Fundamentals of Managerial Accounting Module 1 Fundamentals of Managerial Accounting

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

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

Need to Know About Accounting Need to Know About Accounting and Finance

How would you react to the above statement? “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?

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

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

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

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

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

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

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

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

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

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

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

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)

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

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

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

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

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

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

Financial Statements What are they? Which are important Financial Statements? What purposes do they serve?

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

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

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

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

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.

Borrowings (eg.from Banks) Balance Sheet Profit & Loss Account Liabilities Capital Borrowings (eg.from Banks) Current Liabilities Assets Fixed Assets Current Assets or Working Capital Human Assets Outstanding Infrastructure People Procurement & Inventory Consumption & WIP Delivery & Billing Collection Money Revenue Costs Reserves Profit 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.

Borrowings (eg.from Banks) Balance Sheet Profit & Loss Account Assets Fixed Assets Current Assets or Working Capital Human Assets Liabilities Capital Borrowings (eg.from Banks) Current Liabilities Outstanding Infrastructure People Procurement & Inventory Consumption & WIP Delivery & Billing Collection Money Revenue Costs Reserves Profit 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 may be prepared at any time showing the position as on that date. Profit and loss account may be prepared for any particular period.

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

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

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

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

The Annual Report Usually Contains ... Consolidated Financial Statements Subsidiaries Financial Statements Management Discussion and Analysis Annual General Meeting Notice