Narayanaswamy Indian Institute of Management Bangalore. Merchandising organizations Manufacturing organizations Service organizations Business organizations as cash generating-cum-dispensing machines. Accounting is the language of business Who should know accounting? Why accounting in MBA? The lemons principle and the problem of adverse selection Signalling quality Moral hazard and corporate governance. Statement of profit and loss Statement of retained earnings Balance sheet Cash flow statement Statement of retained earnings How are the financial statements interrelated?

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In all future chapters you will find a series of Problems that generally include computations, are more complex, and generally require more time to complete than Exercises. Critical Thinking Cases Chrysler Corp. Once there they learn about accounting firms, accounting textbook publishers, and professional accounting organizations.

Below are brief descriptions of each case. These descriptions are accompanied by the estimated time in minutes required for completion and by a difficulty rating. These four concepts may be described as an endless cycle in which economic activities occur, are measured by an accounting process which produces accounting information which, in turn, facilitates decision making which restarts the process as economic activities result from those decisions.

An accounting system consists of the personnel, procedures, and records used by an organization to develop accounting information and communicate that information to decision makers. To be cost-effective, the benefit of doing something must exceed the cost of doing it. In the case of an accounting system, the information provided by the system must be at least as valuable as the cost of the system to be cost-effective. We might be able to produce more sophisticated, better information, for example, but if the cost of doing that exceeds the benefit, to still produce the information would not be cost-effective.

The three basic functions of an accounting system are to: Summarize and communicate the information contained in the system to decision makers. Interpret and record business transactions. Note to instructor: We regularly include discussion questions as part of the assigned homework. The primary distinction between financial and other types of accounting information is based on the users of the information.

Financial accounting information is provided primarily to external users, such as investors and creditors. Internal accounting information, on the other hand, is prepared primarily for use by management. While there is some overlap between the information needs of these two groups, external users have different objectives than management and need different information. Accounting is a means to an end because it supports and facilitates decisions by providing important information.

The real end product is a more informed business decision because of the availability of accounting information. Accounting is a way of communicating the results of business activity and, therefore, is sometimes described as the language of business.

Among the important accounting measurements that communicate business activity and justify describing accounting as the language of business are costs, prices, sales volume, profits, and return on investment. All organizations have a need to use accounting information, even if that information is as simple as the cash flowing into and out of the organization.

This includes government organizations, not- for-profit organizations e. The terms financial reporting and financial statements do not mean the same thing, although they are closely related.

Financial reporting is a broad term that refers to all information that is available to investors, creditors, and other external users. Financial statements, on the other hand, is a more narrow term that refers to specific reports that are a part of financial reporting. Financial statements are, thus, a subset of financial reporting information.

Information about economic resources, claims to resources, and changes in resources and claims on them. Statement of financial position balance sheet —A statement that shows where the company stands at a point in time. The three primary financial statements that are means of communicating financial accounting information are: Designing and installing accounting systems is a specialized field for individuals with expertise in management information systems, as well as related fields.

The design and installation of information systems can be very complex and may require the cooperation of a large group of individuals with different areas of specialization and expertise. Today most accounting systems include significant elements of technology, so persons who design accounting systems need a strong technology background. The primary external users of financial accounting information are investors and creditors, although external users also include labor unions, governmental agencies, suppliers, customers, trade associations, and the general public.

The two primary groups of users toward which financial accounting information is directed are investors owners and creditors lenders or sellers on credit. Investors and creditors are ultimately interested in receiving back the amount they have invested or loaned, along with a return on their investment for another party having benefited from using their money. The return of your investment is the repayment to you of the amount you invested earlier.

The return on your investment is what the company pays you for having the use of your money while it was invested as opposed to your having use of the money while it was invested.

The three primary objectives of financial reporting, from general to specific, are to provide: Information that is useful in making investment and credit decisions. Information useful in assessing the amount, timing, and uncertainty of future cash flows.

Internal accounting information is used in the following three primary ways: While financial information has an appearance of precision, it often requires judgment and estimation and, thus, is less precise than one might think. For example, to determine certain information about a company for a certain year, or at a certain point in time, it may be necessary to make estimates about the future. Those estimates may or may not turn out, in the long term, to be precisely correct. This causes information about the current year to be less precise and accurate than would otherwise be the case.

To say that financial accounting information is general-purpose simply means that we generally do not prepare different information for different user groups, with some exceptions. We provide essentially the same information for both investors and creditors, for example, although their information needs may be somewhat different. Examples of management accounting information that would ordinarily not be communicated externally are: Details of production plans.

Much accounting information requires interpretation for it to be meaningful. Thus, management presents its view on information in an effort to make the information more informative.

To assess both past performance and future directions of the enterprise and the information needed to accomplish these objectives. Research and development results. Long-range plans. To help the enterprise achieve its goals, objectives, and mission.

To make decisions about rewarding decision-making performance. Competitive strategies. All of these are professional designations that provide assurance of the competence of the individual.


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Ch01 5th Ed Narayanaswamy Financial Accounting





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