SRM INSTITUTE OF SCIENCE AND TECHNOLOGY

RAMAPURAM CAMPUS

COLLEGE OF SCIENCE AND HUMANITIES

DEPARTMENT OF COMMERCE

BATCH – 2020-23

CANDIDATE NAME: VARSHIKA MS

REGISTRATION NO: RA2031201020323

SECOND YEAR BCOM GEN – ‘F’

SEMINAR REPORT

UCM20G06J

APRIL -2022

SRM INSTITUTE OF SCIENCE AND TECHNOLOGY

COLLEGE OF SCIENCE AND HUMANITIES

BHARATHI SALAI, RAMAPURAM,

CHENNAI
 TABLE OF CONTENTS

 Introduction to Entrepreneurship

 Characteristics of Entrepreneur

 GST – Explanation,Types

 Management Accounting

 Financial Statement Analysis

 INTRODUCTION TO ENTREPRENEURSHIP
CONCEPT AND MEANING :
It was only in the beginning of 18th century that the word “entrepreneur” was used to refer to
economic aspects .Thus the concept of entrepreneur has evolved over a period of two centuries. The
divergent views about entrepreneur can be broadly classified into three groups namely ‘Risk Bearer’,
‘Organizer’ and ‘Innovator’.

DEFINITION:
A.H. Cole has defined entrepreneurship as “The purposeful activity of an individual or a
group of associated individuals, undertaken to initiate, maintain or earn profit by production and
distribution of economic goods and service .”

IMPORTANTS AND BENEFITS OF ENTREPRENEUR:

The benefits of entrepreneurship are listed below:
 GENERATION OF JOB OPPORTUNITY:
Entrepreneurship generates enormous direct and indirect job opportunities to
teeming millions of unemployed individuals in developing and developed countries.

 BULWARK AGAINST EVIL HABITS AND VICES:

Promotion of entrepreneurship prevents jobless individuals from falling into evil
habits and vices like smuggling, theft’ extortion, robbery, rape, terrorism, addiction to
drinking habits etc. Contrarily, it makes the younger population contribute to national
development.

 HIGHER GDP:
Nation’s Gross Domestic Product (GDP) and National Income are sure to hit new
high in the wake of spectacular growth of entrepreneurship.

 UPGRADATION OF LIFESTYLE OF PEOPLE:

Entrepreneurship has tremendous potential to transform the lifestyle of
consuming public besides upgrading the lifestyle of entrepreneurs per sec.

 REDUCTION OF GOVERNMENT BURDEN ON JOB CREATION:

It reduces the Government’s burden on job creation .

 HIGHER FOREIGN EXCHANGE RESERVE:

It enhances the foreign exchange reserve in India.
 HIGHER REVENUE PROSPECTS:
 Government can get more revenue through taxes, cesses, duties, etc. It
helps to heighten the export and may bring about import substitution thus preserving outflow
of precious foreign exchanges.

 GENERATION OF INDIRECT EMPLOYMENT OPPORTUNITY:

Each and Every venture creates enormous indirect employment
opportunities in the vicinity of venture commenced in the form of ancillary units, hotels,
repair shops, provision shops, béauty parlours,
saloons and so on.

 HARNESSING HIDDEN TALENT:

It unearths the hidden talents and potentials of the entrepreneurs which would
have otherwise remained dormant if he/she were mere employees of the
organisation elsewhere.

 INCREASING CAPITAL FORMATION:

It leads to capital formation to the extent that banks, NGOs, NDFCs
institutions lend economic support to entrepreneurs.

 OVERALL DEVELOPMENT OF THE COUNTRY:

It ensures the Overall development of the economy.

 FULL UTILISATION OF RESOURCES:

The scattered resources of a country are fully utilised through the spread of
entrepreneurial wave all across the country.

ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT:

Role of Innovation:
Innovation and entrepreneurship are just like the two sides of a coin that are so closely
related to each other. Entrepreneurs have contributed in no small measure 10 the economic
development of a country in terms of innovation.The term "innovation denotes commercial
application of Invention. Entrepreneurs may bring out brand new product by constantly upgrading
the existing products or may tap new market for the existing products in New territory or invent
totally in new technology to produce products and so on. All these in vative exereises ensure
phenomenal rise in the income

Role of Contribution to GDP:

Establishment of enterprises all over the country across the various sectors by the
entrepreneurs in various sizes contributes significantly to the growth of gross domestic product of a
country. Entrepreneurship is supposed to be the engine of economic growth for any country.
America,Japan, Germany, etc., are cases in point. Entrepreneurship helps achieve remarkable
increase in national income and per capita income of a country which are all pointers to economic
growth of a country.
Capital Formation Role:
Entrepreneurs employ their own funds and borrowed funds for establishing,
expanding, automating and modernising their enterprises. They tap financial resources from various
financing agencies which mobilise the savings of the general public through various channels of
saving programmes. Thus, entrepreneurs contribute greatly to capital formation.
Employment Generation Role:
Entrepreneurs generate direct employment not only for him/her and his/her family but
also for the general public. They upgrade the standard of living of people by providing job
opportunities to teeming millions of people. Besides they generate indirect employment opportunities
for suppliers, distributors, agents, dealers, franchisees, media, ancillary units and the people residing
near the facility.
Role of Reduction of Concentration of Economics Power in Few Hands:
Small, medium and micro entrepreneurs prevent the concentration of economic
power to be in the hands of tew large entrepreneurs. They promote faster industrialisation and
equitable distribution of wealth in the society.
Role of Full Utilization of Latent Resources:
Small, medium and micro enterprises help to tap vast resources remaining untapped
and utilise them to optimal extent. In other words economic, human, material and natural resources
are harnessed fully by entrepreneurs of various sizes when they are running their ventures.
Role of Balanced Regional Development:
Encouragement given to entrepreneurs through various types of incentives to
start their ventures particularly in industrially backward areas or zero industry districts goes a long
way towards ensuring balanced regional development in a country.
Export Promotion:
Entrepreneurs in export sector helps the country in no small measure earn precious
foreign exchange and address adverse balance of payment situation. They contribute significantly to
import and thus saving the outflow of foreign exchange to other countries of export.
Role of Ensuring better Standard of Living:
Entrepreneurs provide a lot of well-being measures to their employees besides
paying salaries and wages. This helps the employees to upgrade their standard of living.
Entrepreneurs who have genuine concern for welfare of the general public supply quality goods at
fair prices. This in turn helps the consuming public save more money and spend it on comfort goods
which in turn enhance their living standards. Growing standard of living of people helps greatly
narrow down between haves and have-nots sections of a society.
Imitating Role:
Entrepreneurs in developing countries simply imitate the innovations made in
industrially advanced countries. This imitating entrepreneurs simply reengineer the successful
products innovated somewhere in other countries and supply them at lower price in developing
countries. Chinese entrepreneurs are adept in imitating the innovations made everywhere across the
globe. But for their imitating entrepreneurs, consumers in developing countries could not have
afforded to buy expensive products innovated across advanced countries. Thus medicines,electronic
goods, engineering goods, software and hardware etc., are made available at affordable prices across
developing countries by the imitating entrepreneurs.
Risk Assumption Role:
Entrepreneurs are inherent risk-takers. Every productive venture involves risks.
If the venture flops, it is the entrepreneur who eventually bears the brunt of loss thereot.The volume
of profit is directly proportional to the volume Of risk, Profit is the reward for risks assumed. Higher
proft leads to saving of wealth which ultimately goes to capital formation which is most essential
ingredient for economic development.
Agent Role:
Since the entrepreneurs bring out a cognizant change in economy, society, lifestyle of
consumers and employees they can be rightly termed as change-agent.
Coordinator Role:
Entrepreneur, after having spotted the opportunity, take all out steps to organise man
power, money. materials, technology, and other much needed resources to produce the products /
services. But for this, coordination of the factors of production will remain unharnessed. In simple
terms, entrepreneurs are the ones who ultimately coordinate all other factors of the production for
actualising the venture envisaged by them.

CHARACTERISTICS OF ENTREPRENEUR

GENERAL CHARACTERISTICS OF AN ENTREPRENEUR

Enterprise:
An entrepreneur needs to be enterprising enough to start a venture. He/she should be bold
enough to encounter risks of various types which are likely to arise in the venture. This risk-taking
quality strongly empowers him/her to rise again and again even after meeting potential failures in the
entrepreneurial journey.

Self-confidence:
 An entrepreneur should have a large measure of self-confidence in order to achieve high
goals in the business. Obstacles likely to be encountered, inconvenience and discomforts likely to be
suffered during the course of entrepreneurial journey, disappointments and dejections which are
likely to be faced should not shake his/her steely resolve even a wee bit to make the entrepreneurial
venture a great success. Thus, self-confidence should be the bedrock of his/her each and every
activity aimed at turning the venture a great success.

Feedback:
An entrepreneur should make it a point to get feedback on his/her performance in various
aspects during the course of entrepreneurial venture which would greatly help him her learn better
lessons from the mistakes and lapses.

Flexibility:
An entrepreneur should not doggedly stick to making decisions in a rigid fashion. He/she
should be willing to change the decisions made already in the light of dynamics of environment.

Planning:
An entrepreneur should have a clear vision of what he/she intends to do in his/her venture.
He/she should plan each and every activity meticulously to the last detail to accomplish the vision
and mission. He/she should not allow the course of enterprise to take its own direction. He/she
should plan each and every action minutely and install checks and balances to coordinate and direct
the flow of operation towards desired goals.
Motivation:
Entrepreneurs have an urge to achieve a set of goals, by pursuit of a venture. Some people
may have economic resources to start a venture but may lack motivation to take up entrepreneurship
due to sheer fear of facing uncertainty in the venture. But committed entrepreneurs face the struggles
to accomplish something great in their journey. They would like to be different from others, Thus,
sense of achievement and spirit of adventure consistently motivate them to take up and continue in
the venture notwithstanding the risks imbedded thereat.
Foresight:
Entrepreneurs should have foresight to visualize the future business environment. In other
words, they should be capable of visualizing or foreseeing the change that may unfold in the business
environment and take proactive decisions accordingly.
Analytical Ability:
Entrepreneurs should not make decisions just on the basis of prejudice or likes and
dislikes. He/she should be able to objectively analyse the situation and take decisions accordingly.
They should abstain from taking decisions when they are under the influence of emotions. In other
words, he/she should take rational decisions examining the various aspects of the problems with an
open mind.
Communicative Ability:
Entrepreneurs should have good command over communicative ability. They should
be able to motivate others to perform effectively and efficiently tO accomplish the very goals of the
venture, They should have the ability to convince others about the project. He/she should be well-
versed in oral and written communication with respect getting things done from various quarters
Resource Mobilisation:
Entrepreneurs should have the capability to mobilise all the inputs like man,
money, materials,technology, market method, etc., which are scattered over a wide area to produce
end product. Entrepreneurship is a function of gap filling by assembling divergent inputs together
and generating output by transformation of inputs.
Decision-making:
An entrepreneur has to take timely and correct decision with regard to nature and
type of product to be produced, type of technology to be deployed, type of human assets to be
employed, location of facility, the size of the unit, volume of production and so on. The very success
of any enterprise hinges in no small measure on the prompt and correct decisions made by the
entrepreneurship on making decisions, he/she should not be governed by emotions but by sense of
rationality and logicality. An entrepreneur has to consider allrelevant factors connected with the
decision and provide for risk elements while shaping decisions of various types.
Innovativeness or Creativity:
J. A. Schumpeter identified innovation as the prime characteristic feature of an
entrepreneur way back in the year 1934. According to him, an entrepreneur has to contribute to
economy by innovating a new technology or innovating a brand new product or innovating new
method of production of existing products or innovating new method of distribution of existing
product or adding new features to the existing products or innovating new raw materials for
producing existing or new products or innovating new geography previously untapped. In other
words, they should contribute something new/unique to meet the changing requirements of the
customers. In his view, entrepreneurs should be none other than change agents in the society,
Vision:
An entrepreneur should have a clear view of the purpose for which the very organisation
exists and what it intends to accomplish over a future period in a definite timeframe. For example,
Steve Jobs of Apple visualised that computers should be an integral part of a person's life in terms of
learning and communicating. This vision has resulted in everybody across the board from
schoolchildren to business people using computers in their day to day life
Optimism:
An entrepreneur should be an optimistic person Me she should not be rattled by challenges,
difficulties Jisom/ones,. disappointments, dejections and so on emerging every now and then during
the course of venture, He/she shoul continuE his her entrepreneurial journey with utmost courage,
confidence and hope that each and every negative event will pay,away and situations would
eventually turn out to be favourable in him/her.
Leadership:
An entrepreneur should be able to influence his/her team members to contribute positively
towards the goals established. He/she should have sympathy and empathy with the members who are
with him/her during his/her entrepreneurial journey. He/she should lead others from the front by
setting the personal example. He/she should walk the talk and effectively take all the followers with
him/her in accomplishing the goals of venture undertaken.
Initiative:
An entrepreneur should be the one who takes much-needed initiative in starting the
venture where the vacuum exists in the entrepreneurial landscape or one who takes initiative in
addressing the problem. He/she should be putting himself/herself in situation where he/she is
personally responsible for the success and failure of the operations.
Exploring Opportunities:
Entrepreneurs are supposed to be ever alert to the opportunities unfolding in an
environment He/she should be daring enough to convert the untapped opportunity into realistic and
achievable business models. An entrepreneur always stays focused on opportunity rather than on
resources, structure or strategy. They start with opportunity and let understanding and faith tackle
other emerging issues. They are goal -oriented in their pursuit of opportunities.
Integrity and Reliability:
Integrity and reliability are the glue and liber which inseparably bind together personal
and business professional relationship. Stakeholders like investors, customers creditors and suppliers
value the integrity and reliability of an entrepreneur high over everything else in establishing
relationship with the enterprise. Business entrepreneurs esteem Spirit of Independence:
Entrepreneurs are those who would like to be their own masters and make themselves accountable
for their actions and decisions. An entrepreneur is simply a job generator and not job-seeker. They do
not like to be dictated by others and like to stick to routines. The desire or sheer passion for
independence is a prime driving force behind the entrepreneurs. Despite their frustration with rigid
bureaucratic system, sheer commitments of theirs to make a difference in the entrepreneurial journey
add sheen to their independent personality.
Tolerance for Ambiguity:
Entrepreneur by their very nature of being achievement-oriented attitude, dare to
encounter uncertainties caused by constant changes in environmental dynamics. They approach the
issue prudently and address the issues tactfully. They do not get rattled simply by any ambiguity or
nebulousness of situation. They patiently wait for the ripples caused by the fluidity of situations to
eventually settle down so as to respond to them smartly.
Perseverance:
Entrepreneurs make strenuous efforts and constant endeavours to accomplish the goals
successfully. They take the uncertainties, risks and constraints in their stride. They do not blame the
uncontrollable factors therefore and focus on addressing the issues in order to stay successful in their
entrepreneurial track.
Determination and Commitment:
Entrepreneurs do not get distracted by the obstacles faced and setbacks suffered by
them during the course of entrepreneurial voyage. A sheer determination and unwavering
commitment on the part of entrepreneur to succeed in the venture against all odds empower the
entrepreneurs in no small measure to overcome those oddities with stoic determination.

GST – OBJECTIVES

[Objectives of GST
GST has completely changed the architecture of indirect taxation. It has restructuredsignificantly the
power to levy tax between the Union and the State Governments.Further, it has established and
integrated common market for the entire nation. The objectives of levy of GST include the
following:
(1) To replace the existing multiple tax structures of Centre and State taxes.
(2) To eliminate cascading effects of taxes on production and distribution cost of
goods and services.
(3) To enhance the competitiveness of original goods and services in the market
which has an impact on the GDP growth of the country.
To contribute substantially to the nation for the development of a common
national market so as to remove economic distortions [one nation, one tax for
single common national market].
(5) To provide for an efficient, transparent system of taxation so as to result in ease
in doing business
[1:27 am, 06/05/2022] Prasanth: Salient Features of GST
The salient features of GST are given below:
(1) It is a comprehensive tax levy on manufacture, sale and consumption of goods
and services at national level. It is levied at each stage in the supply chain where
a transaction takes place.
(2) Under GST laws, exports are not taxable, as the place of consumption is not in
India. However, imports are taxable as the place of consumption is in India.
Both import of goods and services are treated as inter-state supplies and are
subject to IGST.
(3) GST is based on destination based consumption taxation as against original
based consumption.
(4) It is applicable to all goods and services except alcohol for human consumption.
(5) GST is paid to the accounts of Centre and the States separately.
(6) It is a dual GST with the Centre and the States simultaneously levying it on a
common base.
(a) The GST levied by the Centre is known as Central GST.
(b) The GST levied by States including Union Territories with legislature is
known as State GST.
(1) The OST levied on interstate supply ineluding stock transfers of goods and
services and which is collected by the Contre is Called as Integrated GST
(8) ¿ST on petroleum producis (crude, petrol, diesel, AMTF and natural gas) would
be applicable from a date to be recommended by the GST Council.
[1:28 am, 06/05/2022] Prasanth: 9) The rules for taking and utilization of credit for the central GST
and the State
GST are aligned. Accordingly, credit of CST paid on inputs may be utilized
only for paying CGST on the output and the credit of SQST/UGST paid on
inputs may be used only for paying SGST/UTGST. Thus, input tax credit of
CST cannot be used for payment of SGST/UTGST and vice-versa.
(10) Taxpayers are required to submit common format for periodical returns and
cach taxpayer is allotted a PAN-linked taxpayer identifying number.
(1) Electronie filing of returns by different classes of persons at different cut off
dates is adopted.
(12) Tax can be paid by internet banking, NEFT/RTGS/Debit/Credit card and over
the counter.
13) Audit of registered persons is conducted to verify compliance with the provisions
of the Act.
(14) Officers have been given restrictive powers of inspection, search, seizure and
arrest.
(15) An anti-profiteering clause has been provided in order to ensure that business
passes on the benefit of reduced tax incidence on goods or services or both to
the consumers.
GST - Advantages
(1) One Nation, One Tax and One Market: GST is consumption based tax. For
the first time, in the Indian history, the Government of India has introduced as
a revolutionary reform in Indirect taxes in the form of GS1 by levying an
uniform tax for the same commodity transacted in India across the States.
(2) Elimination of Cascading Effects: This will be the major contribution of GST
for the business and commerce. So far till June 2017, there were different state
level and centre level indirect tax levies that were compulsory one after another
on the supply chain till the time of its final consumption. It eliminates multiplicity
of taxation. The one point single taxation has given a lot of comforts and
confidence to business community that they would focus on business rather
than worrying about their taxation that may crop at later stages.
(3) Growth of Revenue in States and Union: The introduction of GST has
increased the tax base but reduced the tax rates and also removed the multiple
point taxation. This has led to higher amount of revenue to both the states and
the union.
(4) Reduces Transaction Costs and unnecessary Wastages: If government works
in an efficient mode, it may be also possible that a single registration and a singlecompliance will
suffice for both SGST and CST provided government provides
effective IT infrastructure and integration of states level with the union.
(5) Increased Exports and Foreign Exchange: By reducing the tax burden, the
competitiveness of Indian products in international market is expected to increase
and thereby promoting more of exports leading to development of the nation,
CST could also result in increased employment, promotion of exports and
consequently a significant boost to overall economic growth and factors of
production - land, labour and capital,
4o) Inerensed ND1: The Now of Forelem Dilettee/Iverihels, Mhay increase once
linerenimplemented.The prement.complicated/wrinltiple-lax-laws. are one ofte
(Ostons That discourged foreign Companies coming to India in addition e
widespread corruption.
Wetter complianee Tool: It is expected that the CaSt regime would ensure
berter-compliance due to elimination of various taxes. Uniformity in tax laws wit
lett to simele point taxation for supply of goods or service all over India. Thi
Will increase the tax compliance and more assesses will come into the tax net
MANAGEMENT ACCOUNTING
Meaning:
The term Management Accounting consists of two words 'Management" and "Accounting". It is
the study of managerial aspects of accounting. it is a tool in the hands of management to exercise
decision making: The emphasis of management accounting is to redesign accounting in a manner
which is helpful to the management is framing the policies and control of their execution.
Management accounting is of recent origin. The term was first used in 1950 by a term. of accounts
visiting U.S. A. under the auspices of Anglo-American Council on productivity.The terminology of
cost accounting had no reference to the toward 'management accountancy before the visit by this
siudy group. Intensive competition, large scale production, dynamic developments in technology,
and complexities of modern business have led to the development of management accounting to
solve many of the problems.
Definition:
Management accounting is the presentation of accounting information in such a way as to
assist management in the creation of policy and in the day-to-day operations of an undertaking".
I.C,M.A. - the definition recently incorporated into the terminology. Management accounting
provides information to the management to use it as a base for decision making.
Nature and Characteristics of Management Accounting
Nature of Management Accounting:
Though Management Accounting is the latest branch in the accounting
arena, it may be regarded partly as a Science and partly as an Art. It is the science
of Quantifying and summarising' and Art of 'Interpreting' accounting data.
Management Accounts derives its conclusions through collection,
processing and objective analysis of data Quantified in figures. Thus it depends
upon "Objectivisation and Quantification of progress and problems". From this
point of view Management accounting may be regarded as a Science.
However Management Accounting also involves human judgement,
impulses, whims and prejudices as evidenced in interpretation of data, deductions
and conclusions drawn from analysis. "Subjectivity' is inevitable in "deriving the
meaning of data'. Deductions can not be scientific with precision. Personal
judgement of Management accountant may influence the interpretations and
deductions significantly. From this point of view, Management Accounting may
be regarded as an Art.
We may conclude by saying that like all other social sciences, Management
Accounting is partly a Science and Partly an Art.
Characteristics of Management Accounting
The objective of Management accounting is to record, analyse and present
financial data to the Management in such a way that it become useful and helpful
in planning and running business operations systematically and effectively. The
following are the main characteristics of management accounting.
(1) Providing Financial Information: The main emphasis of management
accounting is to provide financial information to management. The information
is provided in a manner suitable to various levels of management for reviewing
policies and decision making.
(2) Cause and Effect analysis: Financial accounting confines itself to
presentation of P&L account and Balance Sheet. Management accounting
analyses the cause and effect of the facts and figures thereon. If there is loss
causes for the losses are investigated. If there is profit the variable affecting the
profit are also analysed. The amount of profit is compared with expenditure.
sales, capital employed, etc., to draw appropriate conclusions relating to the
;flect of those items on profit.
(3) Use of Special Techniques and Concepts: Management accounting
employs special techniques like standard costing, budgetary control, marginal
osting, fund flow, cash flow, ratio analysis, responsibility accounting, etc. to
make accounting data more useful and helpful to the management. Each of these
echniques or concepts is a useful tool for specific purpose in analysis and
nterpretation of data, establishing control over operations, etc.
[1:31 am, 06/05/2022] Prasanth: (4) Decision Making: Main objective of management accounting is
to
provide relevant information to management to take various important decisions.
Historical information provides a base on which the future impact is predicted.
alternatives are developed and decisions are made to select to select the most
beneficial course of action
(5) No fixed Conventions : Financial accounting has various established
principles and rules in preparing the financial accounts. Management accounting
has no such fixed rules. The tools or techniques applied by the management
accounting are same but application of these techniques various from concern to
concern and situation to situation. Interpretation of analysed data depends on
the person using it. The conclusions derived from application of a technique
depend on the intelligence and experience of the management account. The
presentation of information depends on the requirements of the concern. Every
concern has its own was of application of the techniques to suit its needs.
(6) Achievement of Objectives: Management accounting is helpful in realising
the enterprise objectives. Based on the historical information and with adjustments
for predicate future changes, objectives are laid down. Actual performance is
recorded. Comparison of actual with predetermined results is made. If there are
deviations of actual from the predetermined results, corrective action is taken
and predicted objectives are achieved. This becomes possible with the help of
management accounting techniques of standard costing and budgetary control.
(7) Improving Efficiency: The purpose of accounting is to provide information
to increase efficiency. The efficiency of departments, and divisions can be
improved by fixation of targets or goals for a specific period. The actual
performance is compared with that of targets. Positive deviations are reviewed.
The negative deviations are probed to ascertain the causes. The ways and
means to tackle the causes are analysed and targets are achieved. The process
of fixing and achieving the targets leads to gradual improvement in overall
efficiency.
(8) Forecasting: Management accounting is concerned with taking decisions
for future implementation. This involves prediction and forecasting of future
It is helpful in planning and laying down of objectives.
(9) Providing of Information and not Decisions: Management accounting
provides financial information and not the decisions. That is why it is said that
management accounting depends on the efficiency of the management in using
information and taking effective decisions.
[1:31 am, 06/05/2022] Prasanth: SCOPE OF MANAGEMENT ACCOUNTING
Management accounting has various facets. The field of management
accounting is very wide. The main purpose of management accounting is to
provide information to the management to perform its functions of planning,
directing and controlling. Management accounting includes various areas of
specialization render effective service to the management.
(1) Financial Accounting: Financial Accounting deals with financial aspects
by preparation of Profit and Loss Account and Balance Sheet. Management
accounting rearranges and uses the financial statements. Therefore management
accounting does not exclusively maintain factual data for itself. It is closely
related and connected with financial accounting. Thus, management accounting
is dependent on financial accounting which limits its scope.
(2) Cost Accounting: Cost Accounting is an essential part of management
accounting. Cost accounting, through its various techniques, reveals efficiency
of various divisions, departments and products. It also provides information
regarding cost of products processes and jobs through different methods of
costing. Management accounting makes use of all this data by focusing it towards
managerial decisions.
(3) Budgeting and Forecasting: Budgeting is setting targets by estirnating
expenditure and revenue for a given period. Forecasting is prediction: of what
will happen as a result of a giyen set of circumstances.
Targets are fixed for
various department and responsibility is pinpointed for achieving the targeis.
Actual results are compared with preset targets and performance is revaluated.
(4) Inventory Control: This includes, planning, coordinating and control of
inventory from the time of acquisition to the stage of disposal. This is done
through various techniques of inventory control like stock levels, ABC and VED
analysis, physical stock verification, etc.
(5) Statistical Analysis: In order to make the information more useful,
statistical tools are applied. These tools include charts, graphs, diagrams, index
numbers, etc. For the purpose of forecasting, other tools such as time serious,
regression analysis and sampling techniques are used.
(6) Analysis of Data: Financial statements are analysed and compared with
past statement, compared with those of other firms and with standards set.
The analysis and interpretation results in drawing reports and presentation to
the management.
(7) Internal Audit: Internal audit helps the management in fixing individual
responsibility for internal control.

Limitations of Management Accounting

Like any other discipline Management Accounting has its own Limitations
Though it is considered as an indispensable tool for Managerial decision making.
its recent origin and several external factors limit it's effectiveness. These factors
are explained below.
(1) Dependence for basic records: Management Accounting rarely maintains
basic and Primary records of operations, expenses and revenues. It derives all of
its Primary data from Financial Accounting, cost Accounting and other relevant
records. So, the accuracy and reliability of the conclusions derived by
Management Accounting is limited to the reliability of its sources of data. so, it
suffers from several of the limitations of Finance Accounts and cost Accounts,
(2) Personal Bias: Analysis and interpretation of Financial information
depends upon the capability of the analyst and interpreter. Personal Judgement
and usage of discretion become necessary in several areas of Management
accounting. Personal 'Prejudices' and 'Bias' of individuals can affect the
objectivity and effectiveness of the conclusions and recommendations.
(3) Management Accounting is only a Tool: Management accounting can
not be considered as an alternative or substitute to Management. Management
accountant acts as an adviser and facilitator for decision making by management.
The actual decisions, their implementation and follow up action are the prerogative
of the Management.
(4) Management Accounting provides only Data: The Main function of
Management Accounting is to provide data in the form of *Alternatives' to the
Management. It is for Management to make suitable choice among the alternatives
or even discard all of them. So, Management Accounting can *only Inform and
not prescribe'.
(5) Broad based scope: The scope of Management accounting is very wide
and broad based. It uses information from varied disciplines like Financial
Accounting, economics, Statistics, Cost Accounts, engineering etc. It considers
Monetary and Non Monetary Transaction of the firm. Limitations of the knowledge
and experience of the Management Accountant in such diverse fields can make
the data unreliable and undependable.
(6) Resistance to Change: Installation of Management accounting involves
basic changes in the organisational set up and Traditional accounting practices.
The personnel concerned may resist such change unless they are taken into
confidence and convinced of the need for such changes.
(7) Costly to Install: Installation of Management Accounting involves huge
expenditure because of the elaborate organisation needed and the large number
oi changes in procedures, forms and rules. So, small firms may not be able to
afford the cost. Only big organisations can afford to Maintain Management
accounting as a department or aid to management.

FINANCIAL STATEMENT ANALYSIS

Limitations of Management Accounting

Like any other discipline Management Accounting has its own Limitations
Though it is considered as an indispensable tool for Managerial decision making.
its recent origin and several external factors limit it's effectiveness. These factors
are explained below.
(1) Dependence for basic records: Management Accounting rarely maintains
basic and Primary records of operations, expenses and revenues. It derives all of
its Primary data from Financial Accounting, cost Accounting and other relevant
records. So, the accuracy and reliability of the conclusions derived by
Management Accounting is limited to the reliability of its sources of data. so, it
suffers from several of the limitations of Finance Accounts and cost Accounts,
(2) Personal Bias: Analysis and interpretation of Financial information
depends upon the capability of the analyst and interpreter. Personal Judgement
and usage of discretion become necessary in several areas of Management
accounting. Personal 'Prejudices' and 'Bias' of individuals can affect the
objectivity and effectiveness of the conclusions and recommendations.
(3) Management Accounting is only a Tool: Management accounting can
not be considered as an alternative or substitute to Management. Management
accountant acts as an adviser and facilitator for decision making by management.
The actual decisions, their implementation and follow up action are the prerogative
of the Management.
(4) Management Accounting provides only Data: The Main function of
Management Accounting is to provide data in the form of *Alternatives' to the
Management. It is for Management to make suitable choice among the alternatives
or even discard all of them. So, Management Accounting can *only Inform and
not prescribe'.
(5) Broad based scope: The scope of Management accounting is very wide
and broad based. It uses information from varied disciplines like Financial
Accounting, economics, Statistics, Cost Accounts, engineering etc. It considers
Monetary and Non Monetary Transaction of the firm. Limitations of the knowledge
and experience of the Management Accountant in such diverse fields can make
the data unreliable and undependable.
(6) Resistance to Change: Installation of Management accounting involves
basic changes in the organisational set up and Traditional accounting practices.
The personnel concerned may resist such change unless they are taken into
confidence and convinced of the need for such changes.
(7) Costly to Install: Installation of Management Accounting involves huge
expenditure because of the elaborate organisation needed and the large number
oi changes in procedures, forms and rules. So, small firms may not be able to
afford the cost. Only big organisations can afford to Maintain Management
accounting as a department or aid to management.
recorded in the books at cost price and shown in the balance sheet at cost price
less depreciation. Facts which cannot be recorded in books are not disclosed by
the financial statements. However, recently such facts are mentioned as footnotes
to make the financial statements more meaningful and useful.
(2) Accounting conventions
The financial statements are prepared by following certain accounting
conventions and principles. Accounting itself is a dynamic science and
accountants have developed, from time to time, a number of conventions on the
basis of experience.
When accounts are finalised, some conventions are followed: For example,
part of a particular expense is charged to profit and loss account (revenue) and
the rest may be capitalised. A number of conventions have been developed for
valuation of stock, debtors, etc., Therefore, data shown in the financial statements
are subject to the validity of conventions used in their preparation.
(3) Postulates
Accountants always take some facts as accepted or 'postulates*. In other
words, business transactions are recorded on certain assumptions such as *going
concern', "stable value of rupee', "profit accrual', etc. These postulates or
assumptions are reflected in the financial statements.
(4) Personal Judgements
Even though a number of conventions and assumptions have been
propounded in Accountancy, their use is affected by the personal judgement of
accountants. That is why financial statements prepared by two different persons
of the same concern give dissimilar results and this is due to different personal
judgement in using or applying particular conventions. Personal judgement of
accountants affects the amount kept as reserve for doubtful debts, amount of
depreciation on fixed assets, valuation of stock, etc. The financial statements are
affected by the personal judgement of accountants and as such they are subjective
documents.
Functions/Importance of Financial Statements
Financial statements provide meaningful, useful and valuable information
periodically regarding financial position and future prospects of the business
concern. Various parties interested can utilise the information provided by the
financial statements for analysis and interpretation.
'The importance and functions of financial statements for each of the interested
pares are discussed below:
(a) for management: Till recently, the feeling was that financial statements
are meant oniy for owners of the concern and to satisfy legal requirements.
it is realised that financial statements are of utmost help to the management of a
concern. Management will be able to take effective decisions only when correct
and reliable information is at its disposal. If information is not available,
management can neither plan nor fulfil the functions of operation and control.
Effective utilisation of capital employed, efficient use of assets, improvement in
financial position, etc., can be deciphered and understood from the financial
statements. It is commonly felt that financial statements are important tools to
the operation and control of business as the barometer, compass, and charts are
to the successful navigation of a ship.
(b) For the Financiers: Besides management, financial statement are also of
great importance to the financiers and lenders. Lenders need information regarding
customer's financial position, solvency, credit standing, profitability, etc. Financial
statements provide most of the information. Financial statements help the bankers
and lenders to decide whether to extend loans to the customers.
(c) For the Creditors: Trade creditors is another class for whom financial
statements are important. Trade credit implies extending facilities of deferred
payment for credit purchases by seller to buyer. Traditionally, the seller used to
depend on trade references, while extending trade credit and financial statements
were rarely used. The seller used to depend on the business concept that" if the
customer has paid in the past at the due date, he will pay in future also." But
these beliefs carry only half the truth. Extending credit is essential due to tough
competition and at the same time supplier of trade credit feels that financial
position of the customers has to be examined before extending trade credit. It is
possible that customer is faithful and paying regularly but his financial position
is not sound. Sometimes, his financial position may be sound but he may be very
negligent in making payments at due dates. All these facts are revealed by financial
statements with the help of solvency ratios, cash and fund flow analysis, etc.
(a) For Investors: Present and prospective investors are interested in studying
financial statements to assess earning capacity, growth potential and efficiency
of management. The share holder would like to assess the present and future
prospects. In case of debenture holder as investor, his interest is limited to the
extent of knowing long-term solvency and coverage of interest in profits. Financial
Statements provide such information readily to shareholders and debenture
holders,
Limitations of Financial statements
While analysing financial statements the following limitations should be kept
in mind.
(1) Information shown in financial statements is not precise since it is based
on practical experience and the conventions and rules developed therefrom.
(2) Financial statements do not always disclose the correct financial pesition
ofbusiness concerns as they are influenced by the personal opinions, judgement
subjective views and whims of accountants of each concern.
(3) Balance sheet of a concern is a static document as it discloses the financial
position of a concern on a particular date. But the values shown and composition
of items keep changing day-by-day. Therefore, the data and information does
not disclose current realities.
(4) information disclosed by profit and loss account may not be real profit as
many items shown in the profit and loss account are not real but estimated.
(5) Financial statements are dumb, because they cannot speak themselves.
The statements require further detailed analysis and interpretation.
(6) Financial statements of one period may not be comparable as such with
statements of other periods due to differences in conditions and changes in
Economic situation. Statements of one concern cannot be compared with those
of other concerns as the accounting practices differ.
(7) Financial statements do not disclose the contribution of man towards the
efficiency of the business. The ability, energy and efficiency of the management
is mainly responsible for the success of a business, the monetary value of which
¿ not disclosed in the financial statements.
Meaning and process of financial statement analysis and interpretation
- Nature and importance of financial statements are explained in the preceding
pages. It has been explained that facts disclosed by financial statements are of
outstanding significance to the various parties interested in financial position cf
a business concern. The financial statements are helpful to the executives to
assess the implications of their decisions, evaluate and review their performance
and implement corrective action. In fact the financial statements render invaluable
service to owners, employees, customers, suppers and the government in their
respective fields of interest. It is to be mentioned that mere presentation ot
statements does not serve any purpose to any of the parties mentioned above.
The financial statements are useful and meaningful only when they are analysed
and interpreted, Scientific method has to be adopted to analyse and interprel
these statements as done in the case of preparation of these statements. The
eftort taken to understand the implications of the statements is called interpretation
Some people call it 'examination',
'criticism' or "analysis'. Therefore, it is
meaningful to call it *analysis and interpretation'
F. Wood in his work *Business Accounting has defined the term interpretatie"
as follows: "To interpret means to put the meaning of a statement in simple term
for the benefit of a person".
Analysis may be described as a critical examination of financial transactions
effected during a definite period of time. Kennedy and Muller said " Analysis and
interpretation of financial statements are an attempt to determine the significance
and meaning of the financial statement data so that forecast may be made of the
prospects for future earnings, ability to pay interest and debt maturities
(both current and long term) and probability of a sound dividend policy»
The balance sheet and profit and loss account are to be interpreted to convey
meaningful message to the lay man who is still the typical shareholder in our
country. Interpretation is considered to be the most important function of
management accountant because the management of today needs relevant data
and information to conduct its function efficiently. The information is more
valuable if it is presented in analytical form than in absolute form. Management
Accountant is expected to analyse and interpret the financial statements to perform
his basic duty of "communication to the management'
Interpretation in its widest sense includes many processes like arrangement,
analysis, establishing relationship between available facts and finally making
conclusions.
Objectives of Analysis and interpretation
The users of financial statements have definite objectives to analyse and
inierpret. Therefore, there are variations in the objectives of interpretation by
various classes of people. However, there are certain specific and common
objectives which are listed below:
(1) To interpret the profitability and efficiency of various business activities
with the help of profit and loss account;
(2) To measure managerial efficiency of the firm;
(3) To measure short-term and long-term solvency of the business;
(4) To ascertain earning capacity in future period;
(5) To determine future potential of the concern;
(6) To measure utilisation of various assets during the period;
(7) To compare operational efficiency of similar concerns engaged in the
same industry.
Procedure for Analysis and interpretation
Certain preliminary steps are required to be completed before attempting
analysis and interpretation of financial statements.
(1) The objectives of analysis of statements have to be thought about as the
techniques of analysis are to be selected on the basis of objectives.
[1:37 am, 06/05/2022] Prasanth: Types of Analysis
The process of financial statement analysis is of different types. The process
of analysis is classified on the basis of information used and
'modus operandi' oi
analysis. The classification is as under:
[1:37 am, 06/05/2022] Prasanth: External Analysis: This analysis is based on published financial
statements
of a firm, Outsiders have limited access to internal records of the concern.
Therefore, they depend on published financial statements. Thus, the analysis
done by outsiders namely, creditors, suppliers, investors and government agencies
is known as external analysis. This analysis serves a very limited purpose.
Internal Analysis: This analysis is done on the basis of internal and
unpublished records, It is done by executives or other authorised officials. I is
very much useful and significant to employees and management.
Horizontal Analysis: This analysis is also known as "dynamic or trend
analysis. The analysis is done by analysing the statements of a number of year
According to John N. Myer " the horizontal analysis consists of a study of the
[1:38 am, 06/05/2022] Prasanth: behaviour of each of the entities in the statement", Thus, under
horizontal analysis
we study the behaviour of each item shown in the financial statements. We
examine as to what has been the periodical trend of various items shown in the
statements i.e., whether they have increased or decrease l over a period of time
If the comparative statements are prepared for more than two periods, then one
of the years is taken as basis to calculate the percentage of increase or decrease.
Some analysts prefer to choose earliest year as basis, while some others prefer to
take just the preceding year as basis.
Vertical Analysis: Vertical analysis is also known as 'static analysis' or
'structural analysis'. This analysis is made on the basis of a single set of financial
statements prepared at a surticular date. Under vertical analysis, quantitative
relationship is established between different items shown in a particular statement.
Common-size statements are a form of vertical analysis. Different items shown in
the statemer
expresged as a percentage to any one item as base.
Use nf bot the methods of analysis is very much required for proper analysis.
Each methoa provides specific type of information and in fact both methods
constitute the backbone of financial analysis.
Techniqu
Tools of financial statement analysis: The history of financial
statément analysis is traced back to the beginning of 20th century. The analysis
was started in western countries for the use of credit analysis. Till 1914, financial
institutions used to rely on the facts of financial statements. But over a period of
time, the need for analysis was felt and a number of techniques were invented
and made use of for the purpose of analysis.
The most important techniques of analysis and interpretation of financial
statements are listed below:
(a) Ratio analysis;
(b) Cash flow analysis;
(c) Funds flow analysis;
(d) Comparative financial statements;
(e) Common measurement or size statements;
(f) Net working capital analysis;
(8) Trend analysis.
(a) Ratio analysis: An analysis of financial statements based on ratios is
known as ratio analysis. A ratio is a mathematical relationship between two of
more items taken from the financial statements, Ratio analysis is the process of
computing, determining, and presenting the relationship of items, It also includes
comparison and interpretation of ratios and using them as basis for the future
[1:38 am, 06/05/2022] Prasanth: projections. Ratio analysis is helpful to management and outsiders
to diagnose
the financial health of a business concern. It helps in measuring the profitability,
solvency, and activity of a firm.
(b) Cashflow analysis; Cash flow analysis depicts the inflows and outflows
of cash. Cashflow statement is the device for guch analysis, It highlights causes
which bring changes in cash position between two balance sheet dates,
(c) Funds flow analysis; Funds flow statement signifies the sources and
applications of funds. The term "funds' refers to working capital. Funds flow
analysis clearly shows internal and external sources of working capital and the
way funds have been used. Funds flow is derived from analysis of changes
which have taken place in assets and equities between two balance sheet dates.
According to Foulke "a statement of sources and application of funds is a
technical device designed to analyse the changes in financial position of a
business concern between two periods"
Funds flow analysis is helpful in judging credit worthiness, financial planning
and budget preparation.
(a) Comparative financial statements: This is yet another technique used in
financial statement analysis. These statements summarise and present related
data for a number of years, incorporating therein changes (absolute and relative)
in individual items of financial statements. These statements normally comprise
comparative balance sheets, comparative profit and loss account, comparative
statements of change in total capital as well as in working capital. These statements
help in making inter-period and inter-firm comparisons and also highlight the
trends in performance efficiency, and financial position.
(e) Common size statements: Common size statements indicate the relationship
of various items with some common items, (expressed as percentage of the common
item). In the income statements, the sales figure is taken as basis and all other
figures are expressed as percentage of sales. Similarly, in the balance sheet the
total assets and liabilities is taken as base and all other figures are expressed as
percentage of this total.
The percentages so calculated are compared with corresponding percentages
in ther periods or other firms and meaningful conclusions are drawn. Generally,
a rommon size income statement and common size balance sheet is prepared.
C) Net Working Capital Analysis;
working capital statement or schedule
of changes in working capital is prepared to disclose net changes in working
capitals on two specific dates (generally two balance sheet dates). It is prepared
rom current assets and current liabilities on the specified dates to show net
increase or decrease in working capital.
[1:39 am, 06/05/2022] Prasanth: (g) Trend analysis: Trend' signifies a tendency and as such the
review anti
appraisal of tendency in accounting variables are nothing but trend analysis.
Trend analysis is carried out by calculating trend ratios (percentage) and /or by
plotting the accounting data on raph paper or chart. Trend analysis is significant
for forecasting and budgeting. Trend analysis discloses the changes in financial
and operating data between specific periods.
Limitations of financial statement analysis
Financial statement analysis is a very important device but it has certain
limitations which are to be kept in mind. Following are the limitations of financial
statement analysis.
(1) Based on past data: The nature of financial statements is historical. Past
cannot be the index of future and cannot be cent per cent basis for future
estimation, forecasting, budgeting and planning.
(2) Financial statements ânalysis cannot be a substitute for judgement:
Analysis is a tool which can be utilised usefully by an expert but may lead to
erroneous conclusions by unskilled analyst. Thus results of analysis cannot be
considered as judgement or conclusion.
3) Reliability of Figures; The accuracy and reliability of analysis depends
on reliability of figures derived from financial statements. If financial statements
are manipulated by window-dressing, analysis based on those figures will be
misleading or meaningless.
(4) Different interpretations: Results of the analysis may be interpreted
differently by different users.
(5) Change in accounting methods: Analysis will be effective if the figures
taken from financial statements are comparable. If there are frequent changes in accounting policies
and methods, the figures of different periods will be different and uncomparable. Then the analysis
will have little meaning and value.
(6) Price level changes: Ever rising inflation erodes the value of money in the present day economic
situation, which reduces the validity of analysis.
(7) Limitations of the tools of analysis: Different techniques of analysis are used by an analyst. These
tools are suitable for different types of analysis. Application of a particular tool or technique depends
on the skill and expertise of the analyst. If an unsuitable technique is used, it gives misleading
results. It may lead to wrong conclusions and prove harmful to the business concern. We may
conclude that financial statement analysis is a valuable tool in the hands of a skilled financial analyst
who can dissect and diagnose the nature of sickness of commercial firms.

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