Project Financial and

managerial Accounting
 Meaning of Accounting

 Accounting is defined as a means by which financial information

about economic entity is communicated to interested parties (users)

 It is the process of identifying, measuring and communicating

economic information to permit informed judgments and decisions
by users of information (AAA)

 Its purpose is to communicate or report the results of a business

operations and its various aspects.
 Cont’d

On analyzing the above definitions, the following characteristics of accounting emerges:

 Accounting is the art of recording and classifying different business transactions.

 Generally the business transactions are described in monetary terms.

 In accounting process, the business transactions are summarized and analyzed so as to arrive at a
meaningful interpretation.

 The analysis and interpretations thus obtained are communicated to those who are responsible to take
certain decisions to determine the future course of business.
 Objective of Accounting

 To record the business transactions in a systematic manner.

 To determine the gross profit and net profit earned by a firm during a specific period.

 To assess the taxable income and the sales tax liability.

 To know the financial position of a firm at the close of the financial year by way of
preparing the balance sheet.

 To facilitate management control.

 To provide requisite information to different parties, i.e., owners, creditors, employees,

management, government, investors, financial institutions, banks etc.
 Accounting Information Users (Interested Parties)

are mainly management personnel of an organization who have direct

involvement and control over organization’s internal activities and they have
Internal
direct access to the internal records of the company
Users
---------------------- -------------------------------------------------------------------
Are users who have no direct access to the internal records of the company.
They are, however, served through general purpose financial statements
 Lenders / Creditors
External Users
 Owners / Shareholders in a corporate form of business organization
 Employees and labor Unions
 Government
 investment Analysts and Consultants
 Accounting Information: - a means to an end

 Accounting information is not an end , but is a means to


an end i.e. its final product is decision which is
Accounting
Information - ultimately enhanced by the use of accounting
a means to
an end information, whether that decision made by owners,
management, creditors, government bodies & labor
unions
 Take a little bit....

 Why accounting is being called as “the language of business”?

 Why Accounting information is a means to an end, not the end in

itself?
 OBJECTIVES OF EXTERNAL FINANCIAL REPORTING

 External financial reporting encompasses several integral elements that

collectively provide a comprehensive view of an organization’s financial
status. At the heart of this reporting are the financial statements, which
include the balance sheet, income statement, and cash flow statement.
 The objectives of general purpose external financial reporting by business
entities in the private sector stem primarily from the information needs of
external users who lack the authority to prescribe the financial information
they need from an entity and therefore must rely on the information
provided by management.
 Con’t....Case analysis

 You are a loan officer at a bank that makes small loans to individuals to help finance
purchases such as automobiles and appliances. You are considering an application from
a young woman who needs to purchase a new car. She is requesting a loan of $10,000
which, when combined with the trade-in value of her old car, will allow her to meet her
needs. What are your expectations with regard to repayment of the loan, and what
information would help you decide whether she is a good credit risk for your bank?
Suppose You as creditor
 Financial Vs. Management
Accounting

Financial Accounting:

 Financial accounting information provides information about the financial

resources, obligations, & activities of an enterprise that is intended for use
primarily by external decision makers.

 Financial accounting information appears in financial statements that are

intended for external use.

 The primary questions about an organization’s success that decision

makers want to know are:

 What is the financial picture of the organization on a given day?

 How well did the organization do during a given period?

 Cont’d……..

Accounting answer these primary questions with four major financial

statements.

1. Balance sheet- Shows financial picture on a given day.

2. Income statement- shows performance over a given period.

3. Statement of cash flows- shows performance over a given period.

4. Statement of Change in Owners’ Equity – shows change in owners’

equity
Financial Accounting Vs. Management Accounting
 Financial accounting is aimed to provide accounting
information to external users.
 Managerial Accounting is aimed to provide accounting
information to internal users.
Although there is a difference in the type of information
presented in financial and managerial accounting, the
underlying objective is the same; to satisfy the information
needs of the user.
Criteria Management Accounting Financial Accounting
Purpose of information Help managers make decisions to fulfill an Communicate organization’s financial Position
organization’s goals and operating results to investors, banks,
regulators, and other outside parties
Primary users Managers of the organization External users such as investors, banks,
regulators, and suppliers

Focus and emphasis` Future-oriented (budget for 2014 prepared in Past-oriented (reports on 2013 performance
2013) prepared in 2014)

Rules of measurement Internal measures and reports do not have to Financial statements must be prepared in
and reporting follow GAAP (IFRS) but are based on cost- accordance with GAAP (IFRS) and be
benefit analysis and usefulness to managers certified by external, independent auditors
Time span and type of reports Varies from hourly information to 15 to 20 Annual and quarterly financial reports,
years, with financial and nonfinancial reports primarily on the company as a whole
on products, departments, territories, and
strategies
Behavioral implications Designed to influence the behavior of Primarily reports economic events but also
managers and other employees influences behavior because manager’s
compensation is often based on reported
financial results
 Finance

 Finance is study of how to raise money and invest it productively.

 It refers to a body of facts, principles and theories dealing with

the raising and using of money by individuals, businesses and
governments

 It uses accounting information as inputs to decision-making.

 Financial Management

 Is the management of the sources and uses of money to maximize shareholders wealth

 “Financial Management deals with procurement of funds and their effective utilization in the
business”

 It involves four finance decisions, namely:

Investment decisions (Capital budgeting)

Financing decisions (capital structure)

Liquidity decisions (working capital management/short term asset mix decision)

Dividend decisions
Financial Management Decisions
Investment  Referred to as capital budgeting decision, commitment of funds to long term assets in
anticipation of long-term benefits
Decision
 It is the allocation of capital to investment proposals
 Is related to the left side of the balance sheet

Financing
Decision • Decision related to raising funds, determining the appropriate mix
of debt and equity called capital structure

Liquidity • Decision relating to the appropriate mix of current assets and

current liabilities by considering risk-return trade off
Decision

Dividend Decision regarding the allocation of profit earned into amount that
Decision should be paid as dividend and amount that should be retained
 Thank you
for the time
being!