upto Day 10

Class Discussion 2014

Day 10

AS- 3: Cash Flow Statement

Closing CIH = Opening + Receipts –Payments Closing CIH = Opening +/-(CFO, CFF, CFI)

Issues for Discussion

Why is CIH not same as PAT? Why is CFO not same as PAT?

o CFO = Operating Receipts – Operating Payments o PAT = Incomes- Expenses

PAT is not equal CFO due to the following: Non Cash items

o Depreciationo Amortisationo Fluctuations in MPo Fluctuations in Foreign Currency

Non Operating Itemso Dividend receivedo Interest receivedo Profit on sale of PPEo PRofiton Sale of Investmento Interest paid

Credit items (Accruals)o Credit Sales (Change in debtors)o Credit Expenses ( Change in OS Expenses)o Credit purchases ( Change in Creditors and Change

stock)o Advances o


CFO =PAT +/-

Non cash items,Non operating items,

Changes in CA and CL

CFO Direct method

o CFO = Operating Receipts – Operating PAyments Indirect method

o CFo = Adjusted Profit PAT +/-

Non cash items, Non operating items,

Changes in CA and CL

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Day 10

Cash Flow Statement: AS-3Closing CIH = Opening CIH +/-(CFO, CFF, CFI)CFO

Directo CFO = Operating Receipts – Operating Payment

Indirecto CFO = Adjusted PAT. Adjusted for Non operating,

Non cash and Credit items (Change in Operating CA and CL)

Issues for Discussion Why is CIH not same as PAT? Why is CFO not same as PAT?

o CFO = Operating Receipts – Operating Paymentso PAT = All incomes – All Expenses

PAT is not equal to CFOo Non Operating items

Interest on loans taken Interest on loan given Dividend on shares purchased Profit on sale of PPE

o Non Cash items Depreciation Amortisation Fluctuation in the MP Fluctuation on FOREX

o Credit Items (Accrual Principles) Credit purchase Credit Sales Credit Expenses Advances to the supplier Advance from Customers


CFO = o PAT +/-( non cash items, non operating items, credit

items)

Determination of CFO Direct Method

o CFO = Operating Receipts – Operating Payments Indirect Method

o CFO = Adjusted PAT

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Day 9

Asset Accounting Inventory Accounting (AS- 2) PPE Accounting (AS-6, 10, 28) Cash (AS- 3)

Under standing Cash Flows CIH = Opening + Receipts – payments Receipts

o Cash Sales o Collection from Debtorso Advance from customer o Loan availedo Issue of share for casho Sale of PPE o Sale of Investments ( shares or bonds)o Interest or Dividend received

Paymentso Expenses paid (rent,salary etc)o Purchase of Stock of goods o Interest paido Distribution of dividendo Buy back of shareso Repayment of loanso Purchase of PPEo Purchase of Investment


Cash From Investment Decisions (CFI) Receipts

o Sale of PPE o Sale of Investments ( shares or bonds)o Interest or Dividend received

Less Payments

o Purchase of PPEo Purchase of Investment

Cash from Financing Activities (CFF)

o Receipts Loan availed Issue of share for cash

Lesso Payments

Interest paid Distribution of dividend Buy back of shares Repayment of loans

o

Cash from Operating Activities (CFO)Receipts

o Cash Sales o Collection from Debtorso Advance from customer

LessPayments

o Expenses paid (rent,salary etc)

CFINegativePositive

CFFNegativePositive

CFONegativePositive


o Purchase of Stock of goods

Cash Flows

Question Why is CFO not same as PAT?

Complete set of Financial statement for year Opening BS

o ISo CFS

Closing BS

Change in the Balance

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Day 8

PPE (AS -6 and AS-10) COA Depreciation Written Down Value

Issue for discussion

If the PPE are sold during the lifeo Sale priceo Lesso WDV

If the MV is not same the WDV o IF MV > WDV

REcognise the increase in the MV but don’t show the gain in the Income statement

Show the Gain as a Source: REVALUATION RESERVE

o IF MV < WDV AS-28: Impairment loss Undertake Impairment Test If MV < BV

Show the impairment loss in the Income Statement

And Reduce the WDV of the asset to that extent

Change in the method of depreciation o Yes, AS-6 allows the changeo Steps for accounting the change (Suppose from SLM

to RBM): Refer to XL Find the Accu dep under SLM ( 320000) Find the ACcu dep under RBM (375000) Find the difference ( 55000 more now)


Show this change as loss or gain due to thechange

in the methods of depreciation in the Income Statement

Issues relating to PPE( AS -6. 10, 28) COA Depreciation Impairment Revaluation Reserves Profit or loss on the sale ofasset Profit orloss due to the change in depreciation

Assets (Fluctuations in the MV) Inventory

o Cost or MV which ever is lesso So the loss is recognized but profit is not

PPEo If MV < BV: Show the loss as impairment loss in the ISo IF MV > BV: Show the gain as RR in the BS

Investmento


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Day 7

Asset Accounting CA

o Inventory NCA

o PPE

Accounting for PPE (Fixed Assets)

Relevant Accounting Standards: AS- 10: Accounting for Fixed AssetsAS-6: Accounting for Depreciation

Cost of Acquisition ( at the time of purchase)o Purchase Priceo Pluso Incidental Expenses required to bring the asset to the

working condition (the process of including the incidental expenses in

the cost of asset is called CAPITALISATION of Expenses)

Decisiono Capitalise or Not to Capitalise?

Depreciation (at the time of use,during the life)o AS-6

See the next paragraph Written Down Value (Net Asset or Book Value) (At the BS

preparation)o WDV = COA – AD


Depreciation What?

o Loss in PPE due to the wear and tear of PPEo Allocation of cost over the lifeo Charge for using the asset o Provision for replacement of PPE

Why ?o Matching Principleo Going Concern Principle

How ?o Depreciation amount depends on the methods of charging

Straight Line Method Depreciation = Cost/Life Dep = COA * Rate of Depreciation Dep amount remains constant the life

Reducing Balance Method (RBM) Dep = Rate *Cost (first year) Subsequent years

o Dep = rate * WDVo WDV = COA – Accumulated Dep

oo


o Day 6

Accounting for Assets Current Asset

o Casho Debtorso Stock or inventoryo Short term investments

Non Current Assetso Fixed Assets ( PPE)o Long Term Investmento Intangible Assets

Sources Equity

o Capitalo Reserves

Noncurrent Liabilitieso L T loanso Bondso Debentures

Current Liabilitieso Creditors orpayableso Expenses Payableso Short Term Loanso Bank overdraft


Accounting for Inventory (Revenue Goods): AS-2 Cost of acquisition (at the time of purchase)

o Purchase Priceo Pluso Incidental Expenses required to bring the assets to the

working condition Cost of goods sold

o COGS is determined by using one of the following methods of issuing inventory

FIFO(First In First Out)

Weighted Average LIFO (not allowed byAS-2)

Cost of unsold stock (Closing stock)o Closing = Opening Stock +Purchase –COGSo Closing stock to be Valued at COST or MV which ever is

lower (Conservative Convention) IF MV > CP: Ignore IF MV< CP: recognize the loss

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Day 5

Financial Statements

Accounting Relationship

Acquisition of assets will result in one of the following Decrease in cash Increase in liability Increase in equity

Incomes will result in one of the following Increase in cash Increase in Assets (Debtor)

Items relating to stock Opening Stock Purchase COGS Closing Stock

o Opening + Purchase – COGS = Closing

Expense and Payment If Payment < Expense: Liability If Payment > Expense: Asset


Items relating to shares Face value Book Value Market Value


Some Financial Terms Relating to Assets

Costs of Goods Sold Part of the revenue goods sold during the period is called

COGS When the stock is sold, profit is determined by deducting

COGS from Sales Closing Stock = Opening stock + Purchases – COGS

BadDebt Loss due to insolvency or bankruptcy of the debtors Irrecoverable debtors Closing Debtors = Opening Debtors + Credit Sales –Collection –

Bad Debts

Deprecition Loss due to wear and tear of Property, Plant and Euipmentsd Reduction in PPE Book value of PPE = Cost – Accumulated Depreciation

Amortisation Allocation of cost of intangible assets over the life It is the reduction in the value of intangible

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Day 4

Business Decisions and Financial Statements

Financial Statements

Balance Sheeto Statement of Financial Position as on a particular dateo Statement of

Assets and Sources

(Equity & Liabilities)

Income Statemento Statement of Financial Performance for a particular

periodo Shows:

Incomes Expenses

Cash Flow Statement o Statement of changes in CIH over a period of time

Relevant Laws and Standards Governing FS are Accounting Standard-1

o ICAI Schedule VI of the CompaniesAct

o MCA SEBI’s Regulation


Receipts may result in Increase in capital Increase in liabilities Income

Payments may result in Acquisition of assets

o Stock Expense

Acquisition of Asset may result in Decrease in cash Increase in liability Increase in capital

Expense Vs Asset Asset: Unexpired benefit Expense: Expired benefit

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Day 2

Accounting Equation

The process of converting BD into fs can be explained in one of the following ways

Rules of Debits and Credits Or Framework of Accounting Equation

Accounting Equation: At any point of time Assets = Sources

o Assets Anything which has the ability to generate

cash flows Cash + other assets

o Sources Equity

Capitalo Money contributed by the owner

Profito Money generated by the business

Liability Contribution by the outsider


Accounting Concepts(Principles) Business Entity concept Accrual concept: Recognition principle:

o Both cash and credit transaction to be recorded at the time of the event

Creditor (payable) Debtor(Receivable)

Matching Concepts: Profit determination principle.o Revenue should be matching corresponding

expense

Accounting Relationship S=A

o Capital + RP + Liabilities =Assetso Equity + Liabilities = Assets

Equity = A-L Equity = C +RP

Profito Distribute: Distribution of profit is called

DIVIDENDo oro Not to distribute: Retained Profit

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Day 1

What is the form of organization? Sole proprietorship Partnership Joint Stock Companies

o Organisation registered under the Companies Act -1956

Corporationo Organization created under a special law

enacted for the purpose Society Trust Department

Who is the owner of the organization?JSC:

Shareholderso Individualo Institutiono Government

Who is the manager of the organization?JSC

Board of Directors

Board and SH relationship


Agent and Principal Relationshipo SH : Principalo BOD: Agent

Agency Problemo Moral Hazardo Information asymmetry (IA)

Financial accounting is expected to address IA

Financial Accounting is means of communication between Board and SH about the Business Decisions taken by the Board

Financial Accounting is the process of measuring and converting the business decisions into financial statements.

Business decision Financing Decisions

o Decision relating to sources of funds Owners money (Shareholder fund or Equity) Outsiders money

Investment Decisionso Results in creation of asseto Asset is anything which has the ability to

generate cash flow Operating Decisions

Accounting EquationAssets = Equity + Liability


Every Business decision will involve financial items . All financial items can be classified into following

Incomes Expenses

o I –E = Profit Assets Liabilities Equity

o A = L+EAll these financial items will appear in the Financail sTatements

Balance Sheet Income Statement Cash Flow Statement

The entire of measuring and converting BD into FS is governed by GAAP (Indian GAAP)

Documents

upto Day 10