12th June 2022

Session 1

1) Accounting methods:

- Cash accounting: It is that basis of accounting where any income or

expense is recognized only when there is an inflow or outflow of cash.
- Accrual accounting: It is that basis of accounting where any income or
expense is recognized when it is earned/ incurred, irrespective of the time
when it is paid/ collected.
E.g.: Sales on Credit, Purchase on Credit, Income Tax Expenses, Rent Paid
in Advance

2) Accounting Standard 1:

a) Going Concern: The enterprise is normally viewed as a going concern,

that is, as continuing in operation for the foreseeable future. It is assumed
that the enterprise has neither the intention nor the necessity of liquidation or
of curtailing materially the scale of the operations.
b) Consistency: It is assumed that accounting policies are consistent from
one period to another.
c) Accrual: Revenues and costs are accrued, that is, recognized as they are
earned or incurred (and not as money is received or paid) and recorded in the
financial statements of the periods to which they relate. (The considerations
 affecting the process of matching costs with revenues under the accrual
assumption are not dealt with in this Standard).

3) Accounting standard 2:

Valuation of inventories:

This standard prescribes the accounting treatment for inventories and sets
the guidelines to determine the value at which the inventories are carried in
the financial statements.

This Standard should be applied in accounting for all inventories except the
following:
(a) Work in progress in the construction business, including directly related
service contracts.
(b) Work in progress of service business (consulting, banking etc.)
(c) Shares, debentures and other financial instruments held as stock in trade.
(d) Inventories like livestock, agricultural and forest products, mineral oils
etc. These inventories are valued at net realizable value.

Definition of the Inventory includes the following:

A. Held for sale in the normal course of business i.e. finished goods
B. Goods which are in the production process i.e. work in progress
C. Raw materials which are consumed during production process or
rendering of services (including consumable stores item)
 II. Net Realizable Value (NRV):

Net realizable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.

Steps for valuation of inventories:

A. Determine the cost of inventories

B. Determine the net realizable value of inventories

C. On Comparison between the cost and net realizable value, the lower of
the two is considered as the value of inventory.

Cost of inventory = purchase cost + conversion cost + other costs

Cost of purchase = purchase cost of inventory including duties and taxes +

freight inwards + other expenditure related to purchase + trade discounts

Conversion cost = direct cost + fixed overhead cost + variable overhead cost

4) Accounting standard 4: contingencies and events occurring after the

balance sheet date
Financial statements approved means that, the books of account of the
financial year are closed. Based on the above diagram, the entity can record
any journal entry related to FY 2015-16 till 31st Aug., 2016 only. If an
entity identifies any income or expenditure related to FY 2015-16
subsequent to 31st Aug., 2016, that income or expenditure should be
recorded in FY 2016-17 as a prior period item.

E.g.: The accounts receivable balance is ` 2 lakh as on 31-3-2018. But

earthquake took place in April 2018 and the debtor became insolvent in May
2018. Discuss the accounting treatment as per AS 4.

Solution: The debtor’s financial position was good as on 31-3-2018 and the
subsequent conditions are entirely different from the balance sheet date
condition i.e. no condition exists. Hence it is a non-adjusting event and it
doesn’t require any adjustment to assets as on 31-3-2018.
 X Ltd. should provide for doubtful debts during the next FY i.e. 2018-19.

Board of Directors can disclose the same in their report, if it is material to X

Ltd.

5) Three golden rules of accounting:

The items related to Personal account and real account comes under the
balance sheet

Real account (trading related items) and nominal account comes under P&L
account.

6) Board of directors prepares financial statements to know the:

- Profitability for the period (Income Statement)
- Source & application of funds (Statement of affairs as on particular
date) [B/S]
- Changes in equity
- Net cash flow from operation, investing & Financing activity (Cash
flow statement)
7) OBJECTIVES OF FINANCE:
 Application of funds for maximum
profits (Investing activities) [Capital
budgeting, ARR, IRR]

Procurement of funds with

minimum cost (sourcing financing
activities) [reducing WACC]

Optimization of return with risk

management (operating activity)

8)
The book closure date is the date on which a shareholder must hold the stock in
their demat account to be eligible for corporate action benefits such as bonus
shares, splits, and dividends.

9) Corporate actions:

10) Working capital cycle:

Working capital: Any asset that can be converted to cash within a span of 12
months.