., market share,percentage of international sales, etc.) 64. Auditors Report Auditor, a professional accountant whoconducts an independent examination of thefinancial accounting data presented by acompany. Auditor gives an unqualified opinion if thefinancial statements present the financialposition, results of operations, and cashflows in accordance with GAAP.