Financial Accounting

Financial Accounting Rucha Trivedi rucha.trivedi@yahoo.com

Types of Accounting • Financial • Managerial • Tax • Non Profit

What is Financial Accounting? • A method to communicate financial information to interested external parties. • It is used for both Prediction and Control • User Includes • Capital Provider ( Both Debt and Equity) • Regulator • Customers • Suppliers • Employees

Financial Statement • The accounting equation • Income Statement ( P&L Account) • Balance Sheet • Statement of Cash Flows • Statement of Owners Equity ( retained earning)

Income Statement PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED _ _ _ _ _ _ _ _

Balance Sheet • Mirrors the Accounting Equation Assets = Liabilities + Equity • Assets are listed in order of liquidity Current and non-current • Equity consists of Contributed Capital and Retained Earnings • Liabilities are listed in order of maturity • Current Liabilities come due in less than a year. • Noncurrent liabilities come due after a year. • Companies desire more current assets than current liabilities – this difference is called net working capital

Balance Sheet as on _ _ _ _ _ _

Exercise : 1 - Prepare P&L and B/S of Pantaloons • Income from the sale of Apparel is Rs. 5000, Income from the sale of Accessories is 10% of Apparel. Income form cosmeticsis Rs. 10. • Cost of Goods sold is Rs. 3000 • Salary to staff is 1/5th of the income of the Apparel. Maintenance exp is 10% of the salary to staff. • Power is Rs. 8 and other Misc. exp is 50% of Power. • Building worth Rs. 1500 and Furniture and Fixtures Rs. 1000. Provide 10% depreciation on both the assets. • Investments worth Rs. 600, Debtors Rs. 500, Loans and Advances Rs. 350 and other current Assets Rs. 250. • Cash and Bank balance Rs. 118 • Creditors Rs. 200, Bills Payable Rs. 75 and Interest Payable Rs. 25. • Equity share capital of the company is Rs. 500 • Term Loan is double the amount of equity share capital. • Working capital and unsecured loan is 20% and 10% of the term loan resp. • Provide Tax @ 35% of the Profit

Cash Flow Statement • Users Includes: • Executives want to know if the cash generated by the company will be sufficient to fund their expansion strategy • Stockholders want to know if the firm is generating enough cash to pay dividends • Suppliers want to know if their customers will be able to pay if offered credit • Investors want to evaluate future growth potential • Employees are interested in the overall viability of their employer as indicated by its ability to fund its operations

Statement of Cash Flows • Statement of cash flows (SCF) reports cash inflows and outflows • Cash flows are reported based on the three business activities of a company: • Operating activities: transactions related to the operations of the business. • Investing activities: acquisitions and divestitures of long-term assets • Financing activities: issuances and payments toward equity, borrowings, and long-term liabilities.

Cash and Cash Equivalents • Cash Equivalents • Held for meeting short term commitments • It is readily convertible into known amounts of cash • It has a very insignificant risk • Short maturity (say 3 months maximum) • Sum of these three types of cash flow reflect net increase or decrease of cash and cash equivalents.

Operating Activities • These are principal revenue producing activities of the enterprise. • Examples: • Cash receipts from sale of goods / rendering services; • Cash receipts from royalties, fees, commissions and other revenue; • Cash payments to suppliers of goods and service; • Cash payments to and on behalf of employees.

Investment Activities • The activities of acquisition and disposal of long term assets and other investments not included in cash equivalent are investing activities. • It includes making and collecting loans, acquiring and disposal of debt and equity instruments, property and fixed assets etc. • Examples of cash flows arising from investing activities are as follows: • Cash payments to acquire fixed assets • Cash receipts from disposal of fixed assets • Cash payments to acquire shares, warrants or debt instruments of other enterprises and interest in joint ventures • Cash receipt from disposal of above investments

Financing Activities • Those activities that result in changes in size and composition of owners capital and borrowing of the organization. • It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc. • Sale of share • Buy back of shares • Redemption of preference shares • Issue / redemption of debentures • Long term loan / payment thereof • Dividend / interest paid

Interest • Received from investment – it is in investment activities • Received from short term investment classified, as cash equivalents should be considered as cash inflows from operating activities. • Received on trade advances and operating receivables should be in operating activities • On loans / debts are in financing activities • On working capital loan and any other loan taken to finance operating activities are in operating activities Interest Received Interest Paid

Dividend • For financial enterprises – in operating activities • For other than financial enterprises – in investing activities • Always classified as financing activities Dividend Received Dividend Paid

Direct Method for Cash flow

Financial Accounting