Corporate Financial Reporting

Week 1 Session Two

Manju Jaiswall
IIM Calcutta
 Recap Exercise
• Carlton Co. had assets of $ 2,80,000 and
liabilities of $ 1,20,000 at the beginning of the
year and assets of $ 4,00,000 and liabilities
of $ 1,40,000 at the end of the year.
• During the year, there was an investment of $
40,000 in the business by the owners, and
the company paid dividends of $ 48,000.
• What amount of net income did the company
earn during the year?
Solution

1–3
Accounting equation in balance- an
illustration
• Few of us jointly promote a trading
Co. on 1-1-23 to buy & sell few
consumer durable items,
contributing 5 lakhs each (6 of us)
to the share capital.

Assets = Liabilities + Owner’s Equity

Cash (30 lakhs) = 0 + Equity share capital (30

lakhs)
Business/Economic Entity Concept
1–4
 Cont’d

• Took a bank loan Rs 20 lakhs.

Assets = Liabilities + Owner’s Equity

Cash (20) = Bank Loan (20)

Cumulative Impact

Cash (50) = Loan (20) + Equity share capital (30)

Monetary Unit Concept 1–5
 Cont’d

• Rented a showroom, paid 5 lakhs as

refundable advance. Rent is 1 lakh p.m.

Assets = Liabilities + Owner’s Equity

Advance rent (5) + Cash (-5) = 0

Cumulative Impact

Advance (5) + Cash (45) = Loan (20) + Equity

share capital (30)
1–6
 Cont’d
• Bought furniture for the showroom for 5
lakhs.

Assets = Liabilities + Owner’s Equity

Furniture (5) + Cash (-5) = 0

Cumulative Impact

Furniture (5) + Advance (5) + Cash (40) = Loan

(20) + Equity share capital (30)
Historical Cost Assumption
1–7
 Cont’d

• Purchased inventory for 60 lakhs. Paid

50% in cash and agreed to pay the
balance in 60 days time.

Assets = Liabilities + Owner’s Equity

Inventory (60) + Cash (-30) = Creditors (30)
Cumulative Impact
Furniture (5) + Inventory (60)+ Advance (5) +
Cash (10) = Creditors (A/P) (30) + Loan (20)
+ Equity share capital (30)
1–8
 Cont’d

• Sold 40 lakhs worth of inventory for 50

lakhs;
– cash sales 30 lakhs, & balance on credit.
Assets = Liabilities + Owner’s Equity
Inventory (-40) + Debtors (20) + Cash (30) = Sales
(50) – Cost of goods sold (40)
Cumulative Impact
Furniture (5) + Stock (20)+ Debtors (20) +
Advance (5) + Cash (40) = Creditors (30) +
Loan (20) + Equity share capital (30) + { Sales
(50) – Cost of goods sold (40) }
Revenue recognition & Matching concept 1–9
 Cont’d
• Manager informs about the following dues -
staff salary 2 lakhs, advertisement
expenses 2 lakhs, interest 20,000 & rent 1
lakh.
Assets = Liabilities + Owner’s Equity
0 = Expenses payable (5.2) + OE (-5.2)
Cumulative Impact
Furniture (5) + Stock (20)+ Debtors (20) + Advance
(5) + Cash (40) = Creditors (30) + Expenses
payable (5.2) + Loan (20) + Equity share capital
(30) + {Sales (50) – Cost of goods sold (40) –
Expenses (5.2)}
Cash vs. Accrual Concept 1–10
 Cont’d
• Dividend paid to investors 1 lakh

Assets = Liabilities + Owner’s Equity

Cash (-1) = OE (-1)
Cumulative Impact

Furniture (5) + Stock (20)+ Debtors (20) +

Advance (5) + Cash (39) = Creditors (30) +
Expenses payable (5.2) + Loan (20) + Equity
share capital (30) + {Sales (50) – Cost of
goods sold (40) – Expenses (5.2)} – Dividend
(1)
1–11
 Balance Sheet as at 31-01-23

Liabilities Assets
Share capital 30 Fixed Assets
Furniture 5
Reserves & Surplus 3.8

Owner's Equity 33.8 Current Assets Loans & Advances

Inventory 20
Loan from Bank 20 Debtors 20
Rent Advance 5

Current Liabilities & Provisions Cash 39 84

Creditors 30
Expenses payable 5.2
89 89
1–12
 Income Statement for the month ending 31-01-23

Income
Sales 50
Other Income 0
Total Income 50
Expenditure
Cost of goods sold 40
Salary 2
Advertisement 2
rent 1
45
PBDIT 5
Depreciation 0
Interest 0.2
PBT 4.8
Tax 0
PAT/Disposable profit 4.8
Dividend 1
Balance profit carried to B/S 3.8 1–13
Cash Flow Summary
Receipts

cash from fresh equity 30

Bank loan 20
cash received from customers 30
80
Payments
cash paid to supplier -30
cash paid for advance rent -5
purchase of furniture -5
paid dividend -1
-41
Balance of cash closing 39
1–14
 Interdependence of Financial Statements
Balance Sheet as at 2023 Income Statement for the month
ending 31-01-23
Cash Flow Summary

Receipts
Income
Liabilities Assets
cash from fresh equity 30
Sales 50
Share capital 30 Fixed Assets Other Income 0 Bank loan 20

Furniture 5 Total Income 50 cash received from

customers 30
Reserves & Expenditure
Surplus 3.8 80
Cost of goods sold 40
Current Assets Loans & Salary 2 Payments
Owner's Equity 33.8 Advances
Advertisement 2 cash paid to
Inventory 20 supplier -30
rent 1
45 cash paid for advance
Loan from Bank 20 Debtors 20 rent -5
PBDIT 5
Rent Advance 5 purchase of
Depreciation 0
furniture -5
Current Liabilities & Interest 0.2
Provisions Cash 39 84 paid dividend -1
PBT 4.8
-41
Tax 0
Creditors 30
PAT/Disposable profit 4.8 Balance of cash
Expenses closing 39
payable 5.2 Dividend 1
Balance profit carried to B/S 3.8
89 89

1–15
 Qualitative Characteristics of
Accounting Information
• Understandability
• Usefulness
– Relevance
• Be timely,
• Provide feedback, and
• Help predict future conditions
– Reliability
• Faithful Representation
• Credible & Verifiable
• Neutral
• Comparability (including Consistency)
Recap …Qualitative Characteristics of
Accounting Information
Qualities of Useful Information
According to the FASB, useful information should possess
two fundamental qualities, relevance and faithful
representation.
 Recap … Qualitative Characteristics of
Accounting Information
Qualities of Useful Information
Enhancing Qualities

Comparability Information has the

results when Information is quality of
different companies verifiable if we are understandability
use the same able to prove that it if it is presented in a
accounting is free from error. clear and concise
principles. fashion.

Consistency means
that a company uses
the same accounting For accounting information to be
relevant, it must be timely.
principles and methods
from year to year.
 Basic Accounting Assumptions
• An understanding of basic accounting
assumptions is vital to understand the
process of accounting.
• Accounting concepts underlying the
recording of transactions:
– Separate/Economic Entity Concept
– Money Measurement Concept
– Going Concern Concept
– Accounting Period/Periodicity Concept

1–19
Financial Accounting Regulations
(GAAP)

GAAP

Assumptions Conventions/ Standards

Principles
Going Concern Full Disclosure
Accounting period Materiality
Money measurement Conservatism
Economic Entity
Historical Cost
Or Separate Entity
Accrual &
Cash basis
Revenue
Recognition
Matching
1–20
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
Part ‘c’ and ‘f’ are based on.. 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) 1–26
(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
 Accounting Regulations

Match each item above with a description below.

1. Ability to easily evaluate one company’s results Comparability
relative to another’s.
2. Belief that a company will continue to operate
for the foreseeable future. Going concern
3. The judgment concerning whether an item is
large enough to matter to decision makers. Materiality
 Accounting Regulations

4. The reporting of all information that would Full disclosure

make a difference to financial statement users.
5. The practice of preparing financial statements Periodicity
at regular intervals.
6. The quality of information that indicates the
Relevance
information makes a difference in a decision.
 Accounting Regulations

7. Belief that items should be reported on the Historical Cost

balance sheet at the price that was paid to
acquire the item.
8. A company’s use of the same accounting Consistency
principles and methods from year to year.
9. Tracing accounting events to particular Economic entity
companies.
 Accounting Regulations

10. The desire to minimize errors and bias in Faithful representation

financial statements.
11. Reporting only those things that can be
measured in rupee/dollars. Monetary unit