2. Code of conduct for virtual sessions
• Set up your own study space well in advance of a scheduled lecture. Make sure you are able to
work quietly, in an environment where you can focus without being disturbed.
• Log in at least 2 minute before the start time of the class. Attendance would be recorded in the first
5 minutes of the session.
• Be aware that you are on camera, use professional language when speaking during the sessions,
and conduct yourself in a respectable manner. Use raised hand emoji ‘✋’ to get heard for your
doubts/concerns during the session.
• Ensure the uninterrupted functioning of your devices in use for the session. Turn off your
microphone unless you are speaking. The instructor may use the 'Mute All' button to enforce this.
• The presenter/active participant must have the video on. However, you can turn off incoming
videos to save bandwidth.
• Chat-box can be used for very necessary conversations that add value to the discussion or should
be used when instructed during the session for Q&A etc. Only meaningful use of chat feature is
encouraged.
• Unmute yourself and talk in case of a cold call by faculty or if you have a doubt to be clarified in
case your hands-up went unnoticed.
3. General Information
• Course Duration: 20 Sessions of 1.5 Hrs. each
• Instructor’s E-mail: rpathak@iimraipur.ac.in
• ‘Basic Rules’ for the course:
• All class participation is welcome. You must read through the course study material as
recommended and engage yourselves into discussions.
• Don’t miss a class unless it is absolutely necessary.
• This is not a course that you can self teach.
• If you have to miss a class, you may use the recorded lecture as a fall back. However, recorded
sessions can never be a replacement of the live class.
• Don’t skip the quizzes/tests and actively attend all the sessions. The course may involve surprise
quizzes.
5. Course Objectives
• To give you the capacity to understand the language of business and interpret and
apply the knowledge in order to assess the financial consequences of a business
transaction/decision.
Who cares if it can’t be applied
• To enable you sketch, read and analyze financial statements of businesses in order
to assess and forecast business performances.
It has become a pre-requisite for financial analysts to understand FSs and how they interact.
• Course Outline
6. Accounting: A Perspective
• What is it?
• A language or a system that provides information of an entity about its
performance, financial position & cash-flow.
• Through set of general purpose financial statements and reports
• How does it function?
• What set of Information does it disseminate?
• To whom?
• Investors, lenders, suppliers, employees, customers, governments
7. Accounting: A Perspective
• Development:
• Evolved over a period of many centuries and certain rules & terminologies are now accepted as useful.
• Key Characteristics
• Generally Accepted Accounting Principle (GAAP)
• Relevance: Information is relevant if it can influence the economic decisions of users by helping them evaluate past, present or future
events.
• Materiality: Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial
statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.
• Objectivity or Reliability: Measurement is free from material error and bias.
• Prudence: Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions
of uncertainty.
• Current State of Accounting Domain
• ICAI, MCA, ASB
• IndAS (Standards prescribed under Section 133 of the Indian Companies Act, 2013)
• AS (applicable to Indian companies including Small and Medium sized Companies to whom Indian Accounting Standards
(Ind AS) are not applicable )
• IFRS (Global Reporting Standard)
8. Accounting: End Products
• Set of Financial Statements (IndAS01)
• The Balance Sheet or Statement of Financial Position
• Purpose: To present the financial health of a business at a point in time
• The Income Statement or Statement of Profit and Loss
• Purpose: To reveal the profitability of the firm over a period of time
• The Cash-flow Statement
• Purpose: To summarize the activities resulting in cash changing hands for the business during a period of time.
• Statement of Changes in Equity
• Purpose: To highlight the factors that cause a change in the owners' equity over the accounting periods.
• Notes to Accounts:
• To present significant accounting policies and other explanatory information in supplementary schedules.
• Status Vs. Flow Report
• The preparation and the true and fair presentation of these statements are the
responsibility of the management of the company.
9. The Balance Sheet- A Status Report
Sources of funds
Owner’s money/equity
Loans
Supplier’s credit
Total Liability
TA= TL
TA= OE+OL (Elements in fundamental equation)
Resources
Machinery
F & F
Computer
Van
Inventory
Cash
Total Assets
10. Balance Sheet Elements
Assets Classifications
• Non-Current Assets
• PPE (long lived Assets)
• Machinery, F&F, L&B,
Computer etc.
• Intangible Assets
• Goodwill, Copyright, Patent
• Investments
• Equity in subsidiary, long term
projects
• Current Assets
• Cash & equivalents, Inventory,
Accounts receivables, notes
receivables etc.
Liabilities Classifications
• Owner’s Equity
• Original Capital contribution,
Retained earnings, reserves and
surplus, securities premium etc.
• Non-Current liabilities
• Bonds, loans, etc.
• Current Liabilities
• Accounts payables, bank overdraft,
notes payables
14. Transaction Analysis
• Accounting Equation
• TA= OE+OL
• TA= Capital+ RE(Incomes-Expenses)+OL
• TA+ Exp= Capital + Incomes + OL
Practice- Case- ‘Docs in a Box, Inc.’
Reading: Chapter-1 (‘Accounting: Text & Cases’ by Anthony, Hawkins and Merchant)
‘Framework for the Preparation and Presentation of Financial Statements’issued by the Accounting Standards
Board of the ICAI.
(http://www.mca.gov.in/XBRL/pdf/framework_fin_statements.pdf)
17. Accounting Concepts-: Balance Sheet
• Duality Concept
• Every transaction has a dual impact on the fundamental equation of accounting.
• The balance sheet matching emanates from the dual concept also called double-
entry system.
• Separate Entity Concept:
• Business and businessman are two distinct entity.
• Owner’s equity is a liability to the firm owing to separate entity concept.
• Money measurement Concept
• Only monetary information are recorded
• Heterogeneous facts are presented under a common denomination
• Going Concern Concept
• The entity will continue to operate for an indefinitely long period.
• Cost Concept
• Initial recording of assets at acquired cost and subsequently non-monetary assets
(NMA) are recorded at unexpired cost. Values of NMA are unaffected by fair value.
18. Accounting Concepts:- Income Statement
• Accounting Period Concept
• Accounting measures performance over a specified period of time.
• Matching Concept
• If an event affects both revenue and expenses, record them into the same AP.
• Direct matching and period cost.
• Conservatism Concept
• Incomes/gains are recorded when reasonably certain whereas expenses/losses are
recorded when reasonably possible. For eg: Provision for bad debts is an example
• Realization Concept
• How much to record in revenue. For eg: Bad debts, discounts, sales returns etc.
• Consistency Concept
• Same accounting method for all subsequent recording of events of homogeneous nature.
• Materiality Concept
• Insignificant events may be disregarded. Can be mis-stated.
Case for practice: Ribbons and Bows
20. Accounting Mechanics
• Most organizations use computer based system of accounting, yet familiarity with manual
procedure is useful.
• Luca Pacioli gave the double entry system of bookkeeping as a major breakthrough in 15th
Century.
• For each transaction, the debit(Dr.) must equal the credit (Cr.)
• Arbitrarily decided Assets to be having debit balance. Hence, Liabilities and Owner’s equity
would be credit for fundamental equation to hold.
• Incomes and expenses are credits and debits respectively owing to their contribution to
retained earnings.
• Permanent (Real) accounts Vs. Temporary Accounts
• Debits and credits are left-hand/right-hand side of a T accounts and have no other meaning in
accounting.
21. Accounting Mechanics
• Accounting as a process of
• Identifying- Judgement of what to record and how
• Chronological Recording- Journalizing
• Classifying/Posting- Ledger book- ‘T Accounts”
• Summarizing- Trial Balance (a quick check for accuracy)
• Errors in Trial Balance
• Reporting- financial Statements (preparation & presentation)
• Income statement, Balance sheet & Cash-flow statement
• Analyzing- inferences, forecasting etc.
• Ratio analysis etc.
22. Financial Statement Preparation using Trial Balance & Adjustments Info
Trial Balance as on 31st December, 2006
Assets/expenses Liabilities/incomes
23. Revenue Recognition (Ind AS 18)
• Revenue is the gross inflow of economic benefits during the
accounting period arising in the course of the ordinary activities of
an entity:
• The sale of goods
• Includes goods produced by the entity for the purpose of sale and goods purchased for resale,
such as merchandise purchased by a retailer or land and other property held for resale.
• The rendering of services
• Involves the performance by the entity of a contractually agreed task over an agreed period of
time. The services may be rendered within a single period or over more than one period.
• The use by others of entity’s assets yielding interest, royalties and dividends.
• Interest—charges for the use of cash or cash equivalents or amounts due to the entity;
• Royalties—charges for the use of long-term assets of the entity, for example, patents,
trademarks, copyrights and computer software; and
• Dividends—Receipts of profits as holders of equity investments in proportion to the holdings.
24. What is not Revenue
• Dividends arising from investments in Associates
• Associate is a company in which that other company has a significant
influence, but which is not a subsidiary company of the company.
• Significant influence means control of at least 20% of total share capital, or of
business decisions under an agreement
• Changes in the fair value of financial assets and financial liabilities.
• Amounts collected on behalf of third parties such as sales taxes, goods
and services taxes and value added taxes
25. Recognition and Related Accounting Concepts
• Most accounting frauds deal with revenue manipulation
• Enron (2001); Worldcom (2002); Freddie Mac Scandal (2003); Satyam (2009)
• Basic Principal
• The entity has substantially performed what is required in order to earn the income
• The amount of income is reliably measured.
• Concepts
• Conservatism Concept
• Realization Concept
26. Recognition of Revenues
• Sale of Good
• The entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
• The entity retains neither continuing ownership nor effective control over the goods sold;
• The amount of revenue can be measured reliably;
• It is probable that the economic benefits associated with the transaction will flow to the entity;
• The costs incurred or to be incurred in respect of the transaction can be measured reliably.
27. Recognition of Revenues
• Rendering of Services:
• Following ‘Percentage of completion method’ revenue is recognised in the accounting periods in which
the services are rendered.
• The amount of revenue can be measured reliably;
• It is probable that the economic benefits associated with the transaction will flow to the entity;
• The stage of completion of the transaction at the end of the reporting period can be measured reliably;
• The costs incurred for the transaction and the costs to complete the transaction can be measured reliably
28. Recognition of Revenues
• Others:
• Royalties shall be recognised on an accrual basis in accordance with the substance of the relevant
agreement;
• Dividends shall be recognised when the shareholder’s right to receive payment is established.
• Interest shall be recognised using the effective interest method as set out in Ind AS 39;
29. Example
A Bank sells a customer $500 American express traveller’s cheque for which bank
collects from customer $505 (the bank charges 1% fee for the services). How does the
bank record the transaction? How it affects American’s express financial statement?
At Collection by Banks
At Remittance by Bank
The answer is not the journal entry here (as it might seem from the way it is presented here)
Cash incoming 505
Payable to American Express (liability) 500
Commission Revenue (income) 5
Cash (going out) 500
Travelers Checks Outstanding (liability
written off)
500
30. Quick Question: Revenue from Services
Daniels Construction incurred $10 million in construction costs on a
new contract this year. They expect to incur another $100 million to
complete the project. The balance in the construction in progress (CIP)
account, which tells the revenue recognized till year end using
percentage of completion method, is $12 million. What is the total
revenue they expect to earn on the contract?
31. More Situations
• ‘Bill and hold’sales, in which delivery is delayed at the buyer’s request but the buyer
takes title and accepts billing.
• Consignment sales under which the recipient (buyer) undertakes to sell the goods on
behalf of the shipper (seller).
• Sale to intermediaries, distributors etc.
• Cash on Delivery sale
• Orders when payment (or partial payment) is received in advance of delivery for goods
not presently held in inventory, for example, the goods are still to be manufactured or
will be delivered directly to the customer from a third party.
• Goods shipped subject to conditions
• Installation & Inspection
• Repurchase Agreement
• Terms of agreement evaluated.
• Transfer of risk and rewards ensured.
32. More Revenue types
• Installment Sale
• Revenue attributable to the sales price is recognized on the day of sale (exclusive of interest)
• Advertising Commission
• When commercial/print appears in public
• Tuition Fees
• Over the period of instruction
• Licensing Fees/Royalties
• Subscription Fees/ Membership fees etc.
• Straight line basis
33. What about these?
• Shilpkala Vedika (SKV), an auditorium and convention centre located in
Hyderabad announces a musical concert of Arijit Singh and Shankar Mahadevan
to be organized in December, 2020. All tickets are sold by SKV and money was
collected worth Rs. 10,00,000 within a week post announcement on 1st July, 2020.
SKV spent worth Rs. 50,000 in selling and other costs. How much, if any, should
SKV recognize as revenue if financial statements are prepared every October end?
• A law firm received a retainer fees of $10000 on July 01, 2018 from a client. In
turn, the firm agreed to furnish legal advices upon request for one year. In
addition, client would be billed separately for legal services such as presentation in
litigation. How much revenue should be recognized out of $10000 if books are
prepared in December every year. What about revenues from presentations, if it
occurs.
