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For Balance Sheet and Retained Earnings Statement - Follow the format in the book
a. Note that, in the class, we discussed that there is difference of opinion regarding
treating ‘Deferred tax liability’ as Quasi Equity versus Long Term Operating Liability. All the instructors have agreed to treat it as Long term Operating Liability for the purpose of the course. Some Examples to help you further clarify the balance sheet items:
1. Examples of Current Assets Operating in Nature - Inventory, Accounts
Receivables (Sundry Debtors/Customers), Accrued Revenue, Prepaid Expense, Cash and cash equivalents
2. Examples of Current Assets, Non-Operating in Nature - Current Assets which
are not operating in nature like Interest Receivable, Accrued Interest, short term loans and advances to subsidiaries if any appearing under the head of current assets, Fixed Assets held for sale
3. Examples of Current Liabilities, Operating in Nature - Accounts payable
(Sundry Creditors, Suppliers), Unearned revenue, Taxes payable, other accruals of operating expenses like wages payable, rent payable
4. Examples of Current Liabilities, Non-Operating in Nature – Current Liabilities
which are not operating in nature like Short-term debt, current portion of long-term debt, interest payable, dividends payable
5. Example of Long Term Assets, Operating in Nature – a. Tangible Assets like Property, Plant and Machinery, Building, Land (Net
of Accumulated depreciation)
b. Intangible Assets like Trademark, Patent, Copyrights (Net of Accumulated
6. Example of Long Term Assets , Non-Operating in Nature - Long term assets
which are not operating in nature like Investments, Long term loans and advances of long term and Non-operating nature
7. Examples of Investments, Strategic in Nature : Investments, Loans and advances
to companies which are Subsidiaries, Associates, key customers, suppliers of critical inputs, Supply chain partners
8. Examples of Investments, Non-strategic in Nature : Investments or Loans and
advances which are not Strategic in nature
Non-Operating in Nature. Research 2 . For Income Statement . Example of Long Term Liabilities. of more than 1 year maturity) Net Operating Working capital = Operating Current Assets . Example of Long Term Liabilities. Distribution Expenses.Follow the Format discussed in the class. debentures. Selling. I am repeating it here again: Income Statement for the period ended 31st March 2011 Net Sales (Net of Excise duty. Discounts) Less: Cost of goods sold (COGS) Gross Profit Less: Operating expenses like General & Administrative Expenses (includes Depreciation on non-factory assets) like Marketing.9. Operating in Nature .Deferred Tax Liability 10.Long term debt. Other borrowings and Notes Payable (Interest bearing. Sales Returns and Allowances. Sales taxes/ Service tax. bonds.Operating Current Liabilities Net Worth or Shareholders’ Equity: = Paid-up Share Capital [or Capital Stock] + Reserves and Surplus (including Share Premium also called Additional-Paid in Capital if any and Retained earnings) – Miscellaneous Expenditure not written off Capital Employed: = Net Worth + Debt (or borrowings) Total Debt or Total Borrowings = Short Term and Long Term Debt or Borrowings (including Preference capital if any) For Fixed Assets: Gross Block (or Gross Book Value which is the acquisition cost) Less Accumulated Depreciation = Net Block (or Net Book Value) II.
like gain/loss on sale of asset. Gains and Losses (Non-operating items .Expenses Operating Income or Operating Profit Add/Less : Other Incomes. Please note that your hand out also mentions Operating Expense + COGS = Cost of Sales Calculation of Cost of goods sold (COGS) . dividend income) Earnings Before Interest and Tax (EBIT) Add: Interest Income Less: Interest Expense Profits before Tax (PBT) Less: Income Tax Net Income or Net Profits (PAT) Note: 1. Report Interest Income and Interest Expense separately (don’t net these off) 2.For Merchandising Company Purchases net of Returns and Allowances 300000 Add: Freight in 4000 3 10000 200000 4000 7000 207000 50000 35000 292000 20000 30000 282000 8000 290000 10000 280000 .For Manufacturing Company Opening Raw Material Add: Raw Material Purchased net of returns and allowances Add: Freight in Less: Closing Stock of Raw Material = Raw Material Consumed Add : Direct Labour cost or wages Add: Manufacturing Expenses (includes depreciation on factory assets) =Total Manufacturing Costs Adjustment for WIP : Add: Opening WIP Less: Closing WIP Adjustment for FG : = Cost of goods manufactured Add: Opening Finished Goods = Cost of goods available for sale Less: Closing Finished Goods = Cost of goods sold Calculation of Cost of goods sold (COGS) .
Indirect Method Profit before tax Adjustment for reconciliation of PBT to CFO: – Non-cash items like Add: Depreciation on PPE. - For Cash Flow Statement – Follow the Format taught in the class and shared with you in the PPT. I am repeating it here again with detailed examples: Cash Flow Preparation – Operating Activity Section . Add: Amortization of intangible Assets – Non-operating items like Add: Loss on sale of assets/investments Less: Gain on sale of assets/investment ** Less: Interest Income Add: Interest expense Operating Profit Before Working Capital Changes Adjustment for changes in non-cash current items: 4 . (Net Income – Preferred Dividends) / weighted average number of shares outstanding - Book value per share (or Face Value) = Common Stock (or Equity Capital) in Balance sheet / Number of outstanding shares Market value per share = Price at which the shares are being traded in the capital market Market Value of Equity capital of the company = Stock price in the market × Number of shares outstanding III.= Cost of goods Purchased Add: Opening Inventory = Cost of goods available for sale Less: Closing Inventory = Cost of goods sold Earnings Per share 304000 10000 314000 4000 310000 = Earnings Available to Equity shareholders / weighted average number of shares outstanding Or.
Machinery Add: Cash Receipts from Sale of investments in equity or debt of other entities 5 (A) . Plant and Equipment..Changes in Current Assets & Current Liabilities (Example: Add-> Decrease in CA or Increase in CL Less-> Increase in CA or Decrease in CL) Add: Decrease in Accounts Receivable/Inventory/Prepaid Expense Add: Increase in Accounts Payable/ Salaries Payable/ Rent Payable Less: Increase in Accounts Receivable/Inventory/Prepaid Expense Less: Decrease in Accounts Payable/ Salaries Payable/ Rent Payable Cash Flow from Operating Activities Less : Income Tax Paid Net Cash Flow from Operating Activities (CFO) ** Gain on sale of asset = Cash Received from sale of the asset Less: (Cost of the asset – Accumulated Depreciation) Cash Flow Statement ( Direct Method) : Cash Flow from Operating Activities: Cash Receipts from customers (for sale of goods and the rendering of services) Less: Cash paid to suppliers (for goods and services) Less: Cash paid to employees Less: Cash paid for other Operating Expenses Less: Income Tax paid (unless otherwise specified) Net Cash from Operating Activities (CFO) Cash Flow from Investing Activities Cash Receipts from Sale of fixed assets like Building.
Plant and Equipment. Collections or Cash Receipts from Customers Credit Sales Add: Opening Balance of Accounts Receivable Less: Closing Balance of Accounts Receivable b. loans.Add: Cash advances and loans made to other parties Less: Cash Payments for Purchase of fixed assets like Building. Cash Payment to suppliers COGS + Closing Inventory – Opening Inventory = Purchases 6 . borrowings bonds. mortgages and other short-term or long-term Less: Cash payments for shares repurchase Less: Repayment of borrowings Less: Interest Paid (not the Interest expense) Less: Dividend Paid Net Cash from Financing Activities (CFF) Net change in Cash and Cash Equivalents (CFO +CFI +CFF) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year (B) (C) (D)=(A+B+C) (E) (E)+ (D) Calculating Cash Receipts and Cash Payments for Direct Method: a. notes. Machinery Less: Cash Payments for Purchase of Investments in equity or debt of other entities Less: Repayment of advances and loans made to other parties Add: Interest Received (not the Interest Income) Add: Dividend Received Net Cash from Investing Activities (CFI) Cash Flow from Financing Activity: Cash proceeds from issuing shares (or common or preference stock) Add: Cash proceeds from issuing debentures.
7 . Cash Payment for Operating Expenses Operating Expenses + (Closing Prepaid – Opening Prepaid) + (Opening Payable – Closing Payable) = Cash paid for Operating Expenses d. Bhattacharyya. Some students were asking for a reference book from which they can practice problems on Cash Flow statement. Interest Paid Interest Expense for the year + Opening Balance of Interest Payable – Closing Balance of Interest Payable = Cash paid for Interest Expense f. I am sure these are available in the library. Income Tax Paid Current Tax Expense + (Closing Advance Tax – Opening Advance Tax) + (Opening Tax Payable – Closing Tax Payable) = Cash paid for Income Tax e. So. Interest Received Interest Income for the year + Opening Balance of Interest Receivable – Closing Balance of Interest Receivable = Cash received for Interest Income II. those who really want to put an extra effort can look at “Financial Accounting for Business Managers” or “Essentials of Financial Accounting” – both by Prof. Asish K.Purchases + Opening Accounts Payable – Closing Accounts Payable = Cash paid to Suppliers c.
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