accounts unit 1

8/19/2019 accounts UNIT 1

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Executive Placement 2003 BIM

School of Management Studies – Striving towards Excellence

Vels University www.velsuniv.org

ACCOUNTS AND

FINANCE FOR LOGISTICIANS


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SYLLABUS

• UNIT I:

•

• Financial Accounti

ng: Meaning of double entry

accounting, Meaning, nature and importance

Accounting cycle, accounting equation. Journal, Ledger

and Trial Balance .Accounting concepts and

conventions, Financial statements !rofit " Loss

account " Balance s#eet. Financial statement Analysis

$omparative Analysis, $ommon si%e " Trend Analysis


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• UNIT II

•

• Financial &tatem

ent Analysis 'atio analysis (

$lassification of ratios, Advantages " )isadvantages

Fund flo* statements advantages and disadvantages

Marginal costing ( $ost +olume !rofit analysis ( Brea

-ven analysis ( B-!, !+ ratio, M&

•


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• UNIT III:• 0ntroduction to Fi

nancial Management ( 1ature of

Financial management (2b3ectives of financial

management Financial )ecisions 2rgani%ation of

Finance function ( Agency !roblem

• 4oring capital ( $oncepts ( Types ( )eterminants


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• UNIT IV

• &ources of capital

$ost of $apital ( Meaning and

&ignificance ( $omponents ( $ost of -quity, $ost of

)ebt, $ost of !referred capital, $ost of retained

earnings and *eig#ted average cost of capital. $apital

budgeting ( meaning ( )ifferent met#ods ( !aybac, 1et

!resent +alue, 0nternal rate of return, !rofitability

inde5 and average rate of return

•


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• UNIT V

•

• Financial ,2perati

ng and $ombined Leverages (Meaning

of $apital &tructure )eterminants of capital

structure .)ividend decision ( )ividend policy )ividend

t#eories ( 4alter and 6ordon modelof dividend (

&tability of dividend ( are split ( Buybac of s#ares.

•


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Executive Placement 2003 BIM School of Management Studies – Striving towards Excellence


REFERENCES

•

• 7. 0.M.!andey, Financial Management, +ias publis#ing

#ouse Ltd., 8t# edition, 9;.

• 9. !rasanna $#andra, Financial Management T#eory and

!ractice, Tata Mc6ra* . Financial and Management accounting by 'eddy and

Moort#y


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UNIT 1


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• A$$2?1T016:

• Accounting is t#e process of collecting, recording,

classifying summari%ing and interpreting financial data

for t#e needs of management.


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CLASSIFICATION (OR) BRANCHES OFACCOUNTING• F01A1$0AL A$$2?1T016

– J2?'1AL, L-)6-' A1) T'0AL BALA1$- – F01AL A$$2?1T&

• T'A)016 A$$2?1T• !'2F0T " L2&& A$$2?1T• BALA1$- &


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Financial accounin!

• T#e main purpose is to ascertain t#e profit or loss and

to indicate t#e financial position of t#e company.

• T#e t*o important statements prepared in financial

accounting are !rofit " loss accounts and Balance

s#eet.

• !rofit " loss accounts ( to no* t#e profitability of t#e

company

• Balance s#eet ( to no* t#e financial position of t#e

company on a particular date.

BIM


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Funcion"#a$%ana!&"#n&&$#i'oancuo"o*+&ci%&"#u"&" o, ,inancial accounin!

• Boo eeping functions

• $lassification of functions

• !reparation of financial statements

• &egregating financial transactions

• 0nterpretation of financial data

• 'eporting of information

• !roviding accurate and reliable information

BIM


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Li'iaion"#$i"a$%ana!&" o, ,inancial accounin!

•


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Co" accounin!

• T#e process of accounting for cost from t#e point at

*#ic# e5penditure is incurred or committed to t#e

company of its ultimate relations#ip *it# cost centres

and cost units.

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Funcion"#A$%ana!&"#n&&$#i'oancuo"o*+&ci%&"#u"&" o, co" accounin!

• Ascertaining cost

• Fi5ation of selling price

• $ost control

• $ost reduction

• -valuation of performance

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Li'iaion"#$i"a$%ana!&" o, co" accounin!

• 0t involves too many forms and statements.

• 0t involves more clerical *or

• 0t is costly to introduce and operate

• 0t depends on financial accounting. 0f any error in

financial accounting *ill affect cost accounting too.

• 0t is difficult to ascertain t#e fully reliable cost

• -ac# cost accountant may use different met#od *#ic#

create confusion

• &ince different companies use different met#ods, it is

difficult to compare t#e companies.

E i Pl 2003 BIM


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-ana!&'&n accounin!

• Management accounting is t#e presentation of

accounting information in suc# a *ay as to assist

management in t#e creation of policy and in t#e day to

day operations of t#e company.

E ti Pl t 2003 BIM


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Funcion"#A$%ana!&"#n&&$#i'oancuo"o*+&ci%&"#u"&" o, -ana!&'&n accounin!

• To #elp in planning and policy formulation

• To #elp in t#e interpretation process

• To #elp in decision maing

• To #elp in controlling performance

• To #elp in coordinating

• To #elp in organi%ing

• To #elp in e5pansion, diversification and strategic business problems

• $ommunication and management policies

• To #elp in motivating employees

•


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Li'iaion"#$i"a$%ana!&" o, 'ana!&'&n accounin!

• 4eaness of source records

• $onsistent efforts

• Management accounting is not a substitute

• Mi5ed discipline

• 'esistance

• $ostly installation

• )evelopmental stage

• &ub3ectivity

E ti Pl t 2003 BIM


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U"&" o, accounin! in,o'aion

• Internal users (Primary Users) of accounting information include the

following:

– Management: for analyzing the organization's performance and

position and taking appropriate measures to improve the company

results. – Employees: for assessing company's profitability and its consequence

on their future remuneration and job security.

– Owners: for analyzing the viability and profitability of their

investment and determining any future course of action.

• Accounting information is presented to internal users usually in the formof management accounts, budgets, forecasts and financial statements.


http://accounting-simplified.com/elements-of-financial-statements.htmlhttp://accounting-simplified.com/elements-of-financial-statements.html


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U"&" o, accounin! in,o'aion.

• External users (Secondary Users) of accounting information include the

following: – Creditors: for determining the credit worthiness of the organization. erms of credit are

set by creditors according to the assessment of their customers' financial health. !reditors

include suppliers as well as lenders of finance such as banks.

– ax !uthorities: for determining the credibility of the ta" returns filed on behalf of the

company.

– Investors: for analyzing the feasibility of investing in the company. #nvestors want to

make sure they can earn a reasonable return on their investment before they commit any

financial resources to the company.

– Customers: for assessing the financial position of its suppliers which is necessary for

them to maintain a stable source of supply in the long term.

– "egulatory !uthorities: for ensuring that the company's disclosure of accountinginformation is in accordance with the rules and regulations set in order to protect the

interests of the stakeholders who rely on such information in forming their decisions.



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ACCOUNTING CYCLE

• J2?'1AL '-$2')016

• L-)6-' $LA&&0F@016

• T'0AL BALA1$- &?MMA'0&016

• F01AL A$$2?1T& 01T-'!'-T016

– T'A)016 A$$2?1T – !'2F0T " L2&& A$$2?1T F01A1$0AL – BALA1$- &


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ACCOUNTING CYCLE.

• J2?'1AL: – Journal is a daily record of business transactions.

– 0t is also called as day boo

– T#e process of recording transactions in t#e 3ournal called

Journali%ing – T#e entries made in 3ournal called 3ournal entries



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ACCOUNTING CYCLE.

• FOR-AT OF /OURNAL

• &.1o )ate !articulars L.F )ebitC's.D $redit

C's.D

• 1ame of t#e Ac• To 1ame of t#e Ac

• C1arrationD



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ACCOUNTING CYCLE.

• A)+A1TA6-& 2F J2?'1AL: – 0t reduces t#e possibility of errors – 0t provides an e5planation of t#e transaction

– 0t provides a c#ronological record of all transactions

– Journal provides records of all business transactions in one place on t#e time and date basis. – All transactions are recorded on t#e basis of receipts or bill, so *e can c#ec aut#enticity of eac# 3ournal entries

*it# t#eir bills. –

T#ere is minimum c#ance to avoid any particular transaction because in 3ournal transactions are recorded datebasis.

– Accountant *rites every 3ournal entryEs narration bello* of t#at 3ournal entry, so ot#er auditor can no* *#at t#e

reason of t#at 3ournal entry is.

– 0n 3ournal, every transaction is recorded after deep analysis of t*o accounts on t#e basis of double entry system, sot#ere is minimum c#ance of mistae in 3ournal.

– Journal is t#e basis of posting in ledger accounts. 4it# maing of 3ournal, accountant can not mae ledgeraccounts.

– 0f t#ere is mistae in ledger, *e can rectify it *it# t#e #elp of 3ournal or rectify 3ournal entry in 3ournal. – All opening 3ournal entries , closing 3ournal entries and all ot#er transactions *#ic# is not recorded in any ot#er

subsidiary boos , *ill be recorded in 3ournal . – Journal is also needed in every type of accounting soft*are . T#ese accounting soft*are can mae auto system of

posting 3ournal entries by t#eir automatic processing , but accountant must feed 3ournal entries in 3ournal and

ot#er specific vouc#ers of 3ournal . – 0n 3ournal , t#ere is one column of ledger folio . 0t is very important for c#ecing reference of eac# accounts

posting *it# its original 3ournal entry .



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ACCOUNTING CYCLE.

• )0&A)+A1TA6-& 2' L0M0TAT021& 2F J2?'1AL: – 0t *ill be too long if all t#e transactions are recorded

– )ifficult to ascertain t#e balance of eac# account



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ACCOUNTING CYCLE.

• L-)6-': – Ledger provides a summary of similar transactions at one

place.

– 0t is a summary statement of complete transactions relating to

an account. – Ledger is considered as main boo of accounts

– 0t is considered to be t#e principal boo of accounts *#ic#

#elps us in attaining t#e main ob3ective of accounting.

– 0t provides vital information lieE

•

Total sales value periodically• Total purc#ases periodically

• Amount due from individual customers

• Amount due to individual suppliers

• Amount spent on specific items of e5penditure etc


S h l f M S di S i i d E ll


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ACCOUNTING CYCLE000DIFFERENCE BETEEN /OURNAL AND LEDGER

• J2?'1AL – 0t is a boo of original entry

– All transactions are recorded in a

c#ronological order

– 0t #as greater *eig#tage because it is a boo

of source of entry

– ?nit of classification of data is transaction

–

!rocess of recording financial transactions iscalled as Journalising

– 0t is a continuous process day after day

– -ntries are transferred to t#e ledger

• L-)6-' – 0t is a source of secondary entry

– All transactions pertaining to a particular

account appear at one place

– 0t is t#e main source of information

– ?nit of classification of data is t#e account

– !rocess of recording transactions in t#eledger is called as posting

– Ledger posting can be done according to

convenience

– From t#e ledger, first t#e trial balance is

dra*n and t#en final accounts are prepared.


S h l f M t St di S i i d E ll


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ACCOUNTING CYCLE000

• DIFFERENCE BETEEN /OURNAL AND LEDGER

– Journal is t#e boo of prime CfirstD entry, *#ile Ledger is t#e boo of final entry.

– G 0n ot#er *ords, ledger contains analytical records, *#ile 3ournal contains c#ronological records.

– G 1arration is required in a 3ournal t#at is not t#e case in t#e ledger.

– G Transactions are recorded in t#e sequence of occurrence in t#e 3ournal, *#ereas transactions are

classified and recorded in relevant accounts in t#e ledger.

–

G )ata can be classified based on transaction in t#e ledger, *#ile t#e basis of classification of data areaccounts in t#e ledger.

– G A transaction is firstly recorded in t#e 3ournal soon after t#e occurrence of itH it is only t#en transferred

to t#e ledger.

– G Final accounts cannot directly be prepared from 3ournal, but ledgers form t#e basis for easy

preparation of final accounts.

– G Accuracy of 3ournal cannot be tested, but accuracy of ledger can be tested to a certain e5tent using

trial balance.

– G Journal #as t*o columns for debit and credit, *#ereas a ledger #as t*o sides of an account one for

debit and t#e ot#er for credit. – G Journals are not balanced at t#e end of a period, but accounts in t#e ledger are balanced at t#e end of

a specific period.


S h l f M t St di St i i t d E ll


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ACCOUNTING CYCLE00

• T'0AL BALA1$-: – A statement containing t#e balances of all ledger accounts, as

at any given date, arranged in t#e form of debit and credit

columns placed side by side and prepared *it# t#e ob3ect of

c#ecing t#e arit#metical accuracy of ledger postings.




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ACCOUNTING CYCLE00• 0M!2'TA1$- 2' &0610F0$A1$- 2F T'0AL BAL1$-:

– &ummary of various accounts

– !roof of double entry

– -nsuring of arit#metical accuracy

– Trial balance facilitates preparation of final accounts.

– Trial Balance acts as t#e first step in t#e preparation of financial statements. 0t is a

*oring paper t#at accountants use as a basis *#ile preparing financial statements. – Trial balance ensures t#at for every debit entry recorded, a corresponding credit entry #as

been recorded in t#e boos in accordance *it# t#e double entry concept of accounting. 0f

t#e totals of t#e trial balance do not agree, t#e differences may be investigated and

resolved before financial statements are prepared. 'ectifying basic accounting errors can

be a muc# lengt#y tas after t#e financial statements #ave been prepared because of t#e

c#anges t#at *ould be required to correct t#e financial statements.

–

Trial balance ensures t#at t#e account balances are accurately e5tracted from accountingledgers. Trail balance assists in t#e identification and rectification of errors

– 0t provides a complete picture of eac# account in t#e ledger

– 0t supplies in one place ready reference of all t#e balances of t#e ledger accounts.

– 0t #elps to locate t#e errors




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ACCOUNTING CYCLE00

• L0M0TAT021& 2F T'0AL BALA1$-: – Trial Balance only confirms t#at t#e total of all debit balances

matc# t#e total of all credit balances.

– Trial balance totals may agree in spite of errors. An e5ample

*ould be an incorrect debit entry being offset by an equalcredit entry.

– Lie*ise, a trial balance gives no proof t#at certain

transactions #ave not been recorded at all because in suc#

case, bot# debit and credit sides of a transaction *ould be

omitted causing t#e trial balance totals to still agree.

– Types of accounting errors and t#eir effect on trial balance are

more fully discussed in t#e section on &uspense Accounts.

– 0f a vouc#er is completed omitted to be entered in a day boo

t#en it *ill not affect t#e total of t#e trial balance.


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Accounin! incil&" (o) Accounin! conc&"

• Accounting principles are t#e set of rules and guidelines for t#e

preparation of financial statements and reports

• T#e accounting concepts are

• Business entity concept

• 6oing concern concept

•Money measurement concept

• Accounting period concept

• )ual aspect concept

• $ost concept ( assets in #istorical cost

• Matc#ing concept ( revenue and e5penses matc#ed to no* profit

•

'evenue recognition concept 0nflo* and outflo* equal• Accrual concept ( revenue or e5penses incurred not received or

paid

• 2b3ective evidence concept ( everyt#ing based on evidence (

auditor




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Accounin! con%&nion"

• $onvention of full disclosure – All information s#ould be revealed

• $onvention of consistency – 'ules, practices and concepts s#ould be used

• $onvention of materiality – 2nly required and important items in financial items.

?nimportant s#ould ne left out or merged.

• $onvention of conservatism – !laying safe. To #ave accounting alternative for transactions.




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Di,,&&nc& *&2&&n Boo3 3&&in! an$ Accounin!

• Booeeping is t#e process of recording, in

c#ronological order, t#e daily transactions of a business

entity. 0t forms part of t#e accounting information

system.

• 2n t#e ot#er #and, accounting is an information system

( includes t#e process of recording, classifying,

summari%ing, reporting, analy%ing and interpreting t#e

financial condition and performance of a business ( inorder to communicate it to stae#olders for business

decision maing.



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S4"&'" o, *oo3 3&&in!

• &ingle entry system

• )ouble entry system




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Sin!l& &n4 "4"&'

• For every transaction t#ere s#ould be one debit and one

credit. T#is #as to be recorded in t#e 3ournal.

• -g: 0f 's. 9 *ort# of ra* materials purc#ased by t#e

company , t#en 's. 9 *ill be going out of t#e

company and 's. 9 *ort# of ra* material coming into t#e company.

• &ingle entry system is al*ays a incomplete double entry




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Sin!l& &n4 "4"&'.

• 0t does not record t#e t*o fold effect of eac# and every

transaction.

• 0n t#is single entry, sometimes t#e business transactions

are recorded in an unsystematic manner by recording only

single aspect, sometimes t*o fold aspect and sometimesomitting bot#.

• &o, it is called as I&ingle entry double entry or no entry

• T#e accounts maintained in t#e single entry is not reliable

•

4it# t#is single entry system of accounting, profit " lossaccount and balance s#eet can not be prepared.

• T#is system is follo*ed in small business

• -g: &ole proprietors#ip




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Dou*l& &n4 "4"&'

• 0n double entry system, in every transaction, t#ere *ill

be one debit and one credit.

• An 0talian merc#ant named Luco !acioli invented t#e

double entry system of boo eeping in 7K8K A).




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A$%ana!&" o, $ou*l& &n4 "4"&'

• 0t reveals t#e detailed information

•


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Di,,&&nc& *&2&&n "in!l& &n4 an$ $ou*l& &n4 "4"&'o, *oo3 3&&in!0

• &ingle entry is an incomplete and unscientific met#od of

boo eeping *#ere as double entry is a complete and

scientific met#od of boo eeping.

• 0n single entry system, debit and credit do not agree

*#ere as in double entry system, dual aspect concept isused.

• 0n single entry, only personal and cas# accounts are

maintained *#ere as in double entry, !ersonal account,

real account and nominal account are maintained.• 0n single entry, !rofit and loss and balance s#eet cannot

be prepared *#ere as in double entry it can be

prepared.




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D&*i an$ C&$i

• )ebit: C)rD – Benefit receiving aspect

• $redit: C$rD – Benefit giving aspect

– 0n Ledger, Trial balance and !rofit " Loss account, t#e left

#and side is no*n as debit side and rig#t side no* as credit

side.




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• ALL T


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g g


NATURE OF ACCOUNT

• !-'&21AL A$$2?1T• -6: 'AM? A$, 6A1-&< A$, BA1 A$, '& " $2 A$ -T$

• '-AL A$$2?1T• TA160BL- A&&-T&

–

-6: MA$


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g g


GOLDEN RULE OF ACCOUNTSNATURE OFACCOUNT

DEBIT (DR) CREDIT (CR)

PERSONAL

A/C

THE

RECEIVER

THE GIVER

REAL A/C WHATCOMES IN

WHAT GOESOUT

NOMINALA/C

EXPENSESAND LOSSES

INCOME ANDGAINS




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g g


FINANCIAL STATE-ENTS

• !'2F0T A1) L2&& A$$2?1T

• BALA1$- &


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g g


5ROFIT AND LOSS ACCOUNT

• !rofit " loss account is prepared to ascertain t#e net profit or net loss of t#e company in anaccounting period

• 0t is an account into *#ic# all gains and losses are collected in order to ascertain t#e e5cess of

gains over t#e losses or vice versa

• T#e left side of t#e profit and loss account is t#e debit side CdrD *#ere all t#e operating and

non operating e5penses are mentioned.

• T#e rig#t side of t#e statement is called as credit side C$rD *#ere all t#e operating and non

operating income are mentioned

• 0f income is more t#an t#e e5penses, t#en company gets 1et profit

• 0f income is less t#an t#e e5penses, t#en it is 1et loss.




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g g



• 0mportant e5penses – $arriage in*ards ( transport c#arges paid *#ile bringing t#e

ra* material to t#e company

– $arriage out*ards ( transport c#arges paid *#ile selling t#e

products to customers

– Bad debts ( amount *#ic# is given as credit but not received

– )epreciation

– Ta5, interest, dividend paid

– &alary, *ages, rent paid

–

)iscount, commission paid




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• 0mportant income: – &ales

– 0nterest, dividend received

– 'ent received

–

$ommission, discount received etc


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5ROFOR-A OF 5ROFIT AND LOSS ACCOUNT.00

– )ividend paid

– Trade c#arges

– Manufacturing e5penses

– &tationary

– 0nsurance

– 'epair

– 2ffice e5penses – &undry e5penses

– -stablis#ment e5penses

– $ommission paid

– Advertise e5penses

– &elling and distribution e5penses

– Audit e5penses – )epreciation

– Bad debts

– Travelling e5penses




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BALANCE SHEET

• T#e balance s#eet comprises of list of assets and

liabilities of t#e company on a given date

• 0t presents t#e financial position of a concern.

• 0t is called as statement of equality.


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CURRENT ASSETS AND FI7ED ASSETS

CURRENT ASSETS• T#e asset *#ic# can be converted into cas# *it#in one

accounting period• -5• )ebtor ( company gives credit to customers. $ustomers

*ill pay later to t#e company. Till t#en t#e customers

are mentioned as )ebtors• Bill receivable ( &ame as debtor. T#e main difference is

t#at bills receivable is considered as promissory note.-ven if customer c#eats, company can tae action

against t#em

• &toc or 0nventory ( 0t may be 'a* material or 4or inprogress and Finis#ed goods

• !repaid e5penses ( amount paid by t#e company in

advance• ort term investment ( company invest t#eir surplus

cas# in s#ort time Cfor period less t#an one yearD• $as#

• $urrent assets are, t#erefore, very important to cas#

flo* management and forecasting, because t#ey are

t#e assets t#at a business uses to pay its bills, repayborro*ings, pay dividends and so on,

FI7ED ASSETS• T#e asset *#ic# taes more t#an one year to

convert into cas#

• -5

• Land " buildingE

• !lant " mac#inery

•

Furniture• Long term investment

• Loose tools

• Motor car

• 6ood*ill

• !atents and copyrig#ts

• Fi5ed assets are not #eld for resale but for t#e

production, supply, rental or administrative

purposes.• Fi5ed assets are normally e5pected to be used for

more t#an one accounting period *#ic# is *#y

t#ey are part of 1on $urrent Assets of t#e entity.

-conomic benefits from fi5ed assets are t#erefore

derived in t#e long term.




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CURRENT LIABILITIES AND LONG TER-LIABILITIES

CURRENT LIABILITIES• T#e liability *#ic# #as to be paid by t#e company

*it#in one accounting period

• -5

• $reditors ( credit received by t#e company from

t#e suppliers

•

Bills payable ( similar to creditors but bills payableis a promissory note. 0f company defaults, t#ent#e suppliers *ill tae action against t#e company

• 2utstanding e5penses ( e5penses not paid by t#e

company eg: 2utstanding rent, outstanding salary

• Ta5 payable

• )ividend payable

• Ban overdraft ( company may *it#dra* morefrom t#eir current account above t#e available

balance and to be repaid *it#in t#e year

LON TER- LIABILITIES• T#e liabilities *#ic# can be paid even after one

year by t#e company is called as long term

liabilities.

• -g

• E6UITY•

-quity s#are capital ( amount received by t#ecompany by issuing equity s#are. For t#is companypays equity dividend to t#e equity s#are#olders.

T#e dividend rate is not fi5ed

• !reference s#are capital ( amount received by t#e

company by issuing preference s#are. For t#is

company pays fi5ed preference dividend to

preference s#are#olders

• 'eserves " &urplus C'etained -arningsD ( unused

last year profit• DEBT• )ebentures ( amount received by t#e company by

issuing debentures. For t#is company pays fi5ed

interest to t#e debenture #olders

• Ban loan




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FINANCIAL STATE-ENT

• Financial statements refer to formal and original

statements prepared by a business concern to disclose

its financial information

• T#e t*o ma3or financial statements are

– !rofit " loss account – Balance s#eet




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USES OF FINANCIAL STATE-ENTS

• !rospective investors use financial statements to perform financial analysis, *#ic# is a ey component in maing investment decisions.

• A lending institution *ill e5amine t#e financial #ealt# of a person or organi%ation and use t#e financial statement to decide *#et#er or not to lendfunds.

• !#ilant#ropies may use financial statements of a nonprofit as a component in determining *#ere to donate funds.

• 6overnment entities Cta5 aut#oritiesD need financial statements to ascertain t#e propriety and accuracy of ta5es and ot#er duties declared and paid

by a company.

• +endors *#o e5tend credit may use financial statements to assess t#e credit*ort#iness of t#e business.

• -mployees also may use reports in maing collective bargaining agreements

• -ana!&" require Financial &tatements to manage t#e affairs of t#e company by assessing its financial performance and position and taingimportant business decisions.

• S8a&8ol$&" use Financial &tatements to assess t#e ris and return of t#eir investment in t#e company and tae investment decisions based on t#eiranalysis.

• Cu"o'&" use Financial &tatements to assess *#et#er a supplier #as t#e resources to ensure t#e steady supply of goods in t#e future. T#is isespecially vital *#ere a customer is dependant on a supplier for a speciali%ed component.

• Co'&io" compare t#eir performance *it# rival companies to learn and develop strategies to improve t#eir competitiveness.

• G&n&al 5u*lic may be interested in t#e effects of a company on t#e economy, environment and t#e local community.

• Go%&n'&n" require Financial &tatements to determine t#e correctness of ta5 declared in t#e ta5 returns. 6overnment also eeps trac ofeconomic progress t#roug# analysis of Financial &tatements of businesses from different sectors of t#e economy.



https://www.boundless.com/finance/definition/credithttps://www.boundless.com/finance/definition/credithttps://www.boundless.com/finance/definition/credit


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ESSENTIALS OF GOOD FINANCIAL STATE-ENTS

• Si'lici4: Financial statements s#ould be simple so t#at concerned individuals can easily understand and interpret t#em properly. For t#is, t#estatements must be simple and clear.

• Ri!8 i'&: T#ese must be prepared at t#e rig#t time. Any delay in t#eir presentation may decrease t#eir usefulness.

• Co'lianc& 2i8 l&!al &9ui&'&n": Financial statements must be prepared in t#e form and style as required by t#e Act. T#ey must #ave sub3ectmatter as prescribed and must be presented as stated in t#e Act.

• A$8&&nc& o, accounin! incil&": T#e financial statements must be based on t#e 6enerally Accepted Accounting !rinciples C6AA!D so t#at t#eymay #ave universal acceptance.

•

Di"clo"u&: T#e financial statements s#ould disclose all t#e relevant and material facts. 0t s#ould be transparent so t#at t#e users of accountinginformation can dra* neat conclusions.

• Au8&nic: T#e information contained in t#e financial statements s#ould be aut#entic supported by evidence.

• R&l&%an o 8& uo"&: Financial statements must be relevant to t#eir purposes. 0rrelevant and unnecessary informations s#ould not be includedin t#ese statements.

• Co'l&& an$ accua& in,o'aion": Financial statements s#ould include t#e complete and accurate information about t#e progress of a businessand its future prospects. 0nformations s#ould be based on facts. False and incomplete information results in *rong interpretation.

• Co'aa*ili4: Financial statements s#ould be comparable. T#e comparison can be made bet*een present and past as *ell as bet*een one business

and t#e ot#er. 0t increases t#e utility of t#e statements. T#is can be done *#en similar accounting principles are adopted for t#eir presentation.

• Faciliain! 8& anal4"i": )ecisions can be taen only by proper analysis of t#e financial statements. T#us, financial statements s#ould be preparedin suc# a *ay t#at it may facilitate t#e analysis. For t#is, t#e various items s#ould be classified and grouped in a proper manner, so t#at data can beobtained easily for analysis.

• S4"&'aic aan!&'&n: T#e information contained in t#e financial statements s#ould be arranged systematically so t#at t#ey may be comparable.

• Au$i&$: T#e financial statements s#ould #ave been presented to t#e uses after being audited by t#e competent c#artered accountants.




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LI-ITATIONS OF FINANCIAL STATE-ENTS

•Ba"&$ on a$iion" an$ con%&nion": Financial statements are prepared and based upon traditions and conventions *#ic# allo* t#e usage of personal 3udgments.

• Ba"&$ on 8i"oical $aa: Financial statements are based on #istorical data *#ile parties are more interested in no*ing t#e present position and future prospects oft#e business enterprise.

• Sco& o, 'aniulaion": Financial statements are sometimes prepared according to t#e needs of t#e situation or *#ims of t#e management. Management canmanipulate financial statements by undervaluation or overvaluation of inventory, under or over c#arging of depreciation etc.

&ometimes *indo* dressing is resorted to in order to s#o* better financial position of a concern t#an its real position. &o financial statements are not free from bias.

• In,lu&nc&$ *4 &"onal +u$!&'&n": Financial statements are influenced by personal 3udgements of t#e account. 2n many issues more t#an one met#ods arepermitted. For e5ample, met#od of depreciation, valuation of stoc, valuation of good*ill etc. all depend upon t#e personal 3udgements of t#e policymaer of t#e

enterprise.

• I!no& 9ualiai%& a"&c": Financial statements s#o* only t#ose facts *#ic# can be e5pressed in money terms. ualitative aspects of t#e business units are omittedfrom t#e boos, because t#ey cannot be e5pressed in money terms. T#us, cordial employeremployee relations, efficiency of management, firmNs ability to develop

ne* products, customer satisfaction, etc. #ave a vital role in t#e profitability of t#e firm, but #ere ignored and omitted because t#ese are qualitative in nature.

• I!no& in,laiona4 &,,&c": $#anges in price level mae data meaningless. Financial statements record transactions at #istorical costs. 1o account is taen of t#epresent value.

• I!no& 8& in&&" o, o8& ai&": Financial statements are prepared *it# a vie* to tae care of t#e interest of proprietors only and ignore t#e interests of allot#er interested parties lie creditors, investors, *orers, stoc e5c#anges, ta5ation aut#orities, economists, researc#ers, politicians, etc.

• Financial "a&'&n" a& onl4 in&i' &o": Financial statements are essentially interim reports. T#ey cannot be final. T#e actual profit or loss of a business canbe determined only *#en t#e business is ultimately closed. T#e e5istence of contingent assets and liabilities, deferred revenue e5penses mae t#e statement less

accurate and more sub3ective.

• Ai,icial %i&2: Financial statements do not reveal a real and correct picture of t#e *ort# of assets and t#eir loss of value. T#e reason is t#at t#ey are s#o*n on#istorical cost. T#us, t#ese statements provide artificial vie*. Maret or replacement value and t#e effect of t#e c#anges in t#e price level are completely ignored.

• Incaa*l&: Financial statements are incapable of s#o*ing profitability, operational efficiency, financial soundness, etc. of t#e business.T#ese limitations of financial statements can be removed by efficient analysis and interpretation of t#e financial statements.




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TECHNI6UES OR TOOLS FOR FINANCIALSTATE-ENT ANALYSIS• $2M!A'AT0+- &TAT-M-1T A1AL@&0& C2'D


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TECHNI6UES OR TOOLS FOR FINANCIALSTATE-ENT ANALYSIS000• T'-1) A1AL@&0&

– Trend analysis is t#e analysis of t#e trend of t#e financial ratios of t#e company over t#e

years. 0t is an important tool of #ori%ontal analysis. ?nder t#is analysis, ratios of different

items of t#e financial statements for various periods are calculated and t#e comparison is

made accordingly. T#e analysis over t#e prior years indicates t#e trend or direction. Trend

analysis is a useful tool to no* *#et#er t#e financial #ealt# of a business entity is

improving in t#e course of time or it is deteriorating.

• 'AT02 A1AL@&0&

– 'atio analysis is t#e analysis of t#e interrelations#ip bet*een t*o financial figures. T#e

most popular *ay to analy%e t#e financial statements is computing ratios. 0t is an

important and *idely used tool of analysis of financial statements. 4#ile developing a

meaningful relations#ip bet*een t#e individual items or group of items of balance s#eets

and income statements, it #ig#lig#ts t#e ey performance indicators, suc# as, liquidity,

solvency and profitability of a business entity. T#e tool of ratio analysis performs in a *ay

t#at it maes t#e process of compre#ension of financial statements simpler, at t#e same

time, it reveals a lot about t#e c#anges in t#e financial condition of a business entity.




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TECHNI6UES OR TOOLS FOR FINANCIALSTATE-ENT ANALYSIS000• F?1) FL24 &TAT-M-1T

– T#e ob3ective of t#is analysis is to e5tract t#e information relating to *oring capital. T#e

amount of net *oring capital is determined by deducting t#e total of current liabilities

from t#e total of current assets. T#e statement of c#anges in *oring capital provides t#e

information in relation to *oring capital bet*een t*o financial periods.

• $A&< FL24 &TAT-M-1T

–$as# flo* analysis is t#e analysis of t#e c#ange in t#e cas# position during a period.

accounts unit 1

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