4 F. A.: WHY TO READ ?Personal LifeProfessional LifeAn Investment for FutureStrategy
5 BUSINESS ORGANISATIONS Merchandising (Trading) OrganisationsManufacturing OrganisationsService OrganisationsBusiness organisations are cash machines.
6 BUSINESS ORGANISATIONS Private Limited CompanyPublic Limited CompanyLimited Liability Partnership
7 ACCOUNTING IS THE LANGUAGE OF BUSINESS. Serves as a means of communicationCommunicates / reports the events
8 Anthony & Reece: “Accounting is not exactly a foreign language; the problem of learning it is more like that of an American learning to speak English as it is spoken in Great Britain.” “Language evolve and change in response to the changing needs of society, and so does Accounting.”
9 ACCOUNTING IS AN INFORMATION SYSTEM INPUT (Raw Data)SYSTEM PROCESSES (Men & Equipment)OUT PUT (Reports & Information)
10 OUTPUTSFinancial StatementsTax ReturnsManagerial Data and ReportsSpecial Reports
11 USERS OF ACCOUNTING INFORMATION ManagementShareholders and InvestorsLendersCreditorsEmployeesCustomersGovt. and Regulatory AgenciesGeneral PublicOthers: Media, Consumer Organizations, Researchers & Analysts, etc.
12 EVOLUTION OF ACCOUNTING Stewardship AccountingFinancial AccountingCost AccountingManagement AccountingFinancial Accounting Vs. Managerial Accounting
13 DEFINITIONS AAA: AICPA: “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of information.”AICPA:“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.”
15 OBJECTIVES : F.A.To keep systematic records.To ascertain the net effects of the business operations.To ascertain the financial position of the organisations.To provide accounting information to interested parties.
16 ACCOUNTING PRINCIPLES Principles to be observed at the recording stageAccounting EntityMoney MeasurementObjective EvidenceDual AspectRealisationCostAccrualPrinciples to be observed at the reporting stageGoing concernAccounting PeriodMatchingConservativeConsistencyMaterialityFull Disclosure
17 CASH BASIS Vs. ACCRUAL BASIS OF ACCOUNTING Accounting Framework:Includes GAAP on the basis of which accounting data is processed, analyzed and reported.
18 GAAP A set of concepts, conventions, rules, and procedures Accepted by accountants over a period of timeGuides in the preparation and presentation of financial reports
19 ACCOUNTING STANDARDS Specifies acceptable accounting methods UniformityHarmonizationASB of the ICAI – AS Vs. Ind ASIASB - IFRSFASB
21 Analysing the Effects of Business Transactions. Investment by Owner Receipt of Loan Purchase of Office EquipmentASSETSCash Rs.12,000Equipments Rs.58,00070,000EQUITY & LIABILITIESCreditors Rs.20,000Suresh, Equity 50,00070,000
22 BALANCE SHEET as at 31st March, 2011 LIABILITIESShare CapitalReserve and SurplusSecured LoansUnsecured LoansCurrent Liabilities and ProvisionsASSETSFixed AssetsInvestmentsCurrent Assets And Loans & AdvancesMiscellaneous ExpendituresProfit & Loss A/C
23 BALANCE SHEET as at 31st March, 2011 SOURCES OF FUNDSShareholders’ FundLoan FundsAPPLICATION OF FUNDSFixed AssetsInvestmentsCurrent Assets, Loans & AdvancesLess Current Liabilities & ProvisionMiscellaneous Expenditure
24 BALANCE SHEET as at 31st March, 2012 EQUITY AND LIABILITIES Note No. Current PreviousShareholders’ FundShare Application Money pending allotmentNon-current LiabilitiesCurrent LiabilitiesASSETSNon-current AssetsFixed AssetsNon-current InvestmentsDeferred Tax Assets (net)Long term loans and advancesOther non-current assetsCurrent AssetsCurrent InvestmentsInventoriesTrade receivablesCash and cash equivalentsShort-term loans and advancesOther current assets
25 PROFIT & LOSS A/C for the year ending 31st March 2011. I IncomeII. ExpenditureIII. Profit before TaxIV. Provision for TaxationV. Profit after TaxVI. Balance b/f from last yearVII. Profit available for appropriationAppropriations: Dividends, ReservesVIII. Balance transferred to Balance Sheet
26 PROFIT & LOSS STATEMENT for the year ending 31st March 2012 I Revenue from operationsII. Other incomeIII. Total RevenueIV. Expenses …………….V. Profit before exceptional and extraordinary items and taxVI. Exceptional ItemsVII. Profit before extraordinary items and taxExtraordinary itemsProfit before taxTax expense: Current tax, Deferred taxProfit/(loss) for the period from continuing operationsProfit/(loss) from discontinuing operationsTax expense of discontinuing operationsProfit/(loss) from discontinuing operations (after tax)Profit/(loss) for the periodEarnings per equity share: Basic, Diluted
27 CASH FLOW STATEMENT for the period ending on March 31, 2012 Cash flow from operating activitiesCash flow from investing activitiesCash flow from financing activitiesNet cash increase (decrease) in cash & CECash & CE at beginning of the periodCash & CE at the end of the period.
28 FINANCIAL STATEMENTS AND REPORTS PRODUCTMARKETFORCESCompetitors,CustomersCAPITALMARKETFORCESInvestors,LendersFINANCIAL STATEMENTS AND REPORTSREGULATORYFORCESGovernment,SecuritiesRegulatorLABOURMARKETFORCESManagers,Employees
29 LIMITATIONS OF FINANCIAL STATEMENTS Vegetable AccountingFocus on past / historical dataPostmortem AnalysisIgnore non-financial informationIgnore HRFails to provide all information to stake-holders for their decision making
30 QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS. RelevanceReliabilityUnderstandabilityComparabilityConsistencyNeutralityMaterialityTimelinessVerifiabilityPrudence
31 RECORDING BUSINESS TRANSACTIONS AccountsLedgerChart of Accounts: AssetsLiabilitiesShareholders’ EquityRevenuesExpenses
33 ANY ASSET / EXPENSE ACCOUNT LEDGER‘T’ Account : A Ledger account in simplified form.TITLE OF ACCOUNTLeft or Debit side Right or Credit sideANY ASSET / EXPENSE ACCOUNT(Debit) (Credit)Increase Decrease
34 ANY LIABILITY / OWNER’S EQUITY / REVENUE ACCOUNT LedgerANY LIABILITY / OWNER’S EQUITY / REVENUE ACCOUNT(Debit) (Credit)Decrease IncreaseStandard Form of AccountsANY ACCOUNTDate Explanation Ref Debit Credit Balance
35 JOURNAL GENERAL JOURNAL 2009 June 1 Cash 1,00.000 DATE ACCOUNT TITLE & EXPLANATION L.F DEBIT CREDITRs Rs.2009June 1 Cash ,00.000Share Capital ,00,000Invested CashJune 2 Office Equipment ,000Cash ,000Creditors ,000Purchase of office equipment on part payment
37 ADVANTAGES Classification of transactions Reference becomes easy Facilitate division of workMore particularsResponsibility can be fixedFacilitates checking
38 PURCHASES JOURNALDate Name of the Supplier Invoice No. L.F. Amount Remarks
39 SALES JOURNALDate Name of the Customer Out ward Invoice No L.F Amount Remarks
40 THREE COLUMN CASH BOOK Date Partic-ulars L.F. Disco-unt Allow-ed Rs. BankDisco-unt Rece-ived Rs.
41 BANK RECONCILATION Cash Book Vs. Pass Book What is shown on the debit side of the Cash Book, appears on the credit side of the Customer’s A/c in Bank’s ledger and vice versa.OVERDRAFT: When cash book shows a credit balance or when pass book shows a debit balance.
42 CAUSES OF DIFFERENCE: Cheques issued but not yet presented for payment Cheques deposited into the bank but not collectedBank chargesInterest allowed by the bank, if any.Interest on overdraft.Amount collected by bank on standing instructionsPayment made by bank as per standing instructionsDirect payments into the bank made by customersDishonor of cheques or billErrors
43 BRS Rs. Rs. Balance as per cash Book Add: Items: 1, 4, 6, 8 Less: Balance as per pass Book***
44 TRIAL BALANCE To check arithmetical accuracy Equality of Debits & Credits
45 LOCATING ERRORS A debit posted in an A/C as a credit or vice versa An A/C balance incorrectly computedAn A/C balance incorrectly recorded in TBA debit balance incorrectly recorded as credit balance in TB or vice versaA balance omitted entirelyThe TB incorrectly addedPartial omission of an entry
46 ERRORS NOT DISCLOSED BY TB Omission from Books of AccountsRecording at a wrong amountCompensating ErrorsPosting in correct side but wrong A/CRecording twice in subsidiary booksErrors of Principle
48 MEASURING BUSINESS INCOME Profits: Life blood – survival & growthAccountants prefer the term “Net Profit” instead of “Income”NP = Revenues – ExpensesGains & LossesAccounting PeriodAccrual AccountingMatching principle
49 Measuring Income – Cont. Adjustment processOutstanding ExpensePrepaid ExpenseAccrued IncomeIncome Received in Advance
50 CAPITAL AND REVENUE RULES: Items of revenue nature : Income Statement. Items of Capital nature : Balance Sheet.NEEDS:Calculation of true Profit.Determination of true Financial Position.
51 Capital & Revenue – Cont. CAPITAL EXPENDITUREAcquisition of F.A.Expenditure on F.A. to increase lifeExp. On development of land or minesCost of experiment: PatentLegal charges for F.A.REVENUE EXPENDITURE- Exp. on day-to-day conduct of businessExp. For buying goodsExp. For maintaining F.A. & Depreciation on F.A.Interest on LoanRegular legal charges
52 DEFERRED REVENUE EXPENDITURE Exp. on advertisement for a new productPreliminary ExpensesBrokerage & Underwriting CommissionCost of shifting plants to a new site
53 Capital & Revenue Receipts CAPITAL RECEIPTSCapital introducedLoan receivedSale proceeds of F.A.REVENUE RECEIPTSSale proceeds of goodsOther Income (Commission, Rent, Interest, etc)
54 PROFIT & LOSS A/C for the year ending 31st March 2012. I Revenue from operationsII. Other incomeIII. Total RevenueIV. Expenses …………….V. Profit before exceptional and extraordinary items and taxVI. Exceptional ItemsVII. Profit before extraordinary items and taxExtraordinary itemsProfit before taxTax expense: Current tax, Deferred taxProfit/(loss) for the period from continuing operationsProfit/(loss) from discontinuing operationsTax expense of discontinuing operationsProfit/(loss) from discontinuing operations (after tax)Profit/(loss) for the periodEarnings per equity share: Basic, Diluted
55 ACCOUNTING FOR MERCHANDISING TRANSACTIONS Revenues from SalesCost of Goods SoldGross Profit = S – COGSOperating ExpensesPBIT = GP – Op. Exp.PBT = PBIT – Int. Exp.NP = PBT – Income Tax
56 MERCHANDISING COMPANY Classified P & L A/CClassified Balance Sheet
60 MANUFACTURING COMPANY Cost of Goods Manufactured- Raw Material Consumed- Direct Labour- Manufacturing Overhead- WIPMANUFACTURING ACCOUNT
61 MANUFACTURING COMPANY COGS- Finished Goods: Opening- Cost of Goods Manufactured- Cost of Goods Available for Sale- Finished Goods: Closing
62 FIXED ASSETS Investment in Long-lived Assets Source of Future Revenue PotentialFixed Assets Vs. Current AssetsIntentionTANGIBLE Vs. INTANGIBLENatural Resources
63 ACQUISITION OF F.A.Cost: Purchase price, Duties & taxes on purchase, and Directly attributable costPurchase price: After Trade Discount & RebatesDirectly Attributable Cost: Registration fees, Lawyer’s fees, Brokerage, Freight, Installation cost, Professional fees,Pre-production exp.
64 F.A. Capitalisation of borrowing costs – Directly attributable Stop capitalisation: When the F.A. is complete & ready for useBasket Purchases: Fair Values – Professional valuers – L. & B.Donated Assets: AS 20 – Grant & Asset – Recorded at fair value or nominal valueSelf-constructed Assets: Costs attributable
65 DEPRECIATIONDepreciation represents the expired portion of the cost of an asset.Depreciation and DepletionDepreciation and AmortizationDepreciation and ObsolescenceDepreciation and Fluctuation
66 CAUSESWear and TearLapse of TimeObsolescenceDepletion
67 OBJECTIVES OF PROVIDING DEPRECIATION Ascertaining the true profitAscertaining the true cost of productionPresentation of true financial positionFunds for replacement of assets
68 FACTORS INFLUENCEING DEPRECIATION Cost of the assetEstimated working lifeEstimated scrap/residual/salvage valueDepreciable Base = Cost – (Residual value – Cost of disposal)
69 DEPRECIATION METHODS Fixed Installment Method or Straight-line Method: Depreciation (p.a.) = (C – S) / N2. Written-down-Value Method or Diminishing Balance Method:Depreciation Rate = 1- (Residual value / Cost)1/n
70 SPECIAL PROBLEMS Depreciation for partial periods Revision of depreciation ratesAssets of low unit costsChanging the depreciation methodGroup depreciationDepreciation for Income TaxDisposal of F.A.Revaluation of F.A.
71 INTANGIBLE ASSETS Amortisation of I.A. Goodwill Brands R. & D. costs Computer software costsDeferred costsIMPAIRMENT OF ASSETSImpairment Loss = Carrying Amt. – Recoverable Amt.
81 RESERVES Capital Reserve & Revenue Reserve Share Premium Capital Redemption ReserveDebenture Redemption ReserveInvestment Allowance ReserveAPPROPRIATIONS
82 Buy-back of Shares Bonus Shares Stock-based Compensation EPS
83 CASH FLOW STATEMENT Shows the historical changes in Cash & CE During a particular periodOperating, Investing & Financing activities
84 C.F.S. – Benefits Ability to generate Cash & CE Needs to utilise cash flowsAssess Liquidity & SolvencyIndicator of future cash flowRelationship: Profitability & Net Cash Flow
85 Cash Flow from Operating Activities-Direct Cash receipts from CustomersCash paid to Suppliers & EmployeesCash generated from Operation- Income taxes paidCash flow before Extra-ordinary items- Extra-ordinary itemsNet cash from Operating Activities
86 Cash Flow from Operating Activities-Indirect N.P. before Tax & Extra-ordinary itemAdjustments for:DepreciationForeign Exchange LossInterest & Dividend IncomeInterest ExpenseOp. Profit before W.C. changesChanges in S. Drs. & InventoryChanges in S. Crs.Cash generated from OperationIncome Taxes paidCash flow before Extra-ordinary itemExtra-ordinary ItemsNet Cash from Operating Activities
87 Cash Flow from Investing Activities Purchase of Fixed AssetsSale of F.A.Purchase of other InvestmentsSale of other InvestmentsInterest ReceivedDividend ReceivedNet cash from(used in) Investing Activities
88 Cash Flow from Financing Activities Proceeds from issue of Share CapitalProceeds from Long-term BorrowingsRepayments of Long-term BorrowingInterest PaidDividend PaidNet Cash from(used in) Financing Activities
89 CASH FLOW STATEMENT Cash flow from operating activities Cash flow from investing activitiesCash flow from financing activitiesNet cash increase(decrease) in cash & CECash & CE at beginning of the periodCash & CE at the end of the period.
90 BALANCE SHEET. (Figures in Lakhs). LIABILITIES AND EQUITY BALANCE SHEET (Figures in Lakhs) LIABILITIES AND EQUITY March 31, March 31, 2011 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
91 PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED MARCH 31, 2012 INCOME PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED MARCH 31, INCOME (Figures in Lakhs) 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 125 Profit available for appropriation Transfer to reserves Proposed dividend (including dividend tax) 55 Balance of profit carried to balance sheet i. Loans and advance include income tax paid Rs.120 lakhs (previous year Rs.75 lakhs). Ii. During , 5,00,000 equity shares of Rs.10 each were issued at par. Iii. Long-term loan Rs.30 lakhs repaid during the year. Long term loan raised during the years Rs.80 lakhs. Prepare Cash flow statement.