finance and accounting

1. FINANCE & ACCOUNTING
Mini-MBA Course
Ch.4
Prepared by:
Amr Abdel-Aziz
Computer science, Helwan University
Amr.abdulaziz@outlook.com

4. INTRODUCTION 
Finance and accounting are two common topics within almost
every MBA program. Depending on the nation, various
governments have unique requirements that tie into reporting
practices for organizations. While they are connected functions
within all organizations, teaching them separately tends to lose the
interconnectedness necessary to avoid financial fallouts. So rather
than treat these topics in separate chapters like courses within an
MBA program, we’ve placing them together in the same chapter.
We’ll break down this chapter into two sections, one for finance
and one for accounting. After both are covered, we’ll briefly cover
the connections between the two along with other topics.

5. INTERNATIONAL FINANCIAL MANAGEMENT
 The Global Financial Environment – International financial
management came about as a result of the trade liberalization
phenomenon, where countries started reducing trade barriers
unilaterally and opening their doors for each other. International
trade flourished due to initiatives like the General Agreement on
Trade and Tariffs (GATT), the North American Free Trade
Agreement (NAFTA), and World Trade Organization (WHO). In
recent years, Brazil, Russia, India, and China (BRIC) account for
two-fifths of the gross domestic product (GDP) of all emerging
countries, mainly due to their low labor and production costs.
Four major aspects that differentiate domestic financial
management and international financial management are:
introduction of foreign currency, political risk, market
imperfections, and enhanced opportunities. Multinational
corporations (MNCs), which produce and sell goods or services
in more than one nation, are major players in a global financial
environment. McDonalds, PepsiCo, Microsoft, British Petroleum,
Apple, Caterpillar, Sony, Deutsche Telekom are some of the
successful MNCs.

6. CURRENCY BASICS
 International business involves foreign currency
transactions for at least one party. There are three
main currency systems: floating currencies, fixed
(or pegged) currencies, and currencies in target
zones or crawling pegs. The floating currencies
system is one which countries allow the value of
their currencies to be determined freely in the
foreign exchange markets. Major currencies, such
as the dollar, yen, euro, and pound fall into this
category. In most countries, the government has
control over the money supply through a central
bank.

7. CURRENCY CRISES
 The price of foreign currency in terms of the domestic
currency is the exchange rate, e.g. the Mexican peso price of
the Canadian dollar. Many developing countries have fixed (or
pegged) exchange rate systems. With the fixed currencies,
governments allow their currencies to trade at particular
“pegged” values relative to a basket of currencies; namely, the
dollar, the euro, the yen, and the pound. The fixed-rate
proponents believe that the currency volatility is not beneficial
for international trade. Instead of a standard pegged
exchange rate system, some countries have opted for a
currency board, which issues base money that is fully backed
by a foreign reserve currency and fully convertible into the
reserve currency at a fixed rate and on demand. To seek
exchange rate stability, the European Union (EU) countries
use the euro that is issued by the European Central Bank.


8. CURRENCY CRISES
 During the past few decades, both the developed
and developing countries encountered several
waves of currency crises. Some of the
explanations of the crises include: (a) depreciation
(devaluation) of one country’s currency makes its
exports less expensive, thereby creating pressure
on its competitors to also devalue their currencies;
(b) financial interdependence among countries; and
(c) crisis experienced in one country causes other
countries with similar characteristics to be
perceived negatively.

9. ADVANTAGES AND DISADVANTAGES OF
ADOPTING THE EURO
 Currently, 23 countries are using the euro. Sharing a currency
makes prices easier to understand and compare, lowers
transactions costs, removes exchange rate uncertainty, and
enhances competition. The potential cost of a single currency
is that if there is a sudden fall in demand for a country’s main
export product or a sudden increase in the price of one main
input for a country’s manufacturing sector, it can no longer
break off a recession or unemployment through monetary
policy. An EC country facing higher inflation than other EC
countries will soon lose its competitiveness with lower exports,
lower economic growth, and declined tax revenues. This
happened to Greece, Spain, and Portugal in recent
years. Many U.S. economists think that Europe is not well
suited to be a monetary union because the shocks hitting
European countries are quite asymmetric (different among
countries), given their cultural, linguistic, and legal differences.

10. FOREIGN EXCHANGE MARKETS
 The foreign exchange ( [ Forex ] in short) market is a large, over-
the-counter market composed of banks and brokerage firms and
their customers in the financial centers of countries
worldwide. Exchange rates can be quoted in direct terms as
the domestic currency price of the foreign currency or in
indirect terms as the foreign currency price of the domestic
currency. Exchange rates between two currencies that do not
involve the U.S. dollar are called cross-rates. Triangular
arbitrage keeps cross-rates in line with exchange rates quoted
relative to the U.S. dollar. An example of triangular arbitrage is to
buy some pounds with euros and then simultaneously selling the
pounds for dollars and selling the dollars for euros. If the ending
number of euros is greater than the starting number, there is a
profit. Traders quote two-way prices in a bid-ask spread; and
they buy one currency at the low bid price and sell that currency
at the higher ask (offer) price. Changes in flexible exchange rates
are described as currency appreciations and depreciations.

11.  Foreign Direct Investment (FDI) – FDI refers to the
acquisition of existing companies in a foreign
country. A less costly entry mode is to establish a
new subsidiary. While the growth in FDI in
developing countries, such as China and Africa,
was faster than in developed countries, FDI
remains primarily an activity between developed
countries. FDI flows to and from developed
countries by the global financial crisis that began in
2007 has slowed economic growth. An
improvement in FDI depends on improved growth
prospects in the world economy and financial
market conditions.

12. TRANSACTION EXCHANGE RISK
 Transaction Exchange Risk, Foreign Exchange Risk, and
Hedging – Fluctuations in exchange rates while waiting for
delivery of goods and payment of goods in a foreign country
could create potential losses or gains for the parties involved.
The possibility of taking a loss is called “transaction exchange
risk.” Since exchange rates can fluctuate in an unfavorable
direction, companies dealing in different currencies have to
mitigate and manage the risk that the foreign currencies will
depreciate in value before payments are received. With the
goal of managing foreign exchange risk and transaction
exchange risk, forward foreign exchange market (also called
the forward market) exists to allow companies to hedge
(protect) themselves against transaction exchange risk by
entering into additional contracts that would potentially provide
profits.

13. GLOBAL COST OF CAPITAL
 The top oil companies (BP, Chevron, ConocoPhillips, ExxonMobil, Shell)
are posting unprecedented profits in 2011. Are these companies creating
value for their shareholders? The answer is not just based on the level of
these companies’ earnings, but also on: (a) how large an investment has
been made in order to produce these earnings; and (b) how risky the
investors perceive the investments. From a financial standpoint, we need
to know the rate of return earned on the invested capital as well as the
market’s required rate of return on the invested capital. The cost of capital
is the rate that must be earned on an investment project if the project is to
increase the value of the common stockholders’ investment. ExxonMobil’s
April 2012 growth period return on capital and cost of capital are 40% and
11.35%, respectively. Its April 2012 perpetual period return on capital and
cost of capital are 15% and 9.36%, respectively. By realizing a premium
that is over its capital cost, it is creating value for its stockholders.

14. INTERNATIONAL CAPITAL BUDGETING
 Capital budgeting is the process by which
corporations decide how to allocate funds for
investment projects. The basic principle of capital
budgeting is that all projects with a positive
adjusted net present value (ANPV) should be
accepted. Two valuation alternatives to ANPV
are: the weighted average cost of capital (WACC)
approach and the flow-to-equity (FTE) approach.

15. GLOBAL INVESTMENT MARKET
 International Stock Markets – An MNC can obtain additional funds by
issuing shares to its existing shareholders or new shareholders. Most
MNCs have shares listed on the stock market of the country in which
they are headquartered, but many list their shares on several stock
exchanges around the world. The largest stock market capitalizations
are in the United States, the United Kingdom, and Japan. A trading
system may be order driven or price driven. In a price-driven
system, dealers stand ready to buy at a bid price and sell at an ask
price. NASDAQ (stands for “National Association of Securities
Dealer Automated Quotation system) in the U.S. is such a
system. In an order-driven system, share prices are determined in
an auction that brings together the supply and demand of
shares. The Tokyo Stock Exchange (TSE) in Tokyo is an example of
an order-driven system. The New York Stock Exchange (NYSE) has
elements of both systems.

16.  Trading on Margin and Selling Short - A "margin account" is a
brokerage account in which the brokerage firm lends the
investor the cash with which to buy securities. The brokerage
firm charges a margin rate, which is interest that must be paid
on the amount borrowed. The "margin" in the account is the
amount of money or securities the investor must deposit in
order to create a loan against securities held in the account. A
margin account, therefore, offers increased purchasing power
for additional securities. Margin accounts can also be used to
enhance anticipated gains from the short sale of a stock.
Selling a stock short means that the investor would borrow
stock from a firm and sell the stock with the hope that the
stock's price falls. If the price falls, the investor would then buy
the stock back at the lower price and return it to the broker,
pocketing the difference.

17.  Trading on Margin and Selling Short - A "margin account" is
a brokerage account in which the brokerage firm lends the
investor the cash with which to buy securities. The
brokerage firm charges a margin rate, which is interest that
must be paid on the amount borrowed. The "margin" in
the account is the amount of money or securities the
investor must deposit in order to create a loan against
securities held in the account. A margin account, therefore,
offers increased purchasing power for additional securities.
Margin accounts can also be used to enhance anticipated
gains from the short sale of a stock. Selling a stock short
means that the investor would borrow stock from a firm and
sell the stock with the hope that the stock's price falls. If the
price falls, the investor would then buy the stock back at
the lower price and return it to the broker, pocketing the
difference.

18. EXAMPLE [C]
 In 2010, China launched a pilot program that
allowed qualified brokerages to conduct margin
trading and short-selling operations. This is a bid to
expand the underdeveloped market, deepen the
country's capital markets, and diversify brokerages'
profit lines amid a weak performance of local
stocks. Although short selling allows investors to
make trades and bet on expectations that the
market will decline, China's investors are not drawn
to it, partly because of the limited number and types
of underlying securities.

19. DERIVATIVE SECURITIES
 Forwards, Futures, Options, Swaps – A derivative
security is an investment from which the payoff over
time is derived from the performance of an
underlying asset. Examples of derivative securities
include: forwards, futures, options, and swaps,
which are financial contracts. The values of these
financial contracts depend on the values of
underlying asset prices, e.g. exchange rates,
interest rates, or stock prices.

20. HEDGING METHODS
 Several hedging (protection) methods are available
to companies that desire to eliminate short-term
transaction exposure. The most common method is
using forward contracts. A forward contract between
a bank and a client calls for delivery of a specified
amount of one currency against payment in another
currency at a specified future date. The specified
exchange rate is called the “forward rate.” Besides
forward contracts, there are other methods of
hedging transaction exchange risk:

21. OTHER HEDGING METHODS
 Futures Contracts – A futures market hedge is essentially the
same as a forward market hedge. If a company purchases a
futures contract to hedge its foreign currency accounts
payable due in a few months, an increase in the foreign
currency would cause a corresponding increase in the
accounts payable due.
 Currency Options – Options provide one party the right to buy
or sell a specific amount of currency at a specified exchange
rate on or before an agreed-upon date. If the exchange rate is
favorable, the option holder can exercise the option. If the rate
moves against the holder, the option can be left to expire.
 Currency Swaps/Credit Swaps – Swaps are agreements by
two parties to exchange specified amounts of currency or
credits now and to reverse the exchange in the future. Default
on a swap generally results in no loss of investments or
earnings.

22. CURRENT FINANCIAL PERSPECTIVES
 The Global Financial Crisis – The crisis is commonly
believed to have started in 2007 in the U.S. when the
value of sub-prime mortgages (non-conventional
mortgages offered to borrowers with lower credit ratings
at higher interest rates) caused serious liquidity
issues. Reacting to the crisis, the U.S. Federal Bank
injected substantial amount of capital into the financial
markets. By September 2008, the crisis deteriorated as
the stock markets around the world crashed. In the U.S.,
the value of homes tumbled. Borrowers with negative
equity in their homes defaulted on their loans. Banks
faced a severe liquidity crisis when they repossessed
homes worth less than the original loan amounts.

23. CURRENT FINANCIAL PERSPECTIVES
 Credit Rating Downgrades – For the first time in
history, the U.S. credit rating was downgraded from
AAA to AA+ in 2011 by Standard & Poor’s (S&P), a
nationally recognized credit-rating
agency. Although Moody’s and Fitch Ratings, two
other U.S. credit-rating agencies, reaffirmed an AAA
rating for the U.S., the outlook on U.S. debt was
classified as “negative.” Responding to the
downgrade, China, U.S.’s largest foreign creditor,
called for a new global reserve currency to take the
place of the dollar.

24. EXAMPLE [D]
 In February 2012, Moody’s downgraded the credit
ratings on Italy, Portugal, Spain, Slovakia, Slovenia,
and Malta, while dropping the outlooks for France,
Britain (currently has the highest AAA rating), and
Austria from “stable” to “negative”. These three
countries are put on negative watch due to
uncertainty over Europe’s handling of its ongoing
debt crisis. Moody’s has recommended western
nations which have high debts to prioritize
programs to stimulate growth and cut deficits which
were brought by the 2008 financial crash.

25. 
PRACTICING YOUR KNOWLEDGE
Perform a historical review of currency exchange
rates to determine if your country’s currency has
strengthened or weakened relative to another
currency (e.g., the U.S. dollar) for the last three years
and determine the impact that change has had on
import and export transactions with companies in that
country (e.g., U.S.). Historical rates are available at:
http://www.oanda.com/currency/historical-rates/
Review the notes to consolidated financial statements of a Fortune 500
company and see how the company discloses derivatives and the type
of hedging activities used.

26. ACCOUNTING
Accounting has three primary focuses. Financial accounting
concentrates on the preparation and provision of financial
statements. Management accounting is concerned with
providing information to internal parties so that they can plan,
control operations, make decision, and evaluate
performance. Cost accounting intersects between financial and
management accounting by providing product cost information to
external parties for investment and credit decisions, and internal
managers for planning, controlling, decision making, and
evaluating performance.

27. MANAGEMENT AND COST ACCOUNTING
 Classification of Cost – Cost can be classified as:
(a) direct or indirect; (b) variable (constant per unit),
fixed (constant in total), or mixed (fluctuate in total
with changes in activity); (c) unexpired (assets) or
expired (expenses or losses); and (d) product
(inventoriable) or period (selling, administrative, and
financing). To convert raw material into finished
goods, manufacturers incur three inventory
accounts: raw material, work in process, and
finished goods. Overhead is any cost incurred to
make products or perform services that is not direct
material or direct labor.

28. MANAGEMENT AND COST ACCOUNTING
 Flexible Budget – A flexible budget is a planning
document that presents expected variable and fixed
overhead costs at different activity levels. The
activity levels cover the contemplated (relevant)
range of activity for the upcoming period. Within
the relevant range, costs at each successive
activity level should equal the previous activity level
plus a uniform monetary increment for each
variable cost factor.

29.  Standard Costing – A standard is a performance
benchmark or norm used for planning and control
purposes. A standard cost system determines
product cost by using standards or norms for
quantities and/or prices of component elements.
Developing a standard cost involves judgment and
practicality in identifying material and labor types,
quantities, and prices as well as an understanding
of the types of organizational overhead costs.

30.  The Budgeting Process – Budgeting is the process of
formalizing plans and translating qualitative narratives
into a documented, quantitative format. A well-prepared
budget can: (a) effectively communicate objectives,
constraints, and expectations to personnel throughout
an organization; (b) translate a company’s strategic and
tactical plans into usable guidelines for company
activities; and (c) become a performance benchmark.
The budgeting process results in the preparation of a
master budget. The master budget is a comprehensive
set of budgets, budgetary schedules, and budgeted (pro
forma) organizational financial statements, prepared for
a specific time period and is static.

31. FINANCIAL ACCOUNTING AND REPORTING
 Financial Reporting and Accounting
Challenges – The role of financial reporting is to
assist in the making of business and economic
decisions by providing unbiased information. The
global financial crisis has affirmed the increased
complexity of Accounting. Some analysts projected
that in the future, there will be a greater regulatory
focus with a single global accounting model that
advocates integrated reporting.

32.  Review of Financial Statements – Financial
statements provide useful information about the
financial position and cash flows of an organization
to support economic decisions by its
stakeholders. Financial information is provided in
four separate financial statements: statement of
financial position (balance sheet), statement of
earnings and comprehensive income (income
statement), statement of cash flows, statement of
investments by and distributions to owners
(statement of owners’ equity).

33.  Cash vs. Accrual Accounting – Cash basis of
accounting recognizes revenue only when cash is
received and expenses only when cash is
dispersed. Accrual basis of accounting recognizes
revenue when it is earned and expenses when
incurred, without regard to the time of receipt or
payment of cash.

34.  Revenue, Expenses, Gains, and Losses –
Revenues are inflows and other increases in
assets, or reduction of liabilities. Expenses are
outflows and other decreases in assets, or
increases in liabilities. Gains are increases in net
assets (equity) that result from transactions other
than those related to the normal ongoing
operations. Losses are decrease in net assets
(equity) that result from transactions other than
those related to the normal ongoing operations.

35.  Realization, Recognition, and Matching –
Realization actually occurs when noncash
resources and rights are converted into cash or
receivables. Recognition relates to the actual
reporting of an item in the financial statements of an
entity. Matching is the process whereby costs that
are associated with particular revenues are
recognized as reductions of those revenues or as
expenses in the same period.

36.  Statement of Financial Position (Balance Sheet) – It
provides information about an entity’s assets, liabilities, and
equity, as well as their relationships to one another as of a
particular point in time. It reports the structure of the entity’s
resources and financing.
 Statement of Earnings and Comprehensive Income
(Income Statement) – the statement of earnings includes the
effects of all revenues, expenses, gains, and losses occurring
during the accounting period and separates earnings (net
income) from comprehensive income. Comprehensive
income incorporates earnings and items that are excluded
from earnings.
 Statement of Cash Flows – It reflects the entity’s cash
receipts classified by major sources, and the entity’s cash
payments classified by major uses, for the period. Those
sources and outflows include: operating activities, investing
activities, and financing activities.
 Statement of Investments by and Distributions to Owners
(Owners’ Equity) – It reflects the increases or decreases in
equity resulting from transactions with the owners.

37. RECORDING TRANSACTIONS
 Each transaction affects at least two accounts and one
or more of the three basic accounting elements (assets,
liabilities, and owner’s equity). Accounting transactions
can be classified into 5 groups:
 increase in an asset offset by an increase in owner’s
equity;
 increase in an asset offset by a decrease in another
asset;
 increase in an asset offset by an increase in a liability;
 decrease in an asset offset by a decrease in a liability;
 decrease in an asset offset by a decrease in owner’s
equity.

38. RATIO ANALYSIS
 In order to gain insight into an entity’s financial
decision making and operating performance,
financial data are converted into ratios to facilitate
the analysis. A ratio is one figure or balance divided
by another. The goal of financial statement analysis
is to measure whether an entity’s figures and
balances fall within certain acceptable ranges that
are derived from the entity’s history, the industry,
the major competitors, or the economy. The five
major types of financial ratios are: liquidity ratios,
coverage ratios, debt ratios, activity or efficiency
ratios, and profitability ratios.

39. REVENUE RECOGNITION ISSUES
 In order to recognize revenues on the income
statement, the following conditions must be
met: (a) the earnings process must have been
substantially complete; (b) the entity must have
reasonable assurance of payment; and (c) the
transaction cannot be cancelled or revoked. If any
of the conditions have not been met, revenue will
have to be deferred until an appropriate time in the
future.

40. EARNINGS QUALITY AND EARNINGS
SURPRISES
 Earnings quality is the extent to which a firm's
reported earnings accurately reflect income for that
period. Firms using conservative accounting
practices tend to penalize current earnings and are
said to have high earnings quality. Earnings
surprise is a situation where a publicly traded
company’s earnings report indicates higher or lower
profit than analysts expected. The situation can
lead to a sharp increase or decrease in the stock
price. Many companies avoid earnings surprises
by slowly distributing information before the
earnings report is released to the public.

41. INVENTORY AND COST OF GOODS SOLD
(COGS)
 Inventory represents items of tangible personal
property that: (a) are held for sale in the ordinary
course of business; (b) are currently in the
production process to be held for sale; and (c) will
be consumed in the production process of goods or
services. Both inventory and COGS are monitored
at the end of the year by a periodic system or on an
ongoing basis by a perpetual system. The cost of
the inventory and COGS can be determined by
using: (a) the average cost method, (b) the first-in,
first-out (FIFO) method, and (c) the last-in, first-out
(LIFO) method.

42.  Intangible Assets – Intangible assets are generally used to generate revenues
but have no physical substance. They can be acquired from outside the entity, or
they can be developed internally. Acquired intangibles are amortized, unless they
have an unlimited life. Internally developed intangibles are expensed. Common
examples of intangible assets are: patents, goodwill, copyrights, franchises, and
trademarks.
 Depreciation – Depreciation is the process of assigning or allocating the cost of a
fixed asset to expense for the years in which it is used to generate revenues.
Accumulated depreciation is a contra-account to the asset and is reported on the
balance sheet. The asset’s book value is its cost less total accumulated
depreciation recognized to date. Acceptable methods of calculating depreciation
include: straight-line method, double-declining balance method, and sum-of-the-
year’s-digits method.
 Current Liabilities – Current liabilities are short-term obligations whose liquidation
is reasonably expected to require the use of existing resources properly classified
as current assets, or the creation of other current liabilities. Examples of current
liabilities are: trade accounts and notes payable, loan obligations, dividends
payable, accrued liabilities, property taxes. Unearned revenue is a liability
because cash receipt precedes accrual-basis recognition

43.  Shareholders’ Equity - This is the residual interest in an
entity’s assets after subtracting the company’s
liabilities. Stockholders’ equity is presented on the balance
sheet and consists of the following items: contributed capital
(or paid-in capital), retained earnings, accumulated other
comprehensive income, and contra stockholders’ equity items.
 Earnings Per Share (EPS) – EPS is a common stock
computation. It must be reported for each income period by
all publicly held companies. Both simple capital structure
entity (an entity that only has common stock outstanding) and
complex capital structure entity (an entity with dilutive
securities [securities that can be converted into common
stock]) must present basic EPS (and diluted EPS, if
applicable) on the face of the income statement for income
from continuing operations and for net income.

44. CURRENT ACCOUNTING PERSPECTIVES
 Globalization of the financial markets has prompted the need
for international standards of accounting. The International
Accounting Standards Board (IASB) has the sole
responsibility of establishing International Financial Reporting
Standards (IFRS). IFRS represent a set of international
accounting standards that determine how economic
transactions and related events should be reported in an
organization’s financial statements. Such standards help all
businesses level have a common foundation, especially when
it comes to investment analysis. Currently, over 100 countries
have adopted the IFRS accounting standards. Some of the
countries which have not implemented mandatory adoption of
the IFRS for listed companies include: India, Japan, Saudi
Arabia, and the United States. For a complete list of the
status of IFRS adoption or convergence by country, please go
to:
 http://www.ifrs.org/Use+around+the+world/Use+around+the+
world.htm.

45.  According to the British Accounting and Finance
Association’s Financial Accounting and Reporting
Special Interest Group (FARSIG), the European Union
was in favor of minimal standards, while the IASB
wanted the highest common denominator. The IASB
was primarily influenced by the U.S.. There were some
major changes to accounting, but many items remained
the same and the resulting standards were primarily
historical-cost. The financial crisis focused attention on
issues such as fair value, the use of which was argued
to have exacerbated the crisis. The IASB was criticized
for its lack of consultation and due process. Two
scenarios are possible in the future: EU retention of
standards or the development of an EU standard-setter.

46. ENTERPRISE RESOURCE PLANNING SYSTEMS
 In order to reduce overheads, eliminate duplication of
effort, improve customer service and quality, and provide
timely management information, organizations are
replacing their decentralized information databases with
enterprise resource planning (ERP) systems. ERP
systems are packaged software programs that allow
companies to have a single enterprise-wide database to:
(a) make quicker decisions based on real-time
information; (b) improve decision making quality; (c)
reconcile and optimize conflicting organizational goals;
(d) standardize business processes; (e) improve
procedures that protect assets and prevent falsification
of accounting records; and (f) enhance audit planning
and execution. The top ERP software vendors
are: SAP, Oracle, Sage, Microsoft, and Infer.

47.  Is your organization using an ERP system? If so, what modules (e.g.
Finance/Accounting, Human Resources, Customer Relationship
Management, Project Management, and so on) does the system
include? What are the advantages and disadvantages of using an ERP
system that you and your colleagues have experienced? If your organization
is not currently using an ERP system, is there a plan to implement it in the
near future?
 International Quality Standards – To compete effectively in a global
environment, companies must recognize the need for and be willing to initiate
compliance with a variety of standards outside their domestic
borders. Standards are essentially formalized agreements that define the
various contractual, functional, and technical requirements to assure
customers that products, services, processes, and/or systems do what they
are expected to do.
 The ISO 9000 series is a primary international guideline for quality standards.
The International Organization for Standardization (ISO), based in Geneva,
Switzerland, developed the ISO 9000 series. Internally, ISO 9000 certification
helps ensure higher process consistency and quality as well as reduce costs.
Externally, ISO 9000 certified companies have an important distinguishing
characteristic from their noncertified competitors.

48.  The European Foundation for Quality Management
(EFQM) was founded in 1988 by the presidents of
14 major European companies with the
endorsement of the European Commission to
develop a European framework for quality
improvement similar to the U.S. Malcolm Baldrige
National Quality Award and Japan’s Deming Prize.
The model is based on the premise that leadership
is delivered through people, policy and strategy, as
well as partnerships and resources, which all
impact organizational processes.
Does your company follow any international quality
standards mandatorily or voluntarily?

49. PRACTICING YOUR KNOWLEDGE
 Obtain a copy of your company’s latest annual report or
published consolidated financial statements. Read and
interpret the statements with one or more of your
colleagues who have working accounting knowledge,
and check your understanding of items presented in the
statements or discussed in the notes to the consolidated
financial statements. You can download an illustrative
IFRS consolidated financial statements as your
reference from:
http://theifrs.com/blog/resources/illustrative-consolidated-
financial-statements-under-ifrs/.
 Visit the IASB website at www.iasb.org and investigate
what progress the IASB has made in developing
convergent accounting standards with countries which
have not fully implemented IFRS