BIMTECH PGDM (RM) 2020-22

Financial and Management Accounting

Prof. Pawan Gupta

 Contents
• Accounting - the basis of decision making
• Users and their information needs
• Annual Report and its constituents
• Financial Statements
• GAAP (Generally Accepted Accounting Principles)
• Concepts & Conventions
• Income Statement
• Cash Flow Statement
• Balance Sheet
 ACCOUNTING - THE BASIS OF
DECISION MAKING
• Accounting is the “language of
business”
• Accounting is the information system that
– Measures business activities
– Processes that information into reports
– Communicates the results to decision
makers
Using Financial Statements
 Users and their information
needs
• Investors
• Employees
• Lenders
• Suppliers and other trade
creditors
• Customers
• Government and their
agencies
• Public
 Annual Report

It includes:
• Financial highlights
• Letter to shareholders
• Discussion of business segments and
operations
• Financial statements and footnotes
• Auditor’s report
 Financial Statements

• Income Statement
• Balance Sheet
• Cash Flow Statement
 Objectives of Financial
Statements

• To provide information about the

financial position & performance of an
enterprise.
• To provide information about the cash
flows of an enterprise.
 Generally Accepted Accounting
Principles and Basic Concepts
• If every accountant used his or her own rules
for recording transactions, the financial
statements would be useless in making
comparisons.
• Therefore, accountants have agreed to apply
a common set of measurement principles (a
common language) to record information on
financial statements. Otherwise, decision
makers could not use or compare financial
statements.
 Generally accepted accounting
principles (GAAP)
• Generally accepted accounting
principles (GAAP) - a term that applies
to the broad concepts or guidelines and
detailed practices in accounting,
including all the conventions, rules, and
procedures that make up accepted
accounting practice at a given time
 Accounting Concepts

• Separate entity concept.

• Going concern concept.
• Money Measurement concept.
• Cost concept.
• Dual aspect concept.
• Accounting period concept.
• Realisation concept.
 Accounting Conventions

• Conservatism.
• Full disclosure.
• Consistency.
• Materiality.
 EQUITY
• Is the sum of:
• Paid-up ordinary share capital
• Irredeemable preference shares
• Preference shares redeemable after three
years
• Net free reserve and retained earnings
• Share premium
• Capital subsidy/cash subsidy from govt.
 DEBT
• Is the sum of:
• Term loans and deposits repayable after 12
months.
• Preference shares, redeemable within three
years.
• Convertible debenture, till their conversion.
• Non-convertible debentures; and
• Unsecured loans
RIGHTS OF EQUITY SHAREHOLDERS

• Right to income
• Right to control
• Pre-emptive right
• Right in liquidation
 Income Statement
Income statement- a report of all revenues and
expenses pertaining to a specific time period
• Net income-the remainder after all expenses
(including income taxes) have been
deducted from revenue.
• Net loss-the excess of expenses over
revenues
 INCOME STATEMENT

• Revenues are
– Increases in retained earnings from
delivering goods or services to customers
or clients
• Expenses are
– Decreases in retained earnings that result
from operations
 INCOME STATEMENT

• Expenses include
– Cost of goods sold (cost of sales)
• The cost of the goods that a company sold to
its customers
– Operating expenses
• The costs of operating the business
 INCOME STATEMENT

• Operating expenses
– Advertising
• The cost to promote the company’s products
– Depreciation
• The expense of using company-owned
buildings, equipment, and furniture
– Other operating expenses
• The costs of salaries, utilities, rent, and
supplies
– Interest expense
• The cost of borrowed money
 Income Statement

• Income Statement of Cairn Energy India

 BALANCE SHEET
• The balance sheet (statement of financial
position) reports the company’s assets, liabilities,
and owners’ equity
 Balance sheet Analysis
The Basic questions:
• What is the book value of the company?
• How much working capital does the company
have?
• How much debt does the company have?
• Is the company highly leveraged?
• Is the company growing?
• What is the company’s real worth?
 Relationship Between Income
Statement and Balance Sheet
• The balance sheet provides a snapshot of an
entity’s financial position at an instant in time.
• The income statement provides a moving
picture of events over a span of time and
explains the changes that have taken place
between balance sheet dates.
 Classified Balance Sheet
• Classified balance sheet - a balance
sheet that groups the accounts into
subcategories to help readers quickly
gain a perspective on the company’s
financial position
– Assets are usually classified as current
assets and long-term assets.
– Liabilities are usually classified as current
liabilities and long-term liabilities.
 Current Assets and Liabilities

• Current assets - include cash plus assets that

are expected to be converted to cash, sold, or
consumed during the next 12 months or
within the normal operating cycle if longer
than a year
• Current liabilities - include liabilities that fall
due within the coming year or within the
normal operating cycle if longer than a year
 Working Capital

• Working capital - the excess of current

assets over current liabilities
– It connects the assets and the liabilities of
the company.

Working capital = Current assets - Current

liabilities
 ASSETS

• Current assets are

– Those assets which the company expects to
convert to cash, sell, or consume during the next
12 months or within the business's normal
operating cycle if longer than a year
• Current assets include
– Cash
– Debtors
– Accounts receivable
– Merchandise inventory
– Prepaid expenses
 ASSETS

• Long-term assets are

– Those assets which the company
expects to hold longer then the next 12
months or the business’s normal
operating cycle if longer than one year
• Long-term assets include
– Property
– Equipment
 ASSETS

• Intangible assets are

– Those with no physical form
• Trademarks
• Patents
• Goodwill
• Other assets are
– Those with small values which do not fall
within any other standard asset category
 LIABILITIES

• Current liabilities are

– Debts payable within one year or within the
business’s normal operating cycle if longer than a
year
• Current liabilities include
– Notes payable, short term loans
– Accounts payable
– Creditors
– Accrued expenses payable
– Income taxes payable
 LIABILITIES

• Long-term liabilities are

– Debts not payable within one year or within
the business’s normal operating cycle if
longer than a year
• Long-term liabilities include
– Notes payable, long term loans
– Bonds payable
– Debentures
 OWNERS’ EQUITY

• Owners’ equity
– Represents the shareholders’ ownership of
the assets of the business
• Owners’ equity of a corporation consists
of
– Common stock
– Retained earnings
 Balance Sheet

Balance Sheet of Cairn India Limited

 Cash Flow Analysis

Whether a profitable company can

be declared insolvent?
 STATEMENT OF CASH FLOWS IN
DECISION MAKING

• A company cannot stay in business for

long if it cannot generate enough cash
from operations to cover operating
expenses
• While borrowing and investing activities
provide cash for business use, long-
term reliance on these activities for
sources of cash is not advised
 STATEMENT OF CASH FLOWS
• The statement of cash flows reports the
company’s cash inflows and outflows from
operating, investing, and financing activities
 STATEMENT OF CASH FLOWS
SCF helps to determine:
• Company’s ability to generate future cash
flows.
• Capacity to meet financial obligations.
• Success in investing strategies.
• Effectiveness in financing strategy.
 STATEMENT OF CASH FLOWS
Cash includes:
• Currency on hand
• Demand deposits with banks or other
financial institutions.
Cash equivalents are short term, highly liquid
investments that are both:
• Readily convertible to cash
• so near their maturity i.e 3 months or less
including treasury bills, certificates of
deposits, commercial paper and money
market deposits etc.
 STATEMENT OF CASH FLOWS
Uses of CFS are:
• To assess the enterprise’s ability to generate
positive future net cash flows
• To find the enterprise’s ability to meet its
obligations in time
• To find the reasons for differences between
net profit and associated cash receipts and
payments
• To know the effects on the enterprise’s
financial position
 FORMAT OF CASH FLOWS-AS 3
• Operating activities
– Companies operate by buying goods and services,
which are sold to customers
– Cash inflows from operating activities include
receipts from customers for sale of goods and
services.
– Cash outflows from operating activities include
payments to suppliers for purchase of materials
and for services, and payments to governments
for taxes and duties.
 FORMAT OF CASH FLOWS-AS 3

• Investing Activities
– Companies invest in long-term assets that
are used to run the business
• Financing Activities
– Companies finance themselves by issuing
stock and borrowing money
 FORMAT OF CASH FLOWS-AS 3

Company Name: Statement of Cash Amount Amount

Flows
Cash flows from operating activities:(List of Xxxx
individual inflows and outflows)

Cash flows from investing activities: Xxxx

Cash flows from financing activities: Xxxx

Net Increase/(Decrease) in cash

Xxxx
Cash and cash equivalents at the beginning of xxxx
the period Xxxx
Cash and cash equivalents at the end of the
period
 Cash Flow Statement

Cash Flow Statement of Cairn India Limit

ed
Thanks