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Class Discussion 2014

Day 10
AS- 3: Cash Flow Statement
Closing CIH = Opening + Receipts Payments
Closing CIH = Opening +/-(CFO, CFF, CFI)
Issues for Discussion
Why is CIH not same as PAT?

Why is CFO not same as PAT?


o CFO = Operating Receipts Operating Payments
o PAT = Incomes- Expenses
PAT is not equal CFO due to the following:
Non Cash items
o Depreciation
o Amortisation
o Fluctuations in MP
o Fluctuations in Foreign Currency
Non Operating Items
o Dividend received
o Interest received
o Profit on sale of PPE
o PRofiton Sale of Investment
o Interest paid
Credit items (Accruals)
o Credit Sales (Change in debtors)
o Credit Expenses ( Change in OS Expenses)
o Credit purchases ( Change in Creditors and Change
stock)
o Advances
o

Class Discussion 2014

CFO =
PAT +/Non cash items,
Non operating items,
Changes in CA and CL

CFO
Direct method
o CFO = Operating Receipts Operating PAyments
Indirect method
o CFo = Adjusted Profit

PAT +/ Non cash items,


Non operating items,
Changes in CA and CL

o
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Class Discussion 2014


Day 10
Cash Flow Statement: AS-3
Closing CIH = Opening CIH +/-(CFO, CFF, CFI)
CFO
Direct
o CFO = Operating Receipts Operating Payment
Indirect
o CFO = Adjusted PAT. Adjusted for Non operating,
Non cash and Credit items (Change in Operating
CA and CL)
Issues for Discussion
Why is CIH not same as PAT?
Why is CFO not same as PAT?
o CFO = Operating Receipts Operating Payments
o PAT = All incomes All Expenses
PAT is not equal to CFO
o Non Operating items
Interest on loans taken
Interest on loan given
Dividend on shares purchased
Profit on sale of PPE
o Non Cash items
Depreciation
Amortisation
Fluctuation in the MP
Fluctuation on FOREX
o Credit Items (Accrual Principles)
Credit purchase
Credit Sales
Credit Expenses
Advances to the supplier
Advance from Customers

Class Discussion 2014


CFO =
o PAT +/-( non cash items, non operating items, credit
items)
Determination of CFO
Direct Method
o CFO = Operating Receipts Operating Payments
Indirect Method
o CFO = Adjusted PAT

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Class Discussion 2014


Day 9
Asset Accounting
Inventory Accounting (AS- 2)
PPE Accounting (AS-6, 10, 28)
Cash (AS- 3)
Under standing Cash Flows
CIH = Opening + Receipts payments
Receipts
o Cash Sales
o Collection from Debtors
o Advance from customer
o Loan availed
o Issue of share for cash
o Sale of PPE
o Sale of Investments ( shares or bonds)
o Interest or Dividend received
Payments
o Expenses paid (rent,salary etc)
o Purchase of Stock of goods
o Interest paid
o Distribution of dividend
o Buy back of shares
o Repayment of loans
o Purchase of PPE
o Purchase of Investment

Class Discussion 2014


Cash From Investment Decisions (CFI)
Receipts
o Sale of PPE
o Sale of Investments ( shares or bonds)
o Interest or Dividend received
Less
Payments
o Purchase of PPE
o Purchase of Investment

CFI
Negative
Positive

Cash from Financing Activities (CFF)


o Receipts
Loan availed
Issue of share for cash
Less
o Payments
Interest paid
Distribution of dividend
Buy back of shares
Repayment of loans
o
Cash from Operating Activities (CFO)
Receipts
o Cash Sales
o Collection from Debtors
o Advance from customer
Less
Payments
o Expenses paid (rent,salary etc)
o Purchase of Stock of goods

CFF
Negative
Positive

CFO
Negative
Positive

Class Discussion 2014


Cash Flows
Question
Why is CFO not same as PAT?

Complete set of Financial statement for year


Opening BS
o IS
o CFS
Closing BS

Change in the Balance

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Class Discussion 2014


Day 8
PPE (AS -6 and AS-10)
COA
Depreciation
Written Down Value
Issue for discussion
If the PPE are sold during the life
o Sale price
o Less
o WDV
If the MV is not same the WDV
o IF MV > WDV
REcognise the increase in the MV but dont show
the gain in the Income statement
Show the Gain as a Source: REVALUATION
RESERVE
o IF MV < WDV
AS-28: Impairment loss
Undertake Impairment Test
If MV < BV
Show the impairment loss in the Income
Statement
And
Reduce the WDV of the asset to that extent
Change in the method of depreciation
o Yes, AS-6 allows the change
o Steps for accounting the change (Suppose from SLM
to RBM): Refer to XL
Find the Accu dep under SLM ( 320000)
Find the ACcu dep under RBM (375000)
Find the difference ( 55000 more now)

Class Discussion 2014

Show this change as loss or gain due to thechange


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

Assets (Fluctuations in the MV)


Inventory
o Cost or MV which ever is less
o So the loss is recognized but profit is not
PPE
o If MV < BV: Show the loss as impairment loss in the IS
o IF MV > BV: Show the gain as RR in the BS
Investment
o

Class Discussion 2014


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Class Discussion 2014


Day 7
Asset Accounting
CA
o Inventory
NCA
o PPE

Accounting for PPE (Fixed Assets)


Relevant Accounting Standards:
AS- 10: Accounting for Fixed Assets
AS-6: Accounting for Depreciation
Cost of Acquisition ( at the time of purchase)
o Purchase Price
o Plus
o Incidental Expenses required to bring the asset to the
working condition
(the process of including the incidental expenses in
the cost of asset is called CAPITALISATION of
Expenses)
Decision
o Capitalise or Not to Capitalise?
Depreciation (at the time of use,during the life)
o AS-6
See the next paragraph
Written Down Value (Net Asset or Book Value) (At the BS
preparation)
o WDV = COA AD

Class Discussion 2014

Depreciation
What?
o Loss in PPE due to the wear and tear of PPE
o Allocation of cost over the life
o Charge for using the asset
o Provision for replacement of PPE
Why ?
o Matching Principle
o Going Concern Principle
How ?
o Depreciation amount depends on the methods of charging
Straight Line Method
Depreciation = Cost/Life
Dep = COA * Rate of Depreciation
Dep amount remains constant the life
Reducing Balance Method (RBM)
Dep = Rate *Cost (first year)
Subsequent years
o Dep = rate * WDV
o WDV = COA Accumulated Dep

o
o

Class Discussion 2014


o Day 6
Accounting for Assets
Current Asset
o Cash
o Debtors
o Stock or inventory
o Short term investments
Non Current Assets
o Fixed Assets ( PPE)
o Long Term Investment
o Intangible Assets
Sources
Equity
o Capital
o Reserves
Noncurrent Liabilities
o L T loans
o Bonds
o Debentures
Current Liabilities
o Creditors orpayables
o Expenses Payables
o Short Term Loans
o Bank overdraft

Class Discussion 2014


Accounting for Inventory (Revenue Goods): AS-2
Cost of acquisition (at the time of purchase)
o Purchase Price
o Plus
o Incidental Expenses required to bring the assets to the
working condition
Cost of goods sold
o COGS is determined by using one of the following
methods of issuing inventory
FIFO(First In First Out)

Weighted Average
LIFO (not allowed byAS-2)
Cost of unsold stock (Closing stock)
o Closing = Opening Stock +Purchase COGS
o Closing stock to be Valued at COST or MV which ever is
lower (Conservative Convention)
IF MV > CP: Ignore
IF MV< CP: recognize the loss

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Class Discussion 2014


Day 5
Financial Statements
Accounting Relationship

Acquisition of assets will result in one of the following


Decrease in cash
Increase in liability
Increase in equity

Incomes will result in one of the following


Increase in cash
Increase in Assets (Debtor)
Items relating to stock
Opening Stock
Purchase
COGS
Closing Stock
o Opening + Purchase COGS = Closing
Expense and Payment
If Payment < Expense: Liability
If Payment > Expense: Asset

Class Discussion 2014

Items relating to shares


Face value
Book Value
Market Value

Class Discussion 2014


Some Financial Terms Relating to Assets
Costs of Goods Sold
Part of the revenue goods sold during the period is called
COGS
When the stock is sold, profit is determined by deducting
COGS from Sales
Closing Stock = Opening stock +
Purchases COGS
BadDebt
Loss due to insolvency or bankruptcy of the debtors
Irrecoverable debtors
Closing Debtors = Opening Debtors + Credit Sales Collection
Bad Debts
Deprecition
Loss due to wear and tear of Property, Plant and Euipmentsd
Reduction in PPE
Book value of PPE = Cost Accumulated Depreciation
Amortisation
Allocation of cost of intangible assets over the life
It is the reduction in the value of intangible
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Class Discussion 2014

Class Discussion 2014


Day 4
Business Decisions and Financial Statements
Financial Statements
Balance Sheet
o Statement of Financial Position as on a particular date
o Statement of
Assets and
Sources
(Equity &
Liabilities)
Income Statement
o Statement of Financial Performance for a particular
period
o Shows:
Incomes
Expenses
Cash Flow Statement
o Statement of changes in CIH over a period of time
Relevant Laws and Standards Governing FS are
Accounting Standard-1
o ICAI
Schedule VI of the CompaniesAct
o MCA
SEBIs Regulation

Class Discussion 2014


Receipts may result in
Increase in capital
Increase in liabilities
Income

Payments may result in


Acquisition of assets
o Stock
Expense
Acquisition of Asset may result in
Decrease in cash
Increase in liability
Increase in capital
Expense Vs Asset
Asset: Unexpired benefit
Expense: Expired benefit

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Class Discussion 2014


Day 2

Accounting Equation

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


of the following ways
Rules of Debits and Credits
Or
Framework of Accounting Equation
Accounting Equation: At any point of time
Assets = Sources
o Assets
Anything which has the ability to generate
cash flows
Cash + other assets
o Sources
Equity
Capital
o Money contributed by the owner
Profit
o Money generated by the business
Liability
Contribution by the outsider

Class Discussion 2014


Accounting Concepts(Principles)
Business Entity concept
Accrual concept: Recognition principle:
o Both cash and credit transaction to be recorded at
the time of the event
Creditor (payable)
Debtor(Receivable)
Matching Concepts: Profit determination principle.
o Revenue should be matching corresponding
expense

Accounting Relationship
S=A
o Capital + RP + Liabilities =Assets
o Equity + Liabilities = Assets
Equity = A-L
Equity = C +RP
Profit
o Distribute: Distribution of profit is called
DIVIDEND
o or
o Not to distribute: Retained Profit

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Class Discussion 2014


Day 1

What is the form of organization?


Sole proprietorship
Partnership

Joint Stock Companies

o Organisation registered under the


Companies Act -1956
Corporation
o Organization created under a special law
enacted for the purpose
Society
Trust
Department

Who is the owner of the organization?


JSC:
Shareholders
o Individual
o Institution
o Government
Who is the manager of the organization?
JSC
Board of Directors

Class Discussion 2014

Board and SH relationship


Agent and Principal Relationship
o SH : Principal
o BOD: Agent
Agency Problem
o Moral Hazard
o Information asymmetry (IA)
Financial accounting is expected to
address IA
Financial Accounting is means of communication
between Board and SH about the Business Decisions
taken by the Board
Financial Accounting is the process of measuring and
converting the business decisions into financial
statements.
Business decision
Financing Decisions
o Decision relating to sources of funds
Owners money (Shareholder fund or Equity)
Accounting Equation
Outsiders money
Assets = Equity + Liability
Investment Decisions
o Results in creation of asset
o Asset is anything which has the ability to
generate cash flow
Operating Decisions

Class Discussion 2014

Every Business decision will involve financial items


. All financial items can be classified into following
Incomes
Expenses
o I E = Profit
Assets
Liabilities
Equity
o A = L+E
All these financial items will appear in the Financail
sTatements
Balance Sheet
Income Statement
Cash Flow Statement
The entire of measuring and converting BD into FS is
governed by GAAP (Indian GAAP)

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