Financial Reporting and Analysis
Financial Accounting
Financial Reporting and Analysis Notes and question Answer for B.com hons/MBA
- Definition
- Three Activities,
- Generally Accepted Accounting Principles.
- Balance Sheet,
- Income Statement and Retained Earnings
- Cash Flow Statement
Accounting and its importance
Accounting is the process of identifying, gathering, measuring and communicating financial information about a company's operations.
Accounting is essential to business decision making and monitoring of its activities.
The two main purposes are:
• To report the financial position of a company
• To assess the performance of the company vis-à-vis a defined period
The most common measurement of performance is profit
Accounting Year
Financial health of a company is assessed with respect to a period
- Monthly; Quarterly; Half yearly; Annual
- A Financial year: any 12 month period used for accounting
- This need not coincide with a calendar year.
- Different countries follow different financial year
- Financial year followed by most Indian companies
April 1st to March 31st
Various Financial Statements
Profit & loss statement
|
Income |
What a company earns through business |
|
Expenses |
Cost incurred to procure or consume any goods or services |
Cash flow statement
|
Inflow |
Funds flowing into the company |
|
Outflow |
Funds flowing out of the company |
Balance Sheet
|
Liabilities |
Obligation to repay someone for funds, goods and services procured |
|
Assets |
Any tangible or intangible resources owned by a company |
Reporting Standards
Preparation of accounting information and its presentation on the financial statements is guided by the 'Generally Accepted Accounting Principles' (GAAP) prevailing in the geography in which the company is incorporated. When a company lists shares on the stock exchanges of other geographies, it is required to comply with the GAAP prevailing in that respective geography by preparing another set of financial statements complying with such GAAP. Adherence to GAAP makes the financial statements of the company comparable with other companies in the same geography
GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions.
Reporting Standards
What are the Principal Qualitative characteristics of GAAP?
Four principal qualitative characteristics that make the financial information useful:
- Understandability
- Relevance
- Comparability
- Reliability
- Faithful representation
- Substance over form
- Neutrality
- Prudence
- Completeness
IFRS
A recent development in this field has been the introduction of IFS or 'International
Financial Reporting Standards'.
IFRS - a framework for reporting and accounting treatment of various items, was introduced by International Accounting Standards Board to provide uniformity to global accounting practices : and thus to make financial statements comparable across geographies.
For Example, Plant and Machinery is classified as fixed assets in India, but non-current assets in some other geographies. These kind of differences will go away under IFS.
Remember
Remember, however, that accounting fundamentals don't change irrespective of these differences. Accounting revolves around six simple concepts: asset, liability, income, expense, inflow and outflow. Once we master them, the rest is easy.
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