The document provides an introduction to financial statements and accounting. It discusses the key financial statements - the balance sheet, profit and loss account, and cash flow statement - and what they measure. It also covers accounting concepts like GAAP, accounting standards, and the accounting process of recording transactions in accounts and periodically summarizing accounts. Exercises are provided to help understand inventory costing methods and the impact of different accounting policies on profits.

1. 1 FINANCIALStatements Anjana Vivek www.bizkul.com anjana@bizkul.com

2. 2 FINANCIAL ACCOUNTING: I INTRODUCTIONTO FINANCIAL STATEMENTS www.biZkul.com

3. 3 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 www.biZkul.com

4. 4 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 www.biZkul.com

5. 5 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 this? - How will you interpret this information? www.biZkul.com

6. 6 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 now? www.biZkul.com

7. 7 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 - 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. 8 BUSINESS ACTIVITY Money is invested in a commercial enterprise with a view to earning profits and being sustainable Money circulates in a business and is used for a variety of purposes Capital expenditure, other expenditure, returned to lenders, distributed to shareholders, invested etc Profits may be earned immediately (ITES/Consulting/Service) or some time into the future (Manufacturing/Biotech) www.biZkul.com

9. 9 MEASURES OF SUCCESS IN BUSINESS How does one measure whether a business is successful or not One needs to have a system of measurement of the financials of a business These 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. 10 Some measures Revenue compared to others companies, in country, in same industry Profits, gross and net after taxes Number of employees Revenue per employee Growth in same company from one period to the next MEASURES OF PERFORMANCE www.biZkul.com

11. 11 ANNUAL REPORTS Business entities bring out annual reports which contain financial and non financial information Reports are made available to shareholders, government and other interested persons There are guidelines to be followed and statutory compliances to be met while preparing these reports www.biZkul.com

12. 12 ANNUAL REPORTS Users Internal Owners and managers External Investors, lenders, suppliers and creditors, customers, government and its agencies, public, analysts, advisors www.biZkul.com

13. 13 KEY CONTENT OF ANNUAL REPORTS Financial statements – balance sheet, profit and loss account, cash flow statement, consolidated financial statements Letter to shareholder Director’s report Management discussion and analysis Auditors’ report www.biZkul.com

14. 14 OTHER CONTENT OF ANNUAL REPORTS Some companies provide additional information, this includes Value reporting Brand valuation Human resource accounting www.biZkul.com

15. 15 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 A vendor www.biZkul.com

16. 16 ANNUAL REPORTS Do 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. 17 FINANCIAL STATEMENTS Used for Measurement, forecasting, decision making, evaluation, control, stewardship, government and statutory regulation Characteristics Understandable Reliable Relevant Comparable www.biZkul.com

18. 18 FINANCIAL ACCOUNTING: I BALANCE SHEET www.biZkul.com

19. 19 BALANCE SHEET Sources of funds Shareholders funds Loan funds Application of funds Fixed assets Investments Current assets less current liabilities and provisions Miscellaneous expenses www.biZkul.com

20. 20 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 banks) www.biZkul.com

21. 21 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.) www.biZkul.com

22. 22 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) www.biZkul.com

23. 23 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, heavy expenditure) www.biZkul.com

24. 24 FINANCIAL ACCOUNTING: I PROFIT AND LOSS ACCOUNT www.biZkul.com

25. 25 PROFIT AND LOSS ACCOUNT Income Sales (gross sales) Other income (interest, dividend, rental income, miscellaneous sales) www.biZkul.com

26. 26 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 www.biZkul.com

27. 27 KEY EQUATIONS Shareholders Stake = Assets – Liabilities Profit = Sales – Costs ( Costs of material used = Opening stock + purchases – closing stock) www.biZkul.com

28. 28 QUESTION You are a finance professional in a company I am also a finance professional in the same company We both independently prepare the financial statements in our company Will you and I arrive at the same numbers in terms of Sales? Profits? Why? Why not? www.biZkul.com

29. 29 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 400 units were consumed in January What is the cost of the material consumed? www.biZkul.com

30. 30 EXERCISE Methods of calculating cost of material consumed: LIFO: Last in first out FIFO: First in first out Weighted average These are accounting methods for calculating costs www.biZkul.com

31. 31 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 400 units were consumed in January 200 units were consumed in February What is the cost of the material consumed in the months of Jan and Feb under the FIFO and LIFO methods? www.biZkul.com

32. 32 ASSIGNMENT Jan sales – Rs. 1000 Feb sales – Rs. 1000 Other costs in Jan – Rs. 500 Other costs in Feb – Rs. 500 For 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. 33 GAAP and ACCOUNTING STANDARDS www.biZkul.com

34. 34 GAAP Generally Accepted Accounting Principles Refer to rules, conventions, principles, procedures To be followed by enterprises in preparation of financial statements www.biZkul.com

35. 35 ACCOUNTING STANDARDS Set of broad guidelines regarding accounting policies adopted by organisations in preparation of financial statements Select set of accounting policies Confirm 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. 36 Framework of Accounting Fundamental accounting assumptions Going concern Consistency Accrual www.biZkul.com

37. 37 Key Accounting Concepts Entity Money measurement Cost concept Realisation Periodicity Matching Dual aspect Conservatism www.biZkul.com

38. 38 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. www.biZkul.com

39. 39 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? www.biZkul.com

40. 40 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. www.biZkul.com

41. 41 FORMS OF BUSINESS ORGANISATIONS Sole Proprietorship Partnership Limited Co Private Public Statutory Bodies Mutual Funds Trusts www.biZkul.com

42. 42 ACCOUNTING BASICS Transaction occurs With funds in flow Without funds flow Transactions are recorded in accounts, eg. Cash/bank Debtors Advance accounts Capital Accruals Expenses www.biZkul.com

43. 43 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 www.biZkul.com

44. 44 ACCOUNTING PROCESS Data Account Entry Passed Trial Balance Final Trial Balance Rectification Entry Passed Financial Statements Final Financial Statements