Financial Accounting: Prof. Padmini Srinivasan

Padmini Srinivasan iimb
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Financial Accounting
Module I
Prof. Padmini Srinivasan
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Preliminaries
1.Course outline is given
2. HUL Annual Report will be given* and will form
part of class discussion. Please get that to every
class.
3. Practice will make you perfect. Students must solve
the assignments and other problems as given
4. Text Book Financial Accounting (RNS)
5. Tutorials
6. Contact

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Preliminaries (Important !)
Evaluation
* Test 1 - 20 %
* Test 2 &3 - 20 %
* End Term - 35 %
* Case Analysis - 10%
*Financial analysis project - 15 %

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Last but not the least
Attendance Policy :
Missing 5 /6 classes 5% total marks out of 100 will be reduced
from total
7 to 9 classes : 10% of the total marks will be reduced

To get the best of class discussion, come prepared for
the cases and readings when specified
Only one person should be speaking in the class at a
time
Learning accounting can be fun too !
Have Fun !!
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Welcome to
World of Financial Accounting
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Lenders
Users of Accounting Information

Suppliers

Investors
Government
Customers
Management
Stakeholders
Employees
Analysts
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Financial information in Business
FINANCIAL INFORMATION IS
NEEDED BY USERS FOR MAKING
ECONOMIC DECISION
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Internal Users
External Users
Users of accounting information
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MANAGEMENT
ACCOUNTING
FINANCIAL ACCOUNTING
Classification of accounting information
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Supply of Information

The supply of information will depend on the
- Forms of business organization
- Internal Processes that generate information
- Corporate Governance Practices

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Forms of Business Organisation
Proprietorship

Partnership

Limited Company

Limited Liability Partnership

Public Ltd
Private Ltd
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Proprietorships
One Proprietor / Owner
total undivided authority
no restrictions on type of business : must be legal
What are some disadvantages?
unlimited personal liability
limitation on size fund raising power

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Partnership Firms
A partnership is a type of business entity in which partners
share with each other the profits or losses of the business
undertaking with or without investment
What are some advantages?
better credit standing possibly
more people, consultation with partners
unlimited personal liability for general partners
Liability Joint and Several
Now Limited Liability Partnerships

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Corporations/ Company
A group of persons united to pursue a common
interest and has a separate legal existence
What are some advantages?
separate legal existence
limited liability of shareholders
transferability of ownership relatively easy
- extensive governmental regulation

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Company
Private Limited Company
- Minimum Capital of Rs. 1 lac.
- Limits the number of members to 50
- Restricts the right to transfer its shares
- Prohibits invitation to raise funds from public
Public Limited Company
- Minimum capital of Rs. 5 lacs
- Not a Private Company
- Or a private company subsidiary of a public company
- The above is not an exhaustive list of characteristics
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Supply of Information
Internal Process
Sophistication of the Accounting System
including the use of technology, size of the
firm, cost for generating the reports etc
Governance Practices
Good Governance practices including the need
for giving transparent information.
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Business Decisions
Investment
Activities
Financing
Activities
Operating
Activities
Accounting System Captures these activities
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Purchase or sale of property,
Machinery and equipment

Investments or sale of investments
in the shares of other companies
Investing Activities
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Borrowing money
Repaying loans
Issuing shares
Repurchasing shares
Paying dividends on shares
Financing Activities
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Sales to customers
Collection of amounts
owed by customers
Purchase of inventory

Payment of amounts
owed to suppliers
Payment of expenses
Payment of taxes
Operating Activities
Accounting process captures the
result of these activities
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What is Accounting
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Accounting is an information system that...
measures business activities,
processes data into reports, and
communicates results to decision makers.
Accounting
The Language of Business
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Measurement
Reporting
Summarizing Accounting
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Identification
Select economic events
Business transactions
Recording
Record, classify
and summarize
Accounting
Reports
SOFTBYTE
Annual Report
Accounting
reports
Analyze and interpret
for users
Communication
ACCOUNTING SYSTEM
FILT
ERS
Audit
Input
Process
Output
Monetary
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Accounting Principles
Monetary transactions and Events enter the
system
Process Using an Accounting Mechanism
Follow certain rules or principles of
Accounting called as GAAP (Generally
Accepted Accounting Principles) or
Accounting standards
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The Audit Report
Owners and managers want the
most favorable results possible
for : Bank credit, Bonus, Share
price
Statutory Auditors
CA firms have economic incentives to
perform credible audits.
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Reporting Function of Accounting
Accounting system generates reports
called as Financial Statements
for the external users
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Primary Financial Statements
Balance Sheet
Profit and Loss
Account
(Income
Statement)
Cash Flow
Statement
The financial statements reports on status &
performance of the company in financial terms
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The Balance sheet
The Balance sheet is a status report
giving the Financial Position
of the Company at a particular
point of time
Resources
owned and
amounts owed
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The Profit and Loss Account
Measures Operating Performance

The profit and loss account or the
Income statement, reports the companys
revenues, expenses, and net income
or net loss for the period.

Revenues or Incomes arise from selling of
goods or services to customers
Expenses related to earnings are deducted
from revenues

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The Statement of Cash Flows
The statement of cash flows reports
the companys cash inflows and
Outflows from its various activities.
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Balance Sheet
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Balance Sheet
Assets.
Liabilities
Owners equity
Gives the resources owned and their funding
The assets owned and the claimants against the assets
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Balance Sheet
Assets are the economic resources
Owned by a business that are
expected to produce a benefit .
Liabilities are Obligations (debts)
Owners equity represents the
liability to owners of a business.
Assets and Liabilities
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Accounting Concepts
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The Entity Concept
An accounting entity is an
organization that stands apart
as a separate economic unit.
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The Going-Concern Concept
The entity will continue
to operate in the future.
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Money Measurement Concept
Only those transactions which
can be expressed in terms of
Money are recorded
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The Accounting Equation
Assets
Owners
Equity
Liabilities
Assets = Liabilities + Owners Equity
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Accounting for business transactions
Mick started Fly by Night Service on
November 1, 2008 by depositing
Rs.80,000 into the business.
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Assets
Total Liabilities Rs. 0
Liabilities
M. Mick, capital Rs.80,000
Total Liabilities
& Owners Equity Rs.80,000
Cash Rs. 80,000

Total Assets Rs.80,000
Owners Equity
Fly by Night Service
Balance Sheet as on
November 1, 2008
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On November 3, the company purchased
land from BMC for Rs.52,000
by paying cash.

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Assets
Total Liabilities Rs. 0
Liabilities
Total Liabilities
Cash Rs. 28,000
Land 52,000

Owners Equity
Balance Sheet
November 3, 2008
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The accounting Equation
Transaction: On November 5,Purchased an
old building from M/s. MTC for the company
costing Rs. 36000. A Cash of Rs.6,000 was
given and for the balance a promissory note
for Rs.30,000.
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Assets
Notes Payable Rs.30,000
Total Liabilities
Rs.30,000
Liabilities
M. Mick, capital 80,000
Total Liabilities
& Owners Equity
Rs.110,000
Cash Rs. 22,000
Land 52,000
Building 36,000

Owners Equity
Balance Sheet
November 5, 2008
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On November 17, Fly by night
purchased Equipment from TI Tools
Ltd for Rs.13,800. The amount is due
in 60 days.
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Assets
Notes payable Rs.30,000
Accounts payable 13,800
Total liabilities Rs.43,800
Liabilities
M. Mick, capital 80,000
Total Liabilities
& Owners EquityRs.123,800
Cash Rs. 22,000
Land 52,000
Building 36,000
Equipment 13,800

Owners Equity

Balance Sheet as on
November 17, 2008
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On November 20, FBN sold part of its
new Equipment to Acer Company for
Rs.1,800. Ace agreed to pay this
amount in 45 days.
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Assets Liabilities
Cash Rs. 22,000
Accts receivable 1,800
Land 52,000
Building 36,000
Eqpt 12,000

Balance Sheet
November 20, 2008
M. Mick, capitalRs.80,000
Total Liabilities
& Owners Equity
Rs.123,800
Owners Equity
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On November 25, FBN received Rs.600
from Acer as partial settlement of its
accounts receivable.
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Assets
Cash Rs.22600
Acct. Receivable 1200
Land 52,000
Building 36,000
Tools 12,000

Balance Sheet
November 30, 2008
Liabilities
Total Liabilities
Owners Equity
Accounts payable 13800
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On November 30, FBN made a partial
payment of Rs.6,800 on its accounts
payable to TI Tools.
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Assets
Cash Rs.15,800
Land 52,000
Building 36,000
Tools 12,000

Balance Sheet
November 30, 2008
Liabilities
Total Liabilities
Owners Equity
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On the Same Day FBN rendered services to
M/s. ANT for which it received Rs. 10000 by
Cash
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Assets
Cash Rs.25,800
Land 52,000
Building 36,000
Tools 12,000

Fly by Night Service Ltd

Balance Sheet
November 30, 2008
Liabilities
Income 10,000

Total L +E Rs.127,000
Owners
Equity
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On November 30, FBN paid salary to its
employee Rs.1000 by Cash
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Assets
Cash Rs.24,800
Land 52,000
Building 36,000
Tools 12,000

Fly by Night Service Ltd
Balance Sheet
November 30, 2008
Liabilities
Income + 10,000
Expenses - 1,000
Total Liabilities
& Equity Rs.125,000
Owners Equity
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Assets
Liabilities
Cash Rs.24,800
Land 52,000
Building 36,000
Tools 12,000


Owners Equity
Balance Sheet
Investment
Activity
Financing
Activity

Operating
Activity
Profits( Retained Earnings)
Income 10,000
Expenses ( 1,000)

Total L & Rs.125,000
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Income Statement

Fly By Night
Income Statement for the period
Income 10,000
Expenses - 1,000
Profits 9,000

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Cash Flow Statement
Cash From Operating Activity
Services 10,000
Expenses -1000
Net Inflow 9000
Cash flow from investing activity
Tools (Payment) 6,800
Receipts from sale - 600
Land 52,000
Building 6,000
Net Cash outflow 64,200
Cash from Financing Activity
Owners Funds 79,000
Net Cash inflow = 9000-64200+79000
Cash Balance Rs.23,800
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Information in the Financial Statements
2. What is the companys
financial position at the
end of the period?
Assets
= Liabilities
+ Owners equity
Balance
sheet
1. How well did the
company perform
during the year?
Revenues
Expenses
Net income (Net loss)

Profit and
Loss
Statement
3. How much cash did
the company generate
and spend during
the period?
Operating cash flows
Investing cash flows
Financing cash flows
Increase or decrease in cash
Statement
of
cash
flows

Financial Accounting: Prof. Padmini Srinivasan

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