Great Land College

College of Business and Economics

Post Graduate program
Masters of Business Administration
Course Title: Financial and Managerial Accounting
Credit hours:2
 Course contents

oChapter 1: Introduction to Accounting and Business

o Chapter 2: Accounting Cycle
oChapter 3: Current assets and long term assets
oChapter 4: Cost Accounting
oChapter 5 :Cost Volume profit Analysis
 Chapter one
Introduction to Accounting and Business

o Nature of business , types and forms of business organizations

o Definition accounting , objectives and its role in business
o Nature of Accounting
o Branches of Accounting
o Accounting from users perspective and users of accounting information
o Qualitative characteristics of accounting information
o Financial statements and relationship among reporting elements
o Accounting equation and terms in business transaction
 Nature of Business

• Engagement in any profitable activity

 Forms of businesses organizations

Single
Partnership Corporation
Proprietorship
 Types of businesses organizations
.

Service Merchandising Manufacturing

Businesses Businesses Businesses
 Definition of Accounting

Accounting is defined as the process of :

oIdentifying
oMeasuring
oPreparing documents
oRecording
oClassifying
oSummarizing
oCommunicating
Important issue “ what to produce, how and for whom and
why”
 Nature of Accounting
• Process
• Service activity
• Profession
• Social force
• Language of Business
• Science and Art
 Objectives of Accounting

• To keep systematic records

• To protect business properties
• To ascertain the operational profit or loss
• To ascertain the financial position of the business
• To facilitate rational decision making
 Branches of Accounting
• Financial Accounting
• Managerial Accounting
• Cost Accounting
• Tax Accounting
• Auditing
• Project Accounting
• Fund Accounting
• Government Accounting
 Users of Accounting Information

Internal Users External users

• Investors
oOwners • Creditors/lenders
oManagement • Members of non profit organizations
oEmployees • Competitors
• Tax authority and government regulatory agencies
• Rating agencies
• Researchers
• Investors : Need information about the profitability, dividend yield and price earnings ratio in order
to assess the quality and the price of shares of a company
• Lenders: Need information about the profitability and solvency of the business in order to determine
the risk and interest rate of loans
• Management: Need information for planning, policy making and evaluation
• Suppliers and trade creditors: Need information about the liquidity of business in order to access
the ability to repay the amounts owed to them
• Government: Need information about various businesses for statistics and formulation of economic
plan
• Customers: Interested in long-tem stability of the business and continuance of the supply of particular
products
• Employees: Interested in the stability of the business to provide employment, fringe benefits and
promotion opportunities
• Public: Need information about the trends and recent development
Qualitative characteristics: General purpose financial reporting
IFRS
Relevance: capable of making a difference in decision made by users fundamental

Faithful representation(complete, neutral and free from error/bias ) fundamental

Understandability enhancing
Timeliness enhancing

Comparability: like things look alike; different things look different enhancing

Verifiability (direct or indirect): consensus, but not necessarily complete

enhancing
agreement, that a depiction is a faithful representation
 Relevance
oRelating to the matter at hand
• Relevance requires financial information to be related to an economic decision
• Financial information is useful if it has predictive value and confirmatory value.
• Capable of making a difference in the decision making of the user
• Predictive value helps users in predicting or anticipating future outcomes.
• Confirmatory value enables users to check and confirm earlier predictions
or evaluations.
• Materiality is an aspect of relevance which is entity-specific. It means that
what is material to one entity may not be material to another. It is relative.
Information is material if it is significant enough to influence the decision of
users.
 Faithfull Representation
oThe financial information in the financial reports should represent what it
purports to represent.
oFinancial report should reflect what really happened, with the correct financial
values.
oThere should be agreement between the accounting numbers and supporting
documentation
oThere are three characteristics of faithful representation:
oCompleteness (adequate or full disclosure of all necessary information)
oNeutrality (fairness and free from bias):Accounting information should not
favor any groups or companies but be a true and factual representation of a
company’s financial position.
oFree from error (no inaccuracies and omissions/mistakes).
 Comparability
oThe quality of information that enables users to identify
similarities in and differences between two sets of economic
phenomena.
oComparable information enables comparisons within the entity and
across entities.
oWhen comparisons are made within the entity, information is
compared from one accounting period to another.
oComparability of information across entities enables analysis of
similarities and differences between different companies.
 Verifiability
• Verifiability helps to assure users that information represents
faithfully what it purports to represent.
• Financial information is supported by evidence and independent
individuals can check them to see whether such information is
faithfully represented.
• Information is verifiable if it can be audited.
 Timeliness
• Timeliness means providing information to decision-makers in time to be capable of
influencing their decisions.
• It shouldn't be significantly delayed or else it will be of little or no value.
• The timeliness of accounting information refers to the provision of information to users
quickly enough for them to take action.
• Timeliness means that the information must be received by the users at the right time
before it loses its ability to affect the decision.
• Information that is not available when it is needed by the decision makers will be useless and the
information may lose its potential value.
 Understandability
• Understandability requires financial information to be understandable or
comprehensible to users with reasonable knowledge of business and economic
activities.

• To be understandable, information should be presented clearly and concisely.

• However, it is improper to exclude complex items just to make the reports

simple and understandable.
Financial Statements & relationship among the elements :
A complete set of financial statements comprises (IAS 1.10)

A. Statement of financial position as at the end of the period; you can still call it
Balance Sheet)
B. Statement of profit or loss and other comprehensive income for the period;
C. Statement of changes in equity for the period;
D. Statement of cash flows for the period;
E. Notes, comprising significant accounting policies and other explanatory
information;
 Sub classified elements of financial statement :
Why sub-classify elements?
• Information about the nature and amounts of a reporting entity’s economic
resources and claims can help users to identify the reporting entity’s financial
strengths and weaknesses.
• That information can help users to:
• assess the reporting entity’s liquidity and solvency
• its needs for additional financing and how successful it is likely to be in
obtaining that financing.
(see paragraph OB13 of the Conceptual Framework)
Classification concepts
• Different types of economic resources affect a user’s assessment of
the reporting entity’s prospects for future cash flows differently.
• Information about priorities and payment requirements of existing
claims helps users to predict how future cash flows will be
distributed among those with a claim against the reporting entity
• For some assets and for some liabilities significant judgement is
required to determine their classification
 Elements of financial position (Balance sheet)
IPSASB (paragraphs IASB proposed (paragraphs 4.5,
Element IASB (paragraph 4.4)
5.6 and 5.14) 4.6, 4.24 and 4.43)

An asset “A resource presently “A resource controlled by the entity as a “a present economic resource (a right
is… controlled by the entity as result of past events and from which future that has potential to produce economic
a result of a past event” economic benefits are expected to flow to benefits) controlled by the entity as a
the entity.” result of past events”

A liability “A present obligation of “a present obligation of an entity arising “a present obligation of the entity to
is… the entity for an outflow from past events, the settlement of which transfer an economic resource as a
of resources that results is expected to result in an outflow from result of a past event.”
from a past event.” the entity of resources embodying
economic benefits”

Equity = assets – liabilities (‘net assets – liabilities assets – liabilities

financial position’)
Statement of financial position: Minimum items
A. Property, plant and equipment;
B. Investment property;
C. Intangible assets;
D. Financial assets (excluding amounts shown under (e), (h) and (i));
E. Investments accounted for using the equity method;
F. Biological assets within the scope of IAS 41 Agriculture;
G. Inventories;
H. Trade and other receivables;
I. Cash and cash equivalents;
 Elements of financial performance

Element IASB (paragraph 4.25)

Income “Increases in economic benefits during the accounting period in the
form of enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from
equity participants.”
Expense “Decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities
that result in decreases in equity, other than those relating to
distributions to equity participants.”
 Accounting Equation

_____Sources of assets_____
Assets = Liabilities + Owner’s Equity
 Definition of terms used in business transactions

o Asset
o Liability
o Capital
o Account receivable
o Account payable
o Prepayment
o Revenue
o Expense
o Net income
o Net loss
o Withdrawal