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Accounting Fundamentals

At the end of the Unit 1:

• You should be able to understand:
• the Meaning of accounting.
• the Significance of accounting information in decision making.
• various terms used in accounting.
• Users of accounting information and Limitations of accounting.

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Introduction:
• Harry potter and the order of the phoenix (2007) (Warner Bros’)
• Grossed $938 million worldwide.
• Posted $ 167 million Loss – because of Hollywood accounting.
• That is what financial statements available on the internet suggest.
• Warner bros paid themselves 212 mln. distribution fee

• Types of expenses they will include to arrive at “net profit”, as the definition of
Net profit is not well defined.
• https://www.ft.com/content/8d4cb800-4064-11e0-9140-00144feabdc0
• Fahrenheit 9/11 (2004)
• Movie by Michael Moore (claim of $2.7 million)
• Harvey Weinstein improperly deducted expenses from Moore’s share of film’s
profits, including the cost of a private jet to fly Weinstein from US to Europe.
• “Hollywood accounting is an oxymoron, like airline food.” - Pierce O'Donnell
(lawyer)

Introduction:
• Harry potter and the order of the phoenix (2007) (Warner Bros’)
• Grossed $938 million worldwide.
• Posted $ 167 million Loss – because of Hollywood accounting.
• That is what financial statements available on the internet suggest.
• Warner bros paid themselves 212 mln. distribution fee

• Types of expenses they will include to arrive at “net profit”, as the definition of
Net profit is not well defined.
• https://www.ft.com/content/8d4cb800-4064-11e0-9140-00144feabdc0
• Fahrenheit 9/11 (2004)
• Movie by Michael Moore (claim of $2.7 million)
• Harvey Weinstein improperly deducted expenses from Moore’s share of film’s
profits, including the cost of a private jet to fly Weinstein from US to Europe.
• “Hollywood accounting is an oxymoron, like airline food.” - Pierce O'Donnell
(lawyer)

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Introduction:
• Smokescreen or Mirror?
• Chemplast Sanmar – a chemical company
• Sales in 2000 - Rs. 3680 mn. – a decrease of 2.9% over previous year
• Net Profit – 301.5 mn. - went up by 6.2%

Introduction:
• Smokescreen or Mirror?
• Chemplast Sanmar – a chemical company
• Sales in 2000 - Rs. 3680 mn. – a decrease of 2.9% over previous year
• Net Profit – 301.5 mn. - went up by 6.2%

• A closer look reveal that company had changed the

inventory valuation method to comply with an
accounting rule.

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Flipkart’s Hidden Assets

• In 2018,
• Walmart acquired 81% outstanding shares in Indian e-commerce firm
Flipkart at a valuation of $24.1 Bn
• $2.2 bn. in Cash
• $2.8 bn. in other Current assets
• $5 bn. in assets such as Trademarks etc.
• $ 1 bn. Fees
• Remaining?

• Close to $18 Bn. In ____________.

• What do you mean by Intangibles Assets and _________?

Why stock price zoomed?

• On April 27, 2018,
• Axis Bank reported a loss of ₹21.89 billion for the March quarter.
• The bank had made a profit of ₹12.25 billion in the March 2017 quarter and
bad loans jumped to 6.77 per cent from 5.07 per cent over that period.
• Interestingly, the bank's stock price zoomed 9.2 per cent.

• Question: Why did the stock price go up in the wake of the bank slipping
into a loss and recording a rise in bad loans?

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Why stock price zoomed?

• On April 27, 2018, Axis Bank reported a loss of ₹21.89 billion for the March
quarter. The bank had made a profit of ₹12.25 billion in the March 2017 quarter
and bad loans jumped to 6.77 per cent from 5.07 per cent over that period.
Interestingly, the bank's stock price zoomed 9.2 per cent.
• Question: Why did the stock price go up in the wake of the bank slipping into a
loss and recording a rise in bad loans?
• For the March quarter, Axis Bank's loans grew 18 per cent, driven by a 23 per cent rise in
loans to retail customers. Its net interest income growth was flat in the quarter, and rose 3
per cent for the full year leading to a net interest margin of 3.44 per cent.
• Chief executive Shikha Sharma, who is due to step down at the end of December after
being at the helm for nine years, said the results were a reflection of the bank's desire to
accelerate NPA (non-performing asset) recognition.
• "With this accelerated recognition, we believe the NPA recognition phase of this credit
cycle is now nearly complete and the focus shifts to resolution," she said.
• Major part of stress recognition seems to be over, but recovery is expected to take a
while," said the brokerage, which has a 'hold' rating on Axis Bank shares. - Edelweiss

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One-time Wonder?
• Housing Development Finance Corporation (HDFC) reported a profit of
₹66.77 billion for the December 2017 quarter, more than double of the
profit in the December 2016 quarter.
• This was mainly because of a profit of ₹52.50 billion from the sale of its
investment in HDFC Life. If that gain is excluded, the increase in profit would
have been less than 15 per cent.
• HDFC made an additional provision of 15.75 billion "to shore up the
Provision and Contingencies Account and thereby recognise provisions
towards specific loans against future risks.”

• What was HDFC’s true profit?

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Masks and Gloves: Inventory or Expense?

• As the Mayo Clinic's doctors were fighting the coronavirus, its accountants
were fighting a different battle: how best to classify a reserve of masks and
gloves.
• Traditionally, Mayo would classify protective gear as inventory if it was
stored in a warehouse and as an expense if it was at a clinical facility or on
a hospital floor.
• In the wake of the pandemic, the hospital had to keep the gear close to its
medical staff.
• The hospital's chief financial officer said that the equipment should be
considered inventory even if it were not in a warehouse.
• Question: When do masks and gloves become expense?

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Drowned in Debt
• In early 2019, V G Siddhartha, the founder of Coffee Day Global, the owner
of the Café Coffee Day chain, was found dead in a river near Mangalore,
Karnataka. Café Coffee Day, India's answer to Star Bucks, was a successful
brand.

• The business was profitable, but the reported suicide was suspected of
having been caused by mounting debt used to finance the company's
expansion.
• Question: Is debt good or bad?

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When Diamonds are not forever

• Feb. 14, 2018,
• India’s second largest public sector lender PNB informed BSE that it has
detected ‘‘fraudulent and unauthorized transactions’’ in Brady house
branch in Mumbai - Rs. 114 bn.

• Two junior employees colluded with jewelry companies and issued

fraudulent “Letter of undertaking” without asking for any margin money as
security, even though the firms did not have any pre-approved credit limit
• Letter of undertaking (LOU) is a form of bank guarantee under which a bank can allow its
customer to raise money from another Indian bank's foreign branch in the form of a short term
credit

• How did such a massive fraud happen when banks are audited and
supervised closely?

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Why Accounting in MBA?/

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Why Accounting in MBA?

• Typical responses you get from MBA students.
• Most common – “it is in the curriculum, so I have no choice”
• “Since a company’s financial statements affect stock prices, a manager should know
accounting”
• “Accounting will help me in understanding what the accountant is trying to say.”
• I want to be an investment banker. Accounting information will help me to value
firms.
• A manager has to analyze financial reports and make critical business decisions
based on them
• CEOs and CFOs, required by law, to certify the financial statements. At the least, the
CEO should know the meaning of various items appearing in the statements.
• MBA oath initiated by HBS students, says:
• “I will report the performance and risks of my enterprise accurately and honestly”.

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Why do you need to study accounting

• Even if you go for marketing, operations, strategy courses,
• You are expected to know accounting.
• If you want to make a career in finance – as finance uses accounting
language.

• When you are managing your funds – personal finance – accounting

would provide you ways to manage funds.

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Accounting - introduction
• All of us use accounting
• Individual
• Volume less
• No Accountability, only Income tax
• How much you are spending on movies, food,
• Example
• Financing– buying a car – Rs. 5 Lakh, Loan 3L, write a cheque
• When you write this in a piece of paper – accounting

• Businesses
• No. of transactions are more
• Accountability - Income tax, GST, Partnership act, Company Law, negotiable instrument,
contract law.
• System to record business transaction – Financial Accounting
• We are going to understand accounting from businesses perspective.

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• Example
• With mother’s contribution of 9,000 and a bank loan of 20,000 you
purchased a peddle sewing machine for 21,000, cloth lengths and the
material for 8,000.
• During May and June, you were able to sell finished goods amounting to
16,000. At the end of June, you had raw material 1,500 in stock, cash
balance 14,000, interest due 500 and Rs. 2,000 to be received for garments
sold on credit.
• How accounting could help?
• Given this information, can you tell what happened to your business in May
and June?
• Were you profitable?
• What do you have to show for your efforts?
• How can you tell?
• Getting answers to such questions requires accounting.

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Importance of Accounting – Decisions, Decisions, Decisions...

• No matter the organization - how large or how small
• No matter whether it is for profit or not-for-profit – Smile foundation, Akshaya
Patra foundation
• No matter whether it is manufacturer, retailer/ reseller/ wholeseller or service
provider like UrbanClap
• decisions.. To be taken everywhere.
• What kind of decisions?
• All kinds of, including everyday decisions – like an employee has to take an overtime
• Long term – guiding the firm for five to ten years, merger, launching a new product line
• Who
• Owners
• Managers and Employees on behalf of owners
• When
• Whenever it is necessary.

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Information
• Why?
• For variety of activities that go on inside the firm
• In doing its work, an organization uses resources — Labor, materials, various services, buildings,
and equipment. These resources need to be financed, or paid for.
• and variety of decisions firm has to make

• Information is the lifeblood of the organization.

• The stuff that keeps the organization going …
• Owner, managers, and employees figuring out how to achieve organizational goal.
• Generally for businesses, it is maximization of the value of the firm
• To work effectively, the people in an organization need information about the amounts of these
resources, the means of financing them, and the results achieved through using them. Parties
outside the organization need similar information to make judgments about the organization.
Accounting is a system that provides such information.

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Example
• Gujarat Motor vehicle company – Earn profit by selling new and used cars, parts
and accessories, and by providing repair service
• Employees - 263
• Chairman – Mr. Peeyoosh Petal
• Owns a building containing Showroom, service shop, storeroom for parts and
accessories, and office space.
• It has 140 new cars, 240 used cars – offered for sale
• Bank balance, inventory of spare parts, accessories and supplies – tools, oil etc.
• Company has been receiving good feedback for its services since last five years.
– customer satisfaction level

• Find the relevant accounting information from the above.

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Non-accounting information
- Data on Age of employees
Non-quantitative Info. - - Years of experience
- customer satisfaction level
- May be provided in accounting reports
in the footnote
• Accounting reports
contain accounting as
well non-accounting
information

Tax rules are differs

How many cars are there in
the warehouse, inventory of
parts etc. When to order,
how much?
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Information used by Information arranged from financial
internal and external in such a way that accounting rules
users – resources, managers can use it.
obligations.

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What is Accounting?
• Accounting as a language of business
• Many words used in accounting means almost but not quite the same
thing.
• Net worth – what something is worth.
• Net worth – meaning in accounting is different. – claim of the owner in the
business.

• Purchase

• Common language used to communicate financial information from one person to

another in the business world.

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