Professional Documents
Culture Documents
Statements
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FINANCIAL
ACCOUNTING: I
INTRODUCTION TO
FINANCIAL STATEMENTS
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FINANCIAL
STATEMENTS
¯ The State of affairs of the organization:
BALANCE SHEET
¯ Working results for a given period:
PROFIT AND LOSS ACCOUNT
¯ Cash receipts & payments during a
period:
CASH FLOW STATEMENT
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ACCOUNTING
¯ An information system -
communicating the financial
position of a company, sometimes
known as the language of business
¯ Accounting is expected to give the
true and fair view of
– The state of affairs of the
organization and
– Its working results for a given period
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EXERCISE
¯ Ram Kumar is a professional
¯ In his first three years of service, he
earned Rs. 2 lakhs, 2.2 lakhs and
2.5 lakhs respectively
¯ His expenses in these three years
were Rs. 1.2 lakhs, 1.6 lakhs and
1.8 lakhs, respectively
- What do you understand from
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EXERCISE
LET US LOOK AT THESE EXPENSES IN
SOME MORE DETAIL:
¯ In the first year (Y 1) Ram stayed in a lodge
¯ In Y 2 he rented an apartment, paying a
deposit of Rs.15,000. His expenses for the
year included this amount of deposit and
payment towards furniture of Rs. 15,000.
The furniture had an expected life of 5
years.
- How will you interpret this information
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EXERCISE
¯ In Y3 he invested in a plot of land
costing Rs. 2 lakhs. This was funded
by borrowing Rs.1.6 lakhs from a
bank
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ANNUAL REPORTS
You have an annual report with
you;
what information would you seek
as:
¯ A short term investor
¯ A long term investor
¯ An employee
¯ A customer
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ANNUAL REPORTS
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FINANCIAL
STATEMENTS
¯Used for
– Measurement, forecasting, decision
making, evaluation, control,
stewardship, government and
statutory regulation
¯ Characteristics
– Understandable
– Reliable
– Relevant
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FINANCIAL
ACCOUNTING: I
BALANCE SHEET
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BALANCE SHEET
¯ Sources of funds
– Shareholders funds
– Loan funds
¯ Application of funds
– Fixed assets
– Investments
– Current assets less current liabilities
and provisions
– Miscellaneous expenses
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BALANCE SHEET
¯ Sources of funds
– Share capital (equity,
preference)
– Reserves and surplus (specific
reserves, surplus profit not
appropriated to any specific
reserve)
– Secured loans (from financial
institutions, commercial
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banks) 20
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BALANCE SHEET
¯ Sources of funds (contd.)
– Unsecured loans (fixed deposits,
promoters, intercorporate loans)
– Current liabilities and provisions
(dues to suppliers, payments
received in advance, expenses
accrued for rent, salary, pension,
etc.)
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BALANCE SHEET
¯ Application of funds
– Fixed assets (Long term assets
not for resale, land, buildings,
machinery, vehicles, computers,
office equipment, furniture)
– Investments (long term or short
term)
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BALANCE SHEET
¯ Application of funds (contd.)
– Current assets, loans and advances
(Bank and cash balance, fixed deposits,
debtors net of bad debts, inventories
raw material, work-in-progress, finished
goods, pre-paid expenses, advance to
employees, advance for service/goods
to be received, travel advances,)
– Miscellaneous expenses (preliminary
expenses, heavywww.biZkul.com
expenditure) 23
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FINANCIAL
ACCOUNTING: I
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PROFIT AND LOSS
ACCOUNT
¯Expenditure
– Manufacturing (Raw material costs, direct
factory expenses)
– Sales and general administration (SG&A)
– Other miscellaneous
– Depreciation (non-cash expense, amortisation
of fixed asset cost over a period)
¯ Prior year adjustments, appropriation
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KEY EQUATIONS
¯ Shareholders Stake =
Assets – Liabilities
¯ Profit =
Sales – Costs
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EXERCISE
¯ C & Co. purchases the following:
– LOT A: Jan 10th, 200 units at Re 1 each
– LOT B: Jan 15th, 100 units at Re 1.1 each
– LOT C: Jan 25th, 150 units at Re 1.2 each
– LOT D: Feb 10th, 300 units at Re 1.2 each
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GAAP
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Framework of
Accounting
Fundamental accounting assumptions
¯ Going concern
¯ Consistency
¯ Accrual
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Key Accounting
Concepts
¯Entity
¯ Money measurement
¯ Cost concept
¯ Realisation
¯ Periodicity
¯ Matching
¯ Dual aspect
¯ Conservatism
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CASELET
¯ Ramesh Vyas, the CFO of Case Co. Ltd
tells his finance manager, Prema John that
the profits this year have been unusually
bad and that the will pick up in the next
year. Previous years profits have been
reasonable. Ramesh wants to change the
accounting policy and show reduced profits
in this year (Big bath method).
¯ FIFO method for inventory valuation is
followed; prices of inventory have been
steadily increasing in the past few years.
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CASELET
¯ Prema is not comfortable with Ramesh’s
suggestion as she feels that this is
unethical and that this may backfire
¯ Profits under FIFO:
– in the past three years: 10, 13, 15
– Current year : 12
– Expected in next year : 16
What change in policy is Ramesh
suggesting? Do you agree with Prema or
not? Why or why not?
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ACCOUNTING
¯ Rules are not absolutely rigid and
provide some flexibility within a
framework, keeping in mind
– Economic position
– Social needs
– Regulatory frameworks
– Technical developments
¯ GAAP in India is influenced by ICAI,
SEBI, RBI, DCA etc.
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FORMS OF BUSINESS
ORGANISATIONS
¯ Sole Proprietorship
¯ Partnership
¯ Limited Co
– Private
– Public
¯ Statutory Bodies
¯ Mutual Funds
¯ Trusts
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ACCOUNTING BASICS
¯ Transaction occurs
– With funds in flow
– Without funds flow
¯ Transactions are recorded in accounts,
eg.
– Cash/bank
– Debtors
– Advance accounts
– Capital
– Accruals
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ACCOUNTING PROCESS
¯ Accounts periodically summarised
¯ Rectification entries may be passed
¯ Adjustment entries may be passed (eg
accruals, advances settled)
¯ Trial Balance is prepared
¯ Trial Balance has to tally
Concept of double entry book keeping
¯ Financial statements are prepared
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ACCOUNTING PROCESS
Entry
Data Passe Account
d
Final Financial
Financial Statement
Statement s
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