Professional Documents
Culture Documents
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
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.
Balance Sheet
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
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
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
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)
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
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:
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)
Total (A)
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