Concepts and Assumptions.docx

Financial Accounting for Managers - CIA 1By,Group 8 - 1st year MBA - Section ISubmitted to,Prof. Latha Ramesh

Group Members and their contributions:

1. Reeba - 2. Naveen Chowdary - 3. Toshi Agarwal - 4. Saurab - 5. Manasa- 6. Nitish Agarwal - Analyse the concepts and assumptions adopted by ACC Ltd., and Sun Pharmaceuticals Industries Ltd., for 2012 and 2013

1. Introduction

In the following report we will be discussing about the financial statements and inference of the following two companies - ACC LTD and Sun Pharmaceuticals Industries Ltd.

Sun Pharmaceuticals Industries LTD It was established by MrDilipShangvi in 1983 in Vapi (Southern Gujarat). It is a pharmaceutical company headquartered in Mumbai, that manufactures and sells pharmaceutical formulations and active pharmaceutical ingredients(APIs) (like steroids,anticancers)primarily in India and US. The company offers formulations in various therapeutic areas such as cardiology ,psychiatry , neurology,gastroenterology and diabtology.

Sun Pharma's Board of Directors include: Israel Makov: Chairman Dilip Shanghvi: Managing Director Sudhir V. Valia: Executive Director Sailesh T. Desai: Executive Director Hasmukh S. Shah: Non Executive Independent Director Keki M. Mistry: Non Executive Independenst Director Ashwin Dani: Non Executive Independent Director S. Mohanchand Dadha: Non Executive Independent Director Rekha Sethi: Non Executive Independent Director

ACC Limited(FormerlyThe Associated Cement Companies Limited) is one of the largest producers of cement in India.It's registered office is called Cement House. It is located on Maharishi Karve Road,Mumbai.The stock price of the company, contributes in calculatingBSE Sensex.The management control of company was taken over by Swiss cement majorHolcimin 2004. On 1 September 2006 the name of The Associated Cement Companies Limited was changed to ACC Limited. The company has the honour of being the only cement company to get "Superbrand" status in India.

History of ACC Ltd.:In 1936 ten cement companies belonging toTatas,Khataus,Killick NixonandF E Dinshawgroups merged to form a single entity, The Associated Cement Companies.Sir Nowroji B Saklatvalawas the first chairman of ACC. The first board of directors had some prominent industrialists J R D Tata,Ambalal Sarabhai,Walchand Hirachand,Dharamsey Khatau,Sir Akbar Hydari,Nawab Salar Jung BahadurandSir Homy Mody.

Current Board of Directors of ACC Ltd.:Mr. N. S. Sekhsaria: Chairman Mr. Bernard Terver: Deputy ChairmanMr. Kuldip K Kaura: Chief Executive Officer & Managing DirectorMr. Bernard Fontana: Director Mr. M L Narula: Director Mr. Shailesh Haribhakti: Director Mr. Aidan Lynam: Director Mr. Sushil Kumar Roongta: DirectorMr. Ashwin Dani: Director Mr. Farrokh K. Kavarana: Director Mr. Vijay Kumar Sharma: DirectorMr. Arunkumar Ramanlal Gandhi: DirectorMrs. Falguni Nayar: Director

Before we get into the detailed analysis of the financial reports of the two companies, let us discuss the importance of financial statements and the limitations of the statements, if any.

2. Analysis of Financial Statements of ACC Limited and Sun Pharmaceuticals Limited:

1. Auditors and the main crux of the auditing reports:

a) ACC Limited:

AUDITORS :-S.R.Batliboi & Co.Chartered accountantsFirm reg.no.301003ERavi Bansal(partner)

Audit Report - Analysis:

Annual report was audited as at 31 December, 2012 and 2013, respectively, which includes the balance sheet, the statement of profit and loss and the cash flow statement for the financial year ended on 31 December, 2012 and 31st December, 2013 respectively. The responsibility of auditors is to express their opinion on financial statement. Includes assessing of accounting principles used and significant estimates made by the management. Audit is done according to the accounting standards, generally accepted in India and in agreement with the book of accounts. Before presenting the financial statement for the financial year on 31 December, 2012 and 2013, they were approved by the Board of Directors. Following the proper book of accounts as required by law, accounting principles, generally accepted in India and Companies act, 1956 were taken into consideration for the financial statement. The company has neither granted nor taken any loans, secured (or) unsecured from companies, firms (or) other parties. The company is not dealing in (or) trading in shares, securities, debentures and other investments, not given guarantee for loans taken by others from banks (or) financing companies. No funds have been raised on short-term basis and used for long-term investment. Physical verification of inventory at reasonable intervals during the FY by the management. Company maintained full records of fixed assets and fixed assets disposed off, were not included in assets, which didnt affect the going concern of company. Maintained the account of arrangements and contracts made and also the dues and disputes pending at court were mentioned clearly. No material fraud was done on company and no fraud was done by the company during financial year.

b) Sun Pharmaceuticals Industries Limited:

Auditors:Deloitte Haskins & sellsChartered accountantsFirm reg.no.117366WRajesh.K.Hiranandani(partner)

Audit Report - Analysis: Annual report was audited as at 31 March, 2012 and 2013 respectively, which includes the balance sheet, the statement of profit and loss and the cash flow statement for the financial year ended on 31 March, 2012 and 31st March 2013 respectively. The responsibility of auditors, to express their opinion on financial statement. Includes assessing of accounting principles used and significant estimates made by the management. Audit is done according to the accounting standards, generally accepted in India and in agreement with the book of accounts. Before presenting the financial statement for the financial year on 31 March, 2012 and 2013, they were approved by the Board of Directors. Following the proper book of accounts as required by law, accounting principles, generally accepted in India and Companies act, 1956 were taken into consideration for the financial statement. The company has neither granted nor taken any loans, secured (or) unsecured from companies, firms (or) other parties. The company is not dealing in (or) trading in shares, securities, debentures and other investments, not given guarantee for loans taken by others from banks (or) financing companies. No funds have been raised on short-term basis and used for long-term investment. Physical verification of inventory at reasonable intervals during the FY by the management. Company maintained full records of fixed assets and fixed assets disposed off, were not included in assets, which didnt affect the going concern of company. Maintained the account of arrangements and contracts made and also the dues and disputes pending at court were mentioned clearly. No material fraud was done on company and no fraud was done by the company during financial year.2. The financial statements were presented by:3. Growth Rate of ACC Ltd., and Sun Pharma Ltd., in terms of their revenue and profit:4. Break up of equity and outside liabilities of ACC Ltd., and Sun Pharma Ltd.,:5. Cash position and the breakup of the activities affecting the cash flow:

Cash flow statement is released by the company to understand the cash flow in the companys activities. Cash flow statements are made for the end of year.

Three major cash flows are recorded in the cash flow statements CASH FLOW FROM OPERATING ACTIVITIES CASH FLOW FROM INVESTING ACTIVITIES CASH FLOW FROM FINANCING ACTIVITIES All the transactions related to operating activities are entered in this category. Net profit from profit and loss statement is based on accrual concept i.e. we record revenues and expenses when earned or incurred, although we may not have received or paid them at all. Depreciation, amortization, and provision for doubtful debts do not reflect cash outflows for both current and future periods. Under this category the following activities are recorded. Thus, the net profit, we recorded, will not indicate the net cash flow from operations. Therefore, net cash flow from operating activities is done by undoing accrual accounting adjustments cash system.

AACRUAL SYSTEM

CASH SYSTEM

ELIMINATE NON-CASH REVENUENON-CASH REVENUEREVENUE

NET CASH FLOW FROM OPERATING ACTIVITIES

NET PROFIT

EXPENSES

ELIMINATE NON-CASH EXPENSES

There are two methods to calculate net cash flow from operating activities:Direct method and indirect method DIRECT METHOD:Cash received from customersCash paid to suppliers and employeesCash generated from operationsIncome tax paid

INDIRECT METHOD:PROFIT BEFORE INCOME TAXAdjustments to reconcile net profit to net cash flow from operating activities:Depreciation and amortizationProvision for doubtful debtsForeign exchange gain/lossInterest/dividend incomeInterest expenseGain/loss on sale of fixed assets/investmentsOperating profit before working capital changesAdjustments for changes in:Trade receivables/bills receivableInventoriesPrepaid expensesTrade payables or bills payableCash generated from operationsIncome tax paidNET CASH FLOW FROM OPERATING ACTIVITIES

The following cash flow from operating activities is reported in indirect method.

COMPARISION OF CASH FLOW FROM OPERATING ACTIVITIES OF SPIL

SPIL2013(in million rupees)2012(in million rupees)2011(in million rupees)

PROFIT BEFORE TAX43,148.933,553.620,359.5

ADJUSTMENTS FOR:

Depreciation and amortisation expense3,361.72,911.62,048.5

(Profit)/Loss on sale of fixed assets (net)(2.4)95.812.0

Finance costs431.6282.0738.8

Interest income(2,368.9)(1,977.6)(2,232.4)

Dividend income(24.3)(0.2)(0.0)

Net gain on sale of investments(1,118.1)(2,415.2)(427.5)

Provision for doubtful trade receivables or advances116.839.52.9

Net (gain)/loss on cancellation of forward exchange contracts190.7(50.1)(75.6)

Net foreign exchange loss/(gain)1,075.62,225.4(1,778.5)

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES44,811.634,664.818,647.7

ADJUSTMENTS FOR (INCREASE)/DECREASE IN OPERATING ASSETS:

Inventories (3,902.2)(5,975.0)(813.5)

Trade receivables(6,479.7)(9,308.4)3,697.3

Loans and advances(673.8)(1,043.4)(345.9)

Other assets(133.5)92.8(485.8)

ADJUSTMENTS FOR INCREASE/(DECREASE) IN OPERATING LIABILITIES:

Trade payables2,142.42,991.1688.2

Other liabilities(1,770.1)1,391.1557.6

Provisions10,101.61,799.31,578.6

CASH GENERATED FROM OPERATIONS44,363.324,612.323,524.2

Net income tax paid(10,734.8)(2,267.7)(693.2)

NET CASH FLOW FROM OPERATING ACTIVITIES (A)33,628.522,344.622,831.0

COMPARISION OF CASH FLOW FROM OPERATING ACTIVITIES OF ACCACC2013(RS CRORE)2012(RS CRORE)2011(RS CRORE)

PROFIT BEFORE TAX1,213.641,440.991,505.29

ADJUSTMENTS FOR:

Depreciation and amortisation expense583.79568.90510.04

Exceptional item-335.38-

Impairment loss11.93

Loss/(profit) on sale/write off of fixed assets (net)3.93(6.11)11.06

Provision for diminution in the value of investment17.86--

Gain on sale of current investments(61.27)(86.11)(36.62)

Dividend income-(30.18)

Interest income(157.86)(171.05)(124.21)

Finance costs51.67114.6596.91

Provision for doubtful debts and advances (net)7.53(3.55)(28.64)

Capital spares consumed23.2236.3614.76

Miscellaneous expenditure written off3.443.473.67

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES1,697.882,232.931,922.08

CHANGES IN WORKING CAPITAL:

ADJUSTMENTS FOR (INCREASE)/DECREASE IN OPERATING ASSETS:

Trade receivables(102.77)(38.82)(45.68)

Inventories12.09(21.63)(186.90)

Short term Loans and advances(18.24)(44.31)28.33

Long term loans and advances(59.57)(41.91)(24.41)

Other current assets(0.29)(0.26)0.35

Other non-current assets(134.45)(109.28)(2.30)

ADJUSTMENTS FOR INCREASE/(DECREASE) IN OPERATING LIABILITIES:

Trade payables(17.89)(152.76)132.96

Other current liabilities79.26(84.19)112.09

Other long-term liabilities25.655.5633.86

Short-term provisions20.296.292.19

Long-term provisions(3.26)31.6619.82

CASH GENERATED FROM OPERATIONS1,498.701,783.281,992.39

income tax paid ( NET OF REFUNDS)(430.10)(206.42)(416.41)

NET CASH FLOW FROM OPERATING ACTIVITIES (A)1,068.601,576.861,575.98

COMPARISION OF CASH FLOW FROM INVESTING ACTIVITIES OF SPIL Investing activities of the current period are computed by analysing the changes in the balance sheet amounts for fixed assets and investments and considering the cash effects of the related transactions of that period. Investing activities involve purchases and sale of fixed assets and financial assets. Interest and dividends received are also recorded under investing activities.SPIL2013(RS MILLION)2012(RS MILLION)2011(RS MILLION)

Capital expenditure on fixed assets, including capital advances(8,454.5)(7,129.1)(4,218.5)

Proceeds from sale of fixed assets136.4107.9286.1

Short-term loans / inter corporate deposits

Given/placed(10,194.1)(7,798.2)(9,036.7)

Received back/matured10,413.86,672.47,068.5

Purchase of investments(156,719.0)(131,751.0)(123,186.1)

Proceeds from sale of investments156,249.0134,501.8126,427.0

Bank balances not considered as cash and cash equivalents

Fixed deposits/margin money placed(30,119.3)(22,637.2)(18,884.3)

Fixed deposits/margin money matured26,674.320,442.55,641.1

Net (loss)/gain on cancellation of forward exchange contracts(190.7)50.175.6

Acquisition of subsidiary(16,414.6)(2,740.4)(4,689.3)

Interest received2,572.11,653.92,039.5

Dividend received24.30.20.0

NET CASH FLOW USED IN INVESTING ACTIVITIES(B)(26,350.5)(8,627.1)(18,477.1)

COMPARISION OF CASH FLOW FROM INVESTING ACTIVITIES OF ACCACC2013(RS CRORE)2012(RS CRORE)2011(RS CRORE)

PURCHASE OF FIXED ASSETS(including capital work-in progress and capital advances)(962.72)(572.17)(484.05)

Proceeds from sale of fixed assets7.3016.4036.73

Gain on sale of current investments (net)61.2786.1136.62

Purchase of non-current investments-(0.34)(6.01)

Purchase of investments in subsidiary company-(5.00)-

Investment in bank deposits (having original maturity for more than 3 months)(119.30)(0.13)(0.10)

Dividend received from associates6.593.092.24

Interest received166.53164.13125.96

NET CASH USED IN INVESTING ACTIVITIES(840.33)(307.91)(258.42)

Thus, the net cash used in investing activities is calculated by subtracting or adding the data as shown above.

COMPARISION OF CASH FLOW FROM FINANCING ACTIVITIES OF SPIL Cash flow from financing activities involve raising and repayment of capital and loans. Cash inflows and outflows from financing activities are calculated by analysing changes in balance sheet amounts for share holders equity and loan funds. The cash effects of these transactions of that period are calculated. SPIL201320122011

Proceeds from borrowings141.8570.822.0

Repayment of borrowings(1,109.3)(521.6)(2,102.6)

Net increase/(decrease) in working capital borrowings219.0(1,097.8)(1,705.9)

Proceeds from issue of shares to minority by subsidiary357.4--

Payment to minority(767.0)(14.3)(69.2)

Finance costs(439.3)(285.5)(865.9)

Dividends paid(4,401.2)(3,523.7)(2,847.3)

Tax on dividend(714.0)(571.8)(473.0)

NET CASH FLOW USED IN FINANCIAL ACTIVITIES (C) (6,712.6)(5,443.9)(8,041.9)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (A+B+C)565.48,273.6(3,688.0)

Cash and cash equivalents taken over on acquisition of subsidiary1,607.3-5,473.9

Cash or cash equivalents at the beginning of the year17,526.78,104.96,338.7

Effect of exchange differences on restatement of foreign currency cash and cash equivalents991.71,148.2(19.7)

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR20,691.117,526.78,104.9

The net increase or decrease in cash and cash equivalents is calculated by adding the cash flow from operating, investing and financial activities. Cash and cash equivalents at the end of the year is calculated by Cash and cash equivalents taken over on acquisition of subsidiary +Cash or cash equivalents at the beginning of the year +Effect of exchange differences on restatement of foreign currency cash and cash equivalents to net increase or decrease in cash and cash equivalents in the above statement.

COMPARISION OF CASH FLOW FROM FINANCING ACTIVITIES OF ACC

ACC2013(RS CRORE)2012(RS CRORE)2011(RS CRORE)

Finance costs(76.93)(110.19)(72.76)

Repayment of short-term borrowings(78.03)(1.62)(9.93)

Repayment of long-term borrowings(50.00)(346.05)(3.30)

Dividend paid(560.20)(522.88)(585.05)

Dividend distribution tax paid(95.72)(85.28)(97.42)

NET CASH USED IN FINANCING ACTIVITIES(860.88)(1,066.02)(768.46)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS(632.61)202.93549.10

Cash and cash equivalents at the beginning of the year 3,155.502,952.572,303.47

Cash and cash equivalents at the end of the year2,522.893,155.502,852.57

Components of cash and cash equivalents:

Cash on hand0.120.140.16

Balance with banks:

On current accounts56.15111.6183.23

On deposit account289.66531.521,542.04

Earmarked for specific purpose38.0435.0032.19

Cash and cash equivalents383.97678.271,657.62

Add: Investment in mutual funds1,083.701,052.35609.10

Add: Investment in certificate of deposits955.221,324.88585.85

Add: Deposit with HDFC Limited100.00100.00-

CASH AND CASH EQUIVALENTS IN CASH FLOW STATEMENT2,522.893,155.502,852.57

Cash and cash equivalents at the end of the year is decreased in 2013 compared to that of 2012 and 2011.

3. Concepts and assumptions adopted by ACC Ltd., and Sun Pharmaceuticals Ltd., while preparing the financial statements:

1. Going Concern Assumption: means that the company will continue to exist and operate indefinitely, or at least for the next twelve months regardless of the change in ownership of the company. It is also known as the continuing concern concept or continuity assumption. Because of this assumption, all assets and liabilities are recorded in the Balance Sheet on the basis that the company will realize its assets, pay off its liabilities and procure funds for financing its activities over the normal course of business.

2. Accrual Concept: states that all incomes and expenses belonging to the period must be recognized and accounted for in that particular period, regardless of actual cash inflow or outflow. This concept proves that cash collection is not the same as income and cash payments are different from expenses. The accrual concept all provides an opportunity for firms to trade in credit or accept advances from clients for future sales.

3. Accounting Entity Concept: states that each business enterprise is separate and distinct from its owners, managers and employees of the business. The company has its own legal existence, set apart from its stakeholders. Due to this concept, all personal transactions of owners, managers, employees and other stakeholders in the business are kept separate from the company books of accounts. This why all personal expenses met by a proprietor with company cash/bank/other assets are accounted for as Drawings and deducted at the end of the financial year from profits earned. The Capital invested by the owners is recorded as a liability because the business enterprise is liable to pay back this amount to its owners.

4. Time Period or Periodicity Concept: states that, even though a business enterprise is expected to survive for ever, the existing stakeholders need to analyse the financial position of the firm at regular intervals in order to check the growth and development of their investments. This concept divides the indefinite life of a firm into small, manageable and consistent time periods so that financial statements can be drawn in order to study the current financial position, performance and cash flow scenario of the given period. This time period is called an Accounting Period and is usually a 12 months period. But, firms are now preparing monthly, quarterly and half yearly reports in order to study the short term and immediate effects of their decisions.

5. Monetary Unit Assumption: states that all records must be maintained in terms of money, generally in the currency of the country in which the business enterprise is located. The concept assumes that the purchasing power of the currency is fixed and stable from the accounting point of view. It asks the accounts to ignore the effect of inflation for accounting purpose. Therefore, this concept has two main characteristics - Quantifiability and Stability of currency. Each element of the financial report should have an accurate and quantifiable monetary value, if not, it should not be included in the financial reports.

The above stated concepts are the backbone of Financial Accounting and are religiously followed by both ACC Ltd., and Sun Pharmaceuticals Ltd., while preparing their financial statements. These concepts have helped in developing many other principles. Some of the principles followed by ACC Ltd., and Sun Pharmaceuticals India Ltd., are as follows:

1. Matching Principle: states that income and expenses have to be matched accurately for any given period. It means that the expenses recognized in a given period has to be matched with the related income and the income recognized in a given period has to be matched with a related expense. This principle assures that the debit and credit sides of each financial statement is balanced accurately. This concept also allows us to calculate the profit/loss earned during a given period by determining the exact income and expenditure.

2. Revenue Recognition Principle: this is a sublet of the Accrual concept, it states that revenue or income needs to recognized and recorded when it is earned, regardless of when the monetary value is received. In order words, income or revenue is recorded when the service is fully rendered to the client or when the sale occurs, even though the money for the same is not received immediately.

3. Expense Recognition Principle: this is a sublet of the Accrual concept, it states that all expenses must be recognized and recorded when they are incurred, regardless of when the monetary value is paid. In order words, an expense is recorded when the benefit has been utilised, regardless of when payment is made for the same.

4. Historical Cost Principle: states that all Assets and Liabilities must be accounted for at their original monetary value/acquisition cost. Assets are depreciated consistently over its useful life and liabilities are written off as and when they are cleared. If the assets and liabilities are recognised at their fair market value, which fluctuates periodically, then there will be no consistency between the periodical financial reports.

4. Similarities and Differences observed in the financial statements of ACC Limited and Sun Pharmaceuticals LimitedSimilarities:1. Both the companies follow the Generally Accepted Accounting Principles while preparing the financial statements.2. Both ACC and Sun Pharma are governed by the Companies Act of 1956.3. Both the companies follow the same concepts and assumptions of financial accounting (refer section 3)4. Both ACC and Sun Pharma are manufacturing enterprises, therefore, purchase of raw materials, inventories, work in progress form a significant part of their financial statements.

Differences:1.

5. Conclusions and Learning

6. References and Bibliography:http://www.accountingverse.com/http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles_(United_States)http://pakaccountants.com/http://learnfinancialaccounting.com/