Follow up questions

1. Is 356 the net asset or total asset for IVAN at the end of the year?
2. We need to convert Land and OX into common currency because ___________
3. Total plough consumption for IVAN is___________ of which the value which is lost
purely because of damage is _________
4. Value of Land in Income Statement is NIL because_________
5. For IVAN, the withdrawal from business which would not have affected business
performance were equals to_______
6. The conceptual difference between 214 and 194 in case of IVAN is_________
7. For Fredrick, the plough maker would not arise in the closing resource list because __
8. Is it fair to say that plough maker arise in IVAN list because the plough has been
broken?
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Balance Sheet (includes Assets, Liabilities and Equity)
 It is the statement of financial position of business as at particular date

Assets Liabilities and Equity

1.Property, Plant & Equipment 1.Share Capital
Long Term Risk
Long Term
2.Intangible Assets finances 2.Reserves
Capital
Capital
Non-
operational
3.Investments Structure
3.Long term loan Borrowed
4.Prepaid expenses Short Term 4.Short term loan
capital

finances
5.Inventory (Stocks) 5.Accounts payable
6.Accounts Receivables 6.Advanced received
Short Term Operational
7.Cash & Bank obligations 7.Unearned revenue
8.Accrued expenses

Equity refers to shareholders’ interest in the assets of the company after subtracting payments required for
outsiders’ liabilities. Therefore, it is also referred to as Net Assets.

3
Basic Construct of the Income Statement

Particulars
Sales

Basic
trade
(Less) COGS (All direct expenses)

Operating
Gross Profit
(Less) Marketing Expense

Business
expense
(Less) Administrative/ General Expense
(Less) Distribution Expense
EBITDA
(Less) Depreciation / Amortisation
EBIT
Operating
Non-

(Less) Interest (Finance Cost)

(Add) Non Operating Income
EBT
(Less) Income Tax Expense
PAT or Net Income
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Cash Flow Statement

Cash Flow Statement provides information about sources and uses of cash of the
firm.
It provides information to assess firm’s liquidity, solvency and financial flexibility.

 Cash flows are classified into the following Net Cash Flow
categories: during the year

1. Cash flow from operating activities (CFO)

2. Cash flow from investing activities (CFI)
3. Cash flow from financing activities (CFF)

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Let us summarize the case

1. Money Measurement
2. Long term asset versus Short term assets
3. Depreciation versus Impairment
4. Land as a special case
5. Reason for origination of Liability
6. Expenses vs Appropriation of Profit
7. Profit versus Retained Earnings
8. Connection between Income Statement and Balance Sheet

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 Basic
Accounting Framework
Focal Point

1 Business Transaction

2 Recording for future reference Accounting

(Journals, Ledgers, Memo)

3 Proper presentation Financial Reporting

(Balance sheet, P/L, Cash Flow St)

4 Use of information by stakeholder Financial

Statement Analysis

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 Blended learning

Recording of Business Information

1. Accounts
 Records which contain history of transactions under taken for business
 Sequence of preparation is :
 Journal (date-wise)>>
 General Ledger (account-wise) >>
 Trial Balance

2. Accounting
“Accounting is the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events, which are, in part at least ,
of a financial character and interpreting the results thereof.”

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 Blended learning

Rules to follow

3. Accountancy

 Principles / techniques / rules which are used in accounting are collectively called as
Accountancy

 These rules are necessary to be followed to promote standardization

 Formed by technical organizations but enforced by regulatory body

The US UK India

Technical FASB IASB ICAI

Regulatory SEC FSA SEBI

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 Blended learning

Telling the Information to Stakeholders

4. Financial Reporting
The process of placing different ledger balances from Trial balance into different formats

5. Financial Statements
Are the different formats which have been prescribed by the law (accountancy) to be used for
the purpose of financial reporting.

Each format communicates a separate aspect of the business

Different Financial Statements are:

1. Income Statements
2. Balance Sheet
3. Cash Flow
4. Statement of Change in Owners’ Equity

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 Blended learning

Reading The Annual Report: Important elements

1. Top Management’s message

2. The Directors Report
3. Management Disclosure and Analysis
4. Auditor’s Report
5. Financial Statements
6. Notes to Accounts
7. Schedules

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Any Value outflow can take three forms

Value outflow
Value does not mean only cash. It can also be effort, time, energy. For the purpose of accounting,
we will have to convert all qualitative parameters into monetary terms

Asset Expenditure Loss

Future benefit Current benefit No Benefit

As future becomes present, the value from Asset will come down into Expenditure

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Let us not forget why we are here?

1 Business Transaction

2 Recording for future reference Accounting

(Journals, Ledgers, Memo)

3 Proper presentation Financial Reporting

(Balance sheet, P/L, Cash Flow St)

4 Use of information by stakeholder Financial

Statement Analysis

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Structure of Financial Statement Analysis

1. Determine
2. Gather
the Objective
Data
and Context

6. Update the 3. Process

Analysis the Data

5. Report the
4. Analyze
Conclusions or
and interpret
Recommendati
the data
ons

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Stakeholders’ perspective to analyze financial statement

Stakeholder Objective

► Lender

► Entrepreneur

► Investor / Shareholders

► Supplier

► Customer

► Capital Markets

► Government

► Employees
Stakeholders’ perspective to analyze financial statement

Stakeholder Objective

► Lender ► Credit worthiness

► Entrepreneur ► Business Viability

► Investor / Shareholders ► Returns from the investment

► Supplier ► Liquidity Position

► Customer ► Sustainability of operations

► Capital Markets ► Corporate Governance

► Government ► Revenue generation ability

► Employees ► Impact on wages/salaries

How do Shareholders Reduce Agency Cost and Trust Data Given by Management?

 Audit is an independent review of Financial

Statements
 To reasonably assure the stakeholders about
the fairness of FS Shareholders
 Watchdog versus Bloodhound
 Types of audit report
1. Standard / unqualified
2. Qualified
3. Adverse
Manageme
4. Disclaimer of opinion nt
Auditor

 Internal Auditor versus Statutory Auditor

The Surveillance Cavalry
1. Internal Auditor
2. Statutory Auditor Inspite of such a
3. Audit Committee | Risk Management Committee layered protection,
4. Board of Directors
why we fail to
5. Credit Rating Agency
6. Ministry of Corporate Affairs / Registrar of Companies prevent the
7. SEBI frauds??
8. RBI/IRDA
9. Economic Offence Wing
10. Serious Fraud Investigation Office
11. National Financial Regulatory Authority (NFRA)
12. Enforcement Directorate

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Three types of activities by any
business
 Blended learning

Classification of Activities

 All the activities of ANY business can be divided into three categories

 These three categories are:

1. MUTUALLY EXCLUSIVE and
2. EXHAUSITIVE

1. Operating activity: transactions that involve the firm’s primary activities by which any company
intends to make profits. It includes the day to day business functions of a company

2. Investing activity: activities associated with the acquisition and disposal of long term business
assets OR any transaction with non-business assets (Investments)

3. Financing activity: activities related to capital structure including obtaining or repaying capital to
be used in the business.

The same transaction can be classified differently by both the entities

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Practice - Classification of Activities (1/2)

1. SBI gave a loan to Maruti for $100 Mn

2. Maruti used that amount to buy a land from DLF for constructing a factory
$80 Mn
3. An full-time investor opened a time deposit account with SBI for $1Mn

4. A part-investor got share in SBI’s IPO for $1Mn

5. DLF sold a commercial space to an investor for his office

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Practice - Classification of Activities (2/2)

6. DLF purchased a piece of land from Farmers near Bhiwadi

7. Tata Motors sold scrap generated during the production process

8. Oyo Hotels made investments into Kotak mutual funds

9. Apple Inc. made a buy back of its shares

10.Uber paid the fees to the GOI for license to ply cabs

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