Financial Accounting and

Reporting
Question -1
Public Company
A public company—also called a publicly traded company—is a corporation whose
shareholders have a claim to part of the company's assets and profits. Through the
free trade of shares of stock on stock exchanges or over-the-counter (OTC) markets,
ownership of a public company is distributed among general public shareholders.
Examples, Reliance, LIC, Tata Motors, Tata Chemicals

Private Company
A private company is a firm held under private ownership. Private companies may
issue stock and have shareholders, but their shares do not trade on public
exchanges and are not issued through an initial public offering (IPO).

Partnership/ Limited Liability Partnership

A partnership has two or more parties as co-owners, and each owner is a partner.
Individuals, corporations, partnerships, or other types of entities can be partners.
Income and loss of the partnership “flows through” to the partners and they
recognize it based on their agreed upon percentage interest in the business. In
general, a partnership is not a taxpaying entity. Instead, each partner takes a
proportionate share of the entity’s taxable income and pays tax according to that
partner’s individual or corporate rate.

A limited-liability partnership is one in which a wayward partner cannot create a large

liability for the other partners. In LLPs, each partner is liable for partnership debts
only up to the extent
of his or her investment in the partnership, plus his or her proportionate share of the
liabilities.
Each LLP, however, must have one general partner with unlimited liability for all
partnership
debts.

Financial Accounting and Reporting 1

 Proprietorship/ One Person Company
A proprietorship has a single owner, called the proprietor. Proprietorships tend to be
small retail stores or individual providers of professional services—physicians,
attorneys, software programmers, or accountants. Legally, the business is the
proprietor, and the proprietor is personally liable for all the business’s debts.

Question -2

Question -3
Managerial
Basis Financial Accounting Cost Accounting
Accounting

Record Transections Ascertainment, To assist the

& determine financial Allocation, management in
Objects
position & Profit and Accumulation and decision making and
Loss accounting for cost. policy formulation
Concerned with both Deals with projection
Concerned with
Nature past and present of data for the further
historical data
records. use
Certain Principle
No set principle are
Principle Followed Governed by GAAP followed for recording
followed in it.
cost.

Uses both qualitative

Qualitative aspect Only qualitative
Data Used and quantitative
are not recorded. aspect are recorded.
aspects.

Examples
Financial Accounting is used for Creditors, Shareholders, Tax Authorities and other
external purposes, like Balance sheet, Profit and loss statement, Cash Flow
statement while Management and cost accounting used for managerial decision
making, Managerial Performance and Planning Evolutions.

Question - 4

Financial Accounting and Reporting 2

 Modern economies rely on cross-border transactions and the free flow of
international capital. More than a third of all financial transactions occur across
borders, and that number is expected to grow.

Investors seek diversification and investment opportunities across the world, while
companies raise capital, undertake transactions or have international operations and
subsidiaries in multiple countries.

In the past, such cross-border activities were complicated by different countries

maintaining their own sets of national accounting standards. This patchwork of
accounting requirements often added cost, complexity and ultimately risk both to
companies preparing financial statements and investors and others using those
financial statements to make economic decisions.

Applying national accounting standards meant amounts reported in financial

statements might be calculated on a different basis. Unpicking this complexity
involved studying the minutiae of national accounting standards, because even a
small difference in requirements could have a major impact on a company’s reported
financial performance and financial position—for example, a company may
recognize profits under one set of national accounting standards and losses under
another.

Benefits
IFRS Accounting Standards bring transparency by enhancing the international
comparability and quality of financial information, enabling investors and other
market participants to make informed economic decisions.

IFRS Accounting Standards strengthen accountability by reducing the information

gap between the providers of capital and the people to whom they have entrusted
their money. Our Standards provide information that is needed to hold management
to account. As a source of globally comparable information, IFRS Accounting
Standards are also of vital importance to regulators around the world.

And IFRS Accounting Standards contribute to economic efficiency by helping

investors to identify opportunities and risks across the world, thus improving capital
allocation. For businesses, the use of a single, trusted accounting language lowers
the cost of capital and reduces international reporting costs.

Example
For example, If company wants to publish its balance sheet, Profit and loss
statement, etc. to the public and if there is in particular nation standards then

Financial Accounting and Reporting 3

 sometimes it can book profit in one country while in other it can be loss. To remove
this type of complications IFRS can help to standardize its accounting statements.

Question - 5
Inventory is a tangible resource that is hold for resale in normal course of operation.
Inventory intended for resale. A car which is Mfg. by company is the inventory for
them, while the person who purchases is asset for him. So the inventory is intended
to sale is the current asset because it is going to sell after sometime.

Current Asset
The current assets meaning is easy to define. These are resources that you can turn
into cash or cash equivalents. It should proceed within a short period of time. In this
way, the current assets support paying the ongoing costs of companies immediately.

For Example,

Cash

Inventory

Prepaid Expenses

Accounts Receivables

Non- Current Asset

Non-current assets,  also famous as long-term investments, are the next resources
that the companies owe. A non-current asset is hard to liquidate in comparison to the
current assets.

For Example,

Property, Plant, Equipment

Land

Trademarks

Long Term investment

Question - 6

Financial Accounting and Reporting 4

 Double entry system of book-keeping has emerged in the process of evolution of
various accounting techniques. It is the only scientific system of accounting.
According to it, every transaction has two-fold aspects–debit and credit and both the
aspects are to be recorded in the books of accounts.

Advantages of Double Entry System

1. By the use of this system the accuracy of the accounting work can be
established, through
the device of the trial balance.

2. The profit earned or loss suffered during a period can be ascertained together
with details.

3. The financial position of the firm or the institution concerned can be ascertained
at the end
of each period, through preparation of the balance sheet.

4. The system permits accounts to be kept in as much details as necessary and,

therefore affords
significant information for the purposes of control etc.

5. Result of one year may be compared with those of previous years and reasons
for the change
may be ascertained.

Example
Consider ABD company Transection basis of double entry system

Schedule No. Property Asset Equity Liability

Transfer of
50000Rs to ABS
1 50000 50000
bank account as
owners equity

Rent of a
2 (10000) (10000)
Building
Purchase of
3 (20000) (20000)
Product X

Loan from Bank

4 80000 80000
B

Financial Accounting and Reporting 5

 Schedule No. Property Asset Equity Liability

Purchase of
5 Product X on 30000 30000
credit
Sale of Product
6 10000 10000
X

Rules of Debit and Credit

Inventory
Inventory is a tangible resource that is hold for resale in normal course of operation.

Financial Accounting and Reporting 6

 Types Of Inventory
Perpetual Inventory System
Updates the inventory system each time inventory brought or sold.

Periodic Inventory System

Updates inventory system only at the end of accounting period.

Inventory Costing System

Specific Identification

First in First Out (FIFO)

Last in First Out (LIFO)

Weighted Average Method

Types Of Accounts

Financial Accounting and Reporting 7

 Accrual Basis Accounting and Cash basis
Accounting
Accrual accounting records the impact of business transactions and events on an
entity’s assets and liabilities over the period in which they occur, even if the resulting
cash receipts or payments occur in a past or future period. For example, when a
business performs a service, makes a sale, or incurs an expense, the accountant
records the transaction even if it receives or pays no cash at the time of the
transaction.

Cash-basis accounting records only cash transactions—cash receipts and cash

payments. Cash receipts are treated as revenues, and cash payments are handled
as expenses. Profits are earned when cash receipts are greater than cash
payments, and similarly, losses are incurred when cash receipts are less than cash
payments.

To illustrate the difference between the two bases of accounting, consider the
following example. Richemont sells inventory produced at the cost of €500 to a
customer for €800 on account. The customer promises to pay in 60 days’ time.
Accrual accounting would recognize the €800 as income because making the sale
increases Richemont’s wealth and Richemont now has the right to some future
economic benefits (in the form of receivables, an asset). The eventual payment is
merely an exchange of one asset (receivable) for another (cash) and has no impact
on Richemont’s income. Cash accounting, on the other hand, will not record a sale
as there was no exchange of cash at the time of the sale. Only when cash is
received (60 days later) will cash basis accounting record the transaction.

The Matching Concept

The matching concept is used to explain the relationship between expenses and
revenues. The Conceptual Framework states that expenses are recognized in
the Income Statement on the basis of a direct association between the costs
incurred and the earning of specific items of income.

This process is commonly referred to as the “matching of costs with revenues.”

Unlike assets, expenses offer no future benefits to the company. Matching
includes two steps:

1. Identify decreases in assets or increases in liabilities that result in a reduction in

equity (excluding transactions with owners) during the period. These are

Financial Accounting and Reporting 8

 expenses.

2. Measure these expenses, and subtract expenses from revenues to compute

profit or loss.

Financial Accounting and Reporting 9