1-Finance for Non Finance - Training Material - 22 Nd & 23rd Feb 2010

8/11/2019 1-Finance for Non Finance - Training Material - 22 Nd & 23rd Feb 2010

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Interpretation of FinancialStatements


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DEFINITION OF ACCOUNTING Accounting is the process of

identifying, measuring and

Communicatingeconomic information to permit

informed judgements anddecisions by users of theinformation.


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USERS OF FIN. ST.

PRESENT & POTENTIAL SHAREHOLDERS /TRUSTEES / MEMBERS EMPLOYEES

LENDERS SUPPLIERS & OTHER CREDITORS CUSTOMERS

GOVERNMENT & ITS AGENCIES PUBLIC


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OBJECTIVE OF FSUSERS INFORMATION NEEDS 1) Liquidity 2) Profitability

3) Solvency


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TYPES OF ACCOUNTING

Financial accounting Income-tax accounting

Cost accounting Management Accounting (Management

Control Systems) Management Reporting


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ACCOUNTING

MECHANICS


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ACCOUNTING EQUIVALENCAssets = Owners Equity +

Outside Liabilities

A = OE + OL


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DOUBLE ENTRY SYSTEM

AA = OE + OL= OE + OL

In the double-entry accounting system,every transaction is recorded by equal

amounts of debits and credits.

In the double-entry accounting system,every transaction is recorded by equal

amounts of debits and credits.

DebitDebit == CreditCredit


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ACCOUNTANTS LIFEAA = OEOE + OL

ASSETSASSETS

Debit

forIncrease

Credit

forDecrease

EQUITIESEQUITIES

Debit

forDecrease

Credit

forIncrease

LIABILITIESLIABILITIES

Debit

forDecrease

Credit

forIncrease

Debit Credit

ASSETS

+ -

LIABILITIES

- +Debit Credit

EQUITIES

- +Debit Credit


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ACCOUNTING CYCLE1. Business Transaction

2. Transaction is recorded in document(Voucher / Receipt)3. Analyze the transaction location ?4. Journal Entry5. Ledger Accounts (or T account)6. Trial Balance7. Balance Sheet, P&L A/c, Cash Flow

Statement


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Balance Sheet

P & L A/c

Cash Flow

Prepare a trial

balance

Post to theledger

Journal Entry

SourcedocumentsTransaction Analyze

ACCOUNTANTS ROUTINE


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Post to theledger

Sourcedocuments

Journal EntryPrepare a trial

balance

Balance Sheet

P & L A/c

Cash Flow

Transaction Analyze

ACCOUNTANTS ROUTINE


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TRANSACTION-1Chirag started business with cash Rs.30,000.

The accounts involved are:The accounts involved are:(1) Cash ((1) Cash ( assetasset ))(2) Owner(2) Owner s Equity (s Equity ( equityequity ))

Assets = OE + OL

Cash Supplies EquipmentAccountsPayable

Note sPayabl

Owne rs'Capital

(1) 30000 30000

30000 0 0 0 0 30000

30000 = 30000


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TRANSACTION-1Chirag started business with cash Rs.30,000.The accounts involved are:The accounts involved are:

(1) Cash ((1) Cash ( assetasset ))

(2) Owner(2) Owner s Equity (s Equity ( equityequity ))

JOURNAL ENTRY Page 1Date Particulars LF Debit Credit2001Dec. 1 Cash 30,000

To Capital 30,000 Investment by owner

Debit Credit

EQUITIES

- +Debit Credit

ASSETS

+ -


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INTRODUCTION Companies need a way to measure

performance over discreet time periods. The most popular period for measuring

income is fiscal year. The fiscal year ends on 31 ST March.


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BASIS OF A/C Accrual basis - recognizes the impact

of transactions for the time periodswhen revenues and expenses occureven if no cash changes hands

Cash basis - recognizes the impact oftransactions only when cash isreceived or disbursed


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MATCHING CONCEPT Fundamental Accounting Concept

Matching Concept is:Expenses incurred in earning revenue

must be matched with therevenue earned during the current accountingperiod for determining results of operations


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MANUFACTURING CO. Trading v/s Manufacturing

Kind of Inventory Nature of Costs Inventory in Manufacturing Co.

Raw Materials Work in Process (WIP) Finished Goods

Stores & Spares Costs in Manufacturing Direct Costs

Indirect Costs


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COSTS Direct Costs

are costs which can be traced to thecost object in economically feasible way.

Indirect Costs are costs which cannot be traced to thecost object in economically feasible way.


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COGM Cost of Good Manufactured (COGM)

= Direct Cost + Indirect Costs


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COGM Cost of Good Manufactured (COGM)

= Direct Cost + Indirect Costs

Cost of Good Manufactured (COGM)= Cost of RM Consumed+ Other Direct Cost of Manufacturing+ Indirect Cost of Manufacturing+ Opening Stock of WIP- Closing Stock of WIP

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COST OF RM CONSUMED Cost of RM Consumed =

Opening Stock of RM+ RM Purchased

+ Directly Attributable Cost for RMPurchase- Purchase Returns of RM

- Closing Stock of RM


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COGS Cost of Good Sold (COGS)

= Cost of Good Manufactured (COGM)+ Opening Stock of Finished Goods- Closing Stock of Finished Goods


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COSTS

Product costs - those linked withrevenue earned in the same period Cost of goods sold or sales commissions

Without sales there is no cost of goods soldor sales commissions.

Period costs - those linked with the

time period itself Rent or other administrative expenses Rent is paid even if no sales are made.


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MATCHING OF EO EXPD. MATCHING OF EXTRA ORDINARY

EXPENDITURE Depreciation Large Advertisement Expenditure Personnel Training & Development Research & Development

Unusual Expenses, Natural Calamities


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INVENTORY

AS 2:Inventories are defined as assetsi. held for sale in ordinary course of

business, orii. in the process of production for such

sale, oriii. in the form of materials of supplies to be

consumed in the production process orin the rendering of services


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INVENTORY VALUATION FIRST-IN-FIRST-OUT (FIFO)

LAST-IN-FIRST-OUT (LIFO) SIMPLE AVERAGE

WEIGHTED AVERAGE


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P & L A/C The income statement is really just a

way of explaining changes that occurbetween one balance sheet date andanother.

The balance sheet equation can bemanipulated to show that revenuesand expenses are subparts of ownersequity. The income statement collects the

changes and combines them in oneplace.


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P & L A/C The income statement must always

indicate the exact period covered (monthended, quarter ended, year ended).

Decision makers inside and outside the

company use the income statement toassess the companys performance overa span of time.

By tracking net income from period toperiod, decision makers can evaluatethe success of the periods operations.


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FIXED ASSETS


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FIXED ASSETS Fixed Assets (FA)are very importantcomponent of the business.

FA is an asset held with the intention of being used for the purpose of producing or providing goods or services and

is not held for sale in normalcourse of business.


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TEST OF FA How to test whether it is a FA or not? Test is made at the time when the

expenditure is incurred by considering

whether the asset or benefit acquiredby the expenditure will be convertedinto cash in the near future, OR

whether it will primarily be used forconducting the operations of

business


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TYPES OF FA FA may be

TANGIBLE FAphysical items that can be seen and touched,such as land, natural resources, buildings,

and equipment - also known as fixed assetsor plant assets

INTANGIBLE FA

rights or economic benefits, such asfranchises, patents, trademarks, copyrights,and goodwill that are not physical in nature


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Allocation of CostsTerms for allocation of costs over time: Depreciation - allocation of the cost of

tangible assets Depletion - allocation of the cost of natural

resources

Amortization - allocation of the cost of

intangible assetsLand is never depreciated because itdoes not wear out or become obsolete.


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Cost of AcquisitionThe acquisition cost of long-livedassets is the purchase price,including incidental costs requiredto complete the purchase, totransport the asset, and to

prepare it for use.


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DepreciationDepreciation is a form of allocating thecost of an asset to periods when theasset is used.Depreciation is one key factor thatdistinguishes accrual accounting fromcash basis accounting. Under the accrual basis, the cost of the

asset is allocated to the periods benefited. Under the cash basis, the cost of the

asset would be expensed immediately.


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Expected LifeUseful life - the time period overwhich an asset is depreciated The useful life is the shorter of the

physical life of the asset before itwears out or the economic life of theasset before it becomes obsolete.

The useful life can be measured interms other than time. For example,

the life of a truck can be measured in


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Depreciation (contd.)Depreciation does not generate cash. Depreciation allocates the original cost

of an asset to the periods when theasset is used.

Accumulated depreciation is merely thetotal amount that an asset has been

depreciated throughout its life.


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Depreciation (contd.)Depreciation is a non-cash expense.

Therefore, depreciation basically has noeffect on ending cash balancesBefore taxes, changes in the depreciationmethod affect only the accumulateddepreciation and retained earnings

account.


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The Decision to CapitalizeNo rules about when to expense orcapitalize an expenditure are written instone. An accountant might want to expense

something that a tax auditor might want tocapitalize.

The tendency in practice is to chargean expense for repairs, parts, andsimilar items. Most of these expenditures are minor, so

the cost-benefit and materiality concepts justify this choice.


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METHODS OF DEPRECIATION Straight Line Method Declining Balance Method (WDV) Sum-of-the-years Digits Method Units of Production Method


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PROFIT & LOSSACCOUNT


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Introduction Annual Report Financial Statement

Balance Sheet Profit & Loss Account

Balance Sheet is a position statement. P&L A/c is a flow statement. Companies Act:

A Balance Sheet as on the last day of thefinancial year A Profit & Loss Account for the financial

year.


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P & L A/c P&L A/c is also called Income

Statement. Income is calculated as the difference

between revenues and expenses. Revenues: from operations

Expenses: specific product/service/period

Accountants have agreed to use theaccrual basis of accounting rather thanthe cash basis.


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Revenues and ExpensesRevenues - gross increases in

owners equity arising frombusiness operations/delivery ofgoods-services to customers

Expenses - decreases in owners equitythat arise because goods or services aredelivered to customers


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TRANSACTION

INCOME EXPENDITURE

RevenueIncome

CapitalIncome

RevenueExpendi

ture

CapitalExpend

iture


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TRANSACTION

INCOME EXPENDITURE

RevenueIncome

CapitalIncome

RevenueExpendi

ture

CapitalExpend

iture

P & L A/cIncome (Revenue Income)Less

Expenditure (Revenue Expenditure)NET PROFIT/LOSS

BALANCE SHEET


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TRANSACTION

INCOME EXPENDITURE

RevenueIncome

CapitalIncome

RevenueExpendi

ture

CapitalExpend

iture

BALANCE SHEETSOURCES OF FUNDS (Liabilities)(Capital Income)

APPLICATION OF FUNDS (Assets)(Capital Expenditure)


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P & L A/c CONCEPTS ACCOUNTING PERIOD

Expenditure during A/c period which arealso expenses of that period.

Expenditure during the A/c period whichwill become expense only in future periods

Expenditure during the previous A/c periodwhich will become expenses during thecurrent A/c period

Expense of the current A/c period whichhave not yet been paid


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The Accounting Time PeriodCompanies also prepare statements

for interim periods , generally on aquarterly or monthly basis.


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Recognition of Revenues Recognition - a test to determine whether

revenues should be recorded in thefinancial statements


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THE DUET: BS & P&L BS provides a snapshot of an entitys

financial position at an instant in time. The P&L A/c provides a moving picture of

events over a span of time and explainsthe changes that have taken placebetween BS dates.


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BALANCE SHEET


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BALANCE SHEET

BS is a position statement.

BS describes the financial position of assets & liabilities of the firm as on a particular date

DEFINITION BS


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DEFINITION: BS

Balance Sheet is defined as

a statement of the financial position of an enterprise as at a given date, which exhibits assets, liabilities, capital, etc.


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WHY BS ?


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WHY BS ?

The legal rules (Companies Act)

A Balance Sheet as on the last day of thefinancial year A Profit & Loss Account for the financial year.

BS should reflect true and fair view.

Balance Sheet


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OwnersEquity

OwnersEquity

Owners Investment

Revenues

Owners Withdrawal

Expenses

Balance Sheet

LOOKS/FORM OF BS


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LOOKS/FORM OF BS

1. HORIZONTAL

2. VERTICAL Except in the first BS, it is required to give

the corresponding amounts for thepreceding financial year (Comparatives)for all the items shown in the BS.

HORIZONTAL FORM OF BS


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XYZXYZ

XX Inventories (Stock)XX Accounts Payable (Creditors)

XX Bills Receivable)XX Bank Overdraft

XX Accounts Receivable(Debtors)XX

Outstanding Expenses

XX Cash / Bank B/sCurrent LiabilitiesCurrent AssetsXXLoan taken

XXFixed Assets-Land, Bldg,XXCapital

AmountASSETSAmountLIABILITIES


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Assets = Owners Equity +

Outside Liabilities

A = OE + OL

A = OE + OL


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A OE + OLAssets are properties or economic

resources owned by a business. They areexpected to provide future benefits to the

business.

Assets are properties or economicresources owned by a business. They areexpected to provide future benefits to the

business.

Liabilities areobligations of thebusiness. They

are claimsagainst the

assets of thebusiness.

Liabilities areobligations of thebusiness. They

are claimsagainst the

assets of thebusiness.

Equity is theowners claim onthe assets of thebusiness. It is the

residual interest inthe assets after

deductingliabilities.

Equity is theowners claim onthe assets of thebusiness. It is the

residual interest inthe assets after

deductingliabilities.

A = OE + OL


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A OE + OL

XYZ

XYZXXInventories (Stock)XX

Accounts Payable

(Creditors)

XXBills Receivable)XXBank Overdraft

XXAccounts Receivable(Debtors)

XXOutstanding Expenses

XXCash / Bank B/sCurrent Liabilities

Current AssetsXXLoan taken


Amoun

tASSETSAmount

LIABILITIES

A = OE + OL


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XYZ

XYZXXInventories (Stock)XX

Accounts Payable(Creditors)

XXBills Receivable)XXBank Overdraft

XXAccounts Receivable(Debtors)

XXOutstanding Expenses

XXCash / Bank B/sCurrent Liabilities

Current AssetsXXLoan taken


AmountASSETSAmountLIABILITIES

A = OE + OL


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A OE OL

Miscellaneous ExpenditureLoans & AdvancesCurrent Assets Current LiabilitiesInvestment

Amount

cy

AmountpyAPPLICATION OF FUNDS

Fixed Assets Gross Block- Depreciation

XXXXUnsecured LoansXXSecured Loans

AAReserves & Surplus

XXAAShare Capital

Amountcy

AmountpySOURCES OF FUNDS

Financial Statements


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Financial StatementsPrepare the Financial Statements reflecting

the transactions we have recorded.

Income Statement


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Scoxs netincome is the

differencebetween

Revenues andExpenses.

The net income ofRs.2,200

increases Scoxsequity byRs.2,200.

Revenues: Consulting revenue 3000Expenses: Salaries expense 800Net income 2200

Scox CompanyIncome Statement

For Month Ended March 31, 2001

Owners' equity, 1st April 2000 0Plus: Investment by owners 20000 Net income 2200Ow ners' equity, 31st March 200 22200

Scox CompanyStatement of Changes in Owners' Equity

For Month Ended March 31, 2001

Balance Sheet

Scox Company


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Accounts payable 1200 Cash 10200Notes payable 4000 Supplies 1200Total liabilities 5200 Equipment 16000Owners' equity 22200

Total liabilitiesand owners'equity 27400 Total asset 27400

AssetsLiabilities & Owners' Equity

Scox CompanyBalance SheetMarch 31, 2001

Owners' equity 0Investment by owners 20000 Net income 2200

Owners' equity, March 31 2001 22200

p y

Statement of Changes in Owners' EquityFor Month Ended March 31, 2001The balance sheet

reflects Scoxsfinancial position at

March 31 2001

The balance sheetreflects Scoxs

financial position at

March 31 2001


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CASH FLOW CASH FLOW

STATEMENT STATEMENT


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CASH FLOW STATEMENT CF Statement is a flow statement.

CFS indicates changes that took placebetween tow successive BalanceSheets.

The statement of cash flows providesa thorough explanation of the changes

that occurred in a firms cash balanceduring the entire accounting period.


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Why CFS? Balance Sheet P&L A/c insufficient. It shows the relationship of net income to changes in

cash balances. It reports past cash flows as an aid to:

Predicting future cash flows Evaluating the way management generates and uses cash Determining a companys ability to pay interest and

dividends and to pay debts when they are due It identifies changes in the mix of productive assets.


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Why CFS? . . . The statement of cash flows, along

with the income statement,explains why balance sheet itemshave changed during the period.

Legal rules.


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Why CFS? The relationship among the balance sheet,

income statement, and statement of cashflows:

Balance Sheet31 st March 2009Balance Sheet

31 st March 2009

Balance Sheet31 st March 2008

Income Statement

Statement of Cash Flows

Activities Affecting Cash


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Operating activities - transactions thataffect the income statement

Investing activities - activities thatinvolve (1) providing and collectingcash as a lender or as an owner ofsecurities and (2) acquiring and

disposing of plant, property,equipment, and other long-termproductive assets

Activities Affecting Cash . . .


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Financing activities - activities that

include obtaining resources as aborrower or issuer of securities andrepaying creditors and owners


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Investing Activities

Cash inflows

Sale of property, plant,and equipment

Sale of securities that

are not cashequivalents Receipt of loan

repayments

Cash outflows

Purchase of property, plantequipment

Purchase of securities thatare not cash equivalents

Making loans


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Financing Activities

Cash inflows Borrowing cash from

creditors

Issuing equity shares Issuing debt securities

Cash outflows Repayment of amounts

borrowed

Repurchase of equityshares Payment of dividends***

1-Finance for Non Finance - Training Material - 22 Nd & 23rd Feb 2010

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Transcript of 1-Finance for Non Finance - Training Material - 22 Nd & 23rd Feb 2010