Title: FINANCIAL ACCOUNTING
1FINANCIAL ACCOUNTING
- Prof. Ranjan Kumar Bal
- Utkal University
2What is Common?
- Lakshmi Niwas Mittal
- Kumar Mangalam Birla
- Indra Nooyi
- Osama Bin Laden
3COURSE OUTLINE F.A.
- Conceptual Knowledge
- Mechanics
- Financial Statements
- Analysis Decision Making
4F. A. WHY TO READ ?
- Personal Life
- Professional Life
- An Investment for Future
- Strategy
5BUSINESS ORGANISATIONS
- Merchandising (Trading) Organisations
- Manufacturing Organisations
- Service Organisations
- Business organisations are cash machines.
6BUSINESS ORGANISATIONS
- Private Limited Company
- Public Limited Company
- Limited Liability Partnership
7ACCOUNTING IS THE LANGUAGE OF BUSINESS.
- Serves as a means of communication
- Communicates / reports the events
8Anthony 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.
9ACCOUNTING IS AN INFORMATION SYSTEM
- INPUT (Raw Data)
- SYSTEM PROCESSES (Men
Equipment) - OUT PUT (Reports
Information)
10OUTPUTS
- Financial Statements
- Tax Returns
- Managerial Data and Reports
- Special Reports
11USERS OF ACCOUNTING INFORMATION
- Management
- Shareholders and Investors
- Lenders
- Creditors
- Employees
- Customers
- Govt. and Regulatory Agencies
- General Public
- Others Media, Consumer Organizations,
Researchers Analysts, etc.
12EVOLUTION OF ACCOUNTING
- Stewardship Accounting
- Financial Accounting
- Cost Accounting
- Management Accounting
- Financial Accounting Vs. Managerial Accounting
13DEFINITIONS
- AAA
- 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.
14FINANCIAL ACCOUNTING
- Recording
- Classifying
- Summarizing
- Analyzing Interpreting
- Communicating
15OBJECTIVES 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.
16ACCOUNTING 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
17CASH BASIS Vs. ACCRUAL BASIS OF ACCOUNTING
- Accounting Framework
- Includes GAAP on the basis of which accounting
data is processed, analyzed and reported.
18GAAP
- A set of concepts, conventions, rules, and
procedures - Accepted by accountants over a period of time
- Guides in the preparation and presentation of
financial reports
19ACCOUNTING STANDARDS
- Specifies acceptable accounting methods
- Uniformity
- Harmonization
- ASB of the ICAI AS Vs. Ind AS
- IASB - IFRS
- FASB
20ACCOUNTING EQUATION
- Economic Resources
- Sources of Resources or Claims.
- Assets Liabilities
- Equity Liabilities Assets
21Analysing the Effects of Business Transactions.
Investment by OwnerReceipt of LoanPurchase of
Office Equipment
- ASSETS
- Cash Rs.12,000
- Equipments Rs.58,000
- ----------
- 70,000
- ----------
- EQUITY LIABILITIES
- Creditors Rs.20,000
- Suresh, Equity 50,000
- -----------
- 70,000
- -----------
-
-
22BALANCE SHEET as at 31st March, 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
23BALANCE SHEETas at 31st March, 2011
- SOURCES OF FUNDS
- Shareholders Fund
- Loan Funds
- APPLICATION OF FUNDS
- Fixed Assets
- Investments
- Current Assets, Loans Advances
- Less Current Liabilities Provision
- Miscellaneous Expenditure
24BALANCE SHEETas at 31st March, 2012
- EQUITY AND LIABILITIES Note No. Current Previou
s - 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 Assets
- Current Investments
- Inventories
- Trade receivables
- Cash and cash equivalents
- Short-term loans and advances
25PROFIT LOSS A/Cfor the year ending 31st March
2011.
- I. Income
- II. Expenditure
- III. Profit before Tax
- IV. Provision for Taxation
- V. Profit after Tax
- VI. Balance b/f from last year
- VII. Profit available for appropriation
- Appropriations Dividends, Reserves
- VIII. Balance transferred to Balance Sheet
26PROFIT LOSS STATEMENTfor the year ending 31st
March 2012
- I. 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
- Extraordinary items
- Profit before tax
- Tax expense Current tax, 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, Diluted
27CASH FLOW STATEMENTfor 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.
28PRODUCT MARKET FORCES Competitors, Customers
CAPITAL MARKET FORCES Investors, Lenders
FINANCIAL STATEMENTS AND REPORTS
REGULATORY FORCES Government, Securities Regulator
LABOUR MARKET FORCES Managers, Employees
29LIMITATIONS 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
30QUALITATIVE CHARACTERISTICS OF FINANCIAL
STATEMENTS.
- Relevance
- Reliability
- Understandability
- Comparability
- Consistency
- Neutrality
- Materiality
- Timeliness
- Verifiability
- Prudence
31RECORDING BUSINESS TRANSACTIONS
- Accounts
- Ledger
- Chart of Accounts Assets
- Liabilities
- Shareholders Equity
- Revenues
- Expenses
32DOUBLE ENTRY SYSTEM
- Luca Pacioli 1494
- Dual Aspect
- Debit Credit
33LEDGER
- T Account A Ledger account in simplified
form. - TITLE OF ACCOUNT
- Left or Debit side Right or Credit side
- ANY ASSET / EXPENSE ACCOUNT
- (Debit) (Credit)
- Increase Decrease
-
34Ledger
- ANY LIABILITY / OWNERS EQUITY / REVENUE ACCOUNT
- (Debit) (Credit)
- Decrease Increase
- Standard Form of Accounts
- ANY ACCOUNT
- Date Explanation Ref Debit
Credit Balance
35JOURNAL
- GENERAL JOURNAL
- DATE ACCOUNT TITLE EXPLANATION
L.F DEBIT CREDIT -
Rs.
Rs. - 2009
- June 1 Cash 1,00.000
- Share Capital 1,00,000
- Invested Cash
- June 2 Office Equipment 50,000
- Cash 20,000
- Creditors 30,000
- Purchase of office equipment on part
payment -
36SUB-DIVISION OF JOURNAL
- Cash Book
- Purchases Journal
- Sales Journal
- Purchases Return Journal
- Sales Return Journal
- Bills Receivable Journal
- Bills Payable Journal
- Journal Proper
37ADVANTAGES
- Classification of transactions
- Reference becomes easy
- Facilitate division of work
- More particulars
- Responsibility can be fixed
- Facilitates checking
38PURCHASES JOURNAL
- Date Name of the Supplier Invoice No. L.F.
Amount Remarks
39SALES JOURNAL
- Date Name of the Customer Out ward Invoice No
L.F Amount Remarks
40THREE COLUMN CASH BOOK
Date Partic-ulars L.F. Disco-unt Allow-ed Rs. Cash Rs. Bank Rs. Date Partic-ulars L.F. Disco-unt Rece-ived Rs. Cash Rs. Bank Rs.
41BANK RECONCILATION
- Cash Book Vs. Pass Book
- What is shown on the debit side of the Cash
Book, appears on the credit side of the
Customers A/c in Banks ledger and vice versa. - OVERDRAFT When cash book shows a credit balance
or when pass book shows a debit balance.
42CAUSES OF DIFFERENCE
- Cheques issued but not yet presented for payment
- Cheques deposited into the bank but not
collected - Bank charges
- Interest allowed by the bank, if any.
- Interest on overdraft.
- 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
43BRS Rs. Rs.
Balance as per cash Book Add Items 1, 4, 6, 8 Less Items 2, 3, 5, 7, 9 Balance as per pass Book
44TRIAL BALANCE
- To check arithmetical accuracy
- Equality of Debits Credits
45LOCATING ERRORS
- 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
46ERRORS 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
47CORRECTING ERRORS
- Correcting Entries
- Suspense Account
48MEASURING 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
49Measuring Income Cont.
- Adjustment process
- Outstanding Expense
- Prepaid Expense
- Accrued Income
- Income Received in Advance
50CAPITAL 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.
51Capital Revenue Cont.
- CAPITAL EXPENDITURE
- Acquisition of F.A.
- Expenditure on F.A. to increase life
- Exp. On development of land or mines
- Cost of experiment Patent
- Legal charges for F.A.
- REVENUE EXPENDITURE
- - Exp. on day-to-day conduct of business
- Exp. For buying goods
- Exp. For maintaining F.A. Depreciation on F.A.
- Interest on Loan
- Regular legal charges
52DEFERRED REVENUE EXPENDITURE
- Exp. on advertisement for a new product
- Preliminary Expenses
- Brokerage Underwriting Commission
- Cost of shifting plants to a new site
53Capital Revenue Receipts
- CAPITAL RECEIPTS
- Capital introduced
- Loan received
- Sale proceeds of F.A.
- REVENUE RECEIPTS
- Sale proceeds of goods
- Other Income (Commission, Rent, Interest, etc)
54PROFIT LOSS A/Cfor the year ending 31st March
2012.
- I. 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
- Extraordinary items
- Profit before tax
- Tax expense Current tax, 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, Diluted
55ACCOUNTING FOR MERCHANDISING TRANSACTIONS
- Revenues from Sales
- Cost of Goods Sold
- Gross Profit S COGS
- Operating Expenses
- PBIT GP Op. Exp.
- PBT PBIT Int. Exp.
- NP PBT Income Tax
56MERCHANDISING COMPANY
- Classified P L A/C
- Classified Balance Sheet
57INVENTORIES
- Raw Materials
- WIP
- Finished Goods
58Inventories
- Physical Inventory
- Pricing the Inventory
- - Specific Identification
- - FIFO
- - LIFO
- - Weighted Average Cost
59Inventories
- Conservatism
- Consistency
- Inventory Turnover
60MANUFACTURING COMPANY
- Cost of Goods Manufactured
- - Raw Material Consumed
- - Direct Labour
- - Manufacturing Overhead
- - WIP
- MANUFACTURING ACCOUNT
61MANUFACTURING COMPANY
- COGS
- - Finished Goods Opening
- - Cost of Goods Manufactured
- - Cost of Goods Available for Sale
- - Finished Goods Closing
62FIXED ASSETS
- Investment in Long-lived Assets
- Source of Future Revenue Potential
- Fixed Assets Vs. Current Assets
- Intention
- TANGIBLE Vs. INTANGIBLE
- Natural Resources
63ACQUISITION OF F.A.
- Cost Purchase price, Duties taxes on
purchase, and Directly attributable cost - Purchase price After Trade Discount
Rebates - Directly Attributable Cost Registration fees,
Lawyers fees, Brokerage, Freight, Installation
cost, Professional fees, - Pre-production exp.
64F.A.
- Capitalisation of borrowing costs Directly
attributable - Stop capitalisation When the F.A. is complete
ready for use - Basket Purchases Fair Values Professional
valuers L. B. - Donated Assets AS 20 Grant Asset Recorded
at fair value or nominal value - Self-constructed Assets Costs attributable
65DEPRECIATION
- Depreciation represents the expired portion of
the cost of an asset. - Depreciation and Depletion
- Depreciation and Amortization
- Depreciation and Obsolescence
- Depreciation and Fluctuation
66CAUSES
- Wear and Tear
- Lapse of Time
- Obsolescence
- Depletion
67OBJECTIVES OF PROVIDING DEPRECIATION
- Ascertaining the true profit
- Ascertaining the true cost of production
- Presentation of true financial position
- Funds for replacement of assets
68FACTORS INFLUENCEING DEPRECIATION
- Cost of the asset
- Estimated working life
- Estimated scrap/residual/salvage value
- Depreciable Base Cost (Residual value
Cost of disposal)
69DEPRECIATION METHODS
- 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 -
-
70SPECIAL 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.
71INTANGIBLE ASSETS
- Amortisation of I.A.
- Goodwill
- Brands
- R. D. costs
- Computer software costs
- Deferred costs
- IMPAIRMENT OF ASSETS
- Impairment Loss Carrying Amt.
Recoverable Amt.
72NATURAL RESOURCES
- Wasting Assets - Depletion
73LIABILITIES
- Obligations for future payment
- Current Vs. Long-term
- Secured Vs. Unsecured
- Contingent liabilities
74CURRENT LIABILITIES
- Definite liabilities Vs. Estimated liabilities
- Definite Liabilities
- Trade Creditors
- Bills Payable
- VAT Payable
- Current portions of Long-term Debt
- Accrued Liabilities
- Unearned Revenues
75Estimated Liabilities
- Provision
- Income Tax
- Product Warranties
- Dividends Payable
76LONG-TERM LIABILITIES
- Debentures or Bonds
- Lease Liabilities
- Pension Liabilities
- Deferred Tax Liabilities
77DEBENTURES
- Secured Unsecured
- Registered Unregistered
- Term Serial
- Convertible
- Callable bonds
- Zero-coupon bonds
- Debenture Rating
- Debenture issued at a Premium/Discount
78SHAREHOLDERS EQUITY
- Share Capital
- Authorised Capital
- Issued, Subscribed Paid-up Capital
- Par Value or Face Value
- Dividends
79Accounting for Share Capital
- Issue at par
- Issue at premium
- Issue for non-cash assets
- Rights Issue
- Forfeiture of Shares
80PREFERENCE SHARE
- Cumulative Non-cumulative
- Participating Non-participating
- Redeemable Non-redeemable
- Convertible Non-convertible
81RESERVES
- Capital Reserve Revenue Reserve
- Share Premium
- Capital Redemption Reserve
- Debenture Redemption Reserve
- Investment Allowance Reserve
- APPROPRIATIONS
82Buy-back of SharesBonus SharesStock-based
CompensationEPS
83CASH FLOW STATEMENT
- Shows the historical changes in Cash CE
- During a particular period
- Operating, Investing Financing activities
84C.F.S. Benefits
- Ability to generate Cash CE
- Needs to utilise cash flows
- Assess Liquidity Solvency
- Indicator of future cash flow
- Relationship Profitability Net Cash Flow
85Cash 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
86Cash Flow from Operating Activities-Indirect
- N.P. before Tax Extra-ordinary item
- Adjustments for
- Depreciation
- Foreign Exchange Loss
- Interest Dividend Income
- Interest Expense
- Op. Profit before W.C. changes
- Changes in S. Drs. Inventory
- Changes in S. Crs.
- Cash generated from Operation
- Income Taxes paid
- Cash flow before Extra-ordinary item
- Extra-ordinary Items
- Net Cash from Operating Activities
87Cash 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
88Cash 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
89CASH 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.
90BALANCE SHEET (Figures in Lakhs) LIABILITIE
S AND EQUITY March 31, 2012 March 31,
2011Share capital 550 500Reserves 200 10
0Profit and Loss balance 135 125Long-term
borrowings 300 250Current liabilities 135
100Provisions for tax 120 75Proposed
dividend 55 50TOTAL 1495 1200ASSETS
Gross fixed assets 750 600Less Accumulated
depreciation 390 300Net fixed
assets 360 300Investment (all
long-term) 250 200Inventories 190 100Debt
ors 120 80Cash and bank balance 50
30Loans and advances 525 490TOTAL 1495 1
200
91PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED
MARCH 31, 2012INCOME (Figures in
Lakhs)Sales 1260Other income 152Stock
adjustment 18Total 1430EXPENDITURERaw
materials consumed 715Manufacturing
expenses 140Administration expenses 80Sell
ing and distribution expenses 65Depreciation
90Interest 55Total 1145Profit
before tax (PBT) 285Provision for
tax 120Profit after tax (PAT) 165Profit
and loss balance at the beginning of the
year 125Profit available for appropriation 29
0Transfer to reserves 100Proposed dividend
(including dividend tax) 55Balance of profit
carried to balance sheet 135i. Loans and
advance include income tax paid Rs.120 lakhs
(previous year Rs.75 lakhs).Ii. During
2008-2009, 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.
92FINANCIAL STATEMENT ANALYSIS
- OBJECTIVES
- Liquidity
- Solvency
- Profitability
- Efficiency
- Health Performance
- PROCESS
- Select
- Relate
- Evaluate
93STANDARDS OF COMPARISONS
- Rule-of-thumb
- Past Performance
- Industry Standards
94SOURCES OF INFORMATION
- Company Reports
- Stock Exchanges
- Business Periodicals
- Information Services
95TECHNIQUES OF FSA
- Horizontal Analysis
- Trend Analysis
- Vertical Analysis
- Ratio Analysis
96RATIO ANALYSIS
- Profitability Ratios
- Liquidity Ratios
- Solvency Ratios
- Capital Market Ratios
97LIQUIDITY RATIOS
- Current Ratio
- Quick Ratio
- Debtor Turnover
- Inventory Turnover
98SOLVENCY RATIOS
- Debt-to-Equity Ratio
- Interest Coverage Ratio
99CAPITAL MARKET RATIOS
- Price-Earnings Ratio
- Dividend Yield
- Price-to-Book Ratio
100PROFITABILITY RATIOS
- Profit Margin
- Asset Turnover
- Return on Assets or ROI
- Return on Equity
- EPS
101CORPORATE DISCLOSURE
- Annual Reports
- Financial Reports / Special Reports
102ANNUAL REPORTS
- To inform the Share Holders
- Performance Health
- To provide information to other users
103Annual Report Contents
- Chairmans Report
- Directors Report
- Auditors Report
- Profit Loss Statement
- Balance Sheet
- Cash Flow Statement
- Segment Reports
104Annual Report Contents
- Highlights
- Financial Production Statistics
- EVA Reporting
- HRA Reporting
- Environmental Reporting
- Social Reporting
- Value Added Statement
- Inflation Accounting
105The woods are lovely, dark and deep. But I have
promises to keep. And miles to go before I
sleep, And miles to go before I sleep. Robert
Frost Arise, awake and stop not till the goal
is reached.