ACCOUNTING FOR MANAGERS

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The Annual Report:

The Annual Report The Companies incorporated under The Companies Act, 1956 are required to keep proper books and records that reflect the true and fair view of the company. Auditors are required to present a report on the company’s accounts to its shareholders. Tax audit is required if sales exceed Rs.4 million.

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Annual Reports are distributed to shareholders and also available on website of the company. Annual reporting system should be capable of delivering uniform data worldwide for management purpose and for investors. The system should also provide potential and different data in each country to suit the local tax requirement.

THE CORPORATE ANNUAL REPORT:

THE CORPORATE ANNUAL REPORT The Annual Report consists of various contents which represent a company’s performance during the previous year. It also contents management’s discussions of company’s strategy for the future. It reports how the company fares financially and explains the scope of its business mission and management philosophy.

Annual Reports – why required?:

Annual Reports – why required? To present an overview of the company’ Companies performance and future plans, To report co’s financial performance for previous year and comparison of figures and performance with prior years. Source for making informed investment decisions.

Contents of Annual Report:

Contents of Annual Report Contents should be to meet requirements of the Primary Securities Regulatory Body, e.g. SEBI. Further, Annual Report also gives and includes elements like – Financial highlights – quick summary of company’s performance Letter to stockholders – Chairman/CEO Speech or Message Corporate message –lines of busi, mkts,mission Board of Directors and management –Top Mgmt Stockholder information –basic informn, AGM,St

Different Financial Statements Chapter IV (Page 81-137):

Different Financial Statements Chapter IV (Page 81-137) Income Statement (Profit and Loss A/c) Balance Sheet (Position Statement), Cash Flow Statement Statement of Share holders’ equity Footnotes, Contingencies, Schedules to the Balance Sheet, Profit and Loss A/c, and Cash Flow Statement of Accounting Policies Auditor’s Report Management Discussion Notes to the Accounts Selected Financial Data

Schedules:

Schedules Schedules to Balance Sheet presents assets, liabilities and shareholders equity – what the firm owns and what it owes to creditors and owners at a particular date. Schedules to the Profit and Loss Account shows break-up of revenue and expenses, and other source of income & expenditure Schedules to the Cash Flow Statement shows source and use of cash during the accounting period i.e. Net cash provided (or used) by operating, investing and financing activities.

Deferred Income Taxes:

Deferred Income Taxes US GAAP requires that the tax element arising on timing differences in amortizing various assets and liabilities as per tax books and financial statements be accounted as deferred taxation and appropriate treatment / provision be made in the income statement. In India also standard on accounting for taxes on income has become mandatory. The difference in deferred tax provision under Indian GAAP and US GAAP during the current year basically arises due to the accounting for gains on foreign exchange contracts.

Deferred Tax Assets:

Deferred Tax Assets Deferred tax assets are the result of temporary difference between the recognition of revenue and expenses for taxable purpose and reported income.

Consolidated Financial Statement:

Consolidated Financial Statement As per section 212 of the Company Act, 1956, the Holding Company Balance Sheet should have following Attachments – i. A copy of the Balance Sheet, Profit and Loss A/c of its Subsidiary Co. ii. A copy of Report of BOD and Auditor iii. A copy of holding co’s interest in sub co iv. Whether financial year of the Subsidiary co coincides with that of holding co.

Shareholder Information disclosed by co. like Dr. Reddy’s Labs:

Shareholder Information disclosed by co. like Dr. Reddy’s Labs Share performance chart Intangible assets Human resources accounting Brand valuation Current-cost-adjusted financial statements (p45) Economic Value-Added (EVA) statement (pg46) Ratio analysis Statutory obligations Value Reporting – financial & non-financial perfo Management structure

Discretionary Items:

Discretionary Items Financial analyst should scrutinize in detail management’s polices regarding below discretionary items through examination of trend in expenditure and , comparing it with Industry competitors. Research and Development Repair and Maintenance Advertising and Marketing (page 51) Summary page 53 & 54

(I) Corporate Governance (II) Responsibility Statement BOD:

(I) Corporate Governance (II) Responsibility Statement BOD (I) Corporate governance policies of company Compliance of corporate governance to SEBI. (II) The Directors’ responsibility statement setting out the compliance with the due accounting and financial reporting requirements specified under section 217 (2AA) of the Companies (Amendment) Act, 2000. (pages of appendix from 67-79.

Window Dressing (Chapter VI – page 161-190):

Window Dressing (Chapter VI – page 161-190)

Cash Flow Statement:

Cash Flow Statement There are two alternatives for reporting net cash flow from operating activities: The direct method and The indirect method.

Cash Flows from Operating Activities (Direct Method):

Cash Flows from Operating Activities (Direct Method) Cash received from customers -------- Cash paid to suppliers and employees --- Cash generated from Operations ------ Income tax paid -------- Cash flow before Extraordinary Item --- Extraordinary Item ---- Net cash flow from Operating Activities --

Indirect Method:

Indirect Method The Indirect Method starts with net profit and adjusts it for revenue and expense items that did not involve operating cash receipts or cash payments in the current period to arrive at net cash flow from operating activities.

Cash Flows from Operating Activities (Indirect Method):

Cash Flows from Operating Activities (Indirect Method) Net Profit before Income Tax and Extraordinary Item ------- Adjustments to reconcile Net Profit to Net Cash Flow from Operating Activities – Depreciation and Amortization Provision for Doubtful Debts Foreign Exchange Gain/Loss Interest/Dividend Income Interest Expenses Gain/Loss on Sale of Fixed Assets/Investments ------- Operating Profit before Working Capital Changes -conted

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Operating Profit before Working Capital Changes Adjustments for Changes in – Debtors Inventories Prepaid Expenses Creditors Bills Payable Cash generated from Operations -------- Income Tax Paid -------- Cash Flow before Extraordinary Item ------ Extraordinary Item (net of tax) ------- Net Cash Flow from Operating Activities ------

Solution Direct Method:

Solution Direct Method Zed Ltd Cash Flow Statement for the year ended 31 st March, 2001 Cash Flows from Operating Activities Cash receipts from customers 36,20,200 Cash paid to suppliers and employees (27,12,500) --------------- Cash inflow from operations 9,07,700 Income tax paid (4,16,000) Cash flow from extraordinary item: Compensation recd in law suit 55,000 ------------- Net cash from operating activities 5,46,700 (A)

Cash Flows from Investing Activities:

Cash Flows from Investing Activities Purchase of fixed assets (2,00,000) Sale proceeds of investments 1,57,500 Interest recd on investment 21,000 -------------- Net cash used in investing activities (21,500) (B)

Cash Flows from Financing Activities:

Cash Flows from Financing Activities Redemption of debentures at par (1,00,000) Interest on debentures paid ( 66,000) Dividends and corporate dvd tax paid (3,30,000) --------------- Net cash used in financing activities (4,96,000) ( C ) ---------------- Net increase in cash and cash equiva- 29,200 lents – (A) – [(B)+( C )] Cash & cash equivalents as on 31.3.2000 1,64,200 (Opening Balance) ------------- Cash & cash equivalents as on 31.3.2001 1,93,400 (Closing Balance)

Working Notes:

Working Notes (i) Calculation of cash receipts from customers: Rs. Sales 36,40,200 Add: Trade Debtors as on 31.3.2000 (op bal) 1,60,000 ------------- 38,00,200 Less: Trade Drs as on 31.3.2001 (clo bal) 1,80,000 -------------- Cash receipts from customers 36,20,200 ========

(ii) Calculation of cash paid to suppliers and employees::

(ii) Calculation of cash paid to suppliers and employees: Cost of Goods sold 18,60,000 Add: Sundry Operating exp 7,83,500 -------------- 26,43,500 Add: Inventory 31.3.2001 5,07,100 Trade Crs 31.3.2000 1,02,500 o/s exp as on 31.3.2000 21,800 ------------- 32,74,900 Less: Inventory 31.3.2000 4,13,300 Trade crs 31.3.2001 1,21,700 o/s exp 31.3.2001 27,400 5,62,400 ------------ -------------- 27,12,500 ========

(iii) Fixed Assets purchased during the year::

(iii) Fixed Assets purchased during the year: Fixed Assets, at cost, on 31.3.2001 26,00,000 Less: Fixed Assets, at cost, on 31.3.2000 24,00,000 -------------- 2,00,000 =======

(iv) Sale proceeds of Investments::

(iv) Sale proceeds of Investments: Cost of investments sold (2,50,000 – 1,00,000) 1,50,000 Add: Profit on sale of investments 7,500 ----------- 1,57,500 ======

(v) Calculation of dividends and corporate dvd tax thereon paid:

(v) Calculation of dividends and corporate dvd tax thereon paid Retained Earnings on 31.3.2000 8,60,000 Add: Net Profit for the yr ended 31.3.2001 4,16,000 ------------ 12,76,000 Less: Retained Earnings as on 31.3.2001 9,46,000 ------------- Dividends and corporate dvd tax paid 3,30,000 =======

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Cash Inflows Activities Cash Outflows Receipts from customers for Sales of goods and Services Activities Operating Activities Payments to suppliers And employees for Materials and services Payments to Government For taxes and duties

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Receipts and Sales of Fixed Assets Eceipts from Sales of Investments and from Collections of Loans Receipts from Interest and Dividends on Loans & Investments Investing Activities Payments for purchase Of Fixed Assets Payments for purchase Of Investments and For making of loans

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Receipts from Issuance of Share Capital Receipts from Issuance Of Debentures Receipts from other Borrowings Financing Activities Payments forDividends On Share Capital Payments for Interest On Debentures and Other Borrowings Payments for Buy-back Of Share Capital and Redemption of Debentures and Loans

Cash Flow Statement:

Cash Flow Statement Provides relevant information about A) Cash Receipts & (cash inflow) B) Cash Payments (cash outflow) of an enterprise during a period. Information about an enterprise’s cash flows is useful in assessing the enterprise’s liquidity, financial flexibility, profitability and risk.

Why need of cash flow statement:

Why need of cash flow statement B/S provides information of assets & liabilities at a point of time (at a particular date) but does not explain changes during period. P & L A/c provides information about an enterprise’s financial performance during a period, but because earnings are measured by accrual accounting, it does not show the cash generated through its operations.

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The downturn in the economy in recent years has led to higher company failures. The ability of company to meet its obligations, especially in the short term, is of paramount importance. Investors and bankers pay greater attention to Company’s liquidity, financial flexibility, cash conversion cycle and risk besides profitability.

Operating Activities of non-financial enterprises:

Operating Activities of non-financial enterprises Firms engaged in providing goods and services Operating Activities involve producing and delivering goods and providing services. Cash inflows from operating activities : Exam : cash sales of goods and services; advances from customers; collections of debtors.

Cash Outflows from Operating Activities:

Cash Outflows from Operating Activities Payments to suppliers for materials and services; Payments to employees for services; Payments to Govt. for taxes and duties

Investing Activities:

Investing Activities These involve making and collecting loans, acquiring and disposing of debt and equity instruments, and fixed assets. Cash inflows from investing activities Sales of fixed assets; Collections of loans; Sales of shares and bonds of other companies; Interest and dividends recd on loans and invest.

Cash Outflows from Investing Activities:

Cash Outflows from Investing Activities Payments (including advance or down payments) to buy fixed assets; Disbursements of loans; Payments to buy shares and bonds of other companies / enterprises.

Financing Activities:

Financing Activities These activities involve – Obtaining resources from owners and providing them return on their investment, Borrowing money and repaying amounts borrowed and Obtaining and paying for other resources obtained from long-term creditors.

Cash inflows / outflows from financing activities:

Cash inflows / outflows from financing activities Cash inflows – Proceeds from issuing shares and bonds; Proceeds from loans. Cash outflows – Payments to buy back or redeem own shares; Principal payments of bonds and loans; Payments of interest; Payments of dividends.

Non-cash investing and financing activities:

Non-cash investing and financing activities These are transactions which affect assets or liabilities but do not result in cash inflows or outflows – E.g. converting debt into equity; Acquiring assets by assuming directly related liabilities such as purchasing a building incurring a mortgage to the seller Obtaining an asset by entering into a hire purchase or a finance lease;

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Exchanging non-cash assets or liabilities for other non-cash assets or liabilities. Although non-cash transactions do not result in cash inflows or outflows in the period in which they occur, they generally have a significant effect on the prospective cash flows of a company. As such this information should be given as foot note or in schedule to the cash flow statement.

Linkage between Trial Balance, Profit & Loss A/c and Balance Sheet:

Linkage between Trial Balance, Profit & Loss A/c and Balance Sheet

PowerPoint Presentation:

Trail Balance Items relating to Income & Expenses Items relating to Assets & Liabilities Profit & Loss Account Balance Sheet Result: Net Profit or Loss Transferred to Balance Sheet Adjustments Double Entry Effect

PowerPoint Presentation:

We start with Trial Balance Give double-entry effect to all adjustments Take some of Trial balance items to trading and Profit & Loss A/c Take result of P & L A/c to Balance Sheet Take rest of items of Trial Balance to Balance Sheet Balance Sheet has to tally.

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Asset side should be equal to Liability side. Utilization of Funds (Assets) should be equal to Sources of Funds (Liabilities).

Treatment of Adjustments for expenses and incomes in B/S:

Treatment of Adjustments for expenses and incomes in B/S Outstanding exp . show on Liability side Prepaid expenses show on Assets side Income recd in advance – Liability side Income earned but not recd, and income accrued but not due – show on Asset side Fixed Assets are recorded at cost minus Depreciation Closing Stock to record at cost price or market price whichever is less.

PowerPoint Presentation:

Trading A/c reflects gross profit or loss arising out of trading and manufacturing operations. Profit & Loss A/c reflects the net profit or loss of the business after duly accounting for all administrative and selling expenses Profit & Loss Appropriation A/c reflects various appropriations made out of disposable profits like dividends, transfer to reserves etc.

Capital, Revenue and Deferred Expenditure:

Cost of air-conditioning the office of the General Manager – This is capital expenditure because the benefit of this expenditure will be available for a number of years. In any case, the machine installed will be there and can be disposed of whenever desired. Capital, Revenue and Deferred Expenditure

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Cost of overhauling and painting a secondhand truck newly purchased – When a secondhand machine is purchased, all expenditure incurred in the beginning to make it fit for working is treated as capital expenditure. The value of machine is increased by the amount spent. Therefore, the cost of overhauling and painting the truck is capital expenses.

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Cost of the annual taxes and insurance premium paid on the truck – Annual taxes and annual premium paid on the truck are revenue expenditure because they do not add to the value of the truck and their benefit will be exhausted within a year.

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Wages paid to workers for installation of machinery – This is capital expenditure because it is necessary to put the machine in working condition.

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Cost of making more exits in a cinema hall under orders of the Government – Making more exits in a cinema hall does not increase the capacity of the hall and, therefore, it should be treated as revenue expenditure.

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Cost of re-decorating a cinema hall – Cost of re-decorating a cinema hall is not capital expenditure because it does not add to the capacity of the hall. But the cost is fairly heavy and the benefit will be there for a number of years. Therefore the cost should be treated as Deferred revenue expenditure.

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Cost of putting a gallery in a theatre hall – When a new gallery is put up, it will increase the number of seats in the hall thereby increasing capacity of the hall. Therefore, this cost should be treated as capital expenditure.

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Cost of acquiring the goodwill of an old firm – This is capital expenditure because the use of that firm’s name will benefit the purchaser for a long time.

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Cost of heavy advertisement for a new product and removal of works to a new and better site – The expenditure is heavy but not of capital nature because no new asset is acquired. But since the benefit of the expenditure will be available for a number of years, it should be treated as deferred revenue expenditure.

Capital and Revenue Receipts:

Capital and Revenue Receipts Amount realized from sale of old furniture – Sale of old furniture only means conversion of one asset into another. Therefore, it is a capital receipt.

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Amount received from a debtor whose account was previously written off as bad – This amount is to be treated as a revenue receipt because it is not to be refunded to the customer and the amount was previously written off as a loss.

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Amount of loan taken from a bank – The loan taken from bank is repayable and, therefore, is a liability. This is capital receipt.

MEANING OF ACCOUNTING:

MEANING OF ACCOUNTING Accounting, as an information system is the process of identifying, measuring and communicating the economic information of an organization to its users who need the information for decision making.

Activities covered under Accounting :

Activities covered under Accounting Identifying the transaction and events – e.g. purchase of raw material, use of raw material for production, sale of goods etc. Measuring the identified transactions and events in the terms of common measurement unit, that is the ruling currency of a country

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Recording – of identified and measured financial transactions in an orderly manner soon after their occurrence in the proper books of account. Classifying – the recorded transactions in a group of similar type at one place. i.e. opening / maintaining different accounts in ledger.

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Summarising the classified transactions in a manner useful to the users. This function involves the preparation of Financial Statements such as Income Statement, Balance Sheet, Statements of Changes in Financial Position, Statement of Cash Flow etc. Analysing the data derived from Income Statement and or Balance Sheet for the purpose of identifying the financial Strengths and weaknesses of the enterprise

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Interpreting – It is concerned with explaining the meaning and significance of the relationship so established by the analysis. Nowadays, the first six functions are performed by electronic data processing devices and the accountant has to concentrate mainly on the interpretation aspect of accounting

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The accountants should interpret the statements in a manner useful to the users, so as to enable the users to make reasoned decisions out of alternative course of action. The accountant should explain – not only what has happened but also why it happened, and what is likely to happen under specified conditions.

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Communicating the summarized, analysed and interpreted information to the users to enable them to make reasoned decisions.

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Accounting is an information system which communicates the accounting information to the users (whether internal or external) to enable them to make reasoned decisions. As an information system, accounting may be viewed as under –

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Input ----------  Process --------  Output | | | Economic events Recording Communicating Measured in financial Classifying Information terms Summarising to Users Analysing Interpreting

Primary Objectives of Accounting:

Primary Objectives of Accounting | | | | To maintain To calculate To ascertain To communicate Accounting the results of the financial the information Records operations position to the users

BASIC ACCOUNTING TERMINOLOGY :

BASIC ACCOUNTING TERMINOLOGY Entity / enterprise / organization – means an economic unit that performs economic activities e.g. Birla Industries, Reliance Industries, Bajaj Auto. Event – An event is a happening of consequences to an entity. For example – use of raw material in production

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Transaction – is an exchange in which each participant receives or sacrifices value. It involves exchange of goods or services on cash or credit basis. It is an event involving transfer of money or money’s worth. Voucher – is a document which serves as an evidence of a transaction. i.e. cash purchases – cash memos, credit purchases – purchase invoice. The vouchers are source documents for recording business transactions in the books of accounts.

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Entry – is the record made in the books of accounts in respect of a transaction or event. An entry is passed on the basis of vouchers. Assets – refer to tangible objects or intangible rights of an enterprise which carry probable future benefits

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Current Assets – Cash, Stock of - Raw Materials (R/M), Work-in-Progress (WIP), Finished Goods, Debtors (Drs), Bills Receivables (B/R). Fixed Assets – are the assets held for purpose of producing goods or providing services and those are not held for resale in the normal course of business. Fixed assets classified into

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Tangible fixed assets which can be seen and touched e.g. Land and Building, Plant and Machinery, Furniture and fixture (ii) Intangible fixed assets – which cannot be seen and touched. E.g. Goodwill, Patent, Trademark, Copyrights etc

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Liabilities – refer to financial obligations of an enterprise other than owner’s funds/equity. (a) Current liabilities – refer to those liabilities which fall due for payment in a relatively short period (normally not more than 12 months from the date of B/S). e.g. Bills Payable (B/P), Trade Creditors, outstanding expenses, bank overdraft etc. (b) Long –term liabilities – refer to those liabilities which do not fall due for payment in a relatively short period. E.g. Long term loans, Debentures etc.

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Capital – is the excess of assets over external liabilities. It refers to the amount invested in an enterprise by the owners. This amount is increased by the amounts earned and amount of additional capital introduced and is decreased by the amount of losses incurred and the amount withdrawn. It is owner’s claim / equity/net assets/net worth.

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Drawings – an amount of cash or goods withdrawn by the proprietor / partner for personal use. Purchases – the total amount of goods obtained by an enterprise for resale or for use in the production of goods or rendering of services in the normal course of business. Sales – The term ‘sales’ refer to the amount for which the goods are sold or services are rendered.

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Stock / Inventory- The term ‘stock’ refers to tangible property held for sale in the ordinary course of business or for consumption in the production of goods or services for sale. Trade Debtors – The term ‘Trade Debtors’ refers to the person from whom the amounts are due for goods sold or services rendered on credit basis

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Trade Creditors – are the persons to whom the amounts are due for goods purchased or services rendered on credit basis.

Cash Flows from Operating Activities (Direct Method):

Cash Flows from Operating Activities (Direct Method) Cash received from customers -------- Cash paid to suppliers and employees --- Cash generated from Operations ------ Income tax paid -------- Cash flow before Extraordinary Item --- Extraordinary Item ---- Net cash flow from Operating Activities --

Indirect Method:

Indirect Method The Indirect Method starts with net profit and adjusts it for revenue and expense items that did not involve operating cash receipts or cash payments in the current period to arrive at net cash flow from operating activities.

Cash Flows from Operating Activities (Indirect Method):

Cash Flows from Operating Activities (Indirect Method) Net Profit before Income Tax and Extraordinary Item ------- Adjustments to reconcile Net Profit to Net Cash Flow from Operating Activities – Depreciation and Amortization Provision for Doubtful Debts Foreign Exchange Gain/Loss Interest/Dividend Income Interest Expenses Gain/Loss on Sale of Fixed Assets/Investments ------- Operating Profit before Working Capital Changes -conted

PowerPoint Presentation:

Operating Profit before Working Capital Changes Adjustments for Changes in – Debtors Inventories Prepaid Expenses Creditors Bills Payable Cash generated from Operations -------- Income Tax Paid -------- Cash Flow before Extraordinary Item ------ Extraordinary Item (net of tax) ------- Net Cash Flow from Operating Activities ------

Solution Direct Method:

Solution Direct Method Zed Ltd Cash Flow Statement for the year ended 31 st March, 2001 Cash Flows from Operating Activities Cash receipts from customers 36,20,200 Cash paid to suppliers and employees (27,12,500) --------------- Cash inflow from operations 9,07,700 Income tax paid (4,16,000) Cash flow from extraordinary item: Compensation recd in law suit 55,000 ------------- Net cash from operating activities 5,46,700 (A)

Cash Flows from Investing Activities:

Cash Flows from Investing Activities Purchase of fixed assets (2,00,000) Sale proceeds of investments 1,57,500 Interest recd on investment 21,000 -------------- Net cash used in investing activities (21,500) (B)

Cash Flows from Financing Activities:

Cash Flows from Financing Activities Redemption of debentures at par (1,00,000) Interest on debentures paid ( 66,000) Dividends and corporate dvd tax paid (3,30,000) --------------- Net cash used in financing activities (4,96,000) ( C ) ---------------- Net increase in cash and cash equiva- 29,200 lents – (A) – [(B)+( C )] Cash & cash equivalents as on 31.3.2000 1,64,200 (Opening Balance) ------------- Cash & cash equivalents as on 31.3.2001 1,93,400 (Closing Balance)

Working Notes:

Working Notes (i) Calculation of cash receipts from customers: Rs. Sales 36,40,200 Add: Trade Debtors as on 31.3.2000 (op bal) 1,60,000 ------------- 38,00,200 Less: Trade Drs as on 31.3.2001 (clo bal) 1,80,000 -------------- Cash receipts from customers 36,20,200 ========

(ii) Calculation of cash paid to suppliers and employees::

(ii) Calculation of cash paid to suppliers and employees: Cost of Goods sold 18,60,000 Add: Sundry Operating exp 7,83,500 -------------- 26,43,500 Add: Inventory 31.3.2001 5,07,100 Trade Crs 31.3.2000 1,02,500 o/s exp as on 31.3.2000 21,800 ------------- 32,74,900 Less: Inventory 31.3.2000 4,13,300 Trade crs 31.3.2001 1,21,700 o/s exp 31.3.2001 27,400 5,62,400 ------------ -------------- 27,12,500 ========

(iii) Fixed Assets purchased during the year::

(iii) Fixed Assets purchased during the year: Fixed Assets, at cost, on 31.3.2001 26,00,000 Less: Fixed Assets, at cost, on 31.3.2000 24,00,000 -------------- 2,00,000 =======

(iv) Sale proceeds of Investments::

(iv) Sale proceeds of Investments: Cost of investments sold (2,50,000 – 1,00,000) 1,50,000 Add: Profit on sale of investments 7,500 ----------- 1,57,500 ======

(v) Calculation of dividends and corporate dvd tax thereon paid:

(v) Calculation of dividends and corporate dvd tax thereon paid Retained Earnings on 31.3.2000 8,60,000 Add: Net Profit for the yr ended 31.3.2001 4,16,000 ------------ 12,76,000 Less: Retained Earnings as on 31.3.2001 9,46,000 ------------- Dividends and corporate dvd tax paid 3,30,000 =======

PowerPoint Presentation:

Cash Inflows Activities Cash Outflows Receipts from customers for Sales of goods and Services Activities Operating Activities Payments to suppliers And employees for Materials and services Payments to Government For taxes and duties

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Receipts and Sales of Fixed Assets Eceipts from Sales of Investments and from Collections of Loans Receipts from Interest and Dividends on Loans & Investments Investing Activities Payments for purchase Of Fixed Assets Payments for purchase Of Investments and For making of loans

PowerPoint Presentation:

Receipts from Issuance of Share Capital Receipts from Issuance Of Debentures Receipts from other Borrowings Financing Activities Payments forDividends On Share Capital Payments for Interest On Debentures and Other Borrowings Payments for Buy-back Of Share Capital and Redemption of Debentures and Loans

Cash Flow Statement:

Cash Flow Statement Provides relevant information about A) Cash Receipts & (cash inflow) B) Cash Payments (cash outflow) of an enterprise during a period. Information about an enterprise’s cash flows is useful in assessing the enterprise’s liquidity, financial flexibility, profitability and risk.

Why need of cash flow statement:

Why need of cash flow statement B/S provides information of assets & liabilities at a point of time (at a particular date) but does not explain changes during period. P & L A/c provides information about an enterprise’s financial performance during a period, but because earnings are measured by accrual accounting, it does not show the cash generated through its operations.

PowerPoint Presentation:

The downturn in the economy in recent years has led to higher company failures. The ability of company to meet its obligations, especially in the short term, is of paramount importance. Investors and bankers pay greater attention to Company’s liquidity, financial flexibility, cash conversion cycle and risk besides profitability.

Operating Activities of non-financial enterprises:

Operating Activities of non-financial enterprises Firms engaged in providing goods and services Operating Activities involve producing and delivering goods and providing services. Cash inflows from operating activities : Exam : cash sales of goods and services; advances from customers; collections of debtors.

Cash Outflows from Operating Activities:

Cash Outflows from Operating Activities Payments to suppliers for materials and services; Payments to employees for services; Payments to Govt. for taxes and duties

Investing Activities:

Investing Activities These involve making and collecting loans, acquiring and disposing of debt and equity instruments, and fixed assets. Cash inflows from investing activities Sales of fixed assets; Collections of loans; Sales of shares and bonds of other companies; Interest and dividends recd on loans and invest.

Cash Outflows from Investing Activities:

Cash Outflows from Investing Activities Payments (including advance or down payments) to buy fixed assets; Disbursements of loans; Payments to buy shares and bonds of other companies / enterprises.

Financing Activities:

Financing Activities These activities involve – Obtaining resources from owners and providing them return on their investment, Borrowing money and repaying amounts borrowed and Obtaining and paying for other resources obtained from long-term creditors.

Cash inflows / outflows from financing activities:

Cash inflows / outflows from financing activities Cash inflows – Proceeds from issuing shares and bonds; Proceeds from loans. Cash outflows – Payments to buy back or redeem own shares; Principal payments of bonds and loans; Payments of interest; Payments of dividends.

Non-cash investing and financing activities:

Non-cash investing and financing activities These are transactions which affect assets or liabilities but do not result in cash inflows or outflows – E.g. converting debt into equity; Acquiring assets by assuming directly related liabilities such as purchasing a building incurring a mortgage to the seller Obtaining an asset by entering into a hire purchase or a finance lease;

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Exchanging non-cash assets or liabilities for other non-cash assets or liabilities. Although non-cash transactions do not result in cash inflows or outflows in the period in which they occur, they generally have a significant effect on the prospective cash flows of a company. As such this information should be given as foot note or in schedule to the cash flow statement.

Linkage between Trial Balance, Profit & Loss A/c and Balance Sheet:

Linkage between Trial Balance, Profit & Loss A/c and Balance Sheet

PowerPoint Presentation:

Trail Balance Items relating to Income & Expenses Items relating to Assets & Liabilities Profit & Loss Account Balance Sheet Result: Net Profit or Loss Transferred to Balance Sheet Adjustments Double Entry Effect

PowerPoint Presentation:

We start with Trial Balance Give double-entry effect to all adjustments Take some of Trial balance items to trading and Profit & Loss A/c Take result of P & L A/c to Balance Sheet Take rest of items of Trial Balance to Balance Sheet Balance Sheet has to tally.

PowerPoint Presentation:

Asset side should be equal to Liability side. Utilization of Funds (Assets) should be equal to Sources of Funds (Liabilities).

Treatment of Adjustments for expenses and incomes in B/S:

Treatment of Adjustments for expenses and incomes in B/S Outstanding exp . show on Liability side Prepaid expenses show on Assets side Income recd in advance – Liability side Income earned but not recd, and income accrued but not due – show on Asset side Fixed Assets are recorded at cost minus Depreciation Closing Stock to record at cost price or market price whichever is less.

PowerPoint Presentation:

Trading A/c reflects gross profit or loss arising out of trading and manufacturing operations. Profit & Loss A/c reflects the net profit or loss of the business after duly accounting for all administrative and selling expenses Profit & Loss Appropriation A/c reflects various appropriations made out of disposable profits like dividends, transfer to reserves etc.

Capital, Revenue and Deferred Expenditure:

Cost of air-conditioning the office of the General Manager – This is capital expenditure because the benefit of this expenditure will be available for a number of years. In any case, the machine installed will be there and can be disposed of whenever desired. Capital, Revenue and Deferred Expenditure

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Cost of overhauling and painting a secondhand truck newly purchased – When a secondhand machine is purchased, all expenditure incurred in the beginning to make it fit for working is treated as capital expenditure. The value of machine is increased by the amount spent. Therefore, the cost of overhauling and painting the truck is capital expenses.

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Cost of the annual taxes and insurance premium paid on the truck – Annual taxes and annual premium paid on the truck are revenue expenditure because they do not add to the value of the truck and their benefit will be exhausted within a year.

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Wages paid to workers for installation of machinery – This is capital expenditure because it is necessary to put the machine in working condition.

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Cost of making more exits in a cinema hall under orders of the Government – Making more exits in a cinema hall does not increase the capacity of the hall and, therefore, it should be treated as revenue expenditure.

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Cost of re-decorating a cinema hall – Cost of re-decorating a cinema hall is not capital expenditure because it does not add to the capacity of the hall. But the cost is fairly heavy and the benefit will be there for a number of years. Therefore the cost should be treated as Deferred revenue expenditure.

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Cost of putting a gallery in a theatre hall – When a new gallery is put up, it will increase the number of seats in the hall thereby increasing capacity of the hall. Therefore, this cost should be treated as capital expenditure.

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Cost of acquiring the goodwill of an old firm – This is capital expenditure because the use of that firm’s name will benefit the purchaser for a long time.

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Cost of heavy advertisement for a new product and removal of works to a new and better site – The expenditure is heavy but not of capital nature because no new asset is acquired. But since the benefit of the expenditure will be available for a number of years, it should be treated as deferred revenue expenditure.

Capital and Revenue Receipts:

Capital and Revenue Receipts Amount realized from sale of old furniture – Sale of old furniture only means conversion of one asset into another. Therefore, it is a capital receipt.

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Amount received from a debtor whose account was previously written off as bad – This amount is to be treated as a revenue receipt because it is not to be refunded to the customer and the amount was previously written off as a loss.

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Amount of loan taken from a bank – The loan taken from bank is repayable and, therefore, is a liability. This is capital receipt.

MEANING OF ACCOUNTING:

MEANING OF ACCOUNTING Accounting, as an information system is the process of identifying, measuring and communicating the economic information of an organization to its users who need the information for decision making.

Activities covered under Accounting :

Activities covered under Accounting Identifying the transaction and events – e.g. purchase of raw material, use of raw material for production, sale of goods etc. Measuring the identified transactions and events in the terms of common measurement unit, that is the ruling currency of a country

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Recording – of identified and measured financial transactions in an orderly manner soon after their occurrence in the proper books of account. Classifying – the recorded transactions in a group of similar type at one place. i.e. opening / maintaining different accounts in ledger.

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Summarising the classified transactions in a manner useful to the users. This function involves the preparation of Financial Statements such as Income Statement, Balance Sheet, Statements of Changes in Financial Position, Statement of Cash Flow etc. Analysing the data derived from Income Statement and or Balance Sheet for the purpose of identifying the financial Strengths and weaknesses of the enterprise

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Interpreting – It is concerned with explaining the meaning and significance of the relationship so established by the analysis. Nowadays, the first six functions are performed by electronic data processing devices and the accountant has to concentrate mainly on the interpretation aspect of accounting

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The accountants should interpret the statements in a manner useful to the users, so as to enable the users to make reasoned decisions out of alternative course of action. The accountant should explain – not only what has happened but also why it happened, and what is likely to happen under specified conditions.

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Communicating the summarized, analysed and interpreted information to the users to enable them to make reasoned decisions.

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Accounting is an information system which communicates the accounting information to the users (whether internal or external) to enable them to make reasoned decisions. As an information system, accounting may be viewed as under –

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Input ----------  Process --------  Output | | | Economic events Recording Communicating Measured in financial Classifying Information terms Summarising to Users Analysing Interpreting

Primary Objectives of Accounting:

Primary Objectives of Accounting | | | | To maintain To calculate To ascertain To communicate Accounting the results of the financial the information Records operations position to the users

BASIC ACCOUNTING TERMINOLOGY :

BASIC ACCOUNTING TERMINOLOGY Entity / enterprise / organization – means an economic unit that performs economic activities e.g. Birla Industries, Reliance Industries, Bajaj Auto. Event – An event is a happening of consequences to an entity. For example – use of raw material in production

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Transaction – is an exchange in which each participant receives or sacrifices value. It involves exchange of goods or services on cash or credit basis. It is an event involving transfer of money or money’s worth. Voucher – is a document which serves as an evidence of a transaction. i.e. cash purchases – cash memos, credit purchases – purchase invoice. The vouchers are source documents for recording business transactions in the books of accounts.

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Entry – is the record made in the books of accounts in respect of a transaction or event. An entry is passed on the basis of vouchers. Assets – refer to tangible objects or intangible rights of an enterprise which carry probable future benefits

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Current Assets – Cash, Stock of - Raw Materials (R/M), Work-in-Progress (WIP), Finished Goods, Debtors (Drs), Bills Receivables (B/R). Fixed Assets – are the assets held for purpose of producing goods or providing services and those are not held for resale in the normal course of business. Fixed assets classified into

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Tangible fixed assets which can be seen and touched e.g. Land and Building, Plant and Machinery, Furniture and fixture (ii) Intangible fixed assets – which cannot be seen and touched. E.g. Goodwill, Patent, Trademark, Copyrights etc

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Liabilities – refer to financial obligations of an enterprise other than owner’s funds/equity. (a) Current liabilities – refer to those liabilities which fall due for payment in a relatively short period (normally not more than 12 months from the date of B/S). e.g. Bills Payable (B/P), Trade Creditors, outstanding expenses, bank overdraft etc. (b) Long –term liabilities – refer to those liabilities which do not fall due for payment in a relatively short period. E.g. Long term loans, Debentures etc.

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Capital – is the excess of assets over external liabilities. It refers to the amount invested in an enterprise by the owners. This amount is increased by the amounts earned and amount of additional capital introduced and is decreased by the amount of losses incurred and the amount withdrawn. It is owner’s claim / equity/net assets/net worth.

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Drawings – an amount of cash or goods withdrawn by the proprietor / partner for personal use. Purchases – the total amount of goods obtained by an enterprise for resale or for use in the production of goods or rendering of services in the normal course of business. Sales – The term ‘sales’ refer to the amount for which the goods are sold or services are rendered.

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Stock / Inventory- The term ‘stock’ refers to tangible property held for sale in the ordinary course of business or for consumption in the production of goods or services for sale. Trade Debtors – The term ‘Trade Debtors’ refers to the person from whom the amounts are due for goods sold or services rendered on credit basis

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Trade Creditors – are the persons to whom the amounts are due for goods purchased or services rendered on credit basis.

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