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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
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