Prof. r. n. Swain_readbs

8/11/2019 Prof. r. n. Swain_readbs

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Finance Area

KIIT School of Management

KNOW YOURFINANCIAL STATEMENTS


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ACCOUNTING

IS A MEASURING DEVICE

Accounting plays a very significant role in

recording the transactions & events of business

in financial terms. It is otherwise known as thelanguage of business. Every limited company in

India whether Private or Public is statutorily

required to maintain accounting records.


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One of the important objectives of accounting isto :

(i) Measure the profit or loss of the business

(ii) Ascertain the financial position of thebusiness


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CONTENTS Information usually available in the Annual Report ( AR)

as per the requirements of the Companies Act1956 are:

1. Directors report to shareholders.

2. Auditors report on the accounts.

3. Balance sheet of the company.4. Profit and Loss account.

5. Accounting policies and notes to accounts.

Annual report also contains additional information of

interest to all of us.


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ADDITIONAL INFORMATIONS

In addition to the statutory requirements reputedcompanies usually publish additional information

such as:

Chairmans Speech,

Comparative statistics for different years,

Board committee activities

HRD programs ,

Environmental protection and safetymeasures,

Research and Development activities

etc.


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INFORMATIONS

FOR VARIOUS INTEREST GROUPS

Shareholders / Owners - rate or return

Creditors, Bankers - solvency & liquidity

position

Employees - earning capacity


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Researchers, economists & financial analysts -research to know solutions to various business

problems

Government - to take decision relating to Duties,

Taxes etc. & effective utilisation of capacity.

Management - Profitability & efficiency.


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READING

BETWEEN THE LINES

AR contains many materials to gossip.

An intelligent businessman can read between the lines

to form the basis for his judgement.

Knowledge about the forms and purpose can help tostudy the balance sheet intelligently.


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We need to know some technical terms andunderstand some general principles of

accountancy to form some first tentative

conclusions.


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DIRECTORS REPORT- CONTENTS

1. State of Companys affairs. 2. Amount carried forward for resources.

3. Amt.. Recommended for dividend.

4. Material changes & commitments afterclosing

date.

5. Conservation of energy, technology

absorption, foreign exchange earning &outgo.

6. Measures taken for environmental protection. 7. Changes in Companys business subsidiary

and on the industry.


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AUDITORS REPORT-CONTENTS

Whether B/s & P/L reflects true & fair view. Obtained all information & explanations.

Whether proper books of accounts

maintained.

B/s and P/L in agreement with books of

accounts.

Deviation to accounting policy ,if any.

Conduct of physical verification. Revaluation of Assets.

Adequacy of internal audit.

Maintenance of Asset Register.


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CLASSIFICATION

OF ACCOUNTS

In order to prepare the accounts, one has to

clearly classify the transactions between the

following four classes :

(1) Assets(2) Liabilities

(3) Income

(4) Expenditure


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FIXED ASSETS

* Land

* Buildings

* Plant and Machinery

* Furniture and Fixtures

* Vehicles

* Electrical Installations

* Utilities like heavy mobile equipments, constructionequipment , communication system etc.


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These fixed assets are recorded in books at theircost price which includes the cost of purchase,

taxes, freight, erection and commissioning

charges etc.

This is known as gross block.


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Depreciation: a charge towards wear and tear isreduced from the gross block.

The resultant figure is known as net block.


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CURRENT ASSETS Current Assets of a company are used for

day-to-day operations that is for working capitalneeds.


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They include:

* Inventories- raw material, WIP, finished

*Accounts Receivable - Sundry Debtor and

other receivables

* Cash and Bank Balances

*Other Current Assets- prepaid expenses,

deposits etc.

* Loans and Advances - employees & outsiders


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LIABILITIES-LONG TERM The liabilities side of a balance sheet

represents the various sources from which acompany obtain the funds which are needed

for its services.


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The main sources are :

* Share Capital- true risk capital- Dividend

and liquidation

* Reserves & Surplus-profit ploughed backReserve may arise due to Share Premium,

Capital subsidy or Revaluation

* Loan Fund - Secured or unsecured.


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CURRENT LIABILITIES Current liabilities are other sources of fund which arise

out of business transactions & mainly consists of : Accounts payable for goods & services- Sundry

Creditors, EMD & Security Deposits received and

interest accrued but not due.

Provision for expenses, taxes etc.

Provision for income tax and sales tax, proposed

dividend etc.

BALANCE SHEET


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BALANCE SHEET

Two sides of the balance sheet always tally.

It can be vertical or horizontal.

Schedule-VI of the Companies Act 1956 has

stipulated the form of reporting.

Whatever may be the form, it tallies because ofdouble entry principle of accounting.

It is the finishing stage for the accountant but the

beginning stage for the analyst.


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A. Liabilities 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00

a)Paid up Capital 490.22 490.22 490.22 490.22 490.22 490.22

b) Reserve & surplus 151.08 142.87 133.84 118.04 152.51 216.30

c) Borrowings 101.39 126.26 188.24 238.69 261.82 318.71

d) Current Liab & Prov 93.90 86.51 246.72 383.09 213.35 131.30

e) Deferred Tax Liability 1.47

TOTAL 838.06 845.86 1059.02 1230.04 1117.90 1156.53

B. Assets

a) Gross Block 1114.00 1112.55 1112.66 1109.74 1107.37 1105.68

b) Less - Depreciation 700.32 642.33 585.64 502.42 419.65334.86

c) Net Fixed Assets 413.68 470.22 527.02 607.32 687.72 770.82d) Capital W-I-P 22.96 17.65 23.23 24.54 24.65 24.65

e)Current Assets

I)Inventories 36.09 37.85 50.97 51.39 48.70 49.52

II)Sundry Debtors 136.94 128.74 233.72 197.73 174.10 152.12

III)Cash & Bank Balances 206.15 172.98 133.94 255.19 97.59 89.41

IV)Other Current Assets 10.82 8.91 0.15 0.18 0.79 0.25V) Loans & Advances 9.44 8.31 46.67 31.76 21.74 6.48

VI)Investments 0 0 42.00 60.00 60.00 60.10 Sub-Total 399.43 356.80 465.44 536.25 402.92 357.88

f)Misc.Expenditure 1.99 1.19 1.33 1.93 2.60 3.19 TOTAL 838.06 845.86 1059.02 1230.04 1117.90 1156.53

C.Capital Employed 845.02 901.95 1022.04

D.Net Worth 606.33 640.13 703.33


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INCOME Sale is the main business income for

manufacturing company.

Other income includes:

*Interest on investments

*Dividend on investment.

*Delayed payment surcharge arising outof

administrative decision.

* Sale of scrap* House rent

* Equipment hire charges received

*Commission received.


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EXPENSESRaw material is the main expenditure for any

manufacturing activity.Production expenses.

Employees Remuneration and benefit

Administrative expenses

Selling & distribution Expenses.

Interest & financing charges

Depreciation

Misc. expenses written off.

Difference between the income & expenditure is

profit. Dividend, Income Tax & reserve are charged

after profit is derived. Net available is surplus.


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ACCOUNTING CONCEPTS

Business Entry Concept - Business Unit is distinct andcompletely separate

Going Concern Concept - Valuation of assets onproductivity basis..

Money Measurement Concept - All transactions interpreted

in terms of money. Cost Concept - Valued at historical cost

Dual Aspect Concept

1.Yielding or receiving benefit

2.Giving that benefit Accounting Period Concept - Choice dates.

Matching Concept -

Realisation Concept - Earned on the date when it is

realised.


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CONVENTIONS

Convention of Disclosure - Be honest and fulldisclosure of all significant nformations

Convention of Materiality -Depends on the amount

involved .

Convention of consistency - Rule, practice &convention should be continuously observed and

applied

Convention of Conservatism - Accounts play safe

in determining profit.


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ACCOUNTING METHODS 1) Cash Basis of Accounting.

2) Accrual Basis of Accounting.

3) Hybrid System of Accounting

Under Cash Basis of Accounting all incomes

are considered to be earned only when they areactually received in cash. Similarly expenses are

deemed to be incurred only when they are

actually paid in cash. This method is usually

followed by individuals like Doctors, Lawyers,Auditors, Engineers and small businessmen.


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CONT..

Under Accrual or Mercantile Basis of AccountingIncomes are recorded or credited to the period in

which they are earned in respective of the fact

when it is recorded. Similar is the case with

expenses. This method is universally followedand is generally acceptable.

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