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INTRODUCTION OF FINANCIAL REPORTING

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Chapter 3 INTRODUCTION OF FINANCIAL REPORTING Dr. BALAMURUGAN MUTHURAMAN 2015-2016 * FINANCIAL REPORTING Financial reporting is presentation of the formal record ... – PowerPoint PPT presentation

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Title: INTRODUCTION OF FINANCIAL REPORTING


1
INTRODUCTION OF FINANCIAL REPORTING
Chapter 3
  • Dr. BALAMURUGAN MUTHURAMAN

2
FINANCIAL REPORTING
  • Financial reporting is presentation of the formal
    record of the financial activities of a business,
    person, or other entries.
  • It is primarily an accounting function.
  • Financial reports are prepared for external as
    well as internal users.
  • Various external users are,
  • present and prospective shareholders ( owners)
  • Lenders
  • Suppliers
  • Customers
  • Government and its agencies
  • Financial analysts
  • Employees and their organisations
  • Internal user is the management.

3
FINANCIAL REPORTING FOR EXTERNAL USERS
  • Main component of the financial reports for
    external users is Annual Report .
  • Annual report contains
  • - Directors report ( which is also termed as
    management commentary) and
  • - Financial statements
  • Before to proceed further you would need to go
    beyond financial reporting. You should understand
    how a company is formed, manages its capital,
    commences functioning.

4
COMPANY FORM OF BUSINESS
  • Four important forms of business organization
    are -
  • Sole Proprietorship,
  • Partnership,
  • Cooperative Society, and
  • Joint Stock company

5
JOINT STOCK COMPANY FEATURES
  • Artificial person It is an artificial person
    created by law, having a separate legal entity,
    with a perpetual succession
  • Separate Legal Entity Being an artificial
    person, a company exists independent of its
    members.

6
Joint Stock Company
  • No physical existence A company has no physical
    existence, it must act through its Board of
    Directors.
  • Common Seal But all contracts entered by them
    shall have to be under the common seal of the
    company. This common seal is the official
    signature of the company. Any document with the
    common seal and duly signed by an officer of the
    company is binding on the company.
  • Perpetual existence It has perpetual existence.
    Since it is created by law, it can only be
    dissolved by law.

7
JOINT STOCK COMPANY FEATURES
  • Membership To form a joint stock company, a
    minimum of two members are required incase it is
    private limited company and seven members incase
    of public limited company. The maximum limit is
    fifty incase of private limited company. There is
    no maximum limit of membership for a public
    limited company.
  • Limited Liability of Members The company form of
    business is able to attract large number of
    people to invest their money in shares because it
    offers them the facility of limited risk and
    liability. The liability of a member is limited
    to the extent of the amount of shares he holds.
  • In other words, a shareholder can be held liable
    only to the extent of the face value of the
    shares he holds, and if he has already paid it,
    which is normally the case, he cannot be asked to
    pay any further amount. For example, if Mr. A
    holds one share of RO. 100 and has paid RO. 75 on
    that share, his liability would be limited only
    upto RO. 25.

8
JOINT STOCK COMPANY FEATURES
  • Transferability of Shares The members of the
    company (Public company) are free to transfer the
    shares held by them to others as and when they
    like. They do not need the consent of other
    shareholders to transfer their shares.
  • Elected Management To know that people of
    different categories and areas contribute towards
    the capital of a company. So, it is not possible
    for them to look after the day-to-day management
    of the company. They may take part in deciding
    the general policies of the company but the
    day-to-day affairs of the company are managed by
    their elected representatives, called Directors.

9
COMPANY SHAREHOLDERS
  • Number of shareholders of a joint stock company
    vary depending upon the size of its share capital.

10
BUSINESS ACTIVITIES
11
OBJECTIVE OF FINANCIAL REPORTING
  • The objective of general purpose financial
    reporting is to provide financial information
    about the reporting entity that is useful to
    existing and potential investors, lenders and
    other creditors in making decisions about
    providing resources to the entity.
  • Those decisions involve buying, selling or
    holding equity and debt instruments, and
    providing or settling loans and other forms of
    credit.
  • Many existing and potential investors, lenders
    and other creditors cannot require reporting
    entities to provide information directly to them
    and must rely on general purpose financial
    reports for much of the financial information
    they need.
  • Consequently, they are the primary users to whom
    general purpose financial reports are directed.

12
LIMITATIONS OF FINANCIAL REPORTING
  • General purpose financial reports do not and
    cannot provide all of the information that
    existing and potential investors, lenders and
    other creditors need.
  • Therefore those users need to consider relevant
    information from other sources.
  • Other parties, such as regulators and members of
    the public other than investors, lenders and
    other creditors, may also find general purpose
    financial reports useful. However, those reports
    are not primarily directed to these other groups.

13
FIVE ELEMENTS OF FINANCIAL STATEMENTS
  • An asset is a resource controlled by the entity
    as a result of past events and from which future
    economic benefits are expected to flow to the
    entity.
  • A liability is a present obligation of the entity
    arising from past events, the settlement of which
    is expected to result in an outflow from the
    entity of resources represents economic benefits.
  •  Equity is the residual interest in the assets of
    the entity after deducting all its liabilities.

14
FIVE ELEMENTS OF FINANCIAL STATEMENTS
  • Income is increases in economic benefits during
    the accounting period in the form of inflows or
    enhancements of assets or decreases of
    liabilities that result in increases in equity,
    other than those relating to contributions from
    equity participants.
  •  Expenses are 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.

15
Fundamental Accounting Equation
  • Assets Liabilities Equity
  • This a core principle of preparation and
    presentation of financial statements.

16
MONEY MEASUREMENT CONCEPT
  • In financial accounting , measurement is the
    process of determining the monetary amounts at
    which the elements of the financial statements
    are to be recognised and carried in the balance
    sheet and income statement. This involves the
    selection of the particular basis of measurement.

17
GOING CONCERN
  • An important accounting assumption
  • The enterprise is normally viewed as a going
    concern, that is, as continuing in operation for
    the expected future. It is assumed that the
    enterprise has neither the intention nor the
    necessity of liquidation or of restricting
    materially the scale of the operations.

18
ACCRUAL BASIS
  • Corporate financial reports are prepared on
    accrual basis
  • Accrual - Revenues and costs are accrued, that
    is, recognised as they are earned or incurred
    (and not as money is received or paid) and
    recorded in the financial statements of the
    periods to which they relate. (The considerations
    affecting the process of matching costs with
    revenues under the accrual assumption are not
    dealt with in this Statement.)

19
ACCRUAL
  • Two principal methods of keeping track of a
    business's income and expenses cash method and
    accrual method (sometimes called cash basis and
    accrual basis).
  • These methods differ only in the timing of when
    income and expenses are recognized in the
    accounts.
  • In cash method, income is recognized when cash is
    actually received, and expenses are recognized
    when actually paid.
  • In general all transactions are recognized when
    they occur regardless of when the money is
    actually received or paid.

20
ANNUAL FINANCIAL REPORTING
  • Annual Accounts and Balance Sheet at every annual
    general meeting of a company held in pursuance of
    the Board of directors of the company shall lay
    before the company
  • a balance-sheet as at the end of the period
    specified and
  • a profit and loss account for that period.
  •  
  • In the case of a company not carrying on
    business for profit, an income and expenditure
    account shall be laid before the company at its
    annual general meeting instead of a profit and
    loss account.

21
STANDALONE VERSUS CONSOLIDATED FINANCIAL
STATEMENTS
  • Standalone Financial statements of a reporting
    company alone
  • Consolidated Financial statements of a
    reporting company and its subsidiaries
  • Listed companies internationally present
    consolidated financial statements as the main
    reporting format
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