a. Reduce information asymmetry b/w management & investors: i. Leads to 'Adverse Selection' - Uncertain risks and rewards b. Discipline management against working on self-interest
2. Accounting is a. Defined set of rules to record transactions and their effects, aggregate them and present them in defined formats Proprietorship b. Formal Process of recording information about business transactions to provide summary statements of a company's financial position & performance to users wo require the info for decision making.
3. Accounting can differentiated based on types of users: a. External users - Called Financial Accounting - Prepared with IND-AS in India, GAAP in USA and IFRS in Rest of the world. Involves - i. Investors, ii. Lenders iii. Suppliers iv. Unions v. Employees vi. Regulators
b. Internal users - Managerial Accounting - Custom reports for internal decision making. Users include: i. C-Suite execs, ii. Board of Directors (BOD) iii. Managers iv. Internal Auditors etc.
c. Tax Authorities - Tax Accounting - for tax payable calculations
4. Who is responsible for preparing FS? a. Management - CEO and CFO signs them b. Audit Committee of BOD provides oversight on MGMTs processes c. BOD hires Auditors to check compliance of process followed by Management d. MCA & other regulators foresee and penalize if required e. Information intermediaries may question firms with suspect accounting.
5. Why do we need FA rules? a. Principles and concepts are well defined to prevent mis & multiple interpretations b. Consistent over time and across sectors/businesses c. Widely understood language to facilitate inter-geographic communications
6. Who makes these rules? a. IND AS by MCA as per recommendations of NFRA b. GAAP by FASB. Was with SEC before c. IFRS by IASB for ROW