Accounting

FINANCIAL ACCOUNTING AND FINANCIAL STATEMENT ANALYSIS

Chapter 1

FINANCIAL REPORTING ENVIRONMENT

Copyright © 2008, AZEK/ILPIP

FINANCIAL ACCOUNTING AND FINANCIAL STATEMENT ANALYSIS Copyright © 2008, AZEK/ILPIP All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical,photocopying, recording, or otherwise, without the prior written permission of AZEK/ILPIP.

Table of contents
1. The financial reporting environment 1

1.1 The financial statements ......................................................................................................................... 1 1 .1 .1 1 .1 .2 1 .1 .3 1 .1 .4 1 .1 .5 1 .1 .6 The balance sheet.............................................................................................................................. 1 The income statement ....................................................................................................................... 3 The cash flow statement .................................................................................................................... 7 The statement ofchanges in equity ................................................................................................... 8 The notes to financial statements ...................................................................................................... 9 The relation between business activities and financial statements .................................................. 10

1.2 Financialreporting issues ..................................................................................................................... 12 1.2.1 Uses of financial statements ............................................................................................................ 12 1.2.2 International differences in accounting........................................................................................... 13 1.2.2.1. The two accounting models....................................................................................................... 13 1.2.2.2. Accounting harmonisation and the IASB.................................................................................. 14 1.3 Appendix................................................................................................................................................ 16

1. The financial reporting environment 1.1 The financial statements
Financial accounting is considered to be the language of business. It is a medium by which the business activities of an organisation are made known to the external world. It is not possible to explain in detail every activity of a business succinctly. Hence, financialstatements are used to disseminate information about the organisation. The main objective of financial statements is to provide a ‘true and fair view’ of the operations of the business to their readers. Thus, all organisations make their activities known through their financial statements. Please note that this is an introductory chapter. The entire gamut of financial accounting is like a telescope.The initial chapters contain a crisp introduction to the terminology and later chapters explain these terms in detail. The reader is therefore requested to read through the terms such as balance sheet, etc. and be comfortable with them. For a better understanding of balance sheet, income statement, cash flow statement etc., the financial statements of Novartis group are provided in an appendix atthe end of this chapter. You may go through this appendix and try to understand various items. Do not worry too much if you do not understand some things. They will be explained in detail in later chapters. There are three principal financial statements: the balance sheet, the income statement and the statement of cash flows. These are also known as the basic financial statements. Apart from...