FINANCIAL ACCOUNTING

Prof. Ranjan Kumar Bal Utkal University

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Lakshmi Niwas Mittal  Kumar Mangalam Birla  Indra Nooyi  Osama Bin Laden

COURSE OUTLINE: F.A.
• Conceptual Knowledge • Mechanics • Financial Statements • Analysis & Decision Making

: WHY TO READ ? •Personal Life •Professional Life •An Investment for Future •Strategy .F. A.

BUSINESS ORGANISATIONS • Merchandising (Trading) Organisations • Manufacturing Organisations • Service Organisations Business organisations are cash machines. .

BUSINESS ORGANISATIONS • Private Limited Company • Public Limited Company • Limited Liability Partnership .

ACCOUNTING IS THE LANGUAGE OF BUSINESS. • Serves as a means of communication • Communicates / reports the events .

Anthony & Reece: “Accounting is not exactly a foreign language. and so does Accounting.” “Language evolve and change in response to the changing needs of society. the problem of learning it is more like that of an American learning to speak English as it is spoken in Great Britain.” .

ACCOUNTING IS AN INFORMATION SYSTEM INPUT (Raw Data) SYSTEM PROCESSES (Men & Equipment) OUT PUT (Reports & Information) .

OUTPUTS • Financial Statements • Tax Returns • Managerial Data and Reports • Special Reports .

and Regulatory Agencies General Public Others: Media. etc. . Researchers & Analysts. Consumer Organizations.USERS OF ACCOUNTING INFORMATION  Management  Shareholders and Investors  Lenders  Creditors      Employees Customers Govt.

EVOLUTION OF ACCOUNTING • Stewardship Accounting • Financial Accounting • Cost Accounting • Management Accounting Financial Accounting Vs. Managerial Accounting .

classifying and summarizing in a significant manner and in terms of money. at least of a financial character and interpreting the results thereof.” .” AICPA: “Accounting is the art of recording.DEFINITIONS AAA: “Accounting is the process of identifying. measuring and communicating economic information to permit informed judgments and decisions by the users of information. transactions and events which are in part.

FINANCIAL ACCOUNTING • Recording • Classifying • Summarizing • Analyzing & Interpreting • Communicating .

 To ascertain the financial position of the organisations.  To provide accounting information to interested parties.OBJECTIVES : F.  To keep systematic records. .A.  To ascertain the net effects of the business operations.

ACCOUNTING PRINCIPLES Principles to be observed at the recording stage Accounting Entity Money Measurement Objective Evidence Dual Aspect Realisation Cost Accrual Principles to be observed at the reporting stage Going concern Accounting Period Matching Conservative Consistency Materiality Full Disclosure .

CASH BASIS Vs. ACCRUAL BASIS OF ACCOUNTING Accounting Framework: Includes GAAP on the basis of which accounting data is processed. analyzed and reported. .

conventions. rules.GAAP • A set of concepts. and procedures • Accepted by accountants over a period of time • Guides in the preparation and presentation of financial reports .

IFRS • FASB . Ind AS • IASB .ACCOUNTING STANDARDS • Specifies acceptable accounting methods • Uniformity • Harmonization • ASB of the ICAI – AS Vs.

ACCOUNTING EQUATION • Economic Resources = Sources of Resources or Claims. • Assets = Liabilities • Equity + Liabilities = Assets .

Analysing the Effects of Business Transactions.000 • Suresh.000 • Equipments Rs. Investment by Owner Receipt of Loan Purchase of Office Equipment EQUITY & LIABILITIES • Creditors Rs.20.000 ----------70.58.000 ---------- . Equity 50.000 ----------- ASSETS • Cash Rs.000 ---------70.12.

2011 LIABILITIES • Share Capital • Reserve and Surplus • Secured Loans • Unsecured Loans • Current Liabilities and Provisions ASSETS • Fixed Assets • Investments • Current Assets And Loans & Advances • Miscellaneous Expenditures • Profit & Loss A/C .BALANCE SHEET as at 31st March.

BALANCE SHEET as at 31st March. Loans & Advances Less Current Liabilities & Provision • Miscellaneous Expenditure . 2011 SOURCES OF FUNDS • Shareholders‟ Fund • Loan Funds APPLICATION OF FUNDS • Fixed Assets • Investments • Current Assets.

BALANCE SHEET as at 31st March. 2012 EQUITY AND LIABILITIES Note No. • Shareholders‟ Fund • Share Application Money pending allotment • Non-current Liabilities • Current Liabilities ASSETS • Non-current Assets – – – – – Fixed Assets Non-current Investments Deferred Tax Assets (net) Long term loans and advances Other non-current assets Current Investments Inventories Trade receivables Cash and cash equivalents Short-term loans and advances Other current assets Current Previous • Current Assets – – – – – – .

Provision for Taxation V. Expenditure III.PROFIT & LOSS A/C for the year ending 31st March 2011. Profit before Tax IV. Balance b/f from last year VII. Income II. Profit after Tax VI. Reserves VIII. Balance transferred to Balance Sheet I. Profit available for appropriation Appropriations: Dividends. .

PROFIT & LOSS STATEMENT
Revenue from operations II. Other income III. Total Revenue IV. Expenses ……………. V. Profit before exceptional and extraordinary items and tax VI. Exceptional Items VII. Profit before extraordinary items and tax VIII. Extraordinary items IX. Profit before tax X. Tax expense: Current tax, Deferred tax XI. Profit/(loss) for the period from continuing operations XII. Profit/(loss) from discontinuing operations XIII. Tax expense of discontinuing operations XIV. Profit/(loss) from discontinuing operations (after tax) XV. Profit/(loss) for the period XVI. Earnings per equity share: Basic, Diluted
I.

for the year ending 31st March 2012

CASH FLOW STATEMENT
for the period ending on March 31, 2012 • • • • • • Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Net cash increase (decrease) in cash & CE Cash & CE at beginning of the period Cash & CE at the end of the period.

CAPITAL MARKET FORCES Investors, Lenders
FINANCIAL STATEMENTS AND REPORTS

PRODUCT MARKET FORCES Competitors, Customers

LABOUR MARKET FORCES Managers, Employees

REGULATORY FORCES Government, Securities Regulator

LIMITATIONS OF FINANCIAL STATEMENTS • • • • • • Vegetable Accounting Focus on past / historical data Postmortem Analysis Ignore non-financial information Ignore HR Fails to provide all information to stake-holders for their decision making .

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS. • • • • • • • • • • Relevance Reliability Understandability Comparability Consistency Neutrality Materiality Timeliness Verifiability Prudence .

RECORDING BUSINESS TRANSACTIONS • Accounts • Ledger • Chart of Accounts: Assets Liabilities Shareholders’ Equity Revenues Expenses .

DOUBLE ENTRY SYSTEM • Luca Pacioli – 1494 • Dual Aspect • Debit & Credit .

LEDGER „T‟ Account : A Ledger account in simplified form. TITLE OF ACCOUNT Left or Debit side Right or Credit side ANY ASSET / EXPENSE ACCOUNT (Debit) Increase (Credit) Decrease .

Ledger ANY LIABILITY / OWNER’S EQUITY / REVENUE ACCOUNT (Debit) Decrease (Credit) Increase Standard Form of Accounts ANY ACCOUNT Date Explanation Ref Debit Credit Balance .

CREDIT Rs.000 30.000 20.JOURNAL GENERAL JOURNAL DATE ACCOUNT TITLE & EXPLANATION L. 2009 June 1 Cash Share Capital Invested Cash Office Equipment Cash Creditors Purchase of office equipment on part payment 1.00.000 June 2 50.F DEBIT Rs.00.000 .000 1.

6. 5. 3. Cash Book Purchases Journal Sales Journal Purchases Return Journal Sales Return Journal Bills Receivable Journal Bills Payable Journal Journal Proper .SUB-DIVISION OF JOURNAL 1. 2. 8. 7. 4.

ADVANTAGES 1. Classification of transactions 2. Responsibility can be fixed 6. Facilitate division of work 4. Reference becomes easy 3. Facilitates checking . More particulars 5.

F.PURCHASES JOURNAL Date Name of the Supplier Invoice No. Amount Remarks . L.

F Amount Remarks .SALES JOURNAL Date Name of the Customer Out ward Invoice No L.

Rece -ived Rs. L.THREE COLUMN CASH BOOK Date Partic -ulars L. Disco Cash -unt Rs. Allow -ed Rs. Bank Date Partic -ulars Rs. Bank Rs.F. Disco Cash -unt Rs. .F.

appears on the credit side of the Customer‟s A/c in Bank‟s ledger and vice versa. Pass Book What is shown on the debit side of the Cash Book. OVERDRAFT: When cash book shows a credit balance or when pass book shows a debit balance. .BANK RECONCILATION Cash Book Vs.

3. Amount collected by bank on standing instructions Payment made by bank as per standing instructions Direct payments into the bank made by customers Dishonor of cheques or bill Errors . 4. 2. 9. 10. Cheques issued but not yet presented for payment Cheques deposited into the bank but not collected Bank charges Interest allowed by the bank.CAUSES OF DIFFERENCE: 1. 7. 5. 8. 6. Interest on overdraft. if any.

BRS Rs. 6. 4. 3. *** *** *** *** *** *** Less: Items: 2. 8 Rs. 7. 5. Balance as per cash Book Add: Items: 1. 9 *** Balance as per pass Book .

TRIAL BALANCE • To check arithmetical accuracy • Equality of Debits & Credits .

• A debit posted in an A/C as a credit or vice versa • An A/C balance incorrectly computed • An A/C balance incorrectly recorded in TB • A debit balance incorrectly recorded as credit balance in TB or vice versa • A balance omitted entirely • The TB incorrectly added • Partial omission of an entry LOCATING ERRORS .

ERRORS NOT DISCLOSED BY TB • • • • • • Omission from Books of Accounts Recording at a wrong amount Compensating Errors Posting in correct side but wrong A/C Recording twice in subsidiary books Errors of Principle .

CORRECTING ERRORS Correcting Entries Suspense Account .

MEASURING BUSINESS INCOME • Profits: Life blood – survival & growth • Accountants prefer the term “Net Profit” instead of “Income” • NP = Revenues – Expenses • Gains & Losses • Accounting Period • Accrual Accounting • Matching principle .

• Adjustment process     Outstanding Expense Prepaid Expense Accrued Income Income Received in Advance .Measuring Income – Cont.

NEEDS: • Calculation of true Profit. • Items of Capital nature : Balance Sheet. • Determination of true Financial Position.CAPITAL AND REVENUE RULES: • Items of revenue nature : Income Statement. .

A. CAPITAL EXPENDITURE – – – – – Acquisition of F. Exp.A. to increase life Exp. Interest on Loan Regular legal charges REVENUE EXPENDITURE . & Depreciation on F. Expenditure on F.Capital & Revenue – Cont. On development of land or mines Cost of experiment: Patent Legal charges for F.A.A.A. For maintaining F. For buying goods Exp. on day-to-day conduct of business Exp.

DEFERRED REVENUE EXPENDITURE • Exp. on advertisement for a new product • Preliminary Expenses • Brokerage & Underwriting Commission • Cost of shifting plants to a new site .

A. Interest. Rent. • REVENUE RECEIPTS – Sale proceeds of goods – Other Income (Commission.Capital & Revenue Receipts • CAPITAL RECEIPTS – Capital introduced – Loan received – Sale proceeds of F. etc) .

Revenue from operations Other income Total Revenue Expenses ……………. XII. XIII. for the year ending 31st March 2012. X.PROFIT & LOSS A/C I. IX. Diluted II. XIV. Profit before exceptional and extraordinary items and tax Exceptional Items Profit before extraordinary items and tax Extraordinary items Profit before tax Tax expense: Current tax. XV. VII. . Deferred tax Profit/(loss) for the period from continuing operations Profit/(loss) from discontinuing operations Tax expense of discontinuing operations Profit/(loss) from discontinuing operations (after tax) Profit/(loss) for the period Earnings per equity share: Basic. XVI. IV. VI. V. III. VIII. XI.

• PBT = PBIT – Int. Exp. Exp.ACCOUNTING FOR MERCHANDISING TRANSACTIONS • Revenues from Sales • Cost of Goods Sold • Gross Profit = S – COGS • Operating Expenses • PBIT = GP – Op. • NP = PBT – Income Tax .

MERCHANDISING COMPANY • Classified P & L A/C • Classified Balance Sheet .

INVENTORIES  Raw Materials  WIP  Finished Goods .

Inventories • Physical Inventory • Pricing the Inventory .LIFO .FIFO .Weighted Average Cost .Specific Identification .

Inventories • Conservatism • Consistency • Inventory Turnover .

MANUFACTURING COMPANY • Cost of Goods Manufactured .Manufacturing Overhead .Direct Labour .Raw Material Consumed .WIP MANUFACTURING ACCOUNT .

Finished Goods: Opening .Cost of Goods Manufactured .Finished Goods: Closing .MANUFACTURING COMPANY • COGS .Cost of Goods Available for Sale .

INTANGIBLE Natural Resources .FIXED ASSETS • Investment in Long-lived Assets • Source of Future Revenue Potential • Fixed Assets Vs. Current Assets – Intention TANGIBLE Vs.

Duties & taxes on purchase. Pre-production exp. Installation cost. Freight.ACQUISITION OF F. Brokerage. • Cost: Purchase price. . and Directly attributable cost • Purchase price: After Trade Discount & Rebates • Directly Attributable Cost: Registration fees. Lawyer‟s fees. Professional fees.A.

A.A. is complete & ready for use • Basket Purchases: Fair Values – Professional valuers – L. & B. .• Capitalisation of borrowing costs – Directly attributable • Stop capitalisation: When the F. • Donated Assets: AS 20 – Grant & Asset – Recorded at fair value or nominal value • Self-constructed Assets: Costs attributable F.

Depreciation and Depletion Depreciation and Amortization Depreciation and Obsolescence Depreciation and Fluctuation .DEPRECIATION Depreciation represents the expired portion of the cost of an asset.

4. 2. Wear and Tear Lapse of Time Obsolescence Depletion . 3.CAUSES 1.

OBJECTIVES OF PROVIDING DEPRECIATION • • • • Ascertaining the true profit Ascertaining the true cost of production Presentation of true financial position Funds for replacement of assets .

FACTORS INFLUENCEING DEPRECIATION

1. Cost of the asset 2. Estimated working life 3. Estimated scrap/residual/salvage value

Depreciable Base = Cost – (Residual value – Cost of disposal)

DEPRECIATION METHODS
1. Fixed Installment Method or Straight-line Method: Depreciation (p.a.) = (C – S) / N 2. Written-down-Value Method or Diminishing Balance Method: Depreciation Rate = 1- (Residual value / Cost)1/n

SPECIAL PROBLEMS
• • • • • • • • Depreciation for partial periods Revision of depreciation rates Assets of low unit costs Changing the depreciation method Group depreciation Depreciation for Income Tax Disposal of F.A. Revaluation of F.A.

A. . – Recoverable Amt.INTANGIBLE ASSETS • • • • • • Amortisation of I. Goodwill Brands R. & D. costs Computer software costs Deferred costs IMPAIRMENT OF ASSETS Impairment Loss = Carrying Amt.

NATURAL RESOURCES • Wasting Assets .Depletion .

Unsecured • Contingent liabilities .LIABILITIES • Obligations for future payment • Current Vs. Long-term • Secured Vs.

CURRENT LIABILITIES • Definite liabilities Vs. Estimated liabilities • Definite Liabilities – Trade Creditors – Bills Payable – VAT Payable – Current portions of Long-term Debt – Accrued Liabilities – Unearned Revenues .

Estimated Liabilities • Provision –Income Tax –Product Warranties –Dividends Payable .

LONG-TERM LIABILITIES • Debentures or Bonds • Lease Liabilities • Pension Liabilities • Deferred Tax Liabilities .

• • • • • • • • DEBENTURES Secured & Unsecured Registered & Unregistered Term & Serial Convertible Callable bonds Zero-coupon bonds Debenture Rating Debenture issued at a Premium/Discount .

Subscribed & Paid-up Capital –Par Value or Face Value • Dividends .SHAREHOLDERS‟ EQUITY • Share Capital –Authorised Capital –Issued.

Accounting for Share Capital • Issue at par • Issue at premium • Issue for non-cash assets • Rights Issue • Forfeiture of Shares .

PREFERENCE SHARE • Cumulative & Non-cumulative • Participating & Non-participating • Redeemable & Non-redeemable • Convertible & Non-convertible .

RESERVES • • • • • Capital Reserve & Revenue Reserve Share Premium Capital Redemption Reserve Debenture Redemption Reserve Investment Allowance Reserve APPROPRIATIONS .

Buy-back of Shares Bonus Shares Stock-based Compensation EPS .

Investing & Financing activities .CASH FLOW STATEMENT • Shows the historical changes in Cash & CE • During a particular period • Operating.

– Benefits • • • • • Ability to generate Cash & CE Needs to utilise cash flows Assess Liquidity & Solvency Indicator of future cash flow Relationship: Profitability & Net Cash Flow .C.S.F.

Cash Flow from Operating Activities-Direct • Cash receipts from Customers • Cash paid to Suppliers & Employees • Cash generated from Operation .Income taxes paid • Cash flow before Extra-ordinary items .Extra-ordinary items • Net cash from Operating Activities .

C. changes – Changes in S. before Tax & Extra-ordinary item • Adjustments for: – – – – Depreciation Foreign Exchange Loss Interest & Dividend Income Interest Expense • Op.P. Crs. • Cash generated from Operation – Income Taxes paid • Cash flow before Extra-ordinary item – Extra-ordinary Items • Net Cash from Operating Activities . & Inventory – Changes in S.Cash Flow from Operating Activities-Indirect • N. Profit before W. Drs.

Cash Flow from Investing Activities • • • • • • • Purchase of Fixed Assets Sale of F.A. Purchase of other Investments Sale of other Investments Interest Received Dividend Received Net cash from(used in) Investing Activities .

Cash Flow from Financing Activities • • • • • • Proceeds from issue of Share Capital Proceeds from Long-term Borrowings Repayments of Long-term Borrowing Interest Paid Dividend Paid Net Cash from(used in) Financing Activities .

CASH FLOW STATEMENT • • • • • • Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Net cash increase(decrease) in cash & CE Cash & CE at beginning of the period Cash & CE at the end of the period. .

2012 550 200 135 300 135 120 55 1495 March 31. 2011 500 100 125 250 100 75 50 1200 750 390 360 250 190 120 50 525 1495 600 300 300 200 100 80 30 490 1200 .BALANCE SHEET LIABILITIES AND EQUITY Share capital Reserves Profit and Loss balance Long-term borrowings Current liabilities Provisions for tax Proposed dividend TOTAL ASSETS Gross fixed assets Less: Accumulated depreciation Net fixed assets Investment (all long-term) Inventories Debtors Cash and bank balance Loans and advances TOTAL (Figures in Lakhs) March 31.

000 equity shares of Rs. .75 lakhs).80 lakhs. Ii. During 2008-2009. Prepare Cash flow statement.10 each were issued at par. 2012 INCOME Sales Other income Stock adjustment Total EXPENDITURE Raw materials consumed Manufacturing expenses Administration expenses Selling and distribution expenses Depreciation Interest Total Profit before tax (PBT) Provision for tax Profit after tax (PAT) Profit and loss balance at the beginning of the year Profit available for appropriation Transfer to reserves Proposed dividend (including dividend tax) Balance of profit carried to balance sheet (Figures in Lakhs) 1260 152 18 1430 715 140 80 65 90 55 1145 285 120 165 125 290 100 55 135 i.00. Long term loan raised during the years Rs. Long-term loan Rs. Loans and advance include income tax paid Rs.PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED MARCH 31. 5.30 lakhs repaid during the year. Iii.120 lakhs (previous year Rs.

FINANCIAL STATEMENT ANALYSIS • OBJECTIVES – Liquidity – Solvency – Profitability – Efficiency – Health & Performance • PROCESS – Select – Relate – Evaluate .

STANDARDS OF COMPARISONS • Rule-of-thumb • Past Performance • Industry Standards .

SOURCES OF INFORMATION • Company Reports • Stock Exchanges • Business Periodicals • Information Services .

TECHNIQUES OF FSA • Horizontal Analysis • Trend Analysis • Vertical Analysis • Ratio Analysis .

RATIO ANALYSIS • Profitability Ratios • Liquidity Ratios • Solvency Ratios • Capital Market Ratios .

LIQUIDITY RATIOS • Current Ratio • Quick Ratio • Debtor Turnover • Inventory Turnover .

SOLVENCY RATIOS • Debt-to-Equity Ratio • Interest Coverage Ratio .

CAPITAL MARKET RATIOS • Price-Earnings Ratio • Dividend Yield • Price-to-Book Ratio .

PROFITABILITY RATIOS • Profit Margin • Asset Turnover • Return on Assets or ROI • Return on Equity • EPS .

CORPORATE DISCLOSURE • Annual Reports • Financial Reports / Special Reports .

ANNUAL REPORTS • To inform the Share Holders: Performance & Health • To provide information to other users .

Annual Report: Contents • • • • • • • Chairman‟s Report Directors‟ Report Auditor‟s Report Profit & Loss Statement Balance Sheet Cash Flow Statement Segment Reports .

Annual Report: Contents • • • • • • • • Highlights Financial & Production Statistics EVA Reporting HRA Reporting Environmental Reporting Social Reporting Value Added Statement Inflation Accounting .

” . And miles to go before I sleep.” Robert Frost “Arise. And miles to go before I sleep.“The woods are lovely. awake and stop not till the goal is reached. But I have promises to keep. dark and deep.

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