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Accounting for Managerial

Decisions

MBA Trimester - I

Kathmandu University School of


Management (KUSOM)

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Evaluations & Grading
Test Activities No. Weight
Quizzes & Class tests 2 10%
Assignments 2 10%
Class participation & Topic Presentation - 15%
Attendance - 5%
Mid Term Exam 1 15%
Project work & presentation ( Group ) 1 20%
End-term Exam 1 25%
TOTAL 100%

Grading
Marks and corresponding grading rule for evaluation shall be as follows:

Marks Range Above 90 85 - 90 80 - 85 75 80 70 75 65 70 60 65


A A- B+ B B- C+ C
Grade
4 3.7 3.3 3 2.7 2.3 2
Grade Point

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Course Outline & Session Plan
Session Topics to be dealt Activities
Part I: Financial Reporting and Analysis

Basic fundamentals of Financial Accounting: Faculty Presentation and


Accounting concepts, Users of Accounting discussions
Information, Branches of Accounting: financial
Discussion on articles by John C.
accounting, management accounting, Career in
Fellingham Is Accounting an
accounting: Financial accountant, cost accountant,
Academic Discipline?
1, 2 & 3 management accountant, internal auditor, account
system designer, tax accountant, statutory auditors,
Discussion on famous ethical issues
tax consultants etc.
and accounting
Enron: What Caused the Ethical
Collapse?

WorldComs Bankruptcy Crisis


Generally Accepted Accounting Principles and Topic Presentation by students,
International financial accounting standards discussions and feedback from the
4 Nepal Accounting Standards (NAS), Nepal Financial faculty G1
Reporting Standards (NFRS) Generally Accepted
Accounting Principles (GAAPS) International
Financial Accounting Standards (IFRS),
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Session Topics to be dealt Activities
Financial disclosure requirements and regulatory Topic Presentation by
institutions: students, discussions and
Conceptual framework for financial reporting, feedback from the faculty
Regulatory role of Company Registrars Office, G2
5&6 SEBON, NRB, Insurance Committee, ICAN and
Discussion on Annual
ASB/Nepal and broad overview of financial
Reports of Nepal Telecom
disclosure requirements set by these agencies;
and Nabil Bank ltd.
Content and explanation of Annual Report of a
Company;
Understanding and Preparation of financial Faculty Presentation,
Statement: discussions and some
Journalizing, posting into ledgers, preparing trial exercises
7, 8, 9 balance, adjusting entries, adjusted trial balance,
& 10 Preparing Income, Balance sheet, End-of-year
adjustments and closing, and Preparing Post closing Assignment - I
Trial balance. NAS 01; NAS 02; Implications of off- Quiz/test - I
balance sheet financial transactions and contingent
liabilities on the solvency and liquidity their
treatment and disclosure, NAS-12
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Session Topics to be dealt Activities

Statement of Cash Flow Analysis: Faculty Presentation, discussions


Concept and importance of cash flow and some exercises
analysis, Sources of cash flows; Operating,
11 & 12 investing and Financing Activities, Method of
cash flow: Direct and Indirect method,
Preparing cash flow statement and its
interpretation. NAS 01 and NAS 07.

Financial Statement Analysis Topic Presentation by students,


Overview of financial analysis, techniques: discussions and feedback from
Vertical Vs. Horizontal Analysis; Common Size the faculty G3
13 & 14 Statements, Financial Ratio Analysis: for
Faculty Presentation, discussions
assessing solvency, liquidity, profitability and
and some exercises
market performance, Du-pont analysis, short
comings of ratio analysis. Mid-Term Examination

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Session Topics to be dealt Activities
Part II: Managerial Accounting
Overview of Managerial accounting:
Difference between management and financial
accounting, Role of management accounting
information in planning, controlling, directing, Projects shall be discussed and
motivating, and performance measurement, assigned.
15
Accounting position in organization structure,
Faculty Presentation and discussions
Controller-ship and treasurer-ship function of CFO,
Role of management accounting changing
environments, career in management accounting
(CMA, CIMA, ICWA), ethical code of conduct.

Cost Behavior and Cost Volume Profit Analysis; Faculty Presentation, discussions
Cost elements, cost classification, Cost behavior: and some exercises
16, 17, Methods of segregating semi-variables costs.
18 & 19 Development of cost function and estimation of cost.
CVP Analysis and CVP analysis with or without
resources constraints. Operating leverage. Exercises
using excel spread sheet

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Session Topics to be dealt Activities

Income effects of alternative product costing methods: Variable Faculty Presentation,


and absorption costing methods, why incomes different? discussions and some
20 & 21
Considerations for the selection of a method. exercises

Costing of products and services : Brief outline of costing systemsJob, Topic Presentation by students,
Process, Batch, Joint-product; Costing under Job Costing system with discussions and feedback from
distinction of standard, normal and actual costing; Different basis of the faculty G4
22 & 23 overhead allocation and end-of year adjustment of under or over
allocation; Activity-based method of overhead allocation distinguishing
from departmental-based.

Relevant Cost for Decision- Making Faculty Presentation, discussions


Steps of managerial decision, types of decisions: Adding or Dropping and some exercises
product lines decisions, Accepting or rejecting special offer decision, Make
24, 25, 26 Assignment - II
or Buy part and components, Sell or process further decisions, Sales mix
& 27 decision under single resource and multiple resource constraints, Quiz/test II
Replacement decision, Lease or purchase, Target costing and pricing
decision.

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Session Topics to be dealt Activities

Profit Planning: A Tool of Strategic Planning and control Topic Presentation by students,
Concept of budget and its objectives, requisites for discussions and feedback from
28, 29 successful budgeting, participative budgeting, budget the faculty G5
& 30 committee, and zero based budgeting. Preparation of
Faculty Presentation, discussions
Master budgets, exercises in budgeting. Responsibility
and some exercises
accounting

Flexible Budget and Flexible Budget Variance Topic Presentation by


Analysis: Overview of flexible budget, use of students, discussions and
31 & flexible budget in performance measurement , feedback from the faculty
32 overhead variances ,Variance analysis, reasons for G6
differences and responsibilities, Balance Scorecard
Faculty Presentation,
discussions and some
exercises

End-Term Examination and Project Presentation


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List of books for reference
Garrison, R. & Noreen, E. (2012). Managerial
Accounting (14th ed.). Tata McGraw Hill Irwin

Financial Accounting for Decision Makers, International


Student Edition ( Gary A. Porter and Curtis L. Norton )

Accounting Principles (sixth edition) by Robert N


Anthony, James S Reece

International Financial reporting Standards (IFRS) and


Nepal Financial Reporting Standards

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PART I Financial Reporting and Analysis

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What Is Business?

to provide with
members goods
Activities of an and
economic services
system

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Forms of Organization

Sole Proprietorship one owner

Partnership two or more owners

Corporation
entity organized under
laws of a particular state

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Nonbusiness Entities

Government Entities Private Organizations

Federal, State, and


Hospitals, Universities,
Local Governments
Cooperatives

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Business Activities

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The Nature of Business Activity
Financing Investing Operating
Activities Activities Activities
Examples:
sale of
borrowing purchase of assets
products/services
sale of stock costs incurred
to operate business

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What is Accounting?

Accounting is not just a procedural record-keeping


activity done by people Who are good at math.
In fact, Accounting is the process of identifying,
measuring and communicating economic
information to permit informed judgments and
decisions by users of the information

American Accounting Association

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What Is Accounting?
Identifying
to
Measuring Economic various
Information users

Communicating

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Myth #1: Accounting = Bookkeeping
Not true!!!!!!

Bookkeepers typically perform data entry tasks

Typically do not have a higher degree/qualifications

Accountants take over where bookkeepers leave off

Spend most of their time in a decision-making capacity


Assist company management to understand financial impact of business decisions
Typically they have professionals degrees like CA, ACCA, CPA, MBA etc.

ACCOUNTING IS THE LANGUAGE OF BUSINESS


Myth #2: Accounting is boring!
Not True!!! Would you consider the following careers boring?
Chief Financial Officer (CFO) for Ford Motor, Microsoft, Procter & Gamble etc.

Tax Accountants work in public accounting, industry, or government (IRS).

An IT Auditor: Blend of accounting and technology - in high demand. Ensure that a company's
cyber security is reliable.

A Plant Controller. Determine how much it really costs to make a product.

Government Accountant. Work for federal, state, or local government in various roles. (Auditor
General)

Finance Director for different entity.


Internal and External
Users of Accounting Information
Bankers
Current
Creditors
and
Potential Internal
Owners Users
Management Financial
Analysts
Suppliers

Trade Government
Associations Agencies
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Decisions Made with
Financial Information
Add new
Invest??
product line??
Borrow $$?? Build new plant??
Extend credit $$?? Loan $$??
Start new business?? Sell stocks or bonds??

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Why do we need to Understand Accounting?

Common Questions Asked? Users &Decisions


related with
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Which product line is most
profitable? For the Management
decision
4. Is cash sufficient to pay dividends making!
to the stockholders? Finance
5. What price for our product will
maximize net income? Marketing
6. Will the company be able to pay
its short-term debts? Creditors

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The Accounting Equation
Assets = Liabilities + Owners Equity
(or Stockholders Equity)

Economic Creditors Owners


resources
= claims + claims
to assets to assets
Examples:
Cash Accounts payable Capital stock
Accounts receivable Notes payable Retained earnings
Land
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Balance Sheet
(snapshot of financial position)

Assets
= Liabilities
+
Owners Equity
(or Stockholders Equity)

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Top of the World
Balance Sheet
June 30, 2012
A A = L + SE
Current assets:
Cash $ 200
Accounts receivable 600
Land 4,000
Lodge, lifts and equipment 2,500
Total assets $7,300

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Top of the World
Balance Sheet A = L + SE
June 30, 2012
Liabilities and Stockholders Equity
Liabilities: = L
Accounts payable $ 700
Salaries and wages payable 400
Notes payable 3,000
Total liabilities $4,100

Stockholders equity: + SE
Capital stock $2,000
Retained earnings 1,200
Total stockholders equity $3,200

Total Liabilities and Stockholders Equity $7,300


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Income Statement
(for a period of time)

Revenues $$
Less: Expenses ($$)
Net income $$

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Top of the World
Income Statement
For the Year Ended June 30, 2012
Revenues Expenses = Net Income
Revenues:
Lift tickets $5,800
Equipment rentals Revenues 2,200
Total revenues $8,000
Expenses:
Salaries and wages $2,000
Depreciation 100
Water, gas, and electricity 1,500
Insurance 1,100
Interest Expenses 300
Income taxes 1,000
Total expenses 6,000
Net income $2,000
Net Income
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Statement of Retained Earnings
(for a period of time)

Beginning retained earnings $$$


Add: Net income for the period $$$
Deduct: Dividends for the period ($$$)
Ending retained earnings $$$

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Top of the World
Statement of Retained Earnings
For the Year Ended June 30, 2012
Retained earnings, beginning of the year $ 0
Add: Net income for the year 2,000
Deduct: Dividends for the year (800)
Retained earnings, end of the year $ 1,200

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Top of the World
Statement of Cash Flows
For the Year ended June 30, 2012
Cash flows from operating activities:
Cash collected from customers $ 7,400
Cash payments for:
Salaries and wages $ 1,000
Water, gas, and electricity 1,500
Insurance 400
Interest 300
Income taxes 1,000
Total cash payments 4,800
Net cash provided by operating activities $ 2,600

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Top of the World
Statement of Cash Flows
For the Year ended June 30, 2012
Cash flows from investing activities:
Purchase of land $(4,000)
Purchase of lodge, lift and equipment (2,600)
Net cash flows from investing activities $(6,600)
Cash flows from financing activities:
Proceeds from issuance of long term note $ 3,000
Proceeds from issuance of capital stock 2,000
Dividends declared and paid (800)
Net cash flows from financing activities 4,200
Net increase in cash $ 200
Cash at beginning of year 0
Cash at the end of the year $ 200
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Relationship among Financial Statements
Top of the World Example
Income Statement for Year ended June 30, 2012
Revenues $ 8,000
Less: Expenses ( 6,000)
Net income $ 2,000

Statement of Retained Earnings for Year ended June 30, 2012


Beginning balance, retained earnings $ 0
Add: Net income 2,000
Deduct: Cash dividends (800)
Ending balance, retained earnings $ 1,200

Balance Sheets
June 30, 2012 July 1, 2011
Total assets $7,300 $ 0
Liabilities 4,100 0
Capital stock 2,000 0
Retained earnings 1,200 0
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equity $7,300 $ 0 33
The Conceptual Framework:
Foundation for Financial Statements
Aids accountants in their role as
interpreters and communicators of
relevant information
Acts as a foundation for the specific
principles and standards needed by
the profession
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Financial Statement Assumptions

Economic
Entity Cost
Concept Principle
Time
Period
Assumption
Going Monetary
Concern Unit

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Economic Entity Concept
Each entity has its own books,
records, and financial statements
that are separate from owners
No intermingling of personal and
business assets and liabilities or
income and expenses
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Cost Principle
Record assets at cost paid to
acquire them
Continue to value assets at
historical cost until sold
More objective than market value

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Going Concern
Assume business will
continue indefinitely into the
future
Justifies use of historical cost

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Monetary Unit
How we measure amounts in the
financial statements (e.g., U.S. dollar,
Japanese yen, Mexican peso, etc.)
Assumes economic measure is
relatively stable; no adjustment for
inflation made in financial statements

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Accrual Concept :
According to the accrual concept revenue is recognized when it is earned and expenses are
recognized when it is incurred and obligation for payment arise, whether cash is received and paid
or not. i.e. Salary payable, electric bill payable, interest due but not paid are recognized into the
respective expenses head and liability is created. Credit sales is record as the income of the year
even though the cash is not realized.

Consistency Concept:
Accounting methods and principals are followed consistently from one accounting period to
another accounting period. Ay change in the accounting principal or methods should be clearly
indicated as notes to accounts in the financial statement. If it is not followed, the financial
statement can not be comparable for one period to another.

Conservatism Concept:
All possible losses should provide and record in the financial statements but anticipated gain should
not record. While choosing the assets valuation method, accountant should choose the method
which leads to the lesser value.
i.e. provision for bad debt, loan loss provision, Inventory is recorded at market value or cost
whichever is less
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Ethics in Accounting
1. Identify the ethical dilemma
2. Analyze key elements
3. Determine the alternatives
4. Resolve by selecting ethical alternative

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The Changing Face of the
Accounting Profession
A financial reporting crisis caused by:

Enron: the omission of entities from the


financial statements
WorldCom: treating costs as assets rather than expenses
causing higher net income

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Sarbanes-Oxley Act
Provisions of the act:
Established the Public Company Accounting
Oversight Board
Required external auditors to report directly to
the companys audit committee
Prohibits external auditors from providing
other services compromising independence

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Comparison of Financial and Managerial Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance


versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on


timeliness precision timeliness

5. Subject Primary focus is on Focuses on segments


the whole organization of an organization

6. GAAP Must follow GAAP Need not follow GAAP


and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
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Users of Accounting Information

Internal Users
External Users

Lenders Consumer Groups Managers Sales Staff


Shareholders External Auditors Officers Budget Officers
Governments Customers Internal Auditors Controllers
1-45
Users of Accounting Information

External Users Internal Users

Financial accounting provides external users Managerial accounting provides information needs
with financial statements (shareholders, for internal decision makers (officers, managers, etc.).
lenders, etc.).

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Auditing
Financial statements are prepared by
and are the responsibility of the
companys management
External auditors performs tests and
procedures to render an opinion as to
the financial statements are fairly
presented
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THE AUDIT OF FINANCIAL STATEMENTS

The process of examining the financial statements and the underlying


records of a company to render an opinion as to whether the
statements are fairly presented.
Internal Audit and External Audit

Auditors express an opinion as to the fairness of the financial


statement presentation.
Independent auditors have responsibilities that extend to the general
public.

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Where Accountants Work
Private business
Non business entities
Public accounting
Auditing services
Tax services
Management consulting services
Education
Others : Govt placement, Fund Manager.
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Career in accounting:
Financial Accountant
Cost Accountant
Management Accountant
Internal Auditor
Account System Designer
Tax Accountant
Statutory Auditors
Accounts and Tax consultants etc.
Accounting Expert

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Opportunities in Accounting

Managerial Taxation
Financial
General accounting Preparation
Preparation Cost accounting Planning
Analysis Budgeting Regulatory
Auditing Internal auditing Investigations
Regulatory Consulting Consulting
Consulting Controller Enforcement
Planning Treasurer Legal services
Criminal Strategy Estate plans
investigation
Lenders Govt investigators
Consultants Market researchers
Analysts Systems designers
Accounting- Traders Merger services Consultant
Directors Business valuation
related Underwriters Forensic accountant
Planners Litigation support
Appraisers Entrepreneurs
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Accounting concepts
NFRS : 13 / NAS 27
www.standards.org.np
IAS : 41 / IFRS 15
www.isab.org
www.ifrs.com

Nepal Accounting Standards (NAS),


Nepal Financial Reporting Standards (NFRS)
Generally Accepted Accounting Principles (GAAPS)
International Financial Accounting Standards (IFRS)
International Accounting Standard (IAS)

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Generally Accepted
Accounting Principles
The various methods, rules, practices
and other procedures that have
evolved over time that regulates the
preparation of financial statements

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Accounting as a Social Science
Accounting is a service activity
Accounting is a social science, not a
physical science
Accounting principles develop in response
to changing business conditions

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International
Accounting Standards
International Accounting Standards
Board was created in 2001
There may be significant differences
between U.S. and international
standards

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WHO DETERMINES THE RULES OF THE GAME?
Financial Accounting Standards Board (FASB) :The group in the private
sector with authority to set accounting standards.
American Institute of Certified Public Accountants (AICPA) :The
professional organization of certified public accountants (CPAs).
International Accounting Standards Board (IASB) : The organization
formed to develop worldwide accounting standards.
Institute of Chartered Accountant of Nepal ( ICAN) : Accounting
Regulatory Authority of Nepal
Association of Certified Chartered Accountants (ACCA) : Accounting
Regulatory Authority of U.K.
International Federation of Accountants ( IFAC) : The organization
formed to develop worldwide accounting professionals .
Accounting Standards : IAS / IFRs/ NAS / AS
Generally Accepted Accounting Principle (GAAP)
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Any Questions???

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