Finance Area

KIIT School of Management

KNOW YOUR
FINANCIAL STATEMENTS
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 the
language of business. Every limited company in
India whether Private or Public is statutorily
required to maintain accounting records.

One of the important objectives of accounting is
to :
(i) Measure the profit or loss of the business
(ii) Ascertain the financial position of the
business

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.
ADDITIONAL INFORMATIONS
In addition to the statutory requirements reputed
companies usually publish additional information
such as:
Chairmans Speech,
Comparative statistics for different years,
Board committee activities
HRD programs ,
Environmental protection and safety
measures,
Research and Development activities
etc.
INFORMATIONS
FOR VARIOUS INTEREST GROUPS
Shareholders / Owners - rate or return
Creditors, Bankers - solvency & liquidity
position
Employees - earning capacity
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.

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 to
study the balance sheet intelligently.
We need to know some technical terms and
understand some general principles of
accountancy to form some first tentative
conclusions.

DIRECTORS REPORT- CONTENTS
1. State of Companys affairs.
2. Amount carried forward for resources.
3. Amt.. Recommended for dividend.
4. Material changes & commitments after
closing
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.

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.
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


FIXED ASSETS

* Land
* Buildings
* Plant and Machinery
* Furniture and Fixtures
* Vehicles
* Electrical Installations
* Utilities like heavy mobile equipments, construction
equipment , communication system etc.

These fixed assets are recorded in books at their
cost price which includes the cost of purchase,
taxes, freight, erection and commissioning
charges etc.
This is known as gross block.

Depreciation: a charge towards wear and tear is
reduced from the gross block.
The resultant figure is known as net block.
CURRENT ASSETS
Current Assets of a company are used for
day-to-day operations that is for working capital
needs.
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

LIABILITIES-LONG TERM
The liabilities side of a balance sheet
represents the various sources from which a
company obtain the funds which are needed
for its services.
The main sources are :
* Share Capital- true risk capital- Dividend
and liquidation
* Reserves & Surplus-profit ploughed back
Reserve may arise due to Share Premium,
Capital subsidy or Revaluation
* Loan Fund - Secured or unsecured.

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
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 of
double entry principle of accounting.
It is the finishing stage for the accountant but the
beginning stage for the analyst.
BALNCE SHEET
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 700.32 642.33 585.64 502.42 419.65
334.86
c) Net Fixed Assets 413.68 470.22 527.02 607.32 687.72 770.82
d) 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 0.25
V) 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
INCOME
Sale is the main business income for
manufacturing company.
Other income includes:
*Interest on investments
*Dividend on investment.
*Delayed payment surcharge arising out
of
administrative decision.
* Sale of scrap
* House rent
* Equipment hire charges received
*Commission received.
EXPENSES
Raw 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.
ACCOUNTING CONCEPTS
Business Entry Concept - Business Unit is distinct and
completely separate
Going Concern Concept - Valuation of assets on
productivity 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.

CONVENTIONS
Convention of Disclosure - Be honest and full
disclosure 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.

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 are
actually 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.


CONT..
Under Accrual or Mercantile Basis of Accounting
Incomes 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 followed
and is generally acceptable.