Corporate Financial Reporting

Week 1 Session One & Two

Manju Jaiswall
IIM Calcutta

Contact - manju@iimcal.ac.in
Office C block 305 Ext 2048
 Week 1 Learning Goals
• Understand the Users & Principle Uses of Accounting
(Chapter 1)
• Understand qualitative characteristics of Accounting
Information (Chapter 2 pg 56 + Reading handout 1)
• Understand Accounting Cycle & Process (Chapter 1)
• Understand GAAP – Principles & Concepts (Chapter 2 pg
57-58 + Chapter 1,3 + Reading Handout 1)
– Separate Entity, Going Concern, Money Measurement, Accounting Period,
Materiality, Realisation, Matching, Conservatism, Historical Cost, Fair Value
– Cash & Accrual Accounting
– Assets, Liabilities, Equity, Income, Expenses, Dividend, Retained Earnings.

• Apply Accounting Equation: (Chapter 1 & 3 pg 85-91)

– to understand the impact of selected transactions on Income, Expenses,
Assets, Liabilities and Shareholder’s Net worth.
1–2
 Why this course?
• Hertz Penalized for Accounting Mishap, Stock
Down 9.1%.
• “The last Bastion falls”- Macquarie Equities
Research downgrades HDFC for using
aggressing accounting practices inflating
earnings and ROE – shares were down by 1.6%.
• “ A House of cards” - Veritas Investment
Research describes Reliance Communications.-
plagued by high debt & “whimsical” accounting
practices – shares down to 52 week low.
• Espirito Santo Downgrades Biocon, questions its
“objectionable” Accounting Practices.
1–3
 Fortis Healthcare Ltd.
• Fortis Healthcare had Net sales recorded at Rs
512.35 crore, and with operating margins at
9.1%, operating profit was reported at Rs 46.64
crore.
• With other income of Rs 13.05 crore, PBDIT
was recorded at Rs 59.69 crore. However, higher
interest cost of Rs 66 crore and depreciation of
Rs 83.80 crore led Company incurring a loss
before tax of Rs 90.12 crore.
• Total tax of Rs 7.28 crore increased the loss after
tax to Rs 97.40 crore and post minority interest,
net loss was recorded at Rs 98.12 crore.
1–4
 Bharat Electronics Ltd. (BEL)
• BEL has registered 9% growth in its Net profit (to Rs
722.87 crore) for the quarter ended March 2015 even
while the revenue for the period was down by 6% to
2928.16 crore.
• Growth at bottom-line despite lower sales was
largely on account of 260 bps expansion in OPM,
32% jump in Other income and lower tax incidence.
• Expansion in OPM the OP was up by 3% to Rs
792.59 crore. Gained further by 32% jump in Other
income, the PBIDT was up by 7% to Rs 931.16 crore.
Interest cost though lower by 48% to Rs 1.12 crore
the Depreciation was up by 6% to Rs 42.64 crore
and thus the growth at PBT moderated marginally to
6% to Rs 887.39 crore.
1–5
 Coal India Ltd.
• Consolidated sales of the company for the fiscal ended
March 2014 was higher by 14% to Rs 46689.29 crore
and the Net profit was up by 142% to Rs 9833.70 crore,
albeit on a lower base. The EPS for the fiscal was Rs
15.2. The offer price band of Rs 225-245 discounts the
FY2010 consolidated earning by 14.8-16.1 times, which
is largely in line with the P/Es at which other global coal
majors (especially Asian) are trading.
Particulars Quarter Ended Year Ended
Qtr 2 Qtr 1 % Var. Year 2 Year 1 % Var.
Sales 18819.29 15396.19 22 75758.41 65841.79 15
OPM % 42.62 33.3 28 48.25 48.46 0
PBDT 8990.49 6061.7 48 40998.58 35294.75 16
PBT 7641.24 3753.36 104 33502.01 27616.37 21
NP 5644.38 2790.86 102 25122.92 18924 33
1–6
 Oil India Ltd.
Financial Performance in Rs crores
Year End Year 5 Year 4 Year 3 Year 2 Year 1
Equity 601.14 240.45 240.45 240.45 214
Net worth 19,211.48 17,721.34 15,601.87 13,765.68 9,332.47
Capital Employed 20,717.42 18,143.98 16,953.76 13,803.18 9,388.92
Gross Block 4,043.65 3,534.03 3,320.24 3,211.05 2,972.04
Sales 9,947.57 9,863.23 11,613.68 9,470.54 7,256.28
Other Income 1,508.75 1,416.67 873.89 954.18 957.29
PBIDT 6,123.46 5,996.47 5,146.00 4,119.01 3,563.75
PBDT 6,120.86 5,987.10 5,132.87 4,115.36 3,555.01
PBIT 5,285.83 5,111.23 4,326.33 3,898.70 3,395.67
PBT 5,283.23 5,101.86 4,313.20 3,895.05 3,386.93
RPAT 3,589.34 3,446.92 2,887.73 2,610.52 2,161.68
APAT 3,589.34 3,446.92 2,887.73 2,610.35 2,161.62
CP 4,426.97 4,332.16 3,707.40 2,830.83 2,329.76
Rev. Earnings in FE 1.63 1.64 1.56 1.87 0.06
Rev. Expenses in FE 273.45 214.11 262.02 389.38 272.86
Book Value (Rs) 319.58 737.01 648.86 572.5 436.1
EPS (Rs.) 54.79 135.65 113.94 102.85 95.83
Dividend (%) 300 475 375 340 305
Payout (%) 54.76 35.02 32.91 33.06 31.83
1–7
 NTPC Ltd.
Financial Performance in Rs crores
Year End Year 5 Year 4 Year 3 Year 2 Year 1
Equity 8,245.46 8,245.46 8,245.46 8,245.46 8,245.46
Net worth 81,657.35 85,815.32 80,387.51 73,291.17 67,892.25
Capital Employed 173,049.14 157,987.24 142,487.62 127,332.93 114,546.89
Gross Block 128,477.59 116,992.06 103,245.70 81,828.26 72,755.15
Sales 73,915.69 72,644.02 66,263.35 62,480.88 55,340.66
Other Income 2,652.05 2,751.63 4,877.92 2,961.58 2,400.96
PBIDT 18,300.03 20,512.80 21,908.40 16,832.45 15,962.86
PBDT 15,458.30 18,046.84 19,975.39 15,117.86 14,535.29
PBIT 13,388.38 16,370.61 18,511.64 14,040.75 13,477.17
PBT 10,546.65 13,904.65 16,578.63 12,326.16 12,049.60
RPAT 10,290.86 10,974.74 12,619.39 9,223.73 9,102.59
APAT 10,140.10 11,006.74 11,395.03 9,256.98 9,143.80
CP 15,202.51 15,116.93 16,016.15 12,015.43 11,588.28
Face Value (Rs) 10 10 10 10 10
Book Value (Rs) 99.03 104.08 97.49 88.89 82.34
EPS (Rs.) 11.97 12.33 14.36 10.55 10.42
Dividend (%) 25 57.5 57.5 40 38
Payout (%) 20.88 46.62 40.05 37.93 36.48
1–8
Snapshot view
Idea
Rs crores Vodafone Cellular MTNL
Equity 404.09 2635.36 630
Net worth 9248.31 3542.27 11921.36

Capital employed 12262.06 10057.02 11921.36

Sales 2733.66 6719.99 4722.52

Fixed Assets 1577.30 13888.89 15842.58

Total Assets 13138.33 15912.58 20834.01
Working Capital 4273.01 -1121.43 4406.53
PBT 357.64 1116.86 811.46
Role of Accounting/Financial Reporting

• Accounting is an Information system that

provides information on:
– Amounts of resources.
– How resources were financed.
– How were the resources invested.
– Results achieved by using those resources.
• For:
– Decision makers inside and outside the
organization.

1–10
 Business Activities

All businesses are involved in three types of

activities
• Financing,
• Investing, &
• Operating

The accounting information system

measures, processes & communicates the
results of these business activities for
business decision makers.
1–11
 The
Accounting
process

Accounting connects
Economic decision makers with Accounting
activities economic activities ⎯ Information
Fin/Inv/Op and the cycle (Financial
continues with the Statements)
results of their
decisions

Actions
(decisions) Decision
makers
1–12
 Users & Uses of Accounting
Information
Who Uses Accounting Data
External
Internal Users
Human Taxing
Users Resources Authorities
Bankers

Finance
Management Customers

Creditors
Marketing Regulatory
Agencies
Investors

1–13
 Users & Uses of Accounting
Information
Questions Asked by
Internal Users User

1. Can we afford to give our

Human Resources
employees a pay raise?

2. What price for our product

Marketing
will maximize net income?

3. Which product line is most Management

profitable?
4. Is cash sufficient to pay
Finance
dividends to the stockholders?
 Users & Uses of Accounting
Information
Questions Asked by
External Users User

1. Is the company earning

Investors
satisfactory income?

2. How does Vodafone compare

Investors
in size and profitability with
MTNL?

3. Will Kingfisher Airlines be able Debt providers

to pay its debts as they come
due?
4. Will Yes Bank have a credit Credit Rating Agencies
downgrade?
 Process of Accounting

• Creating Accounting heads

– Asset, Liability, Equity, Income & Expense
• Double Entry system
• Accounting Equation
Assets = Owner’s/Stockholder’s Equity + Liabilities
• Resources financed by = business creditors +
lenders + capital provided by owners.
• Resources Invested in = Fixed Asset +
Investment + Current Assets
• LHS = RHS
• Yields Financial Statements
1–17
 Financial Statements: Elements

• Elements measuring financial position:

– Assets
– Liabilities
– Equity
• Elements measuring performance
– Revenue / Income (includes gains)
– Expenses (includes losses)

1–18
 Balance Sheet Income Statement
ASSETS 2021 2020 2021 2020
Cash 85,632 7,282 Sales 70,35,600 60,34,000
Accts Receivable / Debtors 8,78,000 6,32,160 COGS -58,75,992 -55,28,000
Inventories 17,16,480 12,87,360 Other expenses -5,50,000 -5,19,988
Total Current Assets 26,80,112 19,26,802 EBITDA 6,09,608 -13,988
Deprn. & Amortn. -1,16,960 -1,16,960
Gross Fixed Assets 11,97,160 12,02,950 EBIT 4,92,648 -1,30,948
Less: Deprn. 3,80,120 2,63,160 Interest Exp. -70,008 -1,36,012
Net Fixed Assets 8,17,040 9,39,790 EBT 4,22,640 -2,66,960
Taxes -1,69,056 1,06,784
Total Assets 34,97,152 28,66,592 Net income 2,53,584 -1,60,176
Dividend 63,396 0
LIABILITIES 2021 2020 Retained Earnings 1,90,188 -1,60,176
Accts payable / Creditors 4,36,800 5,24,160
Short term Bank loan 3,00,000 6,36,808
Accrued Expenses 4,08,000 4,89,600
Total Current Liabilities 11,44,800 16,50,568
Long-term debt 4,00,000 7,23,432
Total External Liability 15,44,800 23,74,000

Common stock/Share Capital 17,21,176 4,60,000

Retained earnings 2,22,780 32,592
Total Owner's Equity 19,52,352 4,92,592

Total Liab & Owner's Equity 34,97,152 28,66,592

1–19
 Financial Elements - Definition

• Assets are Probable Future economic

benefits.
• Liabilities are probable Future Sacrifices of
economic benefits.
• Equity is the residual interest in the assets of
an entity that remains after deducting its
liabilities. In business enterprises, the equity is
the ownership interest.

1–20
 Accounting Equation

Assets =Vagabond
Liabilities + Agency
Travel Owners’ Equity
Balance Sheet
December 31, 2007
$300,000
Assets
= $80,000 +Liabilities
$220,000
& Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000

1–21
 Financial Elements - Definition
• Revenues / Incomes inflows that result from an
entity’s central operation or core activities or principal
business.
– Examples: Sales for Manufacturing & Trading
Companies, Interest & Investment Income for Banks.
– Increase Owner’s Equity
– May not be realized in cash immediately
• Expenses outflows that result from an entity’s central
operations.
– Examples: Raw Material Expenses, Personnel
Expenses, Manufacturing Expenses, Selling Expenses,
etc.
– Decreases Owner’s Equity
– May not be paid in cash immediately
1–22
Recap….Accounting Equation

Net Profit
1–23
Recap….Stockholder’s (Owner’s) Equity

• Change in Stockholder’s Equity =

• Change in Common Stock (Share Capital)
• Amount collected from issuing New Shares
• Add Change in Retained Earnings
• Net Income
• Revenue
• Less Expenses
• Less Dividend
• ∆ SE = ∆ Common Stock + ∆ RE
= $ from Shares Issued + (Revenue – Expenses) –
Dividend
1–24
– Classify each item as an asset, liability, common stock,
revenue, or expense.
Solution
1. Rentals on property used for business. 1. Expense.

2. Truck purchased. 2. Asset.

3. Notes payable. 3. Liabilities.

4. Issuance of ownership shares. 4. Common stock.

5. Amount earned from providing service. 5. Revenue.

6. Amounts owed to suppliers. 6. Liabilities.

 Example of Assets …. Read
• Fixed Assets • Current Assets
– Tangible – Inventory
• Land • Raw Materials
• Building • Work in Process
• Plant & Machinery • Finished Goods
• Furniture & Fixtures • Stores & Spares
• Vehicles – All Receivables
• Computer Hardware • A/R or Account
Receivables or
– Intangible Sundry Debtors
• Goodwill
• Notes Receivables
• Patents
– Prepaid Expenses
• Copyright
• Computer Software – Cash at Bank
– Cash in Hand
 Example of Liabilities

• Current Liabilities • Long Term

– All Payables Liabilities
• A/P or Account – Debentures
Payable or Sundry
Creditors – Long Term
• Expense Payable
Borrowings
• Taxes Payable – Deferred Tax
• Notes Payable Liabilities
– Deferred Revenue – Pension Obligations
– Short Term
Borrowing
 Examples of Income & Expenses

• Income • Expenses
• Sales Revenue • Cost of Goods Sold (COGS)
– Material Consumed
• Service Revenue
– Wages Expenses
• Rent Income – Factory Depreciation, etc.
• Commission Income • Selling, General &
• Interest Income Administration (SG&A)
Expense
• Dividend Income
– Salary Expenses
• Gain on Sale of – Rent Expenses
Securities / Assets
– Utilities Expenses
• Interest Expenses
• Income Tax Expenses
 Recap….Communicating with Users

Companies prepare four financial statements from the

summarized accounting data:

Retained
Balance Income Earnings Statement
Sheet Statement Statement / of Cash
Statement of Flows
Changes in
Owner’s Equity

1–29
 Communicating with Users
Retained Earnings
Income Statement Statement

Net income is needed to

determine the ending balance
in retained earnings.

1–30
 Communicating with Users
Balance Sheet Retained Earnings
Statement

Ending balance in retained

earnings is needed in
preparing the balance sheet.

1–31
 Event vs. Transaction

• Transactions are economic events (business

activities) that require recording in the
financial statements.
• Not all activities represent transactions.
• Assets, liabilities, or stockholders’ equity items
change as a result of some economic event.
• Dual effect on the accounting equation.

1–32
 Examples - Accounting Transactions

Question: Are the following events recorded in the accounting records?

Discuss guided trip

Purchase
options with a Pay rent.
Event computer.
potential customer.

Criterion Is the financial position (assets, liabilities, or

stockholders’ equity) of the company changed?

Record/ Don’t
Record
Recap…All Events are not Transactions

• Note: Transactions ⊂ Events

• Therefore, all transactions are events.
• But, all events are not transactions.
• All transactions are recorded.
• Only some events (that are
transactions) are recorded.
• Criteria: Has the company’s financial
position (Assets, Liabilities, or Equity)
changed?
1–34
Question E1-15
 Chap 1 E1-15
(a) Assets
Cash .......................................................................... $ 2,291.1
Accounts receivable................................................... 2,883.9
Inventory ....................................................................... 2,357.0
Equipment ..................................................................... 1,957.7
Buildings ...................................................................... 3,759.9
Total assets............................................................... $13,249.6

Liabilities
Notes payable ........................................................... $ 342.9
Accounts payable .................................................... 2,815.8
Mortgage payable ......................................................... 1,311.5
Income taxes payable .............................................. 86.3
Total liabilities .......................................................... $ 4,556.5
Stockholders’ Equity
Common stock ......................................................... $ 2,874.2
Retained earnings .................................................... 5,818.9
Total stockholders’ equity ....................................... $ 8,693.1

(b) Assets = Liabilities + Stockholders’ Equity

$13,249.6 $4,556.5 $8,693.1
(c) Nike has relied more heavily on equity than debt to finance its
assets. Debt (liabilities) financed 34% of its assets ($4,556.5 ÷
$13,249.6) compared to equity financing of 66% ($8,693.1 ÷
$13,249.6).
 Alternative solution
Account Balance A L E
Cash 2291.1 • 2,291.1 - -
A/R, Account Receivables 2283.9 • 2,283.9 - -
Common Stock 2874.2 • - - 2,874.2
N/P, Notes Payable 342.9 • - 342.9 -
Other Assets 3759.9 • 3,759.9 - -
Other Liabilities 1311.5 • - 1,311.5 -
Inventories 2357.0 • 2,357.0 - -
IT/P, Income Taxes Payable 86.3 • - 86.3 -
PPE 1957.7 • 1,957.7 - -
RE, Retained Earnings 5858.9 • - - 5,859.9
A/P, Account Payable 2815.8 • - 2,815.8 -
13,249.6 = 4,556.5 + 8,693.1
100% 34% 66%
Question E1-16
 Changes in RE

• Change in Retained Earnings

– Net Income
• Revenue
• Less Expenses
– Less Dividend

• ∆ RE = (Revenue – Expenses) – Dividend

 Chap 1- E1-16
(a) Assets = Liabilities + Stockholders’ Equity
$110,000 = $70,000 + (a)
(a) = $40,000
(b) Assets = Liabilities + Stockholders’ Equity
(b) = $120,000 + $60,000
(b) = $180,000

(c) Beginning + Revenues – Expenses – Dividends = Ending

Stockholders’ Stockholders’
Equity Equity
$40,000(a) + 215,000 – 165,000 – (c) = $60,000
$ 90,000 – (c) = $60,000
(c) = $30,000

(d) Assets = Liabilities + Stockholders’ Equity

$150,000 = (d) + $70,000
(d) = $80,000
(e) Assets = Liabilities + Stockholders’ Equity
$180,000 = $ 55,000 + (e)
(e) = $125,000

(f) Beginning + Revenues – Expenses – Dividends = Ending

Stockholders’ Stockholders’
Equity Equity
$70,000 + (f) – 80,000 – 5,000 = $125,000(e) 1–40
(f) = $140,000
 Alternative way E1-16
Colaw Corp. Beg. End. Beg. End.
Bal. Bal. Bal. Bal.
Total Assets 110 ? (B) Total Liabilities 70 120
Total Equity ? (A) 60

B/S Total Total Revenues 215

Retained Earnings Total Expenses 165
Net Income Dividends ? (C)

Hunter Ent. Beg. End. Beg. End.

Bal. Bal. Bal. Bal.
Total Assets 150 180 Total Liabilities ? (D) 55
Total Equity 70 ? (E)

B/S Total Total Revenues ? (F)

Retained Earnings Total Expenses 80
Net Income Dividends 5
 Beg. End. Beg. End.
Bal. Bal. Bal. Bal.
Colaw Corp. Total Liabilities 70 120
Total Assets 110 ? 180 Total Equity ? 40 60

B/S Total 110 180 Total Revenues 215

Retained Earnings 20 Total Expenses 165
Net Income 50 Dividends ? 30

Hunter Ent. Total Liabilities ? 80 55

Total Assets 150 180 Total Equity 70 ? 125

B/S Total 150 180 Total Revenues ? 140

Retained Earnings 55 Total Expenses 80
Net Income 60 Dividends 5
 Chap 3 – BE3.2
Assets = Liabilities + Stockholders’ Equity
Cash + Accounts + Supplies = Accounts + Bonds + Common + Retained
Receivable Payable Payable Stock Earnings

(1) +$60,000 +$60,000 Issued

Debt
(2) –9,000 –$9,000 Paid div.

(3) +13,000 –$13,000 Credit

Sales
(4) +$3,100 +$3,100 Credit
Purchase
 Chap 3 – E3.4
(a) 1. Stockholders invested $20,000 cash in the business.
2. Purchased equipment for $5,000, paying $1,000 in cash
and the balance of $4,000 on account.
3. Paid $750 cash for supplies.
4. Earned $9,500 in revenue, receiving $4,100 cash and
$5,400 onaccount.
5. Paid $1,500 cash on accounts payable.
6. Paid $2,000 cash dividends to stockholders.
7. Paid $800 cash for rent.
8. Collected $450 cash from customers on account.
9. Paid salaries of $3,000.
10. Incurred $300 of utilities expense on account.

(b) Issued common stock ................................................ $20,000

Service revenue .......................................................... 9,500
Dividends ................................................................... (2,000)
Rent expense .................................................................. (800)
Salaries and wages expense .................................... (3,000)
Utilities expense ............................................................. (300)
Increase in stockholders’ equity $23,400

(c) Service revenue .......................................................... $ 9,500

Rent expense .................................................................. (800)
Salaries and wages expense .................................... (3,000)
Utilities expense ............................................................. (300)
Net income .................................................................. $ 5,400