FA Term Paper

1. Financial Accounting
Term Paper
- Sanmeet Dhokay
(2015PGPMX 025)

2. Day 1:-
Accounting isart of recording,classifying,summarizingandinterpretationof business
Journal isthe firstbookof the company
Ledger- is forclassificationandsortingof transactionsundervariousheads .Paymentmade overthe month
to maid.
Trial Balance - Summaryof ledger
Accounting Mechanics- Journal isforrecording, LedgerandTrial Balance are for classification, Income
StatementandBalance Sheetare forSummary
Balance Sheet/Income statementisthe summaryof whole yearoperation
Owesto Pay
Ownsto Get
Liabilities- Sourcesof fund
Assets– Usesof Funds
Industry trend -The past10 yearsgrowthtrendisusedto forecast the future
Interpretation- TrendIdentification
 Planning
 Controlling
 Decisionmaking
 Valuation
Recording Classifying Summarizing Interpreting

3. Accounting
Financial Accounting
Journal
Ledger
Trial
Incomestatement
Balance sheet
Real
Cost Accounting
Estimated data
Projected financialstatements
Business plan, Strategic Planning
(10 year,20 year plan)
Vision Definition
Estimation

4. Refundable  Liability
Non– RefundableAsset
If you getback ,thenit’scalled Asset
If you don’tgetback , thenit’scalled Expense
Debit
Assets
(Refundable)
Expenses
(Non-Refundable)
Credit
Liabilities
(Refundable)
Incomes
(Non-Refundable)

5. Balance Sheet
Assets Liabilities
Profit/Loss/Income
Statement
Expenses Incomes
Cash Flow Statement
Inflow Outflow

6. Trial Balance :-
Building Asset Debit
Land Asset Debit
Loan Taken Liability Credit
Salary Income Credit
Discount Given Expense Debit
Direct Ledger:-
All Entriesare done bydouble entrysystem
Credit Debit
Debit Credit
(GuptaUmbrella) (Mandar Umbrella)
Assets Expenses Liabilities Income

7. Day 2:-
Questionsto ask inaccounting:-
Are you doingthingsright?
Are you doingthe rightthings?
Debt– EquityRatio – FinancerMoney
Operation Return
SEBI Rules - Data is requiredfor2 years(previousandcurrent) foranalysis
In Indiawe workon Conservatismprinciple whichisgeneral conceptof recognizingexpensesandliabilitiesas
soonas possible whenthere isuncertaintyaboutthe outcome,buttoonlyrecognize revenuesandassets
whentheyare assuredof beingreceived.
SMART
S - Specific
M – Measurable
A – Achievable
R – Relevant
T – Time Bound
Two Managerial Approachesin Accounting :-
1)ThinkPresent,Forward  Typical Managerial Approach
2)ThinkFuture , Backward
Language and AccountingSoftware isusedforcreatingBalance SheetsandIncome Statements
Resulted in

8. Ledger
Trial Balance
Financial Statements
Balance Sheet
Income Statement
Journal
Assets Liabilities Expenses Income
Dr Cr
Dr Cr
Dr Cr

9. Accountingisalwaysdone fromBusinessPointof View
Examplesof differenttransactions:-
Cash Dr – 100000  CashAsset
Capital Cr – 100000  Liability
T accounts are used .Everytransactionhastwoparts – creditand debitwhichare dividedin2columnswhich
looklike aT
Cash a/c
Cash 100000
Capital a/c
Capital – 100000

10. Trial Balance:-
Name ofAccounts Dr Cr
Cash
Capital
100000
100000
100000 100000
Profit/Loss
Balance Statements
Assets
Cash 100000
100000
Liabilities
Capital 100000
100000
Expenses Income

11. Furniture Purchases – 20000
Furniture AccountandCash Account
Cash a/c
Furniture 20000
Furniture a/c
Cash 20000
CommissionReceived - 50000
CommissionAccountandCashAccount
Casha/c
Commission50000

12. Commissiona/c
Cash 50000
Profit,CommissionisshownasLiabilitiesasBusinessowesittoBusinessman.
UnclosedAccountsare reflectedinBalance Sheet.

13. Day 3:-
Inventory
Manufacturingprocess:-
InputProcess  Output
Raw Material ConsumedalsocalledasCostof Raw Material Consumed
OpeningStock
+Purchase of Raw Material
+Expensesincurred
-ClosingStockof RawMaterial
-Scrap
Input OpeningWIP OpeningFinishedGoods
ClosingFinishedGoods
PAT (ProfitAfterTax)
Raw Material
Consumed
Labour
Expenses
Processing
Cost
Closing WIP
Finished Goods
or
Cost of Production
Cost of Goods SoldCompare with SalesGross Margin/Profit
Deduct TaxProfit Before TaxDeduct Expenses

14. Profit before tax = Tax – Profitaftertax
Finance Expenses
OperatingExpenses
OtherExpenses
For Company
Profit Part goesintoreservesdue tolimitedliability
For Individual and Partnership  Liabilityislimitless(PersonalAssetandBelonging)
RetainedEarning - is allowedforthe time periodof 1yearonly, It istime boundand cannotbe extended
DividendDistributionisnot an expense.Itisshownas Distributionof Profit
BookValue = Share Capital + Reserve Surplus
ShareholderFund
Market Value AddedHow muchvalue have youaddedformy sharesinthe market
- Tax = Profit
Finance
Internal External

15. Accounting communication – Howare you communicatingthe inputstoyouraccountingtothe shareholders
Routine or Regular Income ispart of Profit& Loss Account
Non Routine Income  Market Value – BookValue
Non Operational Income – Capital Income
Retentionof Shareholders  Supplywill be less
RetainedEarningof lastyear– Dividend=RetainedEarningof CurrentYear
Accounting Standard Z
FIFOand WeightedAverage
As per IS2 Standard
FIFO, LIFO and WeightedAverage
Valuationof the inventoryisdone atcost price or netrealizedvalue
Conservatismprinciple If there isa lossthenbookthe lossbut notthe profit
10* 2 = 20 10 * 3 = 30  Thisvalue shouldbe considered
InventoryCosts= 6,7,8,9,10
Price Increased

16. To determine price of rawmaterial  use of inventoryvaluation
Quality of earninglatesttermused
Weightedaverage
Perpetual  Continuous
If FIFO isusedtheninventoryisLIFO
If LIFO is usedthenInventoryisFIFO
If Ledgeris createdthenitis perpetual
Depreciation:-
AssociatedwithWear&Tear
Tangible Asset :- Physical
Intangible Asset:- Patent, Copyright
Obsolete :– WhenDepreciationistoohigh
For Eg 100000  10000

17. AccumulatedDepreciation  Itisusedwhenassetvalue isshownatoriginal/procurementvalue
It isshownas Liability
DepreciationisshownasExpense
Capital Expense – Initial
Revenue Expense – AfterOperations
DeferredExpenses:-
Depreciationisusedtoreplace the asset
Acts as Internal Source of Financing
Depreciable value spread overuseful life
Purchase/Cost Repairat time of install Salvage Value
100 crore + 10 crore - 20 crore (value after5years)
= 90 crore

18. Straight Line Depreciation/FixedMethod/CostMethod:-
Writtendown value Method/ DiminishingBalance / DiminishingValue:-
In thismethod,the Costof the assetin the second yearis calculatedaftersubtractingthe depreciationof the
firstyear.
UnitMethod:- Basedon utilization
Eg – Usage of car inkms driven
Sum of digitsmethod :- – digitsof useful life
5 4 3 2 1
15 15 15 15 15
Salvage value wouldbe representedatthe endof useful lifeassale
20
0 1 2 3 4 5

19. International Financial reportingstandard(IFRS) –Assetsare shownatMarket Value
Capital Employed:-
Inflationaccountingis notshowninIndiadue toconservatismprinciple
In India,Valuationisdone onlyatthe time of acquisitionof business
Cash Flow Statement:-
Cash flowfromoperationsshouldbe positive
C2C – Cash to CashCycle( Shouldalwaysbe positive)
ProcessRe-engineering:- Change the processtomake C2C cycle positive
++ -+
+- --
 Profitisnegative,butthe CashFlowispositive (Green section)  there isaneedtodiversifyFunds
because the Businessisgivingnegativereturns
Cash
Profit

20.  Profitispositive butthe cashflowisnegative(Yellow section)  we caninfuse finance intothe company
aftercheckingthe cost of Funds
 ProfitandCash are negative(Orangesection)  the businessissickandrequirescomplete processre-
engineering
Profitispurelybasedonaccrual( Due,Payable)
Cash meansonlywhenwe have receivedthe amount
Funds requirementincludesCashandNonCashBoth
Cash Requirementincludesonlycash(liquid)
Own – Shareholderfund/Equity/Owner’sFund/NetWorth/Capital Fund
Loan – Secured/Unsecured,Inside/Outside,Current/NonCurrent
Non CurrentAssets – FixedInvestments
Debt Equity Ratio – Relationshipbetweenownandloan,Internal andExternal
InterestCoverage Ratio :- Indicateshowmuchprofitisavailable topayInterest

21. Earning Before Interestand Tax(EBIT)
Liquidity  CurrentRatio  Assets(Current)
Liabilities (Current)
High value showsthatitis Easy to convert
CurrentAssets  Inventory
Cashin Hand
Cashat Bank
AccountReceivables
Cash inHand
SuperQuickLiquidity
Cash at Bank
Dividend___ = DPS
No.of Shares
200 % Dividend  Dividendisalwaysgivenonface value
Eg:- Face Value of share is Rs 10 , then200% dividendwill givereturnRs20

22. PE Ratio :- isthe price earningsratioi.e.the earningonthe Market value of sharesi.e.the Earningpershare
(the Bookvalue) vsthe Market price pershare.
Book Value
10 Rs - EPS - Earningper share
6 Rs - DPS– Dividendpershare
How muchis the companydistributingthe profit - 60% (6/10 * 100)
Common Size Income Statement- both value andthe percentage of eachentryisdisplayed
Cost Control - Benchmark,competitorcomparisonandcontrollingthe cost
Operatingcost iscost of goodssold+ operatingexpenses
Value Engineering– Whenyouspend1 Rs , are yougettingthe moneyworth
Cost cutting department / Cost Creationprogram :- isbasicallyaCost reductionprogram – it means
usingCreativityandInnovationtocreate Bettervalue
Harvard Term
Return on Equity  Shareholderfund –RetentionStrategyof the company
Capital Employed– Fundsdeployedinto the organization

23. ROI – Returnon Investment
ROA – Returnon Assets Same
ROI – Returnon Cash
How muchreturn = EBIT (EarningsBefore InterestandTax)
Workingcapital invested  EBIT
ProjectedCashflow:- can helpyouevaluate yourpersonal income andexpensestocheckprofitability
Hedging:- The aimof hedge accountingistoprovide anoffsettothe mark-to-marketmovementof the
derivative inthe profitandlossaccount.Fora fair value hedge thisisachievedeitherbymarking-to-market
an assetor a liabilitywhichoffsetsthe P&Lmovementof the derivative.
ROI
I - 1% 4%
II - 2% If fund(cost) isat5% thenloss is 3% So no value
III - 4.5% 0.5%
Conclusion:- There is profitandgrowthbut no value
EconomicValue Added(EVA)
ROI – WeightedAvgCostof Capital
Growth

24. BusinessBuyability
BusinessFeasibility
IRR(Internal Rate) > Check Costof Fund(Foreg – 5%)  thenaccept proposal
ProposedReturn
onInvestment
Market Efficiency/ActivityRatio/OperationEffectiveness :- Itislinkedwithturnover
Profit Turnover :- Cost of InventoryvsCostof Goods
AssetTurnover :- AssetsvsSales
InventoryTurnover :- is a measure of the numberof times inventory issoldorusedina time period suchas a
year
Account Payable Turnover :- Payablesvs.CreditPurchases
Account Receivable Turnover:- measuringhow efficientlyafirmusesits assets.
Turnover  Sales+ Purchase
Central SalesTax Act :-
Sales :-
 Credit
 Cash
 Cost of goodssold
Assetturnover  Average

25. Day 4:-
Operatingincome :- earningsbefore interestandtaxes(EBIT)
Non-Operatingincome :- is gainsor lossesfromsourcesnotrelatedtothe typical activitiesof the businessor
organization
Department expenses :- Expensesona particulardepartmentinthe company
Netprofit PBT  Profitbefore tax
ProfitAfterTax PAT
Completioncertificate – real estate value shouldbookedwhenitisissued
Buildingunderconstructing iscapital inprogress
Copyright- onlyafterit isregistered,itcanbe shownas an asset
Till itis filed –intangibleinprogress
Fixed/Current Assets:-
Fixedassets are long-term, tangibleassetssuchasland,equipment,buildings,furnitureandvehicles.
Currentassets are the general inventoryof acompany,includingcash,accountsreceivable,insurance claims,
investments,andintangibleornon-physical items
Tangible/Intangible :- Goodwill,copyright,patent
Cash inflow/Cash outflow :-
Cash Inflow:- Moneyreceivedbyanorganizationasa resultof itsoperatingactivities, investmentactivities,
and financingactivities.
Cash Outflow:- isthe netamountof cash andcash-equivalentsmovingintoandoutof a business.

26. Balance sheet
Cash flowstatement iscreated in 3 categories
 Cash fromoperatingactivity
 Cash frominvestingactivity
 Cash fromfinancingactivity
Shareholder Fund
Loan Fund
Fixed Assets
Investments
Net Current Assets
CA – Current Assets
CL – Current Liabilities
Investing
Activities
Operating
Activities
Financing
Activities

27. Openingand closingbalance of cash
As a successful manager,youhave toensure surplusof cashfromoperatingisalsoknownas economicvalue
added(EVA)
WealthCreation,shareholdervalue management
Profit:- A financial benefitthatisrealizedwhenthe amountof revenue gainedfromabusinessactivity
exceedsthe expenses,costsandtaxesneededtosustainthe activity.
Growth:- An increase inthe capacityof an economyto produce goodsandservices,comparedfromone
periodof time toanother.
Value:- The monetary,material orassessedworthof anasset,goodor service.Inaccounting,value describes
whatsomethingisworthintermsof somethingelse.
Excesscash fromoperation,discountedbyweightedaverage costof capital
Weightedavgcost - is a calculationof a firm'scost of capital in whicheachcategoryof capital is
proportionately weighted.
Cash flow:- the total amountof moneybeingtransferredintoandoutof a business,especiallyasaffecting
liquidity.
Direct/Indirectmethod :-
Two activitieswill be common:-
1. cash flowfromfinancingactivities
2. cash flowfrominvestingactivities
Onlydifference isif we are calculatingcashflow fromoperatingactivity

28. Direct method– considerall the itemsforwhichwe getcash receipt
Profitandlossis createdonAccrual Basiswhetherreceivedornotreceived,forthatparticularperiod
Convertingaccrual intocash :- isusedto recordrevenuesandexpensesinthe periodinwhichtheyare
earned,irrespective of the timingof the associatedcashflows
IndirectMethod – non cash and nonincome
Directmethod – usedinsoftware
Indirectmethod –usedby companies(eg.HUL)

29. Day 5:-
Economic Value Added(EVA) = ROI – cost of funds
= NOPAT– cost of funds
Profit sharing :- A planthat givesemployeesa share inthe profits of the company.Each employee receivesa
percentage of those profits basedonthe company'searnings.
Customerbasedmanagement
Businessexcellencemodel
Trend line – A line thatisdrawn overpivothighsorunderpivotlowsto show the prevailingdirectionof price.
Self-Assessment- comparingpastandpresentdata
Competitoranalysis – cause – effect– analysis(gapanalysis)
Controllable / Non Controllable
Dupont chart :- usedto breakapart ROE and geta muchbetterunderstandingaboutwheremovementsin
ROE are comingfrom.
ROI = PBT
Capital employed
Capital employed
Equity FixedAssets
Debt Investment CurrentAssets
NetCurrentAssets

30. Trial and error method:- A methodof estimatinganunknownprice oryieldof asecurity
Optimal capital structuring :- Can yougetRs 1
Book value/Market value :- If CompanyXYZhas total assetsof $100 millionandtotal liabilitiesof $80
million,the bookvalueof the companyis$20 million.Inaverybroad sense,thismeansthatif the company
soldoff itsassetsand paiddownitsliabilities,the equity value ornetworthof the business,wouldbe $20
million.
Market value added :- A calculationthatshowsthe difference betweenthe marketvalue of acompanyand
the capital contributed byinvestors(bothbondholdersandshareholders).
Accounting Standards
Principles
UniversalTruths
DoubleEntry
Conservatism
Period
Matching
Policies
Norms adopted by
management

31. Normswhichare accepteduniversallyare calledaccountingprinciples
Accounting standards :- normsreleasedbystatutorybody
National International
Indiahas adopted/developedfrom41standards
Accounting policymanual:- A manual that contains pertinent accounting rules and other information
for a business or organization. Accounting manuals can contain guidelines for various policies
and procedures.
Mandatory standards ->
Auditorappointmentisdone byboardof directors.He hasto representthe governmentforthe
customers/stakeholders
Ethicsin accounting/Accountinginethics
Auditor’sreport
Cleanreport Qualifiedreport
If there isno observation If there isobservation(para)
Disclosure of significantaccountingpolicies
Windowdressing->dirtyprofit
Director’s report :- ContainsResultof operations,future plan,managementdiscussion
Shareholdersare owners
Directors are servants

32. Corporate governance report:- To show Transparencyandaccountability
Secretarial standards report :- Secretaryrelated –meetingminutes documentation,etc
CAO - ChiefAdministrationOfficer  Newlyintroducedpositionincompanies
UndertakingforinformationgiventoCA
Equivalent-> CFO or CEO
Book value = Share capital + Reserve andSurplus
Noof outstanding equityshares
DPS = Total dividendtoequityshareholders
Noof outstandingequityshares
EPS (Earningpershare) = PAT
Noof outstandingequityshare
Payout ratio = DPS
EPS
PES ( Price Earnings Ratio) = Market price of share
EPS