1 Introduction To Financial Statements
- 2. 2FINANCIAL ACCOUNTING: IINTRODUCTIONTO FINANCIAL STATEMENTS www.biZkul.com
- 3. 3FINANCIAL STATEMENTSThe State of affairs of the organization:BALANCE SHEETWorking results for a given period:PROFIT AND LOSS ACCOUNTCash receipts & payments during a period:CASH FLOW STATEMENT www.biZkul.com
- 4. 4ACCOUNTINGAn information system - communicating the financial position of a company, sometimes known as the language of businessAccounting 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 www.biZkul.com
- 5. 5EXERCISERam Kumar is a professionalIn his first three years of service, he earned Rs. 2 lakhs, 2.2 lakhs and 2.5 lakhs respectivelyHis expenses in these three years were Rs. 1.2 lakhs, 1.6 lakhs and 1.8 lakhs, respectively- What do you understand from this? - How will you interpret this information? www.biZkul.com
- 6. 6EXERCISELET US LOOK AT THESE EXPENSES IN SOME MORE DETAIL:In the first year (Y 1) Ram stayed in a lodgeIn 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 now? www.biZkul.com
- 7. 7EXERCISEIn Y3 he invested in a plot of land costing Rs. 2 lakhs. This was funded by borrowing Rs.1.6 lakhs from a bank- How will you interpret this information? - What do you think of the financial position of Ram at the end of Y 3? www.biZkul.com
- 8. 8BUSINESS ACTIVITYMoney is invested in a commercial enterprise with a view to earning profits and being sustainableMoney circulates in a business and is used for a variety of purposesCapital expenditure, other expenditure, returned to lenders, distributed to shareholders, invested etcProfits may be earned immediately (ITES/Consulting/Service) or some time into the future (Manufacturing/Biotech) www.biZkul.com
- 9. 9MEASURES OF SUCCESS IN BUSINESSHow does one measure whether a business is successful or not One needs to have a system of measurement of the financials of a businessThese need to be comparable, over time and across companies - What do you think could be some measuresof success in a business? www.biZkul.com
- 10. 10Some measures Revenue compared to others companies, in country, in same industryProfits, gross and net after taxesNumber of employeesRevenue per employeeGrowth in same company from one period to the nextMEASURES OF PERFORMANCE www.biZkul.com
- 11. 11ANNUAL REPORTSBusiness entities bring out annual reports which contain financial and non financial informationReports are made available to shareholders, government and other interested personsThere are guidelines to be followed and statutory compliances to be met while preparing these reports www.biZkul.com
- 12. 12ANNUAL REPORTSUsersInternalOwners and managers ExternalInvestors, lenders, suppliers and creditors, customers, government and its agencies, public, analysts, advisors www.biZkul.com
- 13. 13KEY CONTENT OF ANNUAL REPORTSFinancial statements – balance sheet, profit and loss account, cash flow statement, consolidated financial statementsLetter to shareholderDirector’s reportManagement discussion and analysisAuditors’ report www.biZkul.com
- 14. 14OTHER CONTENT OF ANNUAL REPORTSSome companies provide additional information, this includesValue reportingBrand valuationHuman resource accounting www.biZkul.com
- 15. 15ANNUAL REPORTS You have an annual report with you; what information would you seek as:A short term investorA long term investorAn employee A customerA vendor www.biZkul.com
- 16. 16ANNUAL REPORTSDo you think that one set of financial statements and other information in the Annual Report can meet the requirements of all users/readers? www.biZkul.com
- 17. 17FINANCIAL STATEMENTSUsed for Measurement, forecasting, decision making, evaluation, control, stewardship, government and statutory regulationCharacteristicsUnderstandableReliable Relevant Comparable www.biZkul.com
- 18. 18FINANCIAL ACCOUNTING: IBALANCE SHEET www.biZkul.com
- 19. 19BALANCE SHEETSources of fundsShareholders fundsLoan funds Application of fundsFixed assetsInvestmentsCurrent assets less current liabilities and provisionsMiscellaneous expenses www.biZkul.com
- 20. 20BALANCE SHEETSources of fundsShare capital (equity, preference)Reserves and surplus (specific reserves, surplus profit not appropriated to any specific reserve)Secured loans (from financial institutions, commercial banks) www.biZkul.com
- 21. 21BALANCE SHEETSources 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.) www.biZkul.com
- 22. 22BALANCE SHEETApplication of fundsFixed assets (Long term assets not for resale, land, buildings, machinery, vehicles, computers, office equipment, furniture)Investments (long term or short term) www.biZkul.com
- 23. 23BALANCE SHEETApplication 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, heavy expenditure) www.biZkul.com
- 24. 24FINANCIAL ACCOUNTING: IPROFIT AND LOSS ACCOUNT www.biZkul.com
- 25. 25PROFIT AND LOSS ACCOUNTIncomeSales (gross sales)Other income (interest, dividend, rental income, miscellaneous sales) www.biZkul.com
- 26. 26PROFIT AND LOSS ACCOUNTExpenditureManufacturing (Raw material costs, direct factory expenses)Sales and general administration (SG&A)Other miscellaneousDepreciation (non-cash expense, amortisation of fixed asset cost over a period)Prior year adjustments, appropriation www.biZkul.com
- 27. 27KEY EQUATIONSShareholders Stake = Assets – LiabilitiesProfit = Sales – Costs( Costs of material used = Opening stock + purchases – closing stock) www.biZkul.com
- 28. 28QUESTIONYou are a finance professional in a companyI am also a finance professional in the same companyWe both independently prepare the financial statements in our companyWill you and I arrive at the same numbers in terms ofSales?Profits? Why? Why not? www.biZkul.com
- 29. 29EXERCISEC & Co. purchases the following:LOT A: Jan 10th, 200 units at Re 1 eachLOT B: Jan 15th, 100 units at Re 1.1 eachLOT C: Jan 25th, 150 units at Re 1.2 each400 units were consumed in January What is the cost of the material consumed? www.biZkul.com
- 30. 30EXERCISEMethods of calculating cost of material consumed:LIFO: Last in first outFIFO: First in first outWeighted averageThese are accounting methods for calculating costs www.biZkul.com
- 31. 31EXERCISEC & Co. purchases the following:LOT A: Jan 10th, 200 units at Re 1 eachLOT B: Jan 15th, 100 units at Re 1.1 eachLOT C: Jan 25th, 150 units at Re 1.2 eachLOT D: Feb 10th, 300 units at Re 1.2 each 400 units were consumed in January200 units were consumed in FebruaryWhat is the cost of the material consumed in the months of Jan and Feb under the FIFO and LIFO methods? www.biZkul.com
- 32. 32ASSIGNMENTJan sales – Rs. 1000Feb sales – Rs. 1000Other costs in Jan – Rs. 500Other costs in Feb – Rs. 500For Jan and Feb, under the FIFO and LIFO methods: - What is profit - What is the inventory balance, What do you infer from this? www.biZkul.com
- 33. 33GAAP andACCOUNTING STANDARDS www.biZkul.com
- 34. 34GAAPGenerally Accepted Accounting PrinciplesRefer to rules, conventions, principles, proceduresTo be followed by enterprises in preparation of financial statements www.biZkul.com
- 35. 35ACCOUNTING STANDARDSSet of broad guidelines regarding accounting policies adopted by organisations in preparation of financial statementsSelect set of accounting policiesConfirm to applicable laws, custom, business environment (Refer www.icai.org - Web site of Institute of Chartered Accountants of India for detailed Accounting Standards) www.biZkul.com
- 36. 36Framework of AccountingFundamental accounting assumptionsGoing concernConsistencyAccrual www.biZkul.com
- 37. 37Key Accounting ConceptsEntityMoney measurement Cost conceptRealisation PeriodicityMatchingDual aspectConservatism www.biZkul.com
- 38. 38CASELETRamesh 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. www.biZkul.com
- 39. 39CASELETPrema is not comfortable with Ramesh’s suggestion as she feels that this is unethical and that this may backfireProfits under FIFO: in the past three years: 10, 13, 15Current year : 12Expected in next year : 16What change in policy is Ramesh suggesting? Do you agree with Prema or not? Why or why not? www.biZkul.com
- 40. 40ACCOUNTINGRules are not absolutely rigid and provide some flexibility within a framework, keeping in mind Economic positionSocial needs Regulatory frameworksTechnical developments GAAP in India is influenced by ICAI, SEBI, RBI, DCA etc. www.biZkul.com
- 41. 41FORMS OF BUSINESS ORGANISATIONSSole Proprietorship Partnership Limited Co PrivatePublicStatutory BodiesMutual FundsTrusts www.biZkul.com
- 42. 42ACCOUNTING BASICSTransaction occursWith funds in flowWithout funds flowTransactions are recorded in accounts, eg.Cash/bankDebtorsAdvance accountsCapitalAccrualsExpenses www.biZkul.com
- 43. 43ACCOUNTING PROCESSAccounts periodically summarisedRectification entries may be passedAdjustment entries may be passed (eg accruals, advances settled)Trial Balance is preparedTrial Balance has to tally Concept of double entry book keepingFinancial statements are prepared www.biZkul.com
- 44. 44ACCOUNTING PROCESSDataAccountEntryPassedTrial BalanceFinal TrialBalanceRectificationEntryPassedFinancialStatementsFinalFinancialStatements