Fin for Non Fin Exec-session 1

8/8/2019 Fin for Non Fin Exec-session 1

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FINANCE & ACCOUNTING

FOR

NON-FINANCE EXECUTIVES

MURAD ALI, ACA


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Accounting Vs Finance A Comparison

HIGHLIGHTS

Finance as Agent of Org to Outer World

Need for Accounting

Forms of a Business Activity

Accounting Terminologies / Concepts

Various Financial Analysis Tools

Finance Hierarchy, Functions in ADSB


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ACCOUNTING VS FINANCE

Accounting & Finance are not one term.

Both are related, dependent, overlapping

terms & used interchangeably.Need for Accounting arises at very basic

level irrespective of size of Org.

Need for Finance arises at some advance

level and in relatively large organizationsAccounting function has limited use.

Accounting people dont necessarily

need knowledge of Finance


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Finance people must have command over

Accounting.

In most organizations, both functions areperformed simultaneously.

CONCLUSION

Accounting is mainly concerned with what

happened (facts and results of past)

Finance function can analyze as to what

happened is good/bad, why happened &

what will happen?

ACCOUNTING VS FINANCE


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STAKE

HOLDERS

IN AN

ORG.

CUSTOMERS/

SUPPLIERS

LENDERS

SHARE

HOLDERS

GOVERNT.

EMPLOYEES

AUDITORS

(INTL/EXTL)

STAKE HOLDERS IN AN

ORGANIZATION


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HIERARCHY OF STRATEGIC

OBJECTIVES

Org is combination of teams working for

common Objective, Mission Statement

Mission Statement works as guidelinefor setting Corporate Objectives

Corporate Objectives are elaborated to

establish Operational Objectives Operational Objectives used for writing

procedures for each sub unit till bottom.


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ADSBS HIERARCHY BY

ORGANIZATION & OBJECTIVES

PRODN.

BOD

CHIEF EXEC.

FINANCE/

ADMIN

HR

TECH. MATRL.

MISSION

STATEMENT

CORP.

OBJECTIVES

OPERATIONAL

OBJECTIVES

MARKG.


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FFCS STRATEGIC OBJECTIVES

MISSION STATEMENT

FFCs mission is to sustain its role as the

leader in industrial and agricultural

advancement of Pakistan by setting and

achieving new and higher goals, and taking

initiatives. The Company is committed to

ensuring safe and conducive workenvironment, providing high quality

products and allied services to its

customers and profitable returns to its

shareholders.


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FFCS STRATEGIC OBJECTIVES

CORPORATE OBJECTIVES

QUALITY POLICY

ENVIRONMENTAL POLICY

SAFETY AND HEALTH POLICY OPERATIONAL OBJECTIVES

GOOD CORPORATE GOVERNANCE

QUALITY PRODUCT & SERVICES

INCREASE VALUE OF SHAREHOLDERS

HUMAN RESOURCE DEVELOPMENT

DISCOVER & EXPLOIT NEW AVENUES


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ACCOUNTING / FINANCE

FUNCTIONS IN ADSB

Financial Accounting and External Financial Reports

(Annual and Quarterly Reports)

Management Accounting and Internal Management

Reporting Projects Budgeting, Cost Control and Financial Support

Treasury and short term investments

Feasibility analysis and Investment Appraisal

Support for Corporate Governance (Laws, Regulations,Standards and Audits)

Annual Operating Plan

Insurance

Shareholders Relations


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Hamdan Awda, CPA,CITP

Vice President, Finance

Fares Al BaloushiA/Reporting Supvr

Salim Kazi

Lead Fin Anal

Najah Al Z

P/R Anal.

Wafiq Baraki

Sr. Acctt

Kelwyn A

Sr.Fin Anal.

ORGANIZATIONAL

STRUCTURE OF FINANCE DEPT

Mohd Kuhnhi

Sr. Secretary

Mohd MA

S/H Relations

Mohd Akhtar, ACCAAccounting Supvr

Sathiapathi,FCA

Lead Fin Anal

Murad Ali, ACA

Cost Controller

Sasi Kumar N, CIAInternal Auditor

Rami N.

Ass. Acctt.

M. Ashraf

Sr Fin Clerk

Time Keepers

03 Nos.


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THE NEED FOR ACCOUNTING

Need for Accounting arises whenever

there is a Business Activity.

Business Activity may be for Profit orfor Non-Profit purposes e.g. charity.

All Business Activities are carried out

in the form of Transactions.


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THE NEED FOR ACCOUNTING

Accounting is the recording, classifying,

summarizing and presenting of these

transactions in such a manner so as to

reflect the results of a Business Activity

for a certain period and the financial

position of the Business Activity at a

certain date.


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ACCOUNTING CYLCE

TRANSACTION JOURNAL

FINAL

ACCOUNTS

TRIAL

BALANCE

LEDGER

FINANCIAL

STATEMENTS


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Commandite

FORMS OF A BUSINESS ACTIVITY

Joint Venture

Public Joint Stock Co

Private Joint Stock Co

General Partnership

Limited Liability Co

Commandite Ltd. by Shares


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COMPANY

Association of persons united for

some lawful purpose

Separate legal entity & has rights& powers

Members may die or change but

Co. goes on till it is wound upCo. can own property & incur liabil.

Members can contract with the Co.

A company is an artificial person

It has a common seal


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SOLE PROPRIETORSHIP

A form of Business Activity owned and

controlled by one personSimple form of Business Activity conducted

at a relatively small scale

Normally run under the name of the owner

Can be incorporated as a Single Member CNot governed by any commercial law if not

incorporated as a SMC.


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PARTNERSHIP/FIRM

A form of Business Activity owned and

controlled by two or more persons

These persons enter into an agreementcalled Partnership Deed to share the ratio

of investment, P&L and other rights &

responsibilities

Partnerships may be formed in shape ofRegistered or Unregistered Firms

If no. of persons exceeds twenty, it has

to be incorporated as Co


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TYPES OF COMPANIES

COMPANY

PRIVATE

COMPANY

PUBLIC

COMPANY

NON PROFIT

ORGANIZATION

LIMITED BY

GUARANTEE

LIMITED BY

SHARES

LISTEDUN LISTED


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PUBLIC & PRIVATE COMPANIES

Restricts the

transfer of shares

Limits the number

of members to fifty

Prohibits invit. to public

to subscribe for shares

YES

YES

YES

PRIVATE

COMPANYPUBLIC

COMPANY

NO

SMCOthers


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PRIVATE LIMITED COs.

The last words of the name of the Co.

shall ALWAYS be (Private) Limited

IDENTIFICATION

-Feroz Sons (Pvt) Ltd.-Fuji Film Pakistan (Pvt) Ltd.

-Jaffer Brothers (Pvt) Ltd.

-New Age Cables (Pvt) Ltd.

EXAMPLES


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PUBLIC LIMITED COs.

The last word of the name of the Co.

shall ALWAYS be Limited

IDENTIFICATION

-Fauji Fertilizer Co. Ltd.-ICI Pakistan Ltd.

-Fauji Fertilizer Bin Qasim Ltd.

-Habib Bank Ltd.

EXAMPLES


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Companies/Org with limited liability

without the addition of the wordsLimited or (private) Limited

to its name

Companies/Org meant for welfare of

community or for promotion of Art,

Science, Religion or any other cause

NON-PROFIT ORGANIZATIONS


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NON PROFIT ORGANIZATIONS

The name of the Org normally contains

words like Trust, Memorial, Welfare etc.

IDENTIFICATION

-Al-shifa Trust-Hazrat Bilal Trut

-Shaukat Khanum Memorial Hospital

-Edhi Welfare Trust

EXAMPLES


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Company Limited by shares

Co in which the liability of its members

is limited by its MOA to the extent of

unpaid amount of shares held by them.

Legal Definition

-Cos may be Public or Private Ltd

-The last words of the name shall be

(Pvt) Ltd or Ltd.

General Features


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Cos Limited by Guarantee

Liability of its members is limited by MOA

to such amount as the members may

undertake to contribute to the assets of

Co in the event of its winding up.

Legal Definition

-The last words of the name shall

always be (Guarantee) Ltd

General Features


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Minimum/Maximum # of Members

COMPANY

Minimum

Number

Maximum

Number

Private Ltd. SMC 01 01

Private Ltd. Others 02 50

Public Ltd. 03 NIL

Listed Co. 07 NIL


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AIMS OF A BUSINESS ACTIVITY

Business Activity has two basic aims:

Earning of profits &

Increase in net wealth

Accounting System is designed to record:

Profit or Loss for a period (P&L A/C)

Changes in wealth (Balance Sheet)

Changes in Cash & Equivalents (C/Flow)Changes in Capital & Equity

These components when combined, are

called Financial Statements


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FINANCIAL STATEMENTS

BALANCE SHEET

Shows financial position of a business

entity by summarizing the assets, liab.and owners equity at a specific date.

PROFIT & LOSS A/C

Shows the revenue & expense & resultantprofit or loss emanating from operations

carried out during a specific period.


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FINANCIAL STATEMENTS

CASH FLOW STATEMENT

Shows changes in Cash & Cash

Equivalents during a specific periodSTATEMENT OF CHANGES IN EQUITY

Shows changes in Capital & Owners

Equity during a specific period andclosing position at a specific date


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BALANCE SHEET

Liabilities AssetsCapital + =

IntangibleTangible

CurrentNon

CurrentCurrent

Non

Current

Retained

EarningsOwners

Equity+


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IMPORTANT TERMS OF

BALANCE SHEET

ASSETS

Economic resources owned by a

business expected to benefit future

operations of the entity.

Non Current Assets

Assets NOT convertible into cash within

a period of one year.

Current Assets

Assets convertible into cash within a

period of one year.


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Tangible Assets

Assets which have physical existence

Intangible Assets

Assets not having physical existence

CAPITAL

Amount of initial investment of owners.LIABILITIES

Economic Obligations of business entity

towards the outsiders

IMPORTANT TERMS OF

BALANCE SHEET


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Non Current Liabilities

Economic obligations that DO NOT falldue within the current financial year

Current Liabilities

Economic obligations that fall due withinthe current financial year.

OWNERS EQUITY Initial capital + or accum. profit/loss

BALANCE SHEET EQUATION

ASSETS = LIABILITIES + CAPITAL

IMPORTANT TERMS OF

BALANCE SHEET


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REVENUES

Consideration for sale of goods /

rendering of services during a specific

period

EXPENSES/COSTS

Any expenditure incurred in deriving

revenue for a specific period

DEPRECIATION

Systematic allocation of cost of tangible

asset over its useful life.

IMPORTANT TERMS OF

PROFIT & LOSS A/C


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AMORTIZATION/IMPAIRMENT

Systematic allocation of cost of

intangible asset over its useful life.ACCRUALS

To comply with matching concept

PROVISIONS

To comply with prudence concept

IMPORTANT TERMS OF

PROFIT & LOSS A/C


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ACCOUNT

IMPERSONALPERSONAL

LOSSES/

EXPENSESINCOMES/

REVENUES

NOMINALREAL

TYPES OF ACCOUNTS

LIABILITIESASSETS


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BRANCHES OF ACCOUNTING

FINANCIAL ACCOUNTING

Mainly concerned with preparation &

presentation of Fin. Statements fordecision making of external stakeholders

and owners

COST ACCOUNTING

Cost accounting is the process of

tracking, recording and analyzing costs

associated with the products or activities

of an organization


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BRANCHES OF ACCOUNTING

MANAGEMENT ACCOUNTING

The process of identification, measurement,

accumulation, analysis, preparation, interpretation

and communication of information used bymanagement to plan, evaluate and control within an

entity and to assure appropriate use of and

accountability for its resources.

Management accounting also comprises thepreparation offinancial reports for non

management groups such as shareholders,

creditors, regulatory agencies and tax authorities"


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SYSTEMS OF ACCOUNTING

CASH BASIS ACCOUNTING

Transactions are recorded only when

cash is received or paid

Against the spirit of Matching Principle

ACCRUAL BASIS ACCOUNTING

Transactions are recorded when the

amount has become due for payment

or receipt.

Follows the Matching Principle


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TYPES OF COSTING SYSTEMS

PROCESS COSTING

Used in industries with homogeneous products

having continuous/ repetitive processes /

operations Cost not identifiable for each unit/product

Unit cost is calculated by dividing the total cost

for a specific period by the total # of units

produced

Examples: Oil, fertilizer, textile, food processing

industries etc.


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TYPES OF COSTING SYSTEMS

JOB ORDER COSTING

Used in industries where direct costs canbe identified with specific units produced

Direct costs such as material and laborare traced directly into specific jobs whileall indirect costs are allocated on anappropriate basis eg labor or machine hrs

Widely used by custom manufacturerssuch as printing, aircraft /shipconstruction & professional services etc.


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COSTING METHODS

STANDARD COSTING

MARGINAL COSTING

ABSORPTION COSTING

ACTIVITY BASED COSTING

TARGET COSTING

THROUGHPUT COSTING


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BUSINESS ENTITY CONCEPT

Before starting a business activity, an

economic unit that has a separate legal

entity from its owner(s) has to be created.

The entity is regarded as a distinct person

and all transactions with owner(s) recorded

as with other persons/organizations.

Usually the first transaction between owner

and entity is that of capital.


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CONCEPT OF CAPITAL/REVENUE EXP

YE

S

EXP FOR REPL. OF

EXISTING ASSETNO YES

BENEFIT TO ACCRUE

FOR > 1 YEAR

MEET CAPITALIZ. LIMIT AS

PER CO POLICY

EXP RELATES TO BALANCING, MODERNIZATION &

HEAVY REPAIRS WHICH RESULT IN:

- EXTENSION IN USEFUL LIFE OF PLANT

- INCREASE IN CAPACITY

- SUBST. IMPROV. IN QUALITY/REDUCTION IN COSTS

YES

YESCAPITALIZE

CAPEX

REVENUENO

NON CAPITALIZED

NO

NO


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CAPITALIZATION LIMITS

TYPE OF ASSETS LIMIT A/C CODE

Plant & Machinery 50,000 892

Roads & Buildings 50,000 891

Plant Equipment 30,000 897

Clinical equipment 5,000 894

Vehicles 5,000 893

Electrical & Off. Equip. 3,000 895Other assets 3,000 896


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OTHER IMPORTANT

CONCEPTS

DOUBLE ENTRY (DUAL ASPECT) CONCEPT

Every transaction affecting one element of an

entity shall have a corresponding effect on at least

one of other elements of the entity. MATCHING CONCEPT

Only those expenses should be recorded for

which revenue has been recorded for a specific

period and vice versa.

ACCRUAL CONCEPT

Recording of only those revenues earned and only

those expenses incurred during a specific period.


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PROFIT VS NON PROFIT

ORGANIZATIONS

Accounting Procedures areunaffected whether Business Activityis for Profit or for Non-Profit Purpose

The only change is in the names ofBalance Sheet and Profit & Loss A/C.

The B/S is changed to Statement ofClosing Funds.

The P&L A/C is changed to Income &Expenditure A/C


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PRACTICAL EXAMPLE OFACCOUNTING SYSTEM


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TOOLS FOR FINANCIAL ANALYSIS

Variance Analysis

Ratio Analysis

Investment Analysis

Break Even Analysis


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VARIANCE ANALYSIS

Comparison with budget for the

period

Comparison with correspondingperiod actual figures

Comparison with industry standards

Comparison with competitors


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TYPES OF RATIOS

Profitability Ratios

Liquidity Ratios

Leverage RatiosMarketability Ratios


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WHAT TO COMPARE RATIOSWITH?

Historical Ratios

Industry standards

Co own standardsCompetitors standards


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PAY BACK PERIOD (PBP)

TECHNIQUES FOR INVESTMENT ANALYSIS

NET PRESENT VALUE (NPV)

INTERNAL RATE OF RETURN

OTHER TECHNIQUES


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PAY BACK PERIOD

ADVANTAGES

Simple to calculate

Easy to understand

Basic screening tool

DISADVANTAGES

No effect for C/F after PBP (Ignores total C/F)

No effect for Present Values

Not a relevant measure (What PBP is Approp)

APPLICABILITY

Appropriate in Capital Rationing Situations

CALCULATION


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NET PRESENT VALUE

ADVANTAGES

Effect for C/F after PBP

Effect for Present Values

Absolute figure, so easy to understand

DISADVANTAGES

Deciding discount factor is subjective

Not a relevant measure (What NPV is Approp) APPLICABILITY

Appropriate in mutually exclusive projects

CALCULATION


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INTERNAL RATE OF RETURN

ADVANTAGES

Effect for C/F after PBP

Effect for Present Values

Relevant measure (in %), so easy to decide

DISADVANTAGES

Not appropriate when cash O/F in>1 period

Deciding the appropriate IRR is subjective

APPLICABILITY

Appropriate in efficient fund utilization situations

CALCULATION


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BUDGET,What?

Budget refers to an action plan of an

Org. for a specific period, usually 1 year

Major elements for which action plan is

prepared include cash, production,sales/revenues, expenses, manpower

& business development strategies etc.

Definition


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WHY BUDGET?

Planning

FINANCIAL ASPECT

Coordination

Monitoring & Control


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TYPES OF BUDGET

AOP

MASTER

BUDGET

CASH

BUDGET

SALES

BUDGET

PRODUCTION

BUDGET

OPEX

BUDGETCAPEX

BUDGET

DIRECT/VARIABLE

EXP BUDGET

INDIRECT/ FIXED

EXP BUDGET

EXPENSE

BUDGET


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BASIS FOR BUDGETING


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Zero Based Budgeting

No consideration of prior year costs

Every exp. considered new demand

Each dirham needs to be justifiedNormally used in capital rationing

situations, cost conscious & newly

established orgs.


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Incremental/Historical Based Budget

Budget on average of last few years

actual expenditure trend

Above figures are adjusted for unusualjobs / expenses

Only major / unusual jobs need justificatio

Normally used in established Orgs with

no scarcity of resources


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FIXED / FLEXIBLE BUDGETING

Under fixed budgeting, budget

once approved is not revised

Under flexible budgeting, estimatesare flexed for any change in

parameters used at budgeting point

Comparison is more meaningfuland useful in flexible budgeting


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CONCEPT OF LIMITING FACTORS

Factors that restrict performance of an org.

Variable exp budget based on these factors

Every organization has limiting factors

Usually it is sales & production capacity

In ADSB, the limiting factor is sales plus

production capacity


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THANK YOU

Fin for Non Fin Exec-session 1

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