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Income statement, Balance Sheet, Assets, Liabilities, Provisions, Capital, reserve, Cash flow statement, Consolidated Financial Statement, Annual Reports, Understanding and analyzing annual reports.
Types of Organization
Trading organization
Manufacturing organization
Service organization
receipt current
Raj Ltd.
Case-2
Cash from current sales
Creditors for material and expenses Cash payment for materials and expenses
Accounting Analysis
Accounting Analysis
Audience
Internal Investors
Financial Accounting
Financial Accounting
Income
expenses
Assets
Building, plant, furniture, cash, bank, stock etc
Liabilities
Creditors, loan, outstanding expenses, income received in advance, capital
Input
Users
Processing
Output
Inputs
Business Transactions- purchase, sales, cash receipts and cash payments External events- fire, earth quake, change in tax laws.
Processing
Accounting principles Accounting standards Estimates Laws and regulations etc.
Outputs
Profit & Loss Account Balance Sheet Cash flow statement Analysis Tax returns etc.
Users
Share holders Security analysts Banks Rating agencies Managers Employees Suppliers Customers government Researchers etc
Income
It refers to all the revenue receipts during the accounting period. It includes sale proceeds, amount received from services, rent received, interest received , commission received and all other receipts which will can be considered as revenue
Various Incomes
Sales Income from services Rent received discount received commission received interest received bad debts recovered apprentice premium income from investment
Expenses
It includes all the revenue expenses which are incurred to run the organization. It includes all the day to day expenses. Like sales expenses, administrative expenses
Various expenses
Purchases Carriage Carriage inward Freight Freight inward Wages Factory expenses Stores consumed Royalty Motive Power Coal, coke Water Oil Octroi Dock charges Custom Duty
Contd.
salary rent, rate & taxes stationary postage and telegram audit fees legal charges telephone charges insurance premium entertainment expenses repairs depreciation interest trade expenses conveyance charity bank charges
Contd.
office expenses establishment exp stable expenses license fees brokerage commission office lighting advertisement export duty discount packing charges traveling exp bad debts provision for bad debts
Assets
Assets represent something that the organization possess, something that it owns, and which has been obtained by spending the money raised. In other words, assets tells us where the money was spent- the use of money.
Various assets
Cash in hand Cash at bank Bills receivable Sundry debtors Closing stock Finished goods Raw materials Work in progress Stationary Goods sent on consignment Long term investments Trade mark Patents Vehicle Furniture Investments Machinery and plant Tools Land and building Goodwill
Classification of Assets
Current Assets Fixed Assets Wasting Assets
Fictitious Assets
Contingent Assets
Current Assets
Cash, bank, goods Bills receivable, prepaid expenses, Raw materials, stock, work in progress etc.
Fixed Assets
Tangible fixed assets
Land, building, plant, furniture, motor vehicle and tools etc.
Patents, trade mark, copy rights, goodwill and research and development cost etc.
Wasting assets
Assets diminish in value when the assets are taken out of natural resources
Fictitious Assets
Contingent assets
An asset the existence, value and ownership of which depend upon the occurrence or non occurrence of a specified act.
The undecided suits for a property
Liabilities
Liabilities represent money that organization owes. This is money that it owes because it was borrowed by the organization. In other words, liabilities shows the sources of money, where the organization has received its funds.
Various liabilities
Bank overdraft Bills payable Sundry creditors Short term loans Bank loans Long-term loans Incomes received in advance Capital
Classification of Liabilities
Long-term liabilities-
Current liabilities
Contingent liablities
Which does not fall due for payment in relatively short period ( more than 12 months)
Long term loan taken from banks, financial institutions and debentures.
Current liability
Which falls due for payment in a relatively short period (less than 12 months)
Bills payable, Trade creditors, outstanding expenses, bank overdraft, income received in advance etc.
Contingent Liabilities
Arrears of dividend on cumulative preference shares, Bills of exchange discounted, suit for damages against the company.
Transaction
Any exchange of goods or services for money or moneys worth by the business with any other business or person is called transaction. It is an economic activity of the business that changes its financial position.
Contd.
The transactions where in the terms paid, received, settled, cleared, deposited, withdrawn etc is used are identified as cash transactions. Charges paid Rs200 Shilpi settled her account of Rs1,000 Rs2,000 deposited in the bank Mr. Anirban cleared his account or Rs500 by paying Rs450
Contd.
The transactions where Goods sold to Sravani both cash and personal for Cash Rs1,000 names are mentioned Goods purchased from are termed as cash Suman for cash Rs6,000 transactions
Credit transactions
The transactions where Goods sold to Sravani in personal names or Rs1,000 name of a firm is Good returned from mentioned are Sreemoti Rs5,000 identified as credit Goods returned to transactions Sivani Rs1,000 Goods purchased from Suman Rs6,000
Account
An account is summarized record of relevant transactions relating to same activity or particular head that has taken place during a given period. Separate individual accounts are opened for every head of expenses, revenue, asset, liability and capital
Accounts involved
Transactions
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Purchased goods for cash Purchased plant Purchased furniture Purchased good on credit Sold goods on credit to X Rent received Salary paid Commission received Cash deposited in to bank Started business with capital
Accounts involved
Cash, goods Plant ,cash Furniture, cash Goods, creditor Goods, X Cash, rent Salary, cash Commission, cash Bank ,cash Cash, capital
Accounting equation
Asset= Liabilities + Equity
Contd.
Decrease in asset
Decrease in liability
Amount paid to creditors
Furniture purchased
Contd.
Cash brought in to business Increase in capital
Increase in asset
Contd.
Goods purchased on credit Increase in Liability Increase in assets
Increase in capital
Decrease in liability
Increase in liability
Decrease in capital
Contd.
Increase in capital
Decrease in liability
Decrease in assets
Contd.
Increase in assets
Decrease in assets
Decrease in capital
Whether expenses paid or outstanding both the cases the capital will be reduced
Contd.
Contd.
Contd.
Balance Sheet
The Balance Sheet presents an enterprises assets, liabilities and equity at a point in time. It summarizes the resources, and the claim to those resources by owners and creditors of the enterprise on a certain date
Balance Sheet
Liabilities + equity Assets
Assets
Office equipments Stock Bank Cash Building Total of assets
Liabilities
Creditors Outstanding expenses Overdraft
Equity
Share capital Retained earnings Total equity Total of liabilities and equity
Profit Cycle
Profit Expenses Revenue/ Income
Loss Cycle
Income Expenses Loss
____________
____________
____________ ____________
employees, vendors, printing stationer etc. This group represents operating expenses.
Stake holders
the lenders also need to be rewarded.
Capital Expenditure
It is the amount spent to acquire the assets not for resale them, it is for generating the income of the business unit. The benefit of this is not for one year, it is for the longer period. For example purchase of land and building, purchase of plant, brokerage or commission paid for acquiring the long term loan etc. These expenses are recorded in Balance Sheet.
Contd.
Purchase of land, building, plant and machinery, furniture, vehicle and any other fixed asset.
Capital expenditure
Revenue expenditure
It includes purchasing assets required for resale at a profit or being made into saleable goods, maintaining fixed assets in good working conditions, meeting the day to day expenses of carrying business, cost of goods, raw materials and replacements, renewals, repairs, depreciation of fixed assets, rent rates, taxes, wages and salaries, carriage, insurance etc.
Contd.
Rent, rates, salary, telephone expenses
Revenue expenses
Contd.
Wages paid to work man for erecting of PM
Contd.
Heavy Insurance premium paid the benefit derived beyond the accounting period.
Revenue Profit
Capital receipt
Capital receipts
capital invested in the business, loans and the proceeds of sale of assets etc
Revenue receipt
Revenue receipts
cash from sales, discount received, commission, interest on investment, transfer fees received etc
Capital loss
Capital Loss
Loss while which occurs while selling fixed assets or raising share capital
Revenue loss
Revenue loss
Basics
PBIT PBT
PAT
Basics
DISTRUBUTABLE PROFIT
Basics
Basics
Order of Payment
Operating expenses
Interest
Tax
Share holders
Operation Activity
Operating activities
Payments to suppliers and employees Payment to govt. for taxes and duties
Cash inflow
Cash outflow
Investing Activity
Sale of fixed assets, sale of investments, collection of loans, interest and dividend received etc.
Investing activity
Payment for purchase of fixed assets, Payment for purchased of investment and for making loans.
Cash inflow
Cash outflow
Financing Activity
Financing activity
Cash inflow
Outflow of cash
II.
III. Cash flow from Financing Activities Net Increase (Decrease) in cash + Beginning Balance of Cash End Balance of Cash ____________ ------
Trial Balance
Trial Balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical accuracy of books of accounts.
Provisions
set aside ,before ascertaining the net profits,
reasonably necessary for the purpose of providing for any liability or loss, which is likely or certain to be incurred;
Reserve
capital receipts( profit on sale of fixed assets or issue of shares at a premium) upward revaluation of assets( bringing the assets to current value from historical cost amount of money that is set aside until that is required for other purpose
Reserves are the items of owners' equity which arise from retention of profits (an appropriation of profits, sum of money set aside from distributable profits
Reserve
Classification of reserve
Capital reserve Revenue reserve
Depreciation
Due to wear and tear
Causes of Depreciation
Lapse of time Wear and tear due to constant use Depletion
Contd.
Exhaustion of assets
Accident Obsolescence
Ratio Analysis
In general words, a ratio is an expression of relationship of one figure with another. It may be defined as the relationship, or proportion that one amount bears to another. It is found by dividing a figure with another. A ratio may be expressed in percentage in which the base, is taken as equal to 100 and the quotient is expressed as per hundred of the base
Various ratios
Capital structure or leverage ratio
Liquidity ratios
Components
Current Assets
Cash in hand, cash at bank, debtors, prepaid expenses, short term deposits, bills receivable, money at call and short notice, stock ,finished goods, work in progress stock of raw materials and sundry supplies
Current Liabilities
Bills payable, income tax payable, creditors. Outstanding expenses, bank overdraft, provision for taxation, interest due on fixed liabilities, reserve for unbilled expenses, installment payable on long-term loans.
Primarily short term creditors interested in liquidity or short term solvency of the firm. Since their claims are to be met in the short term.
It is the ability of the firm to meet short term obligations. This measures concerns ability to meet short term obligation
Liquid Ratio
This ratio establishes relationship between current assets and current liability
2:1
1:1 Note Quick assets are current assets- stock prepaid expenses and quick liabilities are current liability- bank overdraft.
.5:1
Contd.
Total assets turnover ratio
Contd.
Cost of goods sold / Average stock Cost of goods sold = opening stock + purchases+ direct expenses closing stock Average stock = opening stock + closing stock / 2 Note :1. If cost of goods sold cannot be calculated then sales will be taken as base 2. if opening and closing stock is not given in that case closing stock will be treated as average stock 3 Higher the ratio good for the organization. A low stock turnover ratio indicates that the goods do not sell quickly and efficiently, so the maximum inventory remains lying in the warehouse.
Debtors Turnover ratio or Receivable Turnover Ratio (DTR) This ratio is a qualitative analysis of a firms marketing and credit policy and debtors realizations. It is calculated to know the uncollected portion of credit sales in the form of debtors by establishing relationship between trade debtors and net credit sales of the business.
Contd.
DTR = Net credit sales / Average receivables Net credit sales = Total sales cash sales sales return Avg. receivables = opening receivable +closing receivable / 2 Receivable = Debtors + Bills receivable A decrease in this ratio each year is an indicator of efficiency of marketing and credit policy of the firm.
Contd.
Average collection period or average age of receivables= Trade receivables/ sales per day Or Trade receivables / net credit sales X 365 days Or 365/ DTR
Contd.
In this respect, the general rule is that average collection period should not exceed the stated credit period on trade terms plus 1/3rd of such period. If average collection period exceeds 4/3 of stated credit period, it will indicate either liberal credit policy or slackness of management in realizing debts. A higher average collection period also implies that chances of bad debts are larger.
Contd.
Average payable / net credit purchase X no. of month or weeks or days Or No. of month or week or days / CTR
Debt, long-term or short term, whether in the form of mortgage, bills or debentures
Preference share capital, equity share capital, capital reserves, retained earnings and any other reserves representing the accumulated profit
Proprietary Ratio
This is also known as equity ratio, net worth to total assets ratio. Proprietary ratio = Share holders fund / Total assets Higher the ratio better is the financial position of the firm.
Operating ratio
Cost of sales + operating expenses / net sales X 100 Operating expenses = office and administrative expenses + selling expenses + discount allowed + bad debts etc.
EPS
Indicator
EYR
Indicator
This ratio indicates the relationship between earning per share and market price per share
DPS
Indicator
Higher the ratio, the better is for equity share holders of the concern. This ratio shows the amount of dividend per share paid by the management of the company
POR
Indicator
This ratio helps us to calculate the percentage of dividend paid out of earned incomes and the percentage of earned profits retained in the business concern
DYR
Indicator
Dividend yield ratio helps investors to ascertain the effective return on the amount they invest or intend to invest in the equity shares of a company
DCR
indicator
EPS / DPS
This ratio indicates the relationship between dividend per share and earning per share. This ratio calculated by dividing earning per share by dividend per share
PER
Indicator
MPS /EPS
This ratio indicates relationship between market price per equity shares and earning per share. In other words, this ratio indicates the number of times the earning per share is covered by its market price.
Meaning
Analysis
It is used to mean the simplification of financial data by methodical classification of the data given in the financial statements
Interpretation
Contd.
If the cost of investment is more, the difference will be shown as goodwill on asset side in the balance sheet and if the cost of investment is less the difference will be shown on the liability side of consolidated balance sheet as capital reserve.
Minority interest
Minority interest includes nominal value of share held by minority share holders and proportionate reserves and profits. In the reserves and profits of the holding company, only. On the liability side of consolidated balance sheet minority interest is shown as a separate item.
Unrealized profit
Percentage profit on sales :- If percentage of profit on sales is known, the unrealized profit will be stock X % /100 For example, if stock of B Ltd. includes goods worth Rs10,000 purchased from A Ltd. charged profit of 20% on sales. Then unrealized profit will be 10,000 X20% = Rs2,000.
Contd.
Percentage of profit on cost :- If profit charged by vendor company is a certain percent on cost, then unrealized profit will be Stock X %/ 100 +% For example, stock of B Ltd includes goods worth Rs8,000 purchased from A Ltd. on which A Ltd earned a profit of 25% on cost. Then unrealized Profit will be 8,000 X25/125 = Rs1,600, as goods cost Rs100 was sold at Rs125, thus profit of Rs25 on goods sold of Rs125