Fundamentals of Managerial Accounting

1. Module 1 Fundamentals of Managerial Accounting

2. Dr. Varadraj Bapat • Chartered Accountant • Cost Accountant • Ph.D., IIT B, Powai, Mumbai Contact Information: varadraj@som.iitb.ac.in

3. LEARNING OBJECTIVES • Need to Know About Accounting • Managerial Accounting • Financial Statements - Balance Sheet, Income Statement

4. Need to Know About Accounting • Need to Know About Accounting and Finance

5. “Why do I need to learn about finance … I am very good in my own area of specialization” How would you react to the above statement?

6. The job content Management & Finance Expertise As you move up .. Functional Expertise

7. About Managerial Accounting • What is Accounting? • Financial Accounting, Cost Accounting and Management Accounting • Financial Accounting and Financial Management • Finance and complexity of organisation

8. Accounting • Language of Business • Performance is reported and evaluated in financial terms • Knowledge is useful for personal investment and tax planning as well

9. Accounting • It is not necessary to become accountant • But its very useful if every one understands the accounting and financial concepts and terminology properly

10. Need to Learn Accounting • It assists in management • Will help in planning, organisation and control of business • Leads to increase in efficiency of business • Profit maximization

11. Streams of Accounting • Financial Accounting, Cost Accounting and Management Accounting • Let us understand the similarities and difference in these three streams of accounting

12. Financial Accounting • Recording of Financial Transactions • Reporting of Financial Results • Preparation of Financial Statements • Targeted to External Users

13. Cost Accounting • Recording of Costs • Analysis of Costs • Preparation of Cost Statements • Targeted to Internal Users

14. Management Accounting • Recording of Financial & other data • Analysis of Financial and other information • Preparation of Statements for Managerial Decisions

15. Management Accounting • Targeted to Internal Users - All levels of Management • This is a broader concept encompasses Financial and Cost Accounting

16. Meaning of Management Accounting • Any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting. (Institute of Chartered Accountants of India- ICAI) • Management Accounting is the

17. application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formation of policies and in the planning and control of operations of undertaking. (International Capital Market Association, London- ICMA)

18. Financial Management • Financial Accounting, Managerial Accounting and Financial Management: Relationship • Financial Management deals with raising and utilization of funds • Raising of funds may include Cost of Capital, Capital Structure

19. Financial Management decisions, Capital Markets, IPOs and so on • Financial Management deals with raising and utilization of funds • Utilization of funds may include Capital Budgeting, Portfolio Management, Working Capital Management and so on

20. Managerial V/s Financial Accounting Accounting System (accumulates all accounting data) Managerial Accounting Information for decision making, and control of an organization’s operations. Financial Accounting Published financial statements and other financial reports. Internal Users External Users

21. Complexity of Organisation • Finance and complexity of organisation • As the organizations grow, they become complex • Ownership and Management are separated

22. Complexity of Organisation Ownership is widespread This increases the importance of Finance function

23. About this course • Managerial Accounting Course • The course will cover Financial Accounting, Cost Accounting and Management Accounting • Financial Management is dealt in a different course

24. Financial Statements • What are they? • Which are important Financial Statements? • What purposes do they serve?

25. Company or Organisation PROVIDERS OF MONEY RESOURCES FOR BUSINESS These two are always equal

26. Money Collection Procurement Billing Consumption Delivery The Basic Business Model Infrastructure The Money Cycle Value Addition Cycle People

27. Money Collection Procurement Billing Consumption Delivery Infrastructure Revenue Costs To be profitable, our revenue should be more than our cost ! This would make the organisation stronger, healthy and long-lasting.

28. Liabilities Assets Infrastructure Revenue Capital Costs Fixed Assets Money Borrowings from Banks / FIs Collection Current Assets or Working Capital Procurement & Inventory Outstanding Current Liabilities Profit/ Loss Consumption & WIP Delivery & Billing Human Assets People Profit & Loss Account Balance Sheet Balance Sheet shows the financial position of organisation, while Profit & loss Account shows the profitability of organisation.

29. Balance Sheet shows the cumulative position of resources (assets) and sources of funds (liabilities) at the end of the year. Profit & Loss Account shows ‘Revenue & Cost’ performance during a quarter/ year.

30. Liabilities Assets Infrastructure Revenue Capital Costs Fixed Assets Money Borrowings (eg.from Banks) Collection Current Assets or Working Capital Procurement & Inventory Outstanding Current Liabilities Profit Consumption & WIP Delivery & Billing Human Assets People Profits build up reserves & enable an enterprise to acquire new assets without borrowing money. Exactly the way we can acquire assets for our use without borrowing. Balance Sheet Profit & Loss Account Reserves

31. Liabilities Assets Infrastructure Revenue Capital Costs Fixed Assets Money Borrowings (eg.from Banks) Collection Current Assets or Working Capital Procurement & Inventory Outstanding Current Liabilities Profit Consumption & WIP Delivery & Billing Human Assets People Profits build up reserves & enable an enterprise to acquire new assets without borrowing money. Exactly the way we can acquire assets for our use without borrowing. Balance Sheet Profit & Loss Account Reserves

32. Balance sheet may be prepared at any time showing the position as on that date. Profit and loss account may be prepared for any particular period.

33. Owners Funds Non Current liabilities Current liabilities Fixed Assets Non Current Investments Other non current assets Current Assets Balance Sheet

34. The Annual ReportUsually Contains ... financial statements which consist of Balance sheet, Profit & Loss A/c Cash Flow Statements notes to the financial statements disclosure of accounting policies

35. The Annual ReportUsually Contains ... • Chairman’s Statement • Board of Directors & Committees • Directors Report • Directors Responsibility Statement • Auditors Report • Report on Corporate Governance

36. The Annual ReportUsually Contains ... Disclosure regarding Employee Stock options Schemes List of employees receiving remuneration exceeding Rs. 60 Lakhs Conservation of Energy Reports

37. The Annual ReportUsually Contains ... Consolidated Financial Statements Subsidiaries Financial Statements Management Discussion and Analysis Annual General Meeting Notice