Overview of Financial Statements. Balkrishna Parab

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1 Overview of Financial Statements Balkrishna Parab

4 Accounting is the language of business Why Learn Accounting?

6 Why Learn Accounting? Accounting helps us know the score

7 Why Learn Accounting? Accounting is the language of business

8 Accounting is the language of business Why Learn Accounting? Accounting is the language of business Accounting is the language of business

10 Financial Accounting Cost Accounting Government Accounting Management Accounting

11 Financial Accounting Financial accounting is concerned with the aggregation of financial information into external reports. Accounting Cost Accounting Management Accounting Cost accounting measures and reports financial and non-financial information related to the organisation s acquisition or consumption of resources. Management accounting measures and reports financial and non-financial information with the goal of assisting managers in achieving corporate goals. Government Accounting Government accounting uses a unique accounting framework to create and manage funds related to the provision of services by a government entity.

14 Definition Accounting is a system of analysing, recording, summarising and verifying financial transactions and reporting the results.

15 Definition Accounting is a system of analysing, recording, summarising and verifying financial transactions and reporting the results.

16 Accounting System Input Process Output Storage

17 Defining Accounting

18 The Father of Accounting Fra Luca Bartolomeo depacioli ( )

19 Definition Accounting is a system of analysing, recording, summarising and verifying financial transactions and reporting the results.

20 Asset Analysis of Transaction Expense

21 Definition Accounting is a system of analysing, recording, summarising and verifying financial transactions and reporting the results.

23 Definition Accounting is a system of analysing, recording, summarising and verifying financial transactions and reporting the results.

24 Journal Ledger Summarisation Trial Balance

25 Definition Accounting is a system of analysing, recording, summarising and verifying financial transactions and reporting the results.

26 Definition Accounting is a system of analysing, recording, summarising and verifying financial transactions and reporting the results.

27 Financial Statements Balance Sheet Profit & Loss Account Cash Flow Statement Notes to Accounts Statement of Financial Position Statement of Financial Performance Statement of Cash Flows Accounting Policy & Estimates

28 Balance Sheet Assets Liabilities Owners Equity Financial Position Profit & Loss Account Revenue Expenditure Profit (Loss) Financial Performance Cash Flow Statement Operating Activities Investment Activities Financing Activities Cash Flows

30 A company purchased a plot of land on April 1, 1967 for Rs. 500,000; its current worth is Rs. 500 crores. In the company s balance sheet prepared on March 31, 2017 what amount should be mentioned with respect to this plot of land?

31 How Accounting Rules Are Made?

33 Standard Setting Process Identify Need for a Standard Draft Proposed Standard Constitute a Study Group Prepare Exposure Draft Circulate to Business Associations Prepare Preliminary Standard Circulate to Public Elicit Public Comments Release the Standard

37 UK GAAP US GAAP Indian GAAP

38 International Financial Reporting Standards (IFRS)

39 Elements of Financial Statements

40 Asset Liabilities Income Expenditure Equity Profit Balance Sheet Profit & Loss Account

41 Balance Sheet Financial Statements Profit and Loss Account Cash Flow Statement

42 Balance Sheet A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

43 Profit and Loss Account The profit and loss account is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses. It also shows the net profit or loss incurred over a specific accounting period.

44 Cash Flow Statement The cash flow statement (CFS) shows the amounts of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent.

46 Balance Sheet

47 Equity and Liabilities Balance Sheet Assets

48 Equity Equity and Liabilities Non Current Liabilities Balance Sheet Current Liabilities Assets Non Current Assets Current Assets

50 Share Capital Equity Reserves of Surplus Share Warrants Share Application Money

51 Equity Equity, also called shareholders' equity, is equal to a company's total assets minus its total liabilities. Equity represents the net value of a company, or the amount that would be returned to shareholders if all the company's assets were liquidated and all its debts repaid.

52 Share Capital Share capital consists of all funds raised by a company in exchange for shares. In India companies issue three types of shares: (a) equity shares; (b) preference shares; and (c) differential voting rights (DVR) shares.

53 Reserves and Surplus Reserves and surplus refer to the profits of the company not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under equity on the balance sheet.

54 Share Warrant A share warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed price called exercise price until the expiry date.

56 Share Application Money Share application money is the amount received by a company from applicants who wish to purchase its shares. It is the money received in respect to an initial public offering of shares.

57 Share Capital Equity Share Equity Reserves of Surplus Share Warrants Preference Share DVR Share Share Applications

58 Equity Shares Equity shares were earlier known as ordinary shares. The holders of these shares have voting right in the shareholder meetings. Exercising these voting rights equity shareholders elect a board of director to run the company on their behalf.

59 Preference Share A preference share, also called as preferred stock, enjoy two preferences over equity shares: (a) they are entitled to get a fixed dividend before dividends are paid to holders of equity shares; and (b) at the time of winding up of the company, capital is repaid to preference shareholders prior to the return of equity capital. Generally, preference shares do not carry voting rights.

60 DVR Share A DVR share is like an equity share, but it provides fewer voting rights to the shareholder. In India, listed companies are no longer allowed to issue DVR shares, however, unlisted companies are free to issue such shares.

61 Non Current Liabilities Liabilities Current Liabilities

62 Liability A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.

63 Noncurrent Liabilities Noncurrent liabilities are those liabilities that not due for settlement within one year. These liabilities are separately classified in an entity's balance sheet, away from current liabilities.

64 Current Liability A current liability is a liability that is payable within one year. The cluster of liabilities comprising current liabilities is closely watched, for a business must have sufficient liquidity to ensure that they can be paid off when due.

66 Long Term Borrowings Non Current Liabilities Long Term Provisions Deferred Tax Liabilities Other Non Current Liabilities

67 Long Term Borrowings Borrowing refers to obtaining or receiving money on loan with the promise or understanding of returning it or its equivalent. Long term borrowings obligations that are to come due in a greater than twelve-month period.

68 Long Term Provision A provision is an amount set aside from profits in the accounts of an entity for a known liability, or for the diminution in the value of an asset. A long term provision is an amount set aside for a liability that is expected to come due in a greater than twelve-month period.

69 Deferred Tax Liabilities A deferred tax liability is one that a company owes and does not pay at that current point, although it will be responsible for paying it at some point in the future. A deferred tax liability arises due to differences in accounting practices and tax regulations.

70 Other Non Current Liabilities Other noncurrent liabilities are ones that cannot be categorised under (a) long term borrowings; (b) long term provisions; (c) deferred tax liabilities.

71 Short Term Borrowings Current Liabilities Short Term Provisions Trade Payables Other Current Liabilities

72 Short Term Borrowings Short term borrowings obligations that are to come due in a within a twelve-month period.

73 Short Term Provisions A short term provision is an amount set aside for a liability that is expected to come due within a twelve-month period.

74 Trade Payables A trade payable is an amount billed to a company by its suppliers for goods supplied to or services consumed by the company in the ordinary course of business.

75 Other Current Liabilities Other current liabilities are ones that cannot be categorised under (a) short term borrowings; (b) short term provisions; (c) trade payables.

76 Non Current Assets Assets Current Assets

77 Asset An asset is a right or access to future economic benefits, controlled by the entity as a result of past transaction

78 Non Current Assets A noncurrent asset is one where the right is expected to subsist, or the access to future economic benefits is expected to accrue to the entity, for a period beyond twelve months.

79 Current assets Current assets are assets used by the entity and intended to be sold/ consumed in the ordinary course of business within a period of twelve months

81 Fixed Assets Non Current Investments Non Current Assets Deferred Tax Assets Long Term Loans and Advances Other Non Current Assets

82 Fixed Assets Fixed assets are assets used by the entity and not intended to be sold in the ordinary course of business

83 Non Current Investments Investments are assets not used by the entity in the ordinary course of business. A non current investment is one that is intended to be held for a period beyond twelve months.

84 Deferred Tax Assets A deferred tax asset is one that a company has paid but it expects to recover it at some point in the future. A deferred tax asset arises due to differences in accounting practices and tax regulations.

85 Long Term Loans and Advances Long term loans and advances are monies lent or given as an advance by the entity to others, usually suppliers and employees, and which it expects to recover in a period beyond twelve months.

86 Other Noncurrent Assets Other noncurrent assets are ones that cannot be categorised as: (a) fixed assets; (b) non current investments; (c) deferred tax assets; and (d) long term loans and advances.

87 Tangible Assets Fixed Assets Intangible Assets Capital Work in Progress IAUD

88 Tangible Assets Tangible assets are fixed assets that have physical substance.

89 Intangible Assets An intangible asset is a separable non-monetary asset not having physical substance.

90 Capital Work in Progress Capital work-in-progress is a tangible asset that is under construction as on the balance sheet date.

91 IAUD Intangible assets under development (IAUD) are intangible assets under development as on the balance sheet date.

92 Inventories Trade Receivables Current Assets Cash and Bank Short Term Loans and Advances Short Term Investments

93 Inventories Inventory is the raw materials, work-inprocess products and finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale.

94 Trade Receivables Trade receivables are amounts billed by a business to its customers when it supplies goods or services to them in the ordinary course of business.

95 Cash and Bank These current assets are the balance of cash, or cash equivalents and balance of bank accounts of the company.

96 Short Term Loans & Advances Short term loans and advances are monies lent or given as an advance by the entity to others, usually suppliers and employees, and which it expects to recover within a period of twelve months.

97 Short Term Investments A short term investments is an asset not used by the entity in the ordinary course of business and which is intended to be held for a period of twelve months or less.

98 Profit and Loss Account

99 Profit and Loss Account The profit and loss account is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses. It also shows the net profit or loss incurred over a specific accounting period.

100 Income Profit and Loss Account Expenses Profit/ Loss

101 Income Income is increases in economic benefits in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

102 Other than Contribution by equity participants Inflows Income Increase in Assets Enhance ment of Equity Decrease in Liabilities

103 Expenses Expenses are decreases in economic benefits in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

104 Other than distributions to equity participants Outflows Expenditure Depletion of Assets Decrease in Equity Incurrence of Liabilities

105 Operating Income Income Non Operating Income

106 Operating Income Operating income or operating revenue is revenue generated from a company's day-to-day business activities, which means revenue posted from selling the company's products and services.

107 Non-operating Income Non-operating income is income earned by a company from activities other than day-to-day business activities.

108 Operating Expenses Expenses Non Operating Expenses

109 Operating Expenses Operating expenses are expenses incurred by a company on its dayto-day business activities.

110 Non-operating Expenses Non-operating expense is expense incurred by a company on activities other than day-to-day business activities.

111 EBITDA EBIT Profit EBT EAT

112 Profit Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the shareholders, who may or may not decide to spend it on the business.

113 EBITDA EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA is one indicator of a company's financial performance and is used as a proxy for the earning potential of a business, although doing so has its drawbacks.

114 EBIT EBIT (Earnings Before Interest and Tax) is an indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as "operating earnings", "operating profit" and "profit before interest and taxes (PBIT).

115 EBT Earnings before tax (EBT) is an indicator of a company's financial performance. EBT is a line item on a company's profit and loss account that shows how much the company has earned after the cost of goods sold (COGS), interest, depreciation, general and administrative expenses and other operating expenses have been subtracted from gross sales.

116 EAT Earnings after taxes, abbreviated as EAT, refers to financial performance for an accounting period. It is already after taxation and it is available for distribution between the shareholders and the company. EAT is also referred to as net income (NI), profit after taxes (PAT) and net profit (NP)

117

118 Cash Flow Statements

119 Cash Flow Statement The cash flow statement (CFS) shows the amounts of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent.

120 Operating Activities Cash Flow Statement Investing Activities Financing Activities

121 Cash Flow From Operating Activities Cash flow from operating activities (CFO) indicates the money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service.

122 Cash Flow From Investing Activities Cash flow from investing activities is an item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from amounts spent on investments in capital assets such as plant and equipment.

123 Cash Flow From Financing Activities Cash flow from financing activities is a category in a company s cash flow statement that accounts for external activities that allow a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans or issuing more stock..

124

125 BALKRISHNA PARAB teaches law, accounting and finance at the Jamnalal Bajaj Institute of Management Studies, 164, DN House, HT Parekh Marg, Backbay Reclamation. Mumbai , India. Cell:

FAQ: Statement of Cash Flows

FAQ: Statement of Cash Flows Question 1: What sources are used when the statement of cash flows is being prepared, and what information does each source provide? Answer 1: The statement of cash flows is prepared differently from the