FINANCIAL REPORTING AND COST CONTROL

By Prof. Zohra Bi Alliance Univeristy

COURSE OUTLINE
TEXT BOOK PRESCRIBED MANAGEMENT ACCOUNTING BY MY KHAN AND PK JAIN
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CORPORATE FINANCIAL STATEMENTS / COMPANIES FINAL ACCOUNTS

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 Introduction Characteristics of companies Form and contents of Balance sheet and Profit and loss account Classification of items on a balance sheet Off Balance sheet items Treatment of events occurring after Balance sheet New form of Companies Balance sheet. ( Only theory)
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UNDERSTAND CORPORATE FINANCIAL STATEMENTS Reliance Industries Limited

COMPANY Voluntary association Formed by a group of people Is an Incorporated association Act of 1956 CERTIFICATES Separate legal entity Acquires its status as a Juridical personality Perpetual succession Companies Act 1956 regulates the formation and working of Companies Limited Liability Legal personality Operate through its agents
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FUNDAMENTAL DOCUMENTS TO BE FILED AT THE TIME OF INCORPORATION

MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION
CONTAINS IMPORTANT PARTICULARS RELATING TO THE COMPANY NAME DOMICILE OBJECTS LIABILITY AUTHORISED CAPITAL AND ITS DIVISION DECLARATION OF ASSOCIATION
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ARTICLES OF ASSOCIATION
Determines the constitution for the internal management of the company Defines the relationship between the various members within the company as well as between the company and its members

Memorandum and Articles of Reliance Industries Limited

SHARE
Total Capital of a company is divided into units of small denominations - one of such unit in which the total capital of the company is divided is called an share Refer to Auditors Report = Page 108

The Auto Parts Manufacturing Co. Ltd was registered with a Nominal Capital of Rs 6,00,000 divided in100000 units.
Share = 600000 Rs 10 each 100000

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DIFFERENCE BETWEEN SHARE AND STOCK

Stock is a term used to describe the shares of any company and shares refers to a specific stock of a particular company. EXAMPLE: If investors say they own stocks - They are generally referring to their overall ownership in one or more companies. If investors say they own shares The question then becomes shares in what company

TYPES OF SHARES SECTION 86 OF THE COMPANIES ACT

EQUITY SHARES PREFERENCE SHARES

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EQUITY SHARES
Owners of the company Have management control over the company Voting rights No right to fixed dividend and capital Risk Capital

PREFERENCE SHARES
Have preferential rights With respect to payment of a fixed divided and Repayment of capital at the time of liquidation

TYPES OF PREFERNCE SHARES

CUMULATIVE PREFERNCE SHARES Holders are entitled to unpaid dividend NON- CUMULATIVE PREFERENE SHARES Holders do not carry any right to unpaid dividend PARTICIPATING PREFERENCE SHARES In addition to the fixed rate of dividend, holders have a right to a share in the profit after a fixed rate is paid to the equity shareholders NON PARTICIPATING PREFERENCE SHARES

 REDEEMABLE PREFERENCE SHARES

shares will be repaid on or after a certain date as per the terms of issue Redeemed at the time of liquidation.

NON- REEDEEMABLE PREFERNCE SHARES-

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TYPES OF SHARE CAPITAL SCHEDULE A BALANCE SHEET

AUTHORISED CAPITAL Maximum amount of capital which a company is allowed to raise during its lifetime. ISSUED CAPITAL Portion of authorized capital that has been issued to the investors. Remaining capital is called unissued capital. SUBSCRIBED CAPITAL Portion of the issued capital that has been subscribed by all the investors CALLED UP CAPITAL Portion of the subscribed capital that has been called up by the company. PAID UP CAPITAL Part of called up capital that has been paid up by the subscribers of the company. - Reliance Industries Limited Page - 108

CALLS IN ARREARS

Amount called up but not received from the holder of shares. All such unpaid amount are transferred to calls in arrears account at the end of the accounting year. Company can charge interest from the shareholders who have not paid such arrears

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CALLS IN ADVANCE Amount received from the shareholders before the calls are made Company declares interest on the money received in advance

FORFEITURE OF SHARE Cancellation of shares due to non- payment of calls 14 days valid notice is issued to the shareholders On forfeiture the names of the shareholders is strike off from the register of members. Forfeited shares are reissued by the company.

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SHARES CAN BE ISSUED AT

PAR PREMIUM amount transferred to securities Premium amount Refer Page 109 DISCOUNT

DEBENTURES
Is an acknowledgement under seal of a debt or loan Interest on debentures is a charge against profits TYPES OF DEBENTURES - Redeemable debentures - Irredeemable debentures - Secured debentures - Unsecured debentures - Registered debentures - Unregistered debentures - First debentures - Second debentures - Convertible and Non Convertible

Refer = Page 110

COMPANIES FINAL ACCOUNTS

They are called final accounts because they show the final result and are prepared at the end of the accounting period.

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OBJECTIVES

To ascertain the Profitability Position

To ascertain the Financial Position

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To ascertain the Profitability position We have to prepare an account known as TRADING AND PROFIT AND LOSS ACCOUNT
Refer = Page 105

To ascertain the Financial position We have to prepare BALANCE SHEET Page = 105

TRADING ACCOUNT

The Trading account shows the results of trading, i.e. buying and selling

As the Trading account shows only trading results those transactions which are directly connected with purchases and sales are taken to this account Trading account is a nominal account.

Trading account shows Gross profit or Gross loss

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 If the Credit side total of trading account is more than debit side total the difference is GROSS PROFIT If the debit side total of trading account is more than credit side total the difference is GROSS LOSS

ADVANTAGES

It helps the traders to know whether the item in which he deals is profitable or not

With the help of gross profit, the gross profit turnover ratio can be ascertained Gross profit helps the trader in fixing the sale price
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Trading account
Dr Particulars
To Opening stock To Purchases Less : Purchases returns To manufacturing and trading expenses To Gross Profit b/d

Cr Amount Particulars
xxxx By Sales Less: sales return By closing stock By Gross loss c/d

Amount
xxx xxx xxx

Xxxx Xxxx
Xxx xxx

xxx

Prepare a Trading account

Opening stock Rs 150000 Purchase of raw material Rs 200000 Purchase return Rs 3500 Wages Rs 25000 Other Manufacturing expenses Rs 7000 Sales Rs 500000 Closing stock Rs 50000

Trading account

Dr
Particulars
To Opening stock To Purchases 200000 Less : Purchases returns Rs 3500 To wages To manufacturing and trading expenses To Gross Profit

Cr
Amount Particulars
150000 By Sales By closing stock 196500 25000 7000 171500 550000 550000
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Amount
500000 50000

Trading account = page 46

PROFIT AND LOSS ACCOUNT

Also Known as Income statement, Statement of Earnings, Profit and Loss account Statement P/L a/c Flow statement Portrays the operations of a firm During a particular period of time.

 The span of time covered is an accounting period In practice Mandatory for listed companies to prepare a quarterly basis To assess the efficiency of operations at various levels

P/L a/c Divided into

Trading account To Know the gross profit Profit and Loss account To know the Net profit P/L Appropriation account Showing utilization of profit

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PROFIT AND LOSS ACCOUNT

It is a nominal account All EXPENSES are Debited All INCOMES are Credited Is prepared with a view of finding out the net profit or loss of a business for a particular trading period. Profit and loss a/c shows Net profit or Net loss for a year. If the Credit side total of Profit and loss a/c account is more than debit side total the difference is NET PROFIT If the debit side total of Profit and loss a/c is more than credit side total the difference is NET LOSS
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 The Net profit is credited to profit and loss appropriation account and the net loss is debited to profit and loss appropriation account

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Profit and loss account

Dr Particulars
To Gross loss b/d To All expenses To Net Profit

Cr Amount Particulars
xxxx xxxx Xxxx

Amount

By Gross Profit b/d xxx By all Incomes xxx By Net loss xxx

xxx

xxx

Prepare a P/L account

Gross Profit Rs 171500 Salary Rs 15000 Interest Rs 1500 Advertisement Rs 20000 Depreciation on assets 20000 Bad Debts 2000

Profit and loss account

Dr Particulars
To Salary To Interest To Advertisement To Depreciation on assets To Bad Debts To Net Profit

Cr Amount Particulars
Rs 15000 Rs 1500 Rs 20000 20000 2000

Amount
171500

By Gross Profit b/d

113000 171500 171500

Trading and profit and loss account is one account The first part of the account is called Trading account The second half of the account is called Profit and loss account

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Trading account and profit and loss account Dr Particulars To Opening stock To Purchases Less : Purchases returns To manufacturing and trading expenses To Gross Profit b/d Amount Particulars By Sales Less: sales return By closing stock By Gross loss c/d Amount xxx xxx xxx

Cr

xxx To Gross loss b/d To All expenses To Net Profit By Gross Profit b/d By all Incomes By Net loss

Xxxx

xxx

xxx

Treatment of items : State whether the following items will be taken in Trading account or profit and loss account
Opening Stock Wages Salaries Bad debts Manufacturing expenses Carriage inwards Carriage outwards Factory expenses Office Expenses Directors fees Purchases Sales Purchase return Sales return Advertising Power water fuel Direct Expenses Administration Expenses Insurance Premium Paid Freight charges Postage and telegram Printing and stationery

PROFIT AND LOSS APPROPRAITION ACCOUNT

Profit and loss appropriation account shows the appropriation of profits during the year. Indian Companies Act Requires part of the profits to be transferred or appropriated to statutory reserves Profits should be retained to strengthen the financial position of the company. Page = 105
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PROFIT AND LOSS APPROPRAITION ACCOUNT

Particulars
To Balance b/d ( Losses of last year) To Net Loss To Dividend declared To Transfer to reserves To Surplus ( Transferred to Balance Sheet)

Amount Particulars
xxxx xxxx xxxx By Balance b/d ( Profits of last year) By Net Profit By Deficit( Transferred to Balance Sheet)

Amount
xxx xxx

xxx

Xxx

xxxxx

xxxx

BALANCE SHEET Significant Financial Statement of a firm Called FUNDAMENTAL ACCOUNTING REPORT Also Called Statement of Financial Position / Position Statement Provides information about the Financial Standing / Position of a Firm at a particular point of time.

 Statement of assets and liabilities of business enterprises at a particular date Summarizes and reveals the financial position of an enterprises on a particular date by showing what it owns and what it owes
It is prepared on a particular date it shows the assets and liabilities of a business enterprise on that date The financial position of the company is valid for only One day The reference day

 It is called balance sheet because it is prepared from the ledger account balances.

It has two sides Left hand side Used for recording liabilities Right hand side Used for recording assets
The balance is a detailed summary of the basic accounting equation ( which must always remain in balance)

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BALANCE SHEET USEFULNESS Balance sheet provides information for evaluating Capital Structure Analyzing an enterprise - Liquidity - Solvency - Financial Flexibility

BALANCE SHEET LIMITATIONS

Assets and liabilities are stated at historical cost Judgments and estimated are used in determining many of the items

FORMS OF BALANCE SHEET

HORIZONTAL FORM / ACCOUNT FORM VERTICAL FORM / REPORT FORM

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FORM OF BALANCE SHEET

Companies Act 1956 has prescribed a particular form for showing assets and liabilities in the balance sheet for companies registered under their act. Companies are also required to give figure for the previous year along with the current year figure.

 There is no particular form for the preparation of Balance sheet in the case of proprietary concern and partnership firm. balance sheet is divided into three parts
BALANCE SHEET

ASSETS

LIABILITIES

CAPITAL

The balance sheet of a company may be either in Horizontal Form Vertical Form Assets and liabilities may be arranged either on LIQUIDITY BASIS PERMANENCY BASIS

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 The companies act of 1956 has prescribed a form for the preparation of balance sheet of a company.

This form is set out in part 1 of schedule VI.

SCHEDULE VI PART 1 HORIZONTAL FORM BALANCE SHEET OF AS ON ..

LIABILITIES
A

PY CY ASSETS
1.

PY
E F

CY

FIXED ASSETS INVESTMENTS

SHARE CAPITAL
RESERVES AND B SURPLUSES SECURED LOANS

2.

3.

CURRENT ASSETS ANDG LOAN AND ADVANCE H MISCELLANOUS EXPENDITURE PROFIT AND LOSS ACCOUNT

C
4.

UNSECURED LOANS D CURRENT LIABILITIES AND PROVISIONS I

5.

xxx
Siginficant accounting policies N NOTES ON ACCOUNTS - O

SCHEDULE VI PART 1I VERTICAL FORM BALANCE SHEET OF AS AT .. REFER PAGE 104

1. SOURCES OF FUNDS
1) -

CURRENT YEAR

PREVIOUS YEAR

Shareholders Funds Capital - A Reserve and -B surpluses

2) Loan funds - Secured loans - C - Unsecured loans - D TOTAL xxxx xxxx

II. APPLICATION OF FUNDS

1.

CURRENT PREVIOUS YEAR YEAR

FIXED ASSETS -E INVESTMENTS - F

2.

CURRENT ASSETS- G AND LOAN AND ADVANCE H LESS: Current Liabilities and Provision NET CURRENT ASSETS
3.

4. MISCELLANOUS EXPENDITURE
5. PROFIT AND LOSS ACCOUNT

SIGNIFICANT ACCOUNTING POLICIES SCHEDULE N 1. BASIS OF PREPARATION OF FINANCIAL STATEMENTS GAAP 2. USE OF ESTIMATES 3. FIXED ASSETS OWN OR LEASE 4. INTANGIBLE ASSETS 5. DEPRECIATION WDV METHOD RATES SCHEDULE XIV OF COMPANIES ACT 6. INVESTMENTS 7. INVENTORIES 8. TURNOVER NOTES ON ACCOUNTS SCHEDULE O 1. TRANSFER TO GENERAL RESERVES FROM P/L ACOUNT 2. MANAGERIAL RENMUNERATION DIRECTORS

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ACCOUNTING TREATMENT Land and Building Plant and Machinery Cash in hand Cash at bank Goodwill Creditors Bills payable General Reserves Outstanding Incomes Capital Preliminary Expenditure

MISCELLANEOUS EXPENDITURE
Expenses such as Advertising, incorporation costs, promotion cost, expenses for the issue of capital Benefits of these expenses are expected over several future periods these expenses are deferred or written off over a period of time, Expenses not written off will appear in balance sheet.

CAPITAL WORK IN ROGRESS

Amount incurred on the addition to fixed assets but the stage of assets which is at present not ready to use because further processing required. Page - 104

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DEFERRED TAX - page 104

Is an accounting concept Also known as future income taxes Future tax liability or asset resulting from the difference between the accounting value of assets and liability and their value for tax purposes.

Say example: Accounting value of asset = 100 Tax value of asset = 80 Difference ( under estimate) = 20 Rate 35% Deferred tax liability = 7 ( future tax liability)

DTL
MEANS Currently we are paying less amount of tax as per the Income tax. In future we have to pay more So we need to keep Future tax

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Calculate DTL OR DTA

Company purchases an asset for $1,000 which is depreciated for accounting purposes on a straight-line basis of five years. The company claims tax depreciation of 25% per year on a declining balance basis. The applicable rate of corporate income tax is assumed to be 35 %

Purch Year 1 2 ase

Accou 1000 nting value Tax 1,000 value Differe nce DTL DTA 800 600

3
400

4
200

750 50 18

563 38 13

422 (22)

316 (116)

41

DEPRECIATION , AMORTIZATION AND DEPLETION

DEPRECIATION refers to prorating a TANGIBLE ASSET cost over that asset's life. For example, an office building can be used for a number of years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year.

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 AMORTIZATION spreading an INTANGIBLE ASSET cost over that asset's useful life. For example, a patent. The cost involved with creating the PATENT is spread out over the life of the patent, with each portion being recorded as an expense on the company's income statement.

 DEPLETION refers to the allocation of the cost of natural resources over time. For example, an oil well has a finite life before all of the oil is pumped out. Therefore, the oil well's setup costs are spread out over the predicted life of the oil well. DEPLETION is the actual physical reduction of natural resources by companies. For example, coal mines, oil fields and other natural resources are depleted on company accounting statements. This reduction in the quantity of resources is meant to assist in accurately identifying the value of the asset on the balance sheet.

METHODS OF CALCULATING DEPRECIATION

STRAIGHT LINE METHOD WRITTEN DOWN VALUE METHOD

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 STRAIGHT LINE METHOD: Depreciation is charged evenly every year EXAMPLE: A machinery is purchased for Rs 100000, life of the asset is 10 years after which its scrap value is estimated at Rs 5000. then depreciation will be = Cost scrap Life = 100000 5000 = 9500 10

WRITTEN DOWN VALUE METHOD: Depreciation is charged every year on the remaining book value of the asset at the beginning of the year

X Purchases furniture for Rs 20000 and the applicable rate of depreciation is 10%,
Purchase value of furniture 20000

Less: Depreciation 10%

Book value at the end of year 1 Less: depreciation Book value at the end of year 2

2000
18000 1800 16200

IMPAIRMENT OF ASSETS Assets is treated as impaired when the carrying cost of asset exceeds its recoverable value.

An Impairment loss is charged to P/L account in the year in which asset is identified as impaired.

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Before preparing Trading and profit account and balance sheet certain adjustments are required ADJUSTMENT ENTRIES Final accounts of a business gives true and fair view of the business. Financial accounting uses accrual basis of accounting So all expenses and incomes relating to the period whether or not paid or received is taken to trading and profit and loss a/c Further if any expenditure has been paid in advance or any income has been received in advance only that amount that relates to the period is taken under consideration.

 Therefore trail balance has incomes and expenses at the actual figures which are either more or less than the actual figure for the period under review. Therefore adjustment entries are required to modify certain account balances at the end of the accounting period so that they will reflect fairly the situation as of the end of the period.

TYPES OF ADJUSTING ENTRIES Reflecting unrecorded revenues earned during the accounting period - Interest earned but not received Reflecting unrecorded expenses incurred during the period - Salary and wages incurred but not paid during the period

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 Reflecting recorded cost with the appropriate period Considering expenditures benefiting more than one accounting period - Depreciation Reflecting recorded revenues with the appropriate accounting period. Considering revenues receives in advance. Unearned revenues

FEATURES OF ADJUSTING ENTRIES

Every adjusting entry affects both profit and loss account and balance sheet The are generally recorded at the end of the accounting year

OUTSTANDING EXPENDITURE
Expenses due but not paid are called outstanding expenditure Effect Amount of expenses will be increased by the amount outstanding and shown in the trading and profit and loss account Amount outstanding will be shown as a liability in the balance sheet

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EXAMPLE
ABC Company had the practice of paying the salaries of the employees on 4th of the subsequent month. During the financial year ending 31st March 2010 the salary account shows a debit balance OF Rs 55000. the salaries of Rs 6000 pertaining to march 2010 were paid on 4th April 2010. Outstanding salary = 6000 Total salary for the year ending 31st march will be 55000 + 6000 = 61000 Outstanding salary is a liability = so credited to liability side of the balance sheet

PREPAID EXPENSES
Certain expenses paid may relate to more than one accounting period. In such cases it is necessary to identify the portion of the expenditure for which the benefit is yet to be received by the concern and treat that part of the expenditure as prepaid. EFFECT Prepaid expenses are deducted from the respective expenses on the debit side of profit and loss account or trading account Shown on the assets side of the balance sheet

EXAMPLE
ABC company took an insurance cover for all assets against fire on 1st OCTOBER 2004 and paid the annual premium of Rs 2400 on the same day. Since the benefit of the entire expenditure will expire only on 30th September 2005 it is necessary to recognize this aspect while preparing the financial statement as on 31st march 2005. Therefore prepaid premium will be 2400 X = 1200

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DEPRECIATION
Effect Depreciation is an expense so it appears on the debit side of the profit and loss account Concerned assets shall be reduced by the amount in the balance sheet

POINTS TO BE BORNE IN MIND WHILE PREPARING FINAL ACCOUNTS WITH ADJUSTMENTS TRAIL BALANCE ITEMS All items given in the trail balance should appear only once that is either in the trading account or in the profit and loss account or in the balance sheet ADJUSTMENTS all items under adjustments should appear twice to complete the debit and credit aspects of the transaction.

1.Prepare the final accounts from the following trial balance as on 31.3.2009 PARTICULARS Calls in arrears Premises Debit ( RS) 5000 750000 Credit ( Rs)

Machinery
Furniture Purchases Wages Salaries Interim Dividend ( Including corporate dividend tax ) Goodwill

150000
50000 680000 125000 60000 20000 200000

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PARTICULARS Debtors Bills Receivable Bad Debts Debenture Interest Stock on 1.4.2008 Share Capital Sales Reserve fund Profit and loss account

Debit ( RS) 60000 13000 2000 15000 41000

Credit ( Rs)

500000 1000000 150000

35000

10% Debentures Bills payable

400000 86000

2171000

2171000

Adjustments: 1.The stock on 31.3.2009 was valued at Rs 80000 2.Depreciate machinery and furniture by 10%

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NEW FORM OF BALANCE SHEET

- Excel sheet

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ACCOUNTING STANDARDS

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VARIOUS ACCOUNTING STANDARDS

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AS 1

Disclosure of Accounting Principles

AS 2
AS 3 AS 4 AS 5 AS 6 AS 7 (Revised) AS 8 AS 9 AS 10 AS 11 (Revised 2003) AS 12 AS 13

Valuation of Inventories
Cash Flow Statements Contingencies and Events Occurring After the Balance Sheet Date Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies Depreciation Accounting Construction Contracts Accounting for Research and Development Revenue Recognition Accounting for Fixed Assets

The Effects Of Changes In Foreign Exchange Rates Accounting for Government Grants Prof. Zohra BIAccounting for Investments -Alliance University

AS 14 AS 15 (Revised 2005) AS 16 AS 17

Accounting for Amalgamations Employee Benefits Borrowing Costs Segment Reporting

AS 18
AS 19 AS 20 AS 21

Related Party Disclosures

Leases Earnings Per Share Consolidated Financial Statements -

AS 22
AS 23 AS 24

Accounting for taxes on income

Accounting for Investments in Associates in Consolidated Financial Statements Discontinuing Operations

AS 25
AS 26 AS 27

Interim Financial Reporting

Intangible Assets Financial Reporting of Interests in Joint Ventures

AS 28
AS 29 AS 30 AS 31 AS 32

Impairment of Assets
Provisions, Contingent Liabilities and Contingent Assets Financial Instruments: Recognition and Measurement Financial Instruments: Presentation Prof. Zohra BI -Alliance University Financial Instruments: Disclosures