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Accounting For

Managers

Dr Vikas Madhukar
Professor
Amity Business School, Manesar
Gurgaon
madhukar_vikas@yahoo.com,
vmadhukar@absm.amity.edu
Financial Reporting – who
are the users?
 Our focus
 Shareholders
 Lenders

 Managers

 Potential employees

 Acquirers

But also
 Statutory – tax, company house

 Customers & suppliers

 competitors
What is Accounting?

Accounting is a Language of
Business.
Key Functions Based on
Financial Statements
 Planning/Budgeting
 Control
 Decision Making
 Investment Analysis
 Valuation
In other words….
 Accounting is an art as well as a science
of:
 Recording,
 Classifying
 Summarising
 the business transactions and events,
which are, in part at least of financial
nature, express in terms of money and
 Interpreting the results thereof, and
 Communicating the results to persons who
must make decisions or form judgements.
 Recording Journal
 Classifying Ledger
 Summarising Trial
Balance
 Interpretation Profit & Loss
a/c and
Balance Sheet
Classification of
Accounting
 Financial Accounting: primary concern is to
preparation of profit & loss a/c and balance sheet
and to provide various business information to all
stakeholders.
 Cost Accounting: concern with analysis and
ascertainment of cost, its classification,
accumulation, allocation and absorption so as to
calculate the unit cost of a product/process or a
cost centre and to facilitate cost reduction and
cost control.
 Management Accounting: emphasize on
managerial decision making, which take data
from financial and cost records.
Accounting Concepts
Are the necessary assumptions and
conditions upon which accounting is
based, some important concepts are:
 Business Entity Concept
 Going Concern Concept
 Dual Aspect Concept
 Money Measurement Concept
 Accounting Period Concept
 Accrual Concept
 Matching of Cost and Revenue Concept
Accounting Conventions
are the traditions, usage and
customs which are in use since long.
The most important conventions are:
 Full Disclosure
 Consistency
 Conservatism
 Materiality
Dual Aspect Concept
 Modern accounting system, which is
known as ‘double entry book-keeping
system’ is based on dual aspect concept.
 It says, every ‘debit’ has a ‘credit’ and
every ‘credit’ has a ‘debit’
 It is because of this concept that the total
claims of outsiders and owners are always
equal to total assets. i.e.
Total Liabilities = Total Assets or
Capital + Liabilities = Total Assets, this is
also known as ‘Accounting Equation’
Types of Accounts
 Personal A/c: related with
Natural persons e.g. Suresh a/c
Artificial persons e.g. IBM a/c
Representative persons e.g.
capital a/c
 Real A/c: related with assets e.g.
building a/c
 Nominal A/c: related with expenses &
losses, income & gains e.g. Rent a/c,
wages a/c, interest a/c
Rules of Double Entry
System
  Dr. Cr.

Personal a/c Receiver Giver


Out from
the
Real a/c In the business business

Expenses & Income &


Nominal a/c Losses Gains
Balance Sheet
 Is a statement consisting two sides,
the right hand side is know as
‘Assets’ and left hand side is known
as ‘Liabilities’. The B/S shows the
financial position of business.
Assets: any property own by the
business e.g. cash, land, building,
machinery etc
Liabilities: a liability is a claim of an
outsider on the assets of a business,
e.g. bank loan, creditors etc
 Started business with an investment of Rs 5,00,000/-
 Machinery purchased worth Rs 20,000/-
 Computer purchased Rs 30,000/-
 Goods purchased on credit worth Rs 10,000/-

Balance Sheet

Liabilities Amount Assets Amount

Capital 5,00,000 Cash 5,00,000

5,00,000 5,00,000
 Started business with an investment of Rs 5,00,000/-
 Machinery purchased worth Rs 20,000/-
 Computer purchased Rs 30,000/-
 Goods purchased on credit worth Rs 10,000/-

Balance Sheet

Liabilities Amount Assets Amount

Capital 5,00,000 Cash 4,80,000


Machinery 20,000

5,00,000 5,00,000
 Started business with an investment of Rs 5,00,000/-
 Machinery purchased worth Rs 20,000/-
 Computer purchased Rs 30,000/-
 Goods purchased on credit worth Rs 10,000/-

Balance Sheet

Liabilities Amount Assets Amount

Capital 5,00,000 Cash 4,50,000


Machinery 20,000
Computer 30,000

5,00,000 5,00,000
 Started business with an investment of Rs 5,00,000/-
 Machinery purchased worth Rs 20,000/-
 Computer purchased Rs 30,000/-
 Goods purchased on credit from Satish & Sons worth Rs 10,000/-

Balance Sheet

Liabilities Amount Assets Amount

Capital 5,00,000 Cash 4,50,000


Creditors/Payables 10,000 Machinery 20,000
(Satish & Sons) Computer 30,000
Stock 10,000

5,10,000 5,10,000
Journal
 Journal is the original books of business
where transactions are first recorded.
Date Particulars L. Amount Amount
F. (Dr) (Cr)

Cash a/c 5,00,000


Dr. 5,00,000
To Capital a/c
(Being Business Started with cash)
20,000
Machinery a/c 20,000
Dr.
To Cash a/c
(Being machinery purchased
worth)
Ledger
 It is an account where entries are
transferred from the journal and this
process is known as POSTING.
Dr. Cr.
D Particulars J.F. Amount Date Particulars J.F. Amount
ate
To Capital 5,00,00 By Machinery 20,000
a/c 0 a/c
Trial Balance
Debit balance Amount Credit balance Amount

Expenses Income
Losses Gains
Assets Liabilities

Equal Equal
Financial Statements
 Trading A/c: To calculate gross
profit/gross loss
 Profit & Loss A/c: To calculate net
profit/net loss
 Balance Sheet: To reflect financial
position of the business.
Ratio Analysis
A ratio is simple arithmetical
expression of relationship of one
number to another.

3. Liquidity Ratio
4. Solvency Ratio or Leverage Ratio
5. Activity Ratio
6. Profitability Ratio
Liquidity Ratio
1. Liquid ratio = Current
assets/current liabilities
current assets = cash, bank,
debtors/receivables + stock and
short term marketable securities.
current liabilities = bank overdraft
+ creditors/accounts payables +
short term loans
2. Quick Ratio = quick assets/ current
liabilities
quick assets = current assets -
Solvency Ratio or
Leverage Ratio
 Debt-equity ratio = External
equity/internal equity
 Funded debt to total capitalization ratio =
funded debt/ total capitlaisation x 100
 Ratio of long term debt to shareholder’s
funds= long term debt/shareholder’s funds
 Fixed assets to long-term funds ratio =
fixed assets (after
depreciation)/long term debt
 Current assets to shareholder’s funds =
current assets/shareholder’s funds
 Interest coverage ratio = EBIT/fixed
Activity Ratio
 Stock turnover ratio = cost of goods
sold/average inventory
 Debtors turnover ratio = net credit
sales/average debtors
 Creditors turnover ratio = net credit
purchases/average creditors
 Working capital turnover ratio = cost
of sales/net working capital
Profitability Ratio
 Net-profit ratio = (net profit/sales) x 100
 Gross-profit ratio = (gross profit/sales) x
100
 Operating profit ratio = (operating
profit/net sales) x 100
 Earning per share = net profit after tax
and preference dividend/number of equity
shares
 Dividend yield ratio = dividend per
share/earning per share
 Price earning ratio = market price per
equity share/earning per share
Cash Flow
Statement
Cash Flows Statement
 From OPERATING ACTIVITIES
 From INVESTING ACTIVITIES
 From FINANCING ACTIVITIES

 Which do you think is most


important in assessing the firm’s
prospects? Why?
 Defining these activities may help
answer the question...
Fruit
Businesses are like Fruit Trees…

Net Goods &


Earnings Services
Operating
Activities

Reinvested Investment
Investing in Producing Branches
Activities Assets Trunk &

Debt
Payment Debt
Financing Financing
Activities Roots
Dividends Equity
Financing
The 3 basic activities involved in conducting a business are:

• Financing activities (Roots):


- Owners contribute cash and receive equity shares in return.
- Creditors loan cash in return for the promise of interest and principal payments.

• Investing activities (Trunk and branches):


Once the capital is collected it is invested in producing assets, like buildings,
equipment, machinery and vehicles.

• Operating activities (Fruit):


The assets are operated to produce goods & services which are sold to customers.

The Net Income of these sales can be used in three ways:

2. Reinvested in the producing assets

3. Returned to the creditors in the form of debt payments

4. Returned to the owners in the form of dividends


Operating Activities
include:
 Delivering or producing goods for
sale and providing services
 The cash effects of transactions
and other events that enter into
the determination of income
 Examples: cash flows resulting
from sales of goods, purchase of
inventories, payment of operating
expenses
Investing Activities
include
 Acquiring/disposing of securities that
are not cash equivalents
 Acquiring/disposing of productive
assets
 Lending money/collecting on loans
Financing Activities
include
 Borrowing from creditors/repaying
the principal
 Obtaining resources from owners
 Providing owners with a return on
investment
The three basic activities of businesses and their financial flows:

Financial boundaries of the corporation

Operating costs Operating revenues


Operating
activities

Purchase of assets Investing Sale of assets


activities

Dividends, debt payments Financing Equity, debt


activities
The Statement of Cash Flows

The statement of cash flows is a summary of the financial flows into and out of a
company’s cash account. (Note that accounting flows are not necessarily cash flows)

Operating activities + Cash collection


− Cash paid
= Net cash increase (decrease) from operating activities (1)
Investing activities − Purchases of securities or property
+ Sales of securities or property
= Net cash increase (decrease) from investing activities (2)
Financing activities + raised capital from issuing equity or entering debt
− Dividends or debt payments
= Net cash increase (decrease) from financing activities (3)
(1) + (2) + (3) = Increase (decrease) in cash balance
+ Beginning cash balance
= Ending cash balance

The cash balance provides important information on a company’s solvency.


Cash
Flows
Funds Flow Statement
 Meaning of funds
 Procedure of preparing FFS
 Schedule of changes in working capital
 Calculation of funds from operation

 Preparing fund flow statement


Meaning of Funds
 Here, funds means all financial resources,
specifically in context of FFS, funds means
Working Capital.
 The flow of funds occurs when a
transaction changes on the one hand a
non-current account and on the other
hand a current account and vice – verse.
 FFS is a statement which indicates various
means by which the funds have been
obtained during a certain period and the
ways to which these funds have been
Statement of Changes in
Working Capital
Particulars Previou Current Incre Decre
s year year ase in ase in
WC WC
(A) Current Assets:

Total (A)

(B) Current Liabilities:

Total (B)

Working capital (A – B )
Income Statement
Sales
Less: Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Operating Profit
Add/Less: Non Operating Income or/and
Expenses
EBIT
Less: Interest
PBT
Less: Tax
PAT
Fund Flow Statement
Sources Amount Applications Amount

Funds from operation Funds lost in operation


Issue of share capital Redemption of
Issue of debentures and preference shares
raising long term loans Repayment of long
Sales of non-current term loans and
assets redemption of
Non-trading receipts debentures
Purchase of non-
Decrease in WC
current assets
Payment of dividend
and tax
Non – trading
payments
Equal Equal

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