Financial_Analysis_and_Reporting_2024_Notes.pptx

This presentation is about financial analysis and accounting
In this all the basics of accounting are present

1. Financial Analysis and Reporting Dr Alagesan M V Dr . Trinley Paldon

2. Need for accounting What the enterprise owns? What the enterprise owes? Whether the enterprise has earned a profit or suffered a loss on account of running a business? What is the enterprise’s financial position ? Help to the management; replacement of memory; comparative study; acceptance by authorities; evidence in Court; sale of business.

3. Developing of Accounting Pacioli who lived in Italy in the 15 th Century (1445-1519).

4. According to the American Institute of Certified Public Accountant: “ Accounting is the art of recording, classifying and summarising in significant manner and in terms of money, transactions and events which are, in part, at least of a financial character and interpreting the results thereof ” Accounting is the language of business .

5. Functions of accounting: Recording : recorded in an orderly manner in a Journal. Classifying : systematic analysis of the recorded data to group transactions or entries of one nature at one place in a ledger. Summarising : Trial Balance, Income Statement and Balance sheet Dealing with financial transactions Analysing and Interpreting Communicating

6. Usage of Accounting Information Proprietors Managers Creditors Prospective investors Government and Regulatory Authorities Employees

7. Accounting Principles Uniformly laid down standards. “They are a body of doctrines commonly associated with the theory and procedures of accounting, serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternatives exist”. The conventions, assumptions, concepts and rules which define accepted accounting practice constitute generally accepted accounting principles (GAAP). They are: Accounting Concepts, Accounting Conventions

8. Accounting Concepts It includes those basic assumptions or conditions upon which the science of accounting is based. Separate Entity Concepts Going Concern Concepts Money Measurement Concept Cost Concept Dual Aspect Concept Accounting Period Concept Realisation Concept Periodic Matching of Cost and Revenue Concept

9. Accounting Conventions It includes those customs or traditions which guide the accountant while preparing the accounting statements. Convention of Conservatism Convention of Full Disclosure Convention of Consistency Convention of Materiality

10. Accounting and Other discipline Accounting and Economics Accounting and Statistics Accounting and Mathematics Accounting and Law

11. Business Organizations Business organizations bring together materials, technology, people, and money in order to satisfy their customers’ needs and thereby seek to earn a profit. Merchandising/Trading Organizations: Eg : Wal-Mart, and Amazon etc. Manufacturing Organizations: Eg : Amul , GM etc. Service Organizations: Eg : Goldman Sachs, State Bank of India etc.

12. Forms of Business Organization 1- Sole Proprietorship 2- Partnership 3- Company 4- One person company 5- Private Limited company 6- Public Limited company

13. Sole Proprietorship A single individual carries on a business where liability is unlimited. Eg : 1- Manasi started a proprietorship business with an investment of Rs. 10,000. After one year, the business has Rs. 15,000 in cash and owes Rs. 3000 in unpaid bills. Manasi has no personal cash or debt. 2- Sunil started a proprietorship business with an investment of Rs. 10,000. After one month, the business has Rs. 15,000 in cash and owes Rs. 20,000 in unpaid bills. Sunil has personal cash of Rs. 8000 and no personal debt.

14. Partnership A partnership has a minimum of two and a maximum of 100 persons trading together as one firm. Each partner has unlimited liability for all the debts and obligations of the firm and is further responsible for the liabilities in the firm of his fellow partner or partners. Eg : Maruti Suzuki, BMW & Louis Vuitton, GoPro & Red Bull etc. Eg : 1- Ajay and Pankaj started an equal partnership with an investment of Rs. 10,000 each. After two months, the business has Rs. 25,000 in cash and Rs. 18,000 in unpaid bills. Neither Ajay nor Pankaj has personal cash or debt. 2- Sneha and Sunayana started an equal partnership with an investment of Rs. 10,000 each. After three years, the business has Rs. 25,000 in cash and Rs. 30,000 in unpaid bills. Sneha and Sunayana have personal cash of Rs. 5000 each and have no personal debt.

15. Company A company is a legal entity unlike a sole proprietorship or partnership. Under the law, it has most of the rights of a natural person.

16. One-person company A one-person company has a single shareholder with limited liability. Eg : Durga Cotton Private Limited (OPC) , Nature’s Nectar Wellness Private Limited (OPC) etc.

17. Private limited company A Private Limited company must have a minimum of two shareholders and can have up to 200 shareholders. Private companies’ shares are not available to the public. Eg : Malabar Gold Pvt Ltd., Parle Products Pvt Ltd. etc., Jaquar & Company Pvt Ltd. etc.

18. Public limited company A public limited company must have a minimum of seven shareholders; there is no maximum. Eg : Bharat Heavy Electricals Ltd., Bharat Petroleum Corporation Ltd., Indian Oil Corporation Ltd. etc. Eg : 1- Darshak and Kshitij started a company with an agreed share capital of Rs. 10,000 each. They contributed Rs. 8000 each. After one year, the company has Rs. 25,000 in cash and Rs. 18,000 in unpaid bills. Neither Darshak nor Kshitij has personal cash or debt. 2- Himanshu and Manoj started a company with an agreed share capital of Rs. 10,000 each. They contributed Rs. 10,000 each. After two months, the business has Rs. 25,000 in cash and Rs. 30,000 in unpaid bills. Himanshu and Manoj have personal cash of Rs. 5000 each and have no personal debt.

19. Organization structure Flowchart

20. Legal formalities for a company: Register the company- Registrar of Companies Memorandum of Association- Name of the company, its objects, a statement of the limited liability of its members, the amount of share capital, and how the share capital is divided into shares. Articles of Association- Internal matters: meetings, voting, and issue of shares. Registrar issuing a certificate of incorporation

21. Accounting fraud examples: PMC Bank: Concealing the default on loans Ricoh India : Reporting fictitious sales, cash, receivables and inventories. Enron : Using off-balance sheet entities to hide debts. Worldcom : Overstating assets and understating expenses. Bernard Madoff : Defrauding investors in a Ponzi scheme. Toshiba : Reporting sales before completion of contracts.

22. Wirecard : Faked sales transactions to inflate revenue and profits

23. Indian Accounting Standards (IAS) Listed companies must comply with Indian Accounting Standards from 1 st April, 2016. IFRS ( International Financial Reporting Standards ) follows the fair value measurement basis, whereas Indian standards largely follow historical cost.

24. Institutions that Regulate Accounting The Ministry of Corporate Affairs (MCA), Government of India Securities and Exchange Board of India (SEBI) The Institute of Chartered Accountants of India (ICAI) The Ministry of Finance- CBDT (Central Board of Direct Taxes) and the CBIC (Central Board of Indirect taxes & Customs) The Reserve Bank of India The Comptroller and Auditor-General of India The International Accounting Standards Board (IASB)- International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) International Organization of Securities Commissions (IOSCO)

25. The Accounting Equation Assets = Liabilities + Capital Assets – liabilities = Capital

26. Assets An asset is a resource that gives benefits to its owner. An enterprise should consider a resource its asset if a- it controls the resource, and b- the resource is expected to give benefits. Eg : Cash, Patents, Trademarks, Equipment etc.

27. Liabilities A liability is an obligation that requires to be settled by giving up assets. Eg : Trade payables, and Income tax payable etc.

28. Equity Equity is net assets or residual. It includes share capital, securities premium, and retained earnings.

29. Assets consist of non-current assets and current assets. Non-current assets includes tangible assets, intangible assets, financial assets and deferred tax assets. Tangible assets : Property, plant and equipment: land, buildings, plant and machinery, office equipment, computers, furniture and vehicles. Capital work-in-progress. Intangible assets : Goodwill, software, sub-contracting rights, and intellectual property rights (e.g. copyrights and patents). Financial assets : Long term investments, trade receivables and loans. Deferred tax assets Current assets includes inventories and financial assets. Inventories : Raw materials, semi-finished products and finished goods. Financial assets : Cash, short-term investments and trade receivables.

30. Financial liabilities : Trade payables, bills payable and security deposits payable. Provisions : Employee benefits payable; gratuity, pensions and paid leave. Current tax liabilities : Income tax payable for the current period. Expenses includes cost of materials consumed, employee benefit expense, finance costs, depreciation and amortization expense, and other expense. Cost of materials consumed : cost of raw materials Purchases of stock in trade : Purchase of finished goods for resale. Employee benefits expense : employees’ salaries and other benefits. Finance costs : interest and other borrowing costs. Other expenses : Repairs and maintenance, power and fuel, advertising and sales promotions, and insurance

31. Equity includes equity share capital and other equity. Equity share capital Other equity : retained earnings, sales revenue, interest income Non-controlling interest Liabilities consist of non-current liabilities and current liabilities. Non-current liabilities include financial liabilities, provisions and deferred tax liabilities. Financial liabilities : borrowings.

32. Effects of Transactions On March 1 , Suresh invests Rs. 50,000 in cash. The first balance sheet of the new business will show cash of Rs. 50,000 and equity of Rs. 50,000. On March 2 , Suresh takes an interest-free loan of Rs. 20,000 from his friend, Manish for Softomation. On March 3 , Softomation pays Rs. 58,000 for a computer. On March 6 , Softomation purchases supplies for Rs. 6000 on credit.

33. On March 9 , Softomation sells its first software to a retail store and receives Rs. 12,000 in fee. Revenue increases the owner’s claim on the business. On March 12 , Softomation pays on account for the supplies bought on credit on March 6, Rs. 2000. On March 17 , Suresh takes supplies costing Rs. 1000 for personal use. The reporting entity assumption requires separation of personal and business activities. On March 23 , Softomation returned supplies costing Rs. 1900 and received full refund.

34. On March 26 , Softomation pays employees’ salaries of Rs. 4000 and office rent of Rs. 1200. On March 29 , Softomation completes a software for a shoe store. The customer will pay the agreed fee of Rs. 8000 a week later. On March 30 , Suresh withdraw Rs. 3500 for personal use. The reporting entity assumption requires separation of personal and business activities. On March 31 , Softomation uses supplies costing Rs. 1400.

35. Accrual System: Revenue recognition Revenue is recognised when they are earned regardless of when cash is received and records expenses when they are incurred regardless of when cash is paid. Profit equals revenues earned less expenses incurred. The realization principle or the revenue recognition principle, requires that revenue be recognised when the revenue-earning process is complete or virtually complete. The revenue earning process would be regarding as virtually complete when the firm sells the product or provides a service with assurance of payment by the customer.

36. Accounts Different types of accounts: Personal Accounts Real Accounts Nominal Accounts

37. Personal Accounts It includes the accounts of persons with whom the business deals. It can be classified into the following: Natural Personal Accounts: eg . Sonam’s Account, Tim’s Account etc. Artificial Personal Accounts: the account of a Limited Company, the account of an Insurance Company etc. Representative Personal Accounts: outstanding rent account, outstanding salaries account. Rules : DEBIT THE RECEIVER CREDIT THE GIVER

38. Real Accounts It includes what the business owns and can be classified into: Tangible Real Accounts: eg . Furniture account, stock account etc. Intangible Real Accounts: eg . Patent’s account, goodwill account etc. Rules: DEBIT WHAT COMES IN CREDIT WHAT GOES OUT

39. Nominal Accounts It includes items related with income or expense for eg . Rent, lighting, insurance etc. Rules: DEBIT ALL EXPENSES AND LOSSES CREDIT ALL GAINS AND INCOMES

40. The Double-entry System It records every transaction with equal debits and credits. Total of debits must equal the total of credits.

41. Journal The journal is a chronological record of an enterprise’s transaction. It is the book of original record or primary book . The process of recording transaction in a Journal, is termed as ‘ Journalising ’. It has separate columns to record the following information about each transaction: Date; Individual accounts; Debit and credit amounts; Brief explanation of the transaction; and Posting reference/ Ledger Folio.

42. Journal Date Particulars L.F. Debit (Amount) Credit (Amount)

43. From the following transactions find out the nature of account and also state which account should be debited and which account should be credited. Rent paid Outstanding for salaries Paid to Suresh Dividends received

44. Let us set up Vogue Company, a business that supplies new designs for dresses with the following information. Journalise the information provided. June 1 , Rakesh invested cash in Vogue Company’s share capital, Rs . 50,000. June 2 , Bought office supplies for cash, Rs . 2000. June 3 , Paid office rent for June, Rs . 1500. June 4 , Bought equipment from Agrawal Company for cash, Rs . 3000.

45. June 5, Signed an agreement with EthinicWear for developing a special design. The agreement provided for payment of a fee of Rs. 2000 by EthnicWear on completion of the work. June 6, Paid for a one-year fire insurance policy that will expire May 31, next year, Rs. 720. June 7, Sold design for cash, Rs. 2000. June 8, Received from Kidswear , a customer, for services to be provided later, Rs. 1500. June 9, Bought office supplies on credit from Mohan Company, Rs. 3500. June 10, Billed Shah Company for designs completed, Rs. 9000. June 14, Paid Mohan Company on account, Rs. 1000.

46. June 18, Received from Shah Company on account, Rs. 4000. June 21, Appointed an office manager on a monthly salary of Rs. 1500. June 22, Used office supplies, Rs. 1800. June 25, Completed designs for Gupta Company for Rs. 3000 and received Rs. 1000 in part payment. June 27, Paid telephone bill, Rs. 200. June 28, Paid office assistant’s June salary, Rs. 800. June 29, Paid electricity bill, Rs. 150. June 30, Paid dividend, Rs. 2,200.

47. Q.Bhavya started his business with the following assets and liabilities with opening entries of : Debit balances on Jan 1: Cash in hand Rs . 8,000 Cash at bank Rs . 25,000 Stock of goods Rs . 20,000 Furniture Rs . 2000 Building Rs . 10,000 Debtors: Vijay Rs . 2000 Anil Rs . 1000 Madhu Rs . 2000

48. Creditors: Anand Rs . 5000 Loan from Bablu Rs . 10,000 Following were further transactions in the month of January, 2023: Jan 1: Purchased goods worth Rs . 5000 for cash less 20% trade discount and 5% cash discount. Jan 4: Received Rs . 1980 from Vijay and allowed him Rs . 20 as discount. Jan 6: Purchased goods from Bharat Rs . 5000. Jan 8: Purchased plant from Mukesh for Rs . 5000 and paid Rs . 100 as cartage for bringing the plant to the factory and another Rs . 200 as installation charges. Jan 12: Sold goods to Rahim on credit Rs . 600 .

49. Jan 15: Rahim became insolvent and could pay only 50 paise in a rupee. Jan 18: Sold goods to Ram for cash Rs . 1000. Jan 20: Paid salary to Ratan , Rs . 2000 Jan 21: Paid Anand , Rs . 4800 in full settlement. Jan 26: Interest received from Madhu , Rs . 200. Jan 28: Paid to Bablu interest on loan, Rs . 500. Jan 31: Sold goods for cash, Rs . 500. Jan 31: Withdrew goods from business for personal use Rs . 200. Enter the above transactions in the Journal of Bhavya .

50. Trade Discount VS Cash Discount Trade Discount is a discount given by the supplier to the customer in the catalog price of the goods whereas the Cash Discount is given by the supplier on the invoice price, for immediate payment. Eg .: Anna bought 200 T-shirts, from Roy for Rs. 300 each, subject to trade discount @ 15%. Further, if the terms of payment are 5%, 30 days.

51. Total amounts of goods sold 60,000 Less: Trade Discount @ 15% 9000 Amount payable as per Invoice 51,000 Less: Cash Discount @ 5% 2550 Net amount payable 48450

52. Ledger It is a book which contains various accounts . In other words, Ledger is a set of accounts. It contains all accounts of the business enterprise whether Real, Nominal or Personal . The term “ Posting ” means transferring the debit and credit items from the Journal to their respective accounts in the Ledger. It should be noted that exact names of accounts used in the Journal should be carried to the Ledger.

53. The Ledger Folio (L.F.) column in the Journal is used at the time when debits and credits are posted to the Ledger. The page number of the Ledger on which the posting has been done is mentioned in the L.F. column of the Journal. Similarly a folio column in the Ledger can also be kept where the page from which posting has been done from the Journal may be mentioned. Thus, there are cross references in both the Journal and the Ledger.

54. The T Account Title of Account If the total debits exceed the total credits, the account has a debit balance. If the total credits exceed the total debits, the account has a credit balance. Particulars Amount Particulars Amount Left=Debit Right= Credit

55. Journalise the following transactions, post them in the Ledger and balance the accounts on 31 st March, 2021. Ram started business with a capital of Rs. 10,000. He purchased goods from Mohan on credit Rs. 2000. He paid cash to Mohan Rs. 1000. He sold goods to Suresh Rs. 2000. He received cash from Suresh Rs. 3000.

56. 6. He further purchased goods from Mohan Rs. 2000. 7.He paid cash to Mohan Rs. 1000. 8. He further sold goods to Suresh Rs. 2000. 9. He received cash from Suresh Rs. 1000.

57. Trial Balance It is a statement containing the various ledger balances on a particular date. The Trial Balance represents all transactions relating to different accounts in a summarized form for a particular period. It forms the basis for preparing financial statements such as the Income Statement and the Balance Sheet.

58. Trial Balance Particulars Debit Credit Ledger Balance Total

59. Income measurement-Merchandise organization Whether the enterprise has earned profit or suffered loss during the accounting period, Where does the enterprise stand now? What is the Financial position?

60. Trading and Profit and Loss Account Trading account gives the overall result of trading, i.e., purchasing and selling of goods. It takes into account on the one hand the cost of goods sold and on the other the value for which they have been sold away. The profit disclosed by the Trading Account is termed as Gross Profit . Similarly, the loss disclosed by the Trading Account is termed as Gross Loss .

61. Trading Account Gross Profit Sales- Cost of Goods sold Cost of Goods sold Opening stock + Purchases + Direct expenses-Closing stock Gross Profit Sales + Closing stock –(Opening stock + Purchases + Direct expenses - Closing stock) Or Gross Profit (Sales + Closing Stock) – (Opening stock + Purchases + Direct expense)

62. Direct Expenses It includes those expenses which have been incurred in purchasing the goods, bringing them to the business premises and making them fit for sale. Eg : carriage charges, taxes including octroi and import duty , fuel and power, wages etc.

63. Trading account Particulars Amount Particulars Amount To Opening stock To Purchase xx Les: Returns xx Drawings xx To Wages To Customs and import duty To Freight, carriage and cartage To Royalty (production) To Gas, Electricity, water, fuel To Packing materials To Gross Profit account Xx Xx Xx Xx Xx Xx Xx Xx xx xx By Sales xx Less: Returns xx By Closing stock By Gross Loss account Xx Xx Xx Xx

64. Prepare the Trading Account of Mr. Tim for the year ending 31 st December, 2022 from the data as follows: Purchases –Rs. 10,000 Purchases Returns- RS. 2000 Sales- Rs. 20,000 Sales Returns- Rs. 5000 Wages- Rs. 4000 Carriage charges- Rs. 2000 Stock on 1.1.2022- Rs. 4000 Stock on 31.12.2022- Rs. 6000

65. Profit and Loss account Particulars Amount Particulars Amount To Gross Loss b/d To Salaries To Provident fund contribution To Rent To Royalties (Sales) To Commission To Advertisement To Bad debts To Discount To Printing and stationary To Interest To Miscellaneous expenses To Net Profit Xx Xx Xx Xx Xx Xx Xx Xx Xx Xx Xx Xx Xx xx By Gross Profit b/d By Discount received By Commission By Interest By Net Loss Xx Xx Xx Xx Xx xx

66. From the following balances, taken from the Trial Balance of Timothy, prepare a Trading and Profit and Loss Account for the year ending 31 st December, 2020: The closing stock on 31 st December, 2020 is Rs. 5000 Particulars Debit Credit Stock on 1.1.2020 Purchases and Sales Returns Carriage Cartage Rent Interest received Salaries General expenses Discount Insurance 2000 20,000 2000 1000 1000 1000 2000 1000 500 30,000 1000 2000 500

67. Balance Sheet According to the American Institute of Certified Public Accountant, Balance Sheet is “a list of balances of the asset and liability accounts . This list depicts the position of assets and l iabilities of a specific business at a specific point of time .”

68. Balance sheet Liabilities Amount Assets Amount Bank overdraft Outstanding expenses Bills Payable Sundry creditors Long-term loans Capital : xx Add: Net Profit: xx Less: Drawings: xx Less: Net loss: xx Less: Calls in arrears: xx Xx Xx Xx Xx Xx Xx Xx xx Cash in hand Cash at bank Prepaid expenses Bills receivable Sundry debtors Closing stock: Raw material: xx Work-in-progress: xx Finished goods: xx Furniture Plant and machinery Building Land Goodwill Xx Xx Xx Xx Xx

69. Prepare a Trading & Profit and Loss Account and a Balance Sheet using the following information: Particulars Amount Particulars Amount Opening stock Sales Depreciation Commission (Cr.) Insurance Carriage inwards Furniture Printing charges Carriage outwards Capital Creditors Bills payable 1250 11,800 667 211 380 300 670 481 200 9228 1780 541 Plant and machinery Returns outwards Cash in hand Salaries Debtors Discount (Dr.) Bills receivable Wages Returns inwards Bank overdraft Purchases Petty cash in hand Bad debts 6230 1380 895 750 1905 328 2730 1589 1659 4000 8679 47 180

70. The value of closing stock was Rs . 3700.

71. Q. From the following Trial Balance and additional information, you are required to prepare a Final Accounts. Particulars Debit (Rs.) Credit (Rs.) Capital Sundry debtors Drawings Machinery Sundry creditors Wages Purchases Opening stock Bank balance Carriage charges Salaries Rent and taxes Sales 5400 1800 7000 10,000 19,000 4000 3000 300 400 900 51,800 20,000 2800 29,000 51,800

72. Additional information: Closing stock Rs. 1200. Outstanding rent and taxes Rs. 100. Charge depreciation on machinery at 10%. Wages prepaid Rs. 400.

73. Income measurement-Manufacturing organization Manufacturing account: it gives the cost of the goods manufactured by a manufacturer during a particular period. Trading account: This account gives information about the gross profit or loss made by a manufacturer in selling the manufactured goods. In case he is a manufacturer-cum-trader, his Trading account will disclose not only the profit made by him on selling his manufactured goods, but also the profit made by him in selling the goods purchased by him from others. Profit and loss account: This account gives the overall profit or loss made or suffered by the manufacturer or manufacturer-cum-trader during a particular period.

74. Manufacturing account for the year ending … Particulars Amount Particulars Amount To Work-in-progress (Opening) To Opening stock Add: Purchase of Raw materials To Direct or Productive wages To Factory overheads: Power and fuel Repairs of plant Depreciation on plant Factory rent XX XX XX XX By Work-in-progress (Closing) By Sale of scrap By Cost of Production of finished goods Xx Xx xx Total xx xx

75. Trading account for the year ending … Particulars Amount Particulars Amount To Opening Stock of Finished goods To Cost of Production of Finished goods To Purchases of Finished goods: xx Less: Returns: xx To Carriage charges on goods purchased To Gross Profit c/d* Xx Xx Xx Xx xx By Sales: xx Less: Returns: xx By Closing stock of Finished goods By Gross loss c/d* Xx xx xx xx

76. Q. From the following details, prepare a Manufacturing and a Trading account for the year ending 31 st December , 2022. Stock on 1.1.2022: Raw materials- Rs. 10,000 Work-in-process- Rs. 5000 Finished Goods- Rs. 20,000 Stock on 31.12.2022: Raw materials- Rs. 5000 Work-in-process- Rs. 15,000 Finished Goods- Rs. 30,000

77. Purchase of raw materials- Rs . 50,000 Direct wages- Rs . 10,000 Carriage charges on purchase of raw materials- Rs. 5000 Factory power- Rs. 5000 Depreciation on Factory machines- Rs. 5000 Purchase of Finished Goods- Rs. 30,000 Cartage paid on Finished goods purchased- Rs. 2000 Sale of Finished Goods- Rs. 100,000

78. From the following Trial Balance prepare the Manufacturing Account, the Trading and Profit and Loss account for the year ending 31 st March, 2021 and the Balance sheet as on that date: Particulars Debit Credit Shri Banker’s capital account 41,000 Shri Banker’s Drawing account 6100 Mrs. Banker’s loan account 4000 Sundry Creditors 45,000 Cash in Hand 250 Cash at Bank 4000 Sundry Debtors 40,500

79. The stock on 31.03.2021 was as follows: Rs. 4000 Raw materials, Rs. 4500 Work-in-progress, and Rs. 28,000 Finished Goods.

80. Income statement format The purpose of income statement is to provide information about different sources of income and gains and also expenses and losses incurred during an accounting period. Incomes and expenses may be arranged one after the other and such a presentation is called vertical format . The same information may also be presented in a T-shaped format wherein incomes are presented on the right-hand side and expenses are on the left-hand side, such a presentation is called horizontal format . The Schedule III prescribes the vertical format to be followed showing income first followed by expenses.

81. Income Measurement: Service Organization Particulars Amount Income Total income Xxx xxx Expense Total expense Xxx xxx Profit before tax Less: tax Profit after tax/Profit for the year/Net profit Xxx Xxx xxx

82. Balance Sheet Particulars Amount Assets Xxx Total assets Xxx Liabilities Xxx Total liabilities xxx

83. Particulars Debit Credit Equipment Accumulated depreciation, Equipment Office supplies Trade receivables Cash Prepaid insurance Trade payables Unearned revenue Share capital Dividends Revenue from services Rent expense Telephone expense Salaries expense Electricity expense Office supplies expense Insurance expense Depreciation expense Salaries payable Unbilled revenue 3000 2900 7000 46,930 660 2200 1500 200 1300 150 2600 60 50 700 50 2500 600 50,000 15600 500 Total 69,250 69,250

84. Statement of cash flow The statement of cash flows classifies cash flows into operating, investing and financing categories. Cash receipts and payments result from operating, investing and financing activities.

85. Cash flow from operating activities- It can be computed directly by taking cash receipts from customers and cash paid to suppliers, employees and government. Cash flow from investing activities- It consist of purchases and sales of property, plant and equipment and investments and interest and dividend income. Cash flows from financing activities- It arises from raising and repaying debt and equity capital and paying interest and dividend.

86. Cash flows are inflows and outflows of cash and cash equivalents. Cash includes cash in hand and demand deposits. Cash equivalents are short-term investments that can be quickly converted into cash without any significant risk of change in value. Cash equivalents are held as a substitute to cash and not as investments. Eg : deposits held with banks for short duration, investment in money market instruments like treasury bills, debt mutual funds etc.

87. Non-cash investing and financing activities: Transactions that affect assets or liabilities but do not result in cash inflows or outflows . Eg .: 1. converting debt into equity. 2. Converting preference shares into equity. 3. Purchasing a building by incurring a mortgage to the seller. 4. Obtaining an asset on a finance lease. 5. Exchanging a non-cash asset for another non-cash asset.

88. Q1. Some profitable firms are unable to pay their suppliers promptly. Why? Q2. Why did Infosys hold cash of Rs. 305 billion (38% of assets) at the end of the year? Q3. Despite recurring losses, how does XYZ Ltd. stay afloat and expand?

89. Cash flow statement-Direct Method Decrease in Current Assets, Increase in Current Liabilities Increase in Current Assets, Decrease in Current Liabilities Results in Increase in Cash Results in Decrease in Cash

90. Particulars Amount Amount Cash flows from Operating Activities: Cash received from customers Cash paid for merchandise Cash paid to employees Cash paid for income taxes Net cash provided by(used in) Operating Activities Xx (xx) (xx) (xx) Xx Cash flows from Investing Activities: Purchase of property, plant and equipment Sale of property, plant and equipment Purchase of investments Interest received Net cash provided by (used in) Investing Activities (xx) Xx (xx) xx xx Cash flows from Financing Activities: Proceeds from issue of share Dividend paid Redemption of debentures Repayment of short-term loans Interest paid Net cash provided by (used in) Financing Activities Xx (xx) (xx) (xx) (xx) Xx Net increase/decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Xx Xx Xx

91. 1- A Compass Company has the following operating items: Cash received from customers-Rs. 881,000; cash paid to suppliers and employees-Rs. 797,000; and income tax paid-Rs. 12,000. 2- Compass Company’s investing activities during the year ended March 31 st , 2023 are as follows: Purchase equipment for cash-Rs. 173,000. Sold equipment for cash-Rs. 22,000 (cost-Rs. 67,000; accumulated depreciation-Rs. 51,000) Purchased equipment on credit-Rs. 49,000. Purchased investments for cash-Rs. 26,000. Sold investments for cash-Rs. 42,000 (cost-Rs.51,000) The company received the entire interest-Rs. 7000.

92. 3- The Compass Company’s financing activities during the year ended March 31 st , 2023 are as follows: Issued shares at par-Rs. 100,000. Converted debentures into equity shares of Rs. 10 at par-Rs. 50,000. Paid dividends-Rs. 25,000. Redeemed debentures-Rs. 27,000. Repaid a current loan-Rs. 1000. Interest paid-Rs. 22,000.

93. From the given profit and loss statement and additional information from the Balance sheet, ascertain the cash flow from operating activities for Samurai Limited for the year 2021-22 using Direct method. Particulars Amount Sales revenue Interest earned Total income Less: Expenses Material consumed Employees cost Administrative and marketing expenses Depreciation and amortization Interest and finance charges Profit before tax Provision for tax 168.75 22.43 191.18 67.47 23.34 37.89 18.56 13.45 30.47 10 Profit after tax 20.47

94. Additional information: The company paid Rs. 8 crore towards taxes during the year. The following details were extracted from the balance sheet of the company. Particulars 31 st March 2021 31 st March 2022 Inventories Trade receivables Trade payables Other current liabilities 43.24 39.77 26.89 7.75 55.15 30.43 20.45 11.34

95. From the following summary of Cash account of Thundrey Ltd., prepare Cash Flow Statement for the year ended 31 st March 2021 in accordance with AS-3 using the direct method. The company does not have any cash equivalents. Particulars Amount Particulars Amount To Balance b/d To Equity Shares To Receipt from Customers To Sale of Fixed Assets 50 300 2800 100 By Payment to Suppliers By Purchase of Fixed Assets By Overhead Expenses By Wages & Salaries By Taxation By Dividends By Repayment of Loan By Balance c/d 2000 200 200 100 250 50 300 150 3250 3250

96. On the basis of information given, fill the missing entries: Particulars Start-up Ltd. Mature Ltd. Expand Ltd. Cash Rich Ltd. Cash & cash equivalent at end of the year Cash & cash equivalent at beginning of the year 42.34 3.28 235.27 ? ? 235.67 ? 256.17 Net cash flow increase/decrease in cash and cash equivalents 51.78 (100.69) Cash flow during the year: Operating activities Investing activities Financing activities (5.78) (102.47) ? ? (276.38) (104.73) 334.89 ? 349.09 580.79 (221.12) ? Net cash flow increase/decrease in cash and cash equivalents 39.06 51.78 (100.69) 177.49

97. Indirect Method: Starts with the Profit or loss figure from the profit and loss statement and make the following suitable adjustments to arrive at the cash flow from operating activities. The adjustments are made to remove the effect of: non-cash expenses: Depreciation, amortization and provisions. Non-operating income and expenses: Interest expenses, profit or loss on sale of assets or investments, interest or dividend earned .

98. Indirect Method of Cash Flow Statement Particulars Amount Profit before tax Add: depreciation and amortization Any other non-cash expense Interest expense Loss on sale of investments Loss on sale of assets Decrease in trade receivables Decrease in inventories Decrease in prepaid expenses Increase in trade payables Increase in other current liabilities Xx Xx Xx Xx Xx Xx Xx Xx Xx Xx xx

99. Less: Interest income Dividend income Profit on sale of investments Profit on sale of assets Any other non-cash/non-operating income Increase in trade receivables Increase in inventories Increase in prepaid expenses Increase in other current assets Decrease in trade payables Decrease in other current liabilities Taxes paid Xx Xx Xx Xx Xx Xx Xx Xx Xx Xx Xx xx Cash flow provided from/used in Operating activities xx

100. From the information given on Samurai Limited, ascertain the cash flow from operating activities for the year 2020-21.

101. Calculate the cash flow from operating activities on the basis of the following information using direct and indirect method: Profit and loss statement for the year ended 31 st December 2021 Particulars Amount Amount Sales Interest earned Total income Material consumed Other expenses Loss on sale of asset Depreciation Interest & finance charges Profit before tax Provision for income tax Profit after tax 487.23 58.45 545.68 246.45 133.18 33.45 93.34 82.11 (42.85) (42.85) Balance sheet excerpts as on 31.12.2021 31.12.2020 Inventories Trade receivables Trade payables Provision for tax 67.33 96.56 84.78 45.30 112.65 94.33 4.80

102. Analysis of the Cash Flow Statement Stages Operating Investing Financing Start-up and initial stage Negative/low Negative Positive Maturity stage Positive Negative Negative Expansion stage Positive Negative Positive Cash rich Positive Negative

103. Tool Kit of the Financial Analyst Multi-step income statement Horizontal analysis Common-sized Analysis Ratio Analysis Cash flow analysis

104. Multi-step Statement of Profit and Loss The general Statement of Profit and Loss, does not show the profitability at different intermediate levels of business operations . If that were done the income statement would become much more informative about the profitability and will disclose the following different levels of intermediate profit leading up to the PAT/EAT .

105. 1 Gross Profit GP 2 Profit before depreciation, interest and tax (Cash operating profit) PBDIT OR Earnings before interest, tax, depreciation and amortisation EBITDA 3 Profit before interest and tax (Operating profit) PBIT/OP OR Earnings before interest and tax EBIT 4 Profit before exceptional items and tax PBEIT OR Earnings before exceptional items and tax EBEIT 5 Profit before tax PBT OR Earnings before tax EBT 6 Profit after tax/Net profit PAT/NP OR Earnings after tax EAT

106. Multi-Step Statement of Profit and Loss account 31-Mar, 2021 31-Mar, 2020 INCOME: Sales Other operating revenue 22,694.87 393.16 23,448.39 434.81 Revenue from operations 23,088.03 23,883.20 Expenses: Materials cost of goods sold Excise duty Manufacturing expenses Cost of goods sold 14,624.15 1321.35 396.08 16,341.58 15,056.86 1296.68 452.27 16,805.81 Gross Profit 6746.45 7077.39 Employee benefit expenses Administrative, marketing and other expenses Expenses, included in above items, capitalized Profit before depreciation, interest and tax (PBDIT) 997.07 1349.30 (22.27) 4422.35 917.12 1395.35 (17.02) 4781.94 Depreciation, amortization and impairment expenses Operating profit (PBIT) Finance costs Other Income 307.29 4115.06 1.40 1221.97 307.16 4474.78 1.05 1073.59 Profit before tax (PBT) Total tax expenses Profit after tax(PAT) 5335.63 1508.07 3827.56 5547.32 1617.65 3929.67

107. Horizontal Analysis It facilitates a quick review of the current year’s performance and financial position of a business over the previous year . To work out change (increase/decrease) in each item of the balance sheet and statement of profit and loss of the current year over that of the last year and, express these changes as % of last year’s figure .

108. Horizontal Analysis: Statement of Profit and Loss for the year ended March 31, 2021 Particulars 31.03.2021 31.03.2020 Revenue from operations Other income 6585.96 134.28 5775.42 69.35 Total income 6720.24 5844.77 Materials cost of goods sold Excise duty Employee benefits expense Finance costs Depreciation and amortization expense Other expenses 3648.47 450.70 500.40 12.15 119.63 1162.25 3173.47 397.10 370.79 12.73 104.91 1079.13 Total expenses 5893.60 5138.13 Profit before exceptional items and tax Add: Exceptional items 826.64 (57.81) 706.64 202.39 Profit before tax Tax expense 768.83 909.03 Profit for the year (PAT) 539.04 712.03

109. Balance sheet as at March 31, 2021 31.03.2021 31.03.2020 Fixed assets Non-current investments Other non-current assets Current investments Other current assets 1221.74 161.66 385.47 0.00 3191.12 1208.56 153.10 350.09 0.00 2377.23 Total Assets 4959.99 4088.98 Equity share capital Other equity Non-current borrowings Other non-current liabilities Current liabilities 62.49 3211.09 0.00 127.41 1559.00 62.46 2891.21 0.00 94.99 1040.32 Total Equity and Liabilities 4959.99 4088.98

110. Common-Sized Analysis This tool is very useful in comparing the performance and financial position of two companies , either in the same industry or in different fields . Since no two balance sheets will have the same figures they cannot be compared and analyzed based on absolute figures . They have therefore to be converted into what is known as common-sized statements. The conversion process is very simple: In case of balance sheet, each item is restated taking the total of ‘ Equity and Liabilities/Assets’ as 100 . In case of statement of profit and loss, total income is taken as 100 and all other items are restated proportionately.

111. Statement of Profit and Loss for the year ended March 31, 2023- Eicher Motors Ltd. Particulars Amount Revenue from Operations Other income 7944.06 227.31 Total Income 8171.37 Materials cost of goods sold Excise duty Employee benefits expense Finance costs Depreciation and amortization expense Other expenses 3706.57 906.09 385.05 2.79 153.34 749.54 Total Expenses 5903.38 Profit before tax 2267.99 Tax expense 716.97 Profit for the year 1551.02

112. Balance Sheet as at March 31, 2023 Particulars Amount Fixed assets Non-current investments Other non-current assets Current investments Other current assets 1239.61 2662.33 259.54 883.61 476.75 Total Assets 5521.84 Equity share capital Other equity Non-current borrowings Other non-current liabilities Current liabilities 27.21 3895.38 0.00 145.59 1453.66 Total equity and liabilities 5521.84

113. Statement of Profit and Loss as at March 31, 2023- TVS Motor Company Ltd. Particulars Amount Revenue from Operations Other income 13,190.06 173.37 Total Income 13,363.43 Materials cost of goods sold Excise duty Employee benefits costs Finance costs Depreciation and amortization expense Other expenses 8853.37 1054.75 745.64 43.95 287.81 1679.23 Total expenses 12,664.75 Profit before tax 698.68 Tax expense 140.6 Profit for the year 558.08

114. Balance sheet as at March 31, 2023 Particulars Amount Fixed assets Non-current investments Other non-current assets Current investments Other current assets 2046.15 1587.90 83.73 0.00 2186.89 Total assets 5904.67 Equity share capital Other equity Non-current borrowings Other non-current liabilities Current liabilities 47.51 2360.82 468.76 176.50 2851.08 Total equity and liabilities 5904.67

115. Ratios Expressing one item in relation to another in a meaningful way and draw inferences from that. The ratios can be divided into various categories depending upon the focus of analysis- profitability , growth , liquidity , Solvency, and efficiency etc.

116. Profitability ratios It measures the degree of operating success of a business. Profitability ratios: Profit margin = Earnings Per Share (EPS)=  

117. Measures of profits- gross profit, operating profit, net profit etc. Gross profit represents the excess of sales over cost of goods sold. From gross profit, other operating expenses are deducted to arrive at earnings before interest, tax, depreciation and amortization (EBIDTA) EBITDA is often referred to as cash operating profit.

118. From EBITDA non-cash expenses, that is depreciation and amortization are deducted to get another measure called EBIT or operating profit . EBT is after subtracting interest from EBIT. After meeting tax expenses, the bottom line is ascertained.

119. Gross Profit Ratio =   Operating Profit Ratio = OR Net Profit Ratio =  

120. Following are JYP Ltd. Data: Particulars 2023 2022 2021 2020 Sales Cost of goods sold 13,888 8084 14,002 9368 12,546 7749 10,643 6967 Gross profit Administrative and marketing expenses 5804 1543 4634 1573 4797 1307 3676 1210 EBITDA Depreciation and amortization 4261 513 3061 405 3490 277 2466 321 EBIT Interest 3748 724 2656 523 3213 504 2145 346 PBT Tax 3024 1008 2133 712 2709 907 1799 598 PAT 2016 1421 1802 1201 Number of equity shares 100 75 75 75

121. Liquidity Ratios Liquidity means the ability to repay short-term debts. It is also termed as working capital or short-term solvency ratio. Prominent liquidity ratios are: 1.Current Ratio = (Note: an ideal current ratio is 2:1)  

122. 2.Quick/Acid Test/Liquidity Ratio= ( Note: Quick Assets = Current assets- Inventory & pre-paid expenses. The ideal ratio is 1:1)  

123. Current assets includes cash in hand, balance with banks, inventories, trade receivables etc. Short-term investments often called marketable securities are also classified as current assets. Current liabilities include all short-term obligations. Eg : trade payables, outstanding expenses, provisions and short-term Standard: (Current ratio) More than 1 Current assets are adequate to pay off all current liabilities 1 Just sufficient Less than 1 Unable to pay current dues

124. From the following balance sheet, calculate liquidity ratio. liabilities Amount Assets Amount Equity share capital Reserves P & L Account Bank overdraft Bills payable Sundry creditors 100,000 50,000 50,000 30,000 25,000 45,000 Fixed assets Stock Sundry debtors Bills receivables Cash and bank Prepaid expenses Marketable securities 100,000 50,000 75,000 20,000 30,000 5000 20,000 300,000 300,000

125. Solvency/leverage Ratios These ratios help in ascertaining the long-term solvency of a firm, which depends basically on three factors: Whether the firm has adequate resources to meet its long-term funds requirements. Whether the firm has used appropriate debt-equity mix to raise long-term funds. Whether the firm earns enough to pay interest and installment of long-term loan in time.

126. Solvency ratios are: Debt-Equity Ratio= ( Note : Standard ratio is 2:1)   Long-term debt or long-term liabilities or term liabilities Total debt Shareholders’ net worth Debentures, Secured loan, Long-term Loan Long-term debt and current liabilities Equity Share Capital + Preference Share Capital+ Reserve and Surplus – Intangible and Fictitious Assets

127. Fixed Assets Ratio = ( Note: The ratio should not be more than 1 )   Net Capital Employed Gross Capital Employed Shareholders’ Net worth + Long-term liabilities Alternatively, Fixed assets including investment +Total Current assets-Current Liabilities Shareholders’ Net worth + Long-term liabilities+ Current liabilities Alternatively, Fixed Assets including Investment + Total Current Assets

128. Proprietary Ratio = ( Note: Higher the ratio ( more than 75%) , the stronger is the financial position of the company and the higher is the capability of bearing financial stress and vice-versa).  

129. Debt Ratio =   (Note: It is inverse of proprietary ratio.)

130. From the following balance sheet, calculate solvency group ratio. Liabilities Amount Assets Amount Equity share capital Preference share capital General reserves Securities premium P& L account Debentures Secured Bank Loan Bank overdraft Sundry creditors Tax Payables Dividend Payables 500,000 150,000 70,000 30,000 125,000 150,000 100,000 45,000 55,000 100,000 60,000 Land & building Plant & Machinery Furniture Investment Stock Sundry debtors Bills Receivables Cash and Bank Prepaid expenses Marketable securities Preliminary expenses Goodwill Patents 530,000 110,000 20,000 90,000 95,000 175,000 25,000 80,000 15,000 20,000 40,000 110,000 75,000