Financial & Management

Accounting (FMA)

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Profit Maximization : Propositions

Operating Profit Maximization =

f(Revenue Maximization or Cost Minimization or Revenue
Maximization is greater than cost minimization.

If VC > 60% of Revenue, cost minimization may result in higher

profit than revenue maximization and vice-a-versa.

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 From Business Strategy to Business Activities to Financial
Statements to assessing business performance (maximizing
operating profit)

Market (industry/ AMNS’s You need mechanism to account for and

Strategy
AMNS’s Business

sector) Structure & Activities convert business activities into report?

Govt Policies
Revenue
AMNS’s Vision & and Cost
Mission
Financial Statements for
Accounting System Output
internal and external
(Business Language)
stakeholders

GAAP
1. Statement of income and
expenditure,
2. Statement of Sources &
Application of funds
3. Cash Flow Statement

Financial Statement Analysis &

Interpretation (Mgt Accounting)
7/22/2023 3
 FMA - Concept

What is Financial Accounting?

Recording and reporting monetary transactions (Financial

Transactions) as per statutory requirements (Generally Accepted
Accounting Principles- GAAP).

Outcomes: Financial Statements (Statement of Income and

Expenditure, Statement of Sources & Application of Funds and
Cash Flow Statement)

Users: Internal and External

Major Learnings from Financial Accounting

 Understood Concepts of accounting and rationale behind the

concepts.
 Financial Accounting enabled to record (measure) revenues and
expenses as per GAAP and to prepare financial statements.
 Understood various line items in Financial statements and importance
of Financial Statements
 Helped to know how much revenue and cost will result in ZERO profit
(BEP)? What and how much to produce?

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Major Learnings from Financial Accounting

 Can estimate the level of business risk (operating & financial)

organization is exposed
 Learnt how much revenue and cost will generate desired level of
profits?
 Understood importance of cash flow and capital blocked various
components of working capital – A/R, Inventories, etc.
 Understood as to why to reduce organization’s dependency on bank
borrowing for working capital financing?

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What is Management Accounting?

Tools and Techniques used by the management for financial

decision making, budgetary control and profitability analysis,
enterprise performance management, driving profitability
rather than just analysing it.
Major Learnings from Management Accounting

Management Accounting helped to

 analyze the financial position of the Company through ratio
analysis.
 suggest measures for improving the financial performance of
organization.
 analyze the profitability position of the company.
 assess the return on investment.
 analyze the asset turnover ratio.
 determine the solvency position of company.
 suggest measures for effective and efficient usage of inventory
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Understanding financial and management accounting
concepts, application and outcomes will enable
Business Manager to analyse and interpret financial
health of an organization.
 Business Analytics and FMA

Business Analytics utilizes Descriptive and Diagnostic analytics is

useful for cost accounting (Management Accounting) and
descriptive and predictive tools are applied for performance
measurement using financial staments (Financial Accounting).

Therefore, descriptive, predictive, and prescriptive can be used

for planning and decision making.
Understanding financial and management accounting
concepts, application and outcomes will enable
Business Analysts (Analytics) / CFO financial analyst to
do Financial Analysis (Descriptive, Diagnostic,
Predictive and Prescriptive) and Financial Analytics
 Role of Financial Analytics

The goal of financial analytics, a component of business

analytics, is to shape business strategy through reliable data,
factual insight rather than intuition.

Financial analytics offers insight into organizations' financial

status and improves the profitability, cash flow and value of the
business.

Financial analytics also helps companies improve income

statements and business processes.
Financial Analytics – Concept and Types:

Financial analytics offers various views of companies' past,

present and future performance. The following are key types of
analytics that can help companies of different sizes:

 Predictive sales analytics ( Revenue Forecasting: Variables from

Financial Statement – Financial Accounting)

 Client profitability analytics (Profitable clients: Internal variables –

Management Accounting)

 Product profitability analytics (Profitable products / services – Cost

Accounting / management accounting)
 Cash-flow analytics (regression analysis to predict operating
cash flow: working capital ratio and cash conversion cycle –
Financial and Management Accounting)

 Value-driven analytics (Focussing on business' value drivers, or the key

"levers“ - Financial and Management Accounting)

 Shareholder value analytics (examining the returns organization

provides to shareholders, is used concurrently with profit and
revenue analytics - Financial and Management Accounting)
Types of Financial Analysis

Predictive Analysis answers “What will happen in future and

when”. This involves the art of forecasting. To predict the
future occurrence of a particular event, the analyst needs to
build a model or algorithm for identifying the various necessary
components.

Prescriptive Analysis answers “How can I make it happen?”

Diagnosis and prediction are useless without recommendations
or suggestions as to how to bring about improvement.
Descriptive Analysis explains “What happened” For example conducting
financial ratio to compare RoI on historic performance using
visualization and text mining tools.

Diagnostic Analysis offers an answer to “How did it happen and why it

happened and it will also try to bring out solutions to stop such
occurrences. For example, if there is reduced number of orders by a
particular client in the previous year, the Diagnostic analysis will get to
cause as to how and why it happened. Not just this, it will also try to
bring out solutions to stop such occurrences.
Importance of FMA in Investment Banking (MBA – Finance)

Trading /Investment
2
Fund on own fund / On
behalf of client
3
1 Based &
Fee Based
Activities
Investment Sources of Funds:
Banking
Investment Own fund, Clients’4
fund and Markets
5 Avenues
(Application of
funds)

Money Market and

Forex Market 6 Capital Market 7
Return on investments depends on understanding fundamental aspects of business
based on financial statements and economic environment (FMA). 19
 Objectives of Monetary & Credit Policy are to:

Nirmala Sitharaman – Shaktikanta Das – Economic Advisor -

Growth Engine Confidence among V Anantha Nageswaran
participants

Regulate the Price of Capital. Interest Rate

Regulate the Price of Goods & Services. Inflation

Regulate the Price of Forex. Forward Premia or Discount

To Improve the Credit Flow to the Corporates.
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 Course Objectives

Learning Aims:
 Understand the framework of accounting systems and
the Generally Accepted Accounting Principles
 Preparation financial statements.
 Understand cost concepts, behavior and risk
associated with cost.
 Analyze & Interpret Financial position of an
organization.
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 Need for Accounting

Purpose of business is to make profit from operation,

one must keep an ongoing track of the activities
undertaken in course of business. Two basic questions
would have to be answered:
(a) What is the result of business operations? This will
be answered by finding out whether it has made profit
or loss.
(b) What is the position of the resources acquired and
used for business purpose? How are these resources
financed? Where the funds come from?

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Conti..

The answers to these questions are to be found

continuously and the best way to find them is to record
all the business activities.

Recording of business activities has to be done in a

scientific manner so that they reveal correct outcome.

The science of book-keeping and accounting provides an

effective solution. It is a branch of social science.

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Conti..

This course aims at providing a platform to the

participants to understand basic principles and
concepts, which can be applied to accurately
measure performance of business.

After going through this course, you should be able to

apply the principles / rules, conventions and practices to
different business situations like trading, manufacturing
or service.

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25
Accounting Definition

The field of accounting is generally sub-

divided into:
(a) Book Keeping
(b) Financial Accounting
(c) Cost Accounting and
(d) Management Accounting

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Accounting Definition - Book-keeping

“Book-keeping is an art of recording business transactions in a set

of books.”

It is basically a record keeping function. One must understand that

not all dealings are, however, recorded. Only transactions
expressed in terms of money will find place in books of accounts.

These are the transactions which will ultimately result in transfer of

economic value from one person to the other.

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Accounting Definition - Book-keeping

It is also referred to as a set of primary records. These

records form the basis for accounting.

It is an art because, the record is to be kept in such a

manner that it will facilitate further processing and
reporting of financial information which will be useful to
all stakeholders of the business.

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Accounting Definition - Financial Accounting

It is commonly termed as Accounting. The Indian Institute of

Certified Public Accountants defines Accounting as “an art of
(1) recoding,
(2) classifying and
(3) summarizing in a significant manner and in terms of (a) money,
(b) transactions and ( c ) events which are in part at least of a
(e) financial character, and (f) interpreting the results thereof.”

Financial Accounting deals with recording and reporting financial

transactions as per the statutory requirements (GAAP)

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Accounting Definition - Financial Accounting
Financial Accounting is concerned with how entities prepare
financial statements.

The intended user for financial accounting is external to the entity

(organization).

The time period for financial accounting is historical. It means that

the financial reported statements are constructed based on events
which have already happened.

Financial accounting is heavily regulated and standardized

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Accounting Definition - Financial Accounting

Therefore, the Financial Accounting course is an introduction to the

fundamental concepts of financial accounting in a management
context.
The course will teach us how accounting systems are used to record
the day-to-day economic activities of a business and places special
emphasis on understanding accounting terminology.

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Accounting Definition - Financial Accounting

You will be able to learn fundamental accounting concepts and then

apply those concepts in a detailed examination of the financial
statements used to describe the business.

In the course, you will be presented with real-world challenges that

require them to interpret the financial data to find answers.

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Financial Accounting Cycle

As soon as a transaction
Allhappens
the adjustments
it is atentriesfirst
are to be recorded
recorded in properly
subsidiary
and
book. adjusted accordingly
Financial statementTcan he transactions
now be easilyare
before preparing financial
prepared which willrecorded
exhibit thein Journal
true
statements.
financial position chronologically.
and Trail
An adjusted operating
Balance may
All the nominal accounts are to
All journals are posted into
results. also be prepared.
After
ledgertaking
be closed by the transferring to all the ledger
chronologically and
Trading Account andaccount’s
Profit
in andclosing
a classified balances,
manner.
Loss Account. a Trial Balance is prepared
at the end of the period
for the preparations of
financial statements.

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Financial Accounting - Process

1. The first step in the cycle of accounting is to identify

transactions that will find place in books of accounts.

Transactions having financial impact only are to be

recorded.

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Financial Accounting - Process

2. Secondly, the recording of the business transactions (Journal

Entry) is done based on the Golden Rules of Accounting
Golden Rule
Types of Accounts

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Financial Accounting - Process

Transaction of similar nature are grouped together and

recorded accordingly (Ledger or Books of Accounts). e.g.
Sales Transactions, Purchase Transactions, Cash
Transactions etc.

One has to interpret the transaction and then apply the

relevant Golden Rule to make a correct entry thereof
and group similar transaction into ledger.

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Financial Accounting - Process

3. Thirdly, as the transactions increase in number, it will

be difficult to understand the combined effect of the
same by referring to individual records.

Hence, the art of accounting also involves the step of

summarizing (Trial Balance) them and reporting in terms
of financial statements.

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Financial Accounting - Process

Lastly, the accounting process provides the users with financial

statements which will describe what has happened to the business.
Remember the two basic questions we talked about, one to know
whether (1) business has made profit or loss and (2) the other to
know the position of resources that are used by the business.

1. Statement of Income & Expenditure

2. Statement of Sources & Application of Funds

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Outcomes of Financial Accounting

Financial Accounting is recording and reporting

transactions of monetary term as per statutory
requirement (GAAP)

Outcome of Financial Accounting:

1. Statement of Income & Gains and Expenses & Losses,

2. Statement of Sources & Application of Fund and
3. Funds Flow Statement

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Outcomes of Financial Accounting
Statement of Income & Gain and Statement of Sources & Application of Fund.
Expenses & Losses. Shows Financial Position on a particular date
Shows Financial Performance during a since inception
period.

Profit &
Loss (P/L) Balance
Sheet (B/S)

FF
 Accounting Definition -
Management Accounting

Management Accounting (Ratios) is “the process of

identification, measurement, analysis, interpretation
and communication of information used by
management to plan, evaluate and control within an
entity and to assure appropriate use of and
accountability for its resources.

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 Accounting Definition -
Management Accounting

Management Accounting is concerned with how an

organization prepares reports like budgets for internal
users i.e. management.

Management Accounting reports are intended for future

and what may happen.

Management Accounting reports are only used within the

organization, so the organization and its management are
free to choose how they construct these reports.

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Importance of Management
Accounting

Basically, Management Accounting aims to facilitate

management in formulating strategies, planning and
constructing business activities, making decisions,
optimal use of resources, and safeguarding assets of
business.

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Cost Accounting - Concept

The theme Cost Accountancy could be defined as

application of
 cost accounting principles, methods and
techniques for
 ascertaining and controlling/managing cost,
 ascertaining profit; and
 presenting information for the purpose of
managerial decision-making.”

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Significance of Cost Accounting

Cost Accounting is frequently used to facilitate internal

decision making and provides tools with which
management can appraise performance and control
costs of doing business.

It primarily involves relating the costs to the different

products produced and sold or services rendered by the
business.

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Financial Accounting vs.Cost
Accounting

While Financial Accounting deals with (1) recording and

reporting (2) monetary business transactions (at a
broader level) as per (3) statutory requirements
(GAAP),

Cost Accounting aims at further breaking it up to the last

possible level to identify costs with products and
services.

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 OBJECTIVES OF ACCOUNTING

(a) To ascertain the amount of profit or loss made by the

business i.e. to compare the income earned versus the
expenses incurred and the net result thereof.
(b) To know the financial position of the business i.e. to
assess what the business owns and what it owes.
(c) To provide a record for compliance with statutes and
laws applicable.
(d) To enable the readers to assess progress made by the
business over a period of time.
(e) To disclose information needed by different
stakeholders.
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ACCOUNTING CONCEPTS AND CONVENTIONS

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ACCOUNTING CONCEPTS AND
CONVENTIONS: A. BASIC ASSUMPTIONS

(a) Separate Business Entity

Concept
The entity concept requires
that all the transactions are to
be viewed, interpreted and
recorded from ‘business
entity’ point of view. Business
is separate from owner.

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ACCOUNTING CONCEPTS AND CONVENTIONS

(b) Going Concern or Continuity Concept

The basic principles of
this concept is that
business is assumed to
exist for an indefinite
period and is not
established with the
objective of closing it
down.

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ACCOUNTING CONCEPTS AND CONVENTIONS

(c) Money Measurement Concept

A business transaction will
always be recoded if it can be
expressed in terms of money.
The advantage of this concept
is that different types of
transactions could be
recorded as homogenous
entries with money as
common denominator.

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ACCOUNTING CONCEPTS AND CONVENTIONS

(d) The Accounting As per the going-concern concept

Period Concept the business entity is assumed to
have an indefinite life.
Now if we are to assess whether
the business has made profit or
loss, should we wait until this
indefinite period is over?

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ACCOUNTING CONCEPTS AND CONVENTIONS

(d) The Accounting Would it mean that we will not be able to

Period Concept assess the business performance on an
ongoing basis?

Does it deprive all stakeholders the right to

the accounting information?

Would it mean that the business will not pay

income tax as no income will be computed?

To circumvent this problem, the business entity is supposed to be

paused after a certain time interval. This time interval is called an
accounting period.

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