Financial Accounting Basics Lecture 1 and 2.pptx

Financial Accounting basics; assets and liabilities, basic definitions, what is financial accounting, why is it important, who is it important for.

1. Financial Accounting Introduction and Background

2. Business What it is????????? Why does it exist?????????

3. Problem of adverse selection The lemon principle Collapse of markets What make them work?????

4. High quality financial reporting

5. Moral hazard perspective Agency cost!!!!!! Who is the saviour????? Accounting

6. Accounting Accounting is a process of identifying, recording, and summarizing economic information and reporting it to decision makers. Accounting organizes and summarizes economic information so decision makers can use it. Accountants present this information in reports called financial statements. To prepare these statements, accountants analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their financial effects on an organization.

7. Accounting system An organization’s accounting system is the series of steps it uses to record financial data and convert them into informative financial statements. Accountants analyze the information used by managers and other decision makers and create the accounting system that best meets their needs. Bookkeepers and computers then perform the routine tasks of collecting and compiling economic data. The real value of any accounting system lies in the information it provides to decision makers.

8. Accounting as an Aid to Decision Making When the engineering department of Apple Computer developed the iPad, accountants developed reports on the potential profitability of the product, including estimated sales and estimated production and selling costs. Managers used the reports to help decide whether to produce and market the product.

9. When DATATOBIZ, a small consulting firm with few employees, decides who to promote (and possibly who to fire), the managing partner produces reports on the productivity of each employee and compares productivity to the salary and other costs associated with the employee’s work for the year.

10. When portfolio managers at Goldman Sacks consider buying stock in either ford Motor companies or Volkswagen group, they consult published accounting reports to compare the most recent financial results of the companies. They must be able to compare Ford’s information reported in the accounting language of U.S. companies with that of Volkswagen reported in the accounting language of Europe. Understanding the information in the reports helps the managers decide which company would be the better investment choice.

11. When HDFC Bank considers a loan to a company that wants to expand, it examines the historical performance of the company and analyzes projections the company provides about how it will use the borrowed funds to produce new business.

12. Putting together Accounting helps decision making by showing where and when a company spends money and makes commitments. It also helps predict the future effects of decisions, and it helps direct attention to current problems, imperfections, and inefficiencies, as well as opportunities.

13. Accounting: Language of business financial accounting The field of accounting that serves external decision makers, such as stockholders, suppliers, banks, and government agencies. management accounting The field of accounting that serves internal decision makers, such as top executives, department heads, and people at other management levels within an organization.

14. Annual report A document prepared by management and distributed to current and potential investors to inform them about the company’s past performance and future prospects. assets Economic resources that a company expects to help generate future cash inflows or help reduce future cash outflows. generally accepted accounting principles (GAAP) The term that applies to all the broad concepts and detailed practices to be followed in preparing and distributing financial statements. It includes all the conventions, rules, and procedures that together comprise acceptable accounting practice. International Financial Reporting Standards (IFRS) The set of GAAP that applies to companies reporting in more than 100 countries around the world.

15. liabilities Economic obligations of the organization to outsiders or claims against its assets by outsiders. owners’ equity The owners’ claims on an organization’s assets, or total assets less total liabilities. inventory Goods held by a company for the purpose of sale to customers. notes payable Promissory notes that are evidence of a debt and state the terms of payment. account payable A liability that results from a purchase of goods or services on open account.

16. creditor A person or entity to whom a company owes money. sole proprietorship A business with a single owner. partnership A form of organization that joins two or more individuals together as co-owners. corporation A business organization that is created by individual state laws. limited liability A feature of the corporate form of organization whereby corporate creditors (such as banks or suppliers) ordinarily have claims against the corporate assets only, not against the personal assets of the owners.

17. privately owned (closely held, unlisted) A corporation owned by a family, a small group of shareholders, or a single individual, in which shares of ownership are not publicly sold. publicly traded stock Shares in the ownership of a company that are sold to the public. stockholders’ equity (shareholders’ equity) Owners’ equity of a corporation. The excess of assets over liabilities of a corporation. paid-in capital The total capital investment in a corporation by its owners, both at and subsequent to the inception of the business. par value (stated value) The nominal Rupee amount printed on stock certificates.

18. paid-in capital in excess of par value (additional paid-in capital) When issuing stock, the excess of the total amount the company receives for the stock over the par value of the shares. common stock Par value of the stock purchased by common shareholders of a corporation. audit An examination of a company’s transactions and the resulting financial statements. SEBI (Securities and Exchange Board of India) Financing Activities Investing activities Operating activities

19. Expenses Revenues Operating income Prepaid expenses Outstanding expenses Prepaid income Accrued income Dividend Retained earnings Earnings per share Dividend per share p/e ratio (price earnings ratio)