AMITY BUSINESS SCHOOL

COST & MANAGEMENT ACCOUNTING FOR DECISION MAKING-

ACCT611

SEMESTER III

DR. MANJULA SHASTRI

COMPANY FINANCIAL
STATEMENTS
FINAL ACCOUNTS
• At the Annual General Meeting (AGM) of a company, the
BoD of the company shall lay financial statements before
the company
• A balance sheet as at the end of the financial year
• A profit & loss account or income & expenditure a/c
• Cash flow statement for the year
• A statement of changes in equity
• An explanatory note annexed
MEANING
■ Final accounts are the end results of the working of the organization. We
prepare two statements:
■ Profit & Loss Statements
– Gives net profit earned or losses
incurred during the period under
consideration
– Flow Concept – prepared for a
period
– It is prepared for the year ended
31 March 20XX
• Balance Sheet
• Also called Statement of Affairs
or Position
• Gives details of assets owned &
liabilities owed by the
organization
• Stock concept – prepared at a
particular point of time
• Prepared as on 31 March 20XX
• Vertical format
SCHEDULE III
• Balance Sheet format given in Part I of Schedule III
• Statement of Profit & Loss format given in Part II of
Schedule III
REVENUE FROM OPERATIONS

(A) In respect of a company other than a finance company revenue from

operations shall disclose separately in the notes revenue from—
(a) Sale of products;
(b) Sale of services;
(c) Other operating revenues;
Less:
(d) Excise duty.
(B) In respect of a finance company, revenue from operations shall include
revenue from—
(a) Interest; and
(b) Other financial services.
OTHER INCOME

• Interest income (in case of a company other a finance company)

• Dividend income
• Net gain/(loss) on sale of investments
• Gain on sale of fixed assets
• Insurance claims
• Bad debts recovered
• Discount received
• Other non-operating income
EXPENSES - CPCEFDO
• Cost of materials consumed
• Purchase of stock in trade
• Changes in inventories of finished goods, work-
in-progress and stock-in-trade
• Employee benefits expense
• Finance costs
• Depreciation and amortization expense
• Other expenses
COST OF MATERIALS CONSUMED

• Opening Stock of Materials + Net Purchases – Closing

Stock of Materials
PURCHASES OF STOCK-IN-TRADE

• Goods purchased for resale.

 CHANGES IN INVENTORIES OF FINISHED GOODS, WORK-
IN-PROGRESS AND STOCK-IN-TRADE

• If opening is greater than closing – difference is positive

• If closing is greater than opening – difference is negative
EMPLOYEE BENEFIT EXPENSES

• Salaries
• Wages
• Contribution to provident fund & other funds
• Expense on Employees Stock Option Scheme (ESOP) &
Employee Stock Purchase Plan (ESPP)
• Staff welfare expenses
• Bonus
FINANCE COSTS

• Interest on OD, debentures, bonds, cash credit, public

deposits, term loans
• Discount on issue of debentures
DEPRECIATION AND AMORTIZATION EXPENSE

• Depreciation on buildings, P&M, loose tools, furniture,

computer software
• Goodwill & patents written off
• Preliminary expenses written off
OTHER EXPENSES – EXPENSES THAT DO NOT FIND PLACE
IN THE ABOVE MENTIONED HEADS

(a) Consumption of stores, (g) Rates and taxes (excluding

spares and tools taxes on income)
(b) Power and fuel (h) Audit fees
(c) Rent (i) Packing and freight charges
(d) Repairs – buildings (j) Advertisement and publicity &
(e) Repairs - plant and Other marketing expenses
equipment (l) Loss on sale of fixed assets
(f) Insurance (m) Discount allowed
TAX

• As it is not possible to determine the amount of tax

payable at the time of preparing final accounts, it is
necessary to create a provision for taxation on the basis
of an estimate.
• It is calculated on profit before tax
EXCEPTIONAL ITEMS

• Exceptional item arise from ordinary activity i.e. normal course of the
business
• They are not expected to be recurring;
• It must be material
• Example:
• Profits or losses on disposal of fixed assets
• Profits or losses on sale or termination of an operation
• Disposal of long term investments
• Amount received in settlement of insurance claims
EXTRAORDINARY ITEMS

• Arise from abnormal or unusual events & not in the ordinary

course of business
• Not expected to recur frequently or regularly
• This item is disclosed in the statement of profit and loss as a
part of net profit for the period.
• Only on rare occasions
• Example
• Losses from disasters not commonly insured against (e.g.,
wars, riots, and earthquakes)
EXTRAORDINARY ITEMS

• Nonrecurring amounts specifically related to prior years’ operations, such as

eliminating previously established retained earnings reserves or adjusting
past income taxes
• Amounts resulting from unusual sales of assets not of the type in which the
company commonly deals
• Losses from disasters not commonly insured against (e.g., wars, riots, and
earthquakes), unless such losses are a recurrent business hazard
• Losses from completely writing off intangibles, such as goodwill or
trademarks; and
• Amounts from writing off unamortized bond discounts, bond premiums, or
bond issue expenses when the related debt is retired or refunded before
maturity.
BASIC EPS

• EPS which accrues to the shareholders of the company.

• This is derived by dividing the net profit (after deducting
dividend on preference shares) of a company by the total
number of ordinary shares outstanding.
• Basic EPS = NP after tax & preference dividend/no. of
shares outstanding
DILUTED EPS

• Calculated by assuming that everyone who has an

instrument that can be converted into an equity share
converts it into an equity share and so the total number
of outstanding shares of the company increase, thereby
reducing the EPS.
• Diluted EPS = NP after tax & preference dividend/ no. of
shares outstanding including stock options, convertible
debentures, bonds & preference shares
MANAGERIAL REMUNERATION

Remuneration in case of nil

or inadequate profits

Remuneration in case of
adequate or sufficient profits
IN CASE OF INADEQUATE
PROFITS

Remuneration maybe paid by way of salary,

dearness allowance, perquisites or any other
allowances not exceeding the ceiling limit
of :
• Rs. 24 lakhs per annum or Rs. 2 lakhs per month
• Rs. 48 lakhs per annum or Rs. 4 lakhs per month
 CEILING OF RS. 24 LAKHS PER
ANNUM

Maximum remuneration
Effective Capital
payable per month
• Less than 1 crore • Rs. 75,000
• Rs. 1 crore or more but <
5 crores • Rs. 100,000
• Rs. 5 crore or more but <
25 crores • Rs. 125,000
• Rs. 25 crore or more but
• Rs. 150,000
< 50 crores
 CEILING OF RS. 24 LAKHS PER
ANNUM

Maximum
Effective Capital remuneration payable
per month
• Rs. 50 crore or more • Rs. 175,000
but < 100 crores
• Rs. 100 crore or more • Rs. 200,000
 CEILING OF RS. 48 LAKHS PER
ANNUM

Maximum remuneration
Effective Capital
payable per month
• Less than 1 crore • Rs. 750,000
• Rs. 1 crore or more but <
5 crores • Rs. 100,000
• Rs. 5 crore or more but <
25 crores • Rs. 125,000
• Rs. 25 crore or more but
• Rs. 150,000
< 50 crores
 CEILING OF RS. 24 LAKHS PER
ANNUM

Maximum
Effective Capital remuneration payable
per month
• Rs. 50 crore or more • Rs. 175,000
but < 100 crores
• Rs. 100 crore or more • Rs. 200,000
MAXIMUM & MINIMUM LIMIT

• Maximum Limit – 11% of the net profits in any financial

year
• Minimum Limit – if in any financial year a company has
no profits
DISCLOSURES
SHAREHOLDERS’S FUNDS

• Owners’ Funds
 SHARE CAPITAL

• The authorized share capital, issued share capital, paid up

capital & subscribed capital but not fully paid
• Par value per share
• A reconciliation of the number of shares outstanding at the
beginning and at the end of the reporting period.
• The rights, preferences and restrictions attaching to each class
of shares including restrictions on the distribution of dividends
and the repayment of capital.
 • Shares in respect of each class in the
company held by its holding company or
its ultimate holding company.
• Shares in the company held by each
shareholder holding more than 5 per
SHARE cent, shares specifying the number of
CAPITAL shares held.
• Shares reserved for issue under options
and contracts/commitments for the sale
of shares/disinvestment, including the
terms and amounts.
SHARE • For the period of five years
CAPITAL immediately preceding the date as at
which the Balance Sheet is prepared.
• Aggregate number and class of shares
allotted as fully paid-up pursuant to
contract(s) without payment being received
in cash.
• Aggregate number and class of shares
allotted as fully paid-up by way of bonus
shares.
• Aggregate number and class of shares
bought back.
• Terms of any securities convertible into
equity/preference shares issued along with the
SHARE
earliest date of conversion in descending order CAPITAL
starting from the farthest such date.

• Calls unpaid (showing aggregate value of calls

unpaid by directors and officers).

• Forfeited shares (amount originally paid-up).

RESERVES AND SURPLUS

a) Capital Reserves; e) Revaluation Reserve;

b)Capital Redemption f) Other Reserves–(specify the
Reserve; nature and purpose of each
c) Securities Premium Reserve; reserve and the amount in
respect thereof);
d)Debenture Redemption
Reserve; g)Surplus i.e., balance in Statement
of Profit and Loss
Additions and deductions since last balance sheet to be shown
under each of the specified heads
RESERVES & SURPLUS
• Debit balance of statement of profit and loss shall be
shown as a negative figure under the head “Surplus”.
• Similarly, the balance of “Reserves and Surplus”, after
adjusting negative balance of surplus, if any, shall be
shown under the head
• “Reserves and Surplus” even if the resulting figure is in
the negative.
MONEY RECEIVED AGAINST SHARE WARRANTS

• Share Warrant is an option issued by the company that gives the

holder a right to subscribe equity shares at a pre-determined price
(which is lower than the market price)within a certain time period
• They are issued to attract potential investors to invest in the
company.  They are issued with debentures/bonds or preference
shares that allows an investor the option to purchase the shares at a
later date. This will help the issuing company to pay lower rate of
interest on debentures
• From exam point of view, it is generally not mentioned in sum
SHARE APPLICATION MONEY PENDING ALLOTMENT

• A Company receives certain amount from shareholders on application known

as share application money
• Inspite of receipt, allotment maybe pending.
• Share application money to the extent not refundable is included in
Shareholders’ Funds, as it is the amount received by the company against
which allotment will be made.
• If share application money is received and no allotment will be made (in case
of over-subscription) it is shown under the head Other Current Liability as
the amount is refundable at some later date.
 NON CURRENT LIABILITIES

• Four sub-headings
• Long term borrowings
• Deferred tax liabilities
• Other Long term liabilities
• Long term provisions
LONG TERM BORROWINGS

(a) Bonds/debentures; (e) Loans and advances from

related parties;
(b) Term loans:
(A) from banks. (f) Long term maturities of
finance lease obligations;
(B) from other parties.
(g) Other loans and advances
(c) Deferred payment
(specify nature).
liabilities;
(d) Deposits;
Borrowings shall further be sub-classified
as secured and unsecured.
DEFERRED TAX LIABILITIES

• Every year accounting income is compared with taxable

income as rules as per IT Act and Financial accounting are
different.
• If difference between the two exists which is temporary in nature,
income tax on the difference is termed as deferred tax.
• If taxable income is lesser than accounting income, it results in
deferred tax liability. (Paying less)
• If taxable income is greater than accounting income, it results in
deferred tax asset (advance tax)
OTHER LONG TERM
LIABILITIES
(a) Trade payables: Amount due on account of goods
purchased or services received in the normal course of
business which are not current liabilities;
(b) Others: Amount payable in respect of statutory
obligation, purchase of assets
LONG TERM PROVISIONS

• Provisions against which liability will arise after 12

months of the date of balance sheet or after the period of
operating cycle
• The amounts shall be classified as:
(a) Provision for employee benefits – retirement
benefits, gratuity, provident fund
(b) Others (specify nature) – e.g. warranty claims
 CURRENT LIABILITIES

• Liabilities that are expected to be settled in the company’s normal

operating cycle or due to be settled within 12 months
• Divided into:
• Short term borrowings
• Trade payables
• Other current liabilities
• Short term provisions
 SHORT-TERM BORROWINGS

(a) Loans repayable on demand;

(A) from banks.
(B) from other parties.
(b) Loans and advances from related parties;
(c) Deposits;
(d) Other loans and advances (specify nature).
Borrowings shall further be sub-classified
as secured and unsecured.
TRADE PAYABLES

• A payable shall be classified as a “trade payable” if it is

in respect of the amount due on account of goods
purchased or services received in the normal course of
business.
• Includes sundry creditors & bills payable
 OTHER CURRENT LIABILITIES

(f) Unpaid dividends;

(a) Current maturities of long-
term debt; (g) ESI Payable
(b) Current maturities of finance (h) Outstanding expenses
lease obligations; (i) Calls in advance
(c) Interest accrued but not due (j) Provident Fund payable
on borrowings;
(d) Interest accrued and due on
borrowings;
(e) Income received in advance;
SHORT-TERM PROVISIONS

• Proposed dividend
• Tax on proposed dividend (dividend distribution tax)
• Provision for tax
• Provision for expenses
• Provision for employee benefits (to be settled within 12
months)
 NON-CURRENT ASSET

• Those assets which are not current assets.

• Divided into
• Fixed assets
• Non-current Investments
• Deferred Tax Asset
• Long-term loans & advances
• Other non-current assets
 FIXED ASSETS

• Divided into:
1. Tangible Assets
2. Intangible assets
3. Capital Work-in-progress
4. Intangible assets under development
 TANGIBLE FIXED ASSETS

• Assets which can be physically seen and touched

• Land
• Building
• Plant and Equipment
• Furniture and Fixture
• Vehicles Office
• Equipment
• Others
 TANGIBLE FIXED ASSETS

• It is necessary to give the following information regarding each

class or kind of fixed tangible asset:
a. Original cost
b. Addition (purchase)
c. Deductions (sale)
d. Total depreciation written off or provided for up to the end of
the year.
INTANGIBLE FIXED ASSETS

 Goodwill
 Brands / Trademark
 Computer software
 Mining rights
 Copyrights and patents
 Recipes, formulae, models and designs
 Licenses and franchise.
CAPITAL WORK-IN-PROGRESS

• Items of property, plant and equipment under

construction
INTANGIBLE ASSETS UNDER
DEVELOPMENT
• Patents, Intellectual rights under development
 NON-CURRENT INVESTMENT

• Investments which are held not with the purpose to resell but to
retain them.
(i) Trade Investments: Investments made by the company in shares
or debentures of another company, not being its subsidiary, to
promote its own trade and business.
(ii) Other investments: Which are not trade investments.
 Investments in property  In equity shares
 In preference shares  In debentures
 In mutual funds  In partnership firms
 In govt. securities
DEFERRED TAX ASSET

• A deferred tax asset comes in to force when taxable

income is more than accounting income.
 LONG TERM LOANS &
ADVANCES

• Expected to be received back in cash or in kind after 12 months from the date of the
balance sheet
(i) Capital Advances: Advanced for acquiring fixed assets
(ii) Security Deposits: Deposit for electricity, telephone etc given for a period
beyond 12 months.
(iii)Other loans and advances
 Long term loan to employees
 Long term advance to suppliers etc
 OTHER NON-CURRENT ASSETS

• Long term Trade Receivables - receivable 12 months from the date of the
balance sheet if the operating cycle is less than 12 months or beyond the
operating cycle if the operating cycle is more than 12 months.
• Insurance claim receivable
• Preliminary expenses
• Discount on issue of shares
• Share issue expenses
• Loss on issue of debentures
• Underwriting commission
 CURRENT ASSET

• An asset shall be classified as current when it satisfies any of the following

criteria:—
(a) it is expected to be realised in, or is intended for sale or consumption in
the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realised within twelve months after the reporting date;
or
(d) it is cash or cash equivalent unless it is restricted from being exchanged
or
used to settle a liability for at least twelve months after the reporting date.
• All other assets shall be classified as non-current.
OPERATING CYCLE

• An operating cycle is the time between the acquisition of

assets for processing and their realization in cash or cash
equivalents.
• Where the normal operating cycle cannot be identified, it
is assumed to have a duration of twelve months.
HEADS UNDER CURRENT
ASSETS
• Current investments
• Inventories
• Trade Receivables
• Cash & cash equivalents
• Short-term Loans & Advances
• Other Current Assets
 CURRENT INVESTMENTS

• Those investments which are held to be converted into cash within a

short period, i.e. within 12 months from the date of purchase of the
investment.
 Investments in partnership firms
 In equity shares  In preference shares
 In debentures  In mutual funds
 In govt. securities  Short Term Investment
 Marketable Securities
 INVENTORIES

• Refers to stock held for the purpose of trade in the normal course of the
business, i.e. for manufacturing or trading of goods.
(i) Raw Materials
(ii) Work-in-Progress
(iii) Finished Goods
(iv) Stock-in-Trade (for goods acquired for trading)
(v) Stores and Spares
(vi) Loose Tools
(vii)Goods - in – Transit
 TRADE RECEIVABLE

• Refers to the amount due on account of goods sold or services

rendered in the normal course of business.
• It includes:
 Debtors
 Bills Receivable
• Deduct: Provision for bad & doubtful debts
 CASH AND CASH EQUIVALENTS

• Balances with banks (including bank deposits having a maturity

period of more than 3 months but not exceeding 12 months from
the date of the balance sheet)
 Balances with banks
 Cheques, drafts on hand
 Cash in hand
 Bank deposits with more than 12 months maturity (fixed
deposit)
 SHORT-TERM LOANS AND
ADVANCES

• Expected to be realised within 12 months from the B/S date or

within the operating cycles, if the operating cycle is more than 12
months.
• Loans and advances to related parties
• Loans to directors or other officers of the company
• Advances to employees & suppliers
• Security deposits
 OTHER CURRENT ASSETS

 Dividend receivable
 Interest accrued on investments
 Income receivable
 Prepaid expenses
 Advance tax
 CONTINGENT LIABILITIES AND
CAPITAL COMMITMENTS

(a) Contingent Liabilities- Those liabilities which may or may not arise
because they are dependent on a happening in future. It is not
recorded in the books of accounts but is disclosed in the Notes to
Accounts for the information of the users. (Claims against the
company not acknowledged as debts, Guarantees, Other money for
which the company is contingently liable.)
(b) Capital Commitments – Financial commitments due to activities
agreed by the company to be undertaken by it in future. (Uncalled
Liability)