Broad Agenda

1 Personal Bal Sheet - your Bal Sheet

2 Personal P&L - your P&L
3 Accounting transaction
4 Accounting equation
5 Illustrative company - several transactions
Company Bal Sheet, P&L
6 Monopoly Game
You play, you generate transactions, you generate your Bal Sheet, P&L
7 Cash Flow Statements
8 Corporate Bal Sheet, P&L
9 Inventories, Depreciation, Taxes, Interest

Two types of numbers

1 Point in time numbers
2 Period of time numbers

How many cell phones do you have Two

Point in time - as of today - 22 June 2018 she has two cell phones

If we had asked her on 22 June 2004, zero phones

If we ask her on 22 June 2044, zero phones

What is your salary Prerna - she says Rs 6 lakhs

What kind of number is this

It is a period of time number - Rs 6 lakhs per annum

Or it could be Rs 6 lakhs per hour (Harish Salve, Jethmalani)

per annum per hour - period of time

Point in time numbers Period of time numbers

Photograph
Balance Sheet
Remain there till disturbed
Statement of Wealth
Wealth is a stock - pool
Video film
P&L
Gets refreshed very period, starts from zero
Statement of Income
Income is a flow - river

Your Balance Sheet as of today - 22 June 2018

Assets (own)
House, Land, Buildings, Mountains
Car, Vehicles
Appliances
Jewelry

Insurance policies
Bank Balances
Stocks and shares, mutual funds
Loans given, Advances given

Total Assets 100.00

Liabilities (owe)

Loans taken - from banks

Loans taken - from friends, relatives, well
wishers, from hither and thither
Expenses outstanding
(rent, school fees, drivers salaries, society
maintenance, many many exps)
Advances received
Total Liabilities 22.00

Capital, Net Worth, Equity, Shareholders

Equity, Shareholders Funds, your
Savings 78.00

Opening Capital (1 April 2018) 75.00 0

Savings for this period 3.00
Closing Capital (22 June 2018) 78.00

Liabilities are your sources of funds

1 Savings 78.00
2 Friends, loans, exps 22.00
 100.00

Assets are your application of funds

House, Car, Jewelry, PF 100.00

Assets - measurable in monetary terms, control over, own, potential to generate money,
result of past transactions
You have a donkey that sleeps all day and night - is it an asset ? Yes

Some assets that are questionable

1 Moral values, Immoral values ?? Not measurable, not transferable
2 Clothing ? Most likely an expense in practice
3 Body, Health Not measurable, not transferable
4 Soul Not measurable, not transferable
5 Education Not measurable, not transferable
6 Goodwill Not measurable, not transferable
7 Friends, Relatives Not measurable, not transferable
8 Company registered on your nameIf you own Shares, that is an asset
9 Brand value Not measurable, not transferable
10 Salary Period of time number, belongs to P&L
11 Trademarks and patents Assets if measurable/transferable

Some assets may be very important, very valuable in social life, human life, but that
stupid accountant does not know how to recognize them
The world of accounting does not recognize ALL your assets
The most important asset is your intellect
The second asset is your people

In the world of accounting, assets need to fulfil two criteria:

a Measurable in rupee naya paisa
b Transferable (sell, puchase, lease, licence, gift, dispose off)

BRAND VALUE (OR ANY ASSET VALUE)

1 Should be measurable
2 Should be transferable

If you say that brand value of Amitabh Bachhan is Rs 250 cr - somebody says - KPMG sa
We all clap and say wah wah
Then they say write that cheque - we all disappear

So AB with his aura / brand charged Kalyan Jewellers Borivli Rs 2 cr for a 20 sec ad
We will be delighted to account for Rs 2 cr - something happened - somebody wrote a
cheque
This is income (not brand value)

Trademarks and Patents and Brands

If you can make any asset measurable and transferable, we are quite happy to recognize
that item as an asset
If you tell me that you can translate a piece of your intellect into a transferable
commodity, then the accountant is too happy to account

Trademarks and patents are intellectual efforts which have been made measurable/
transferable by the innovative legal community
Once they are measurable/transferable I am happy to account for them

If you are Bayer and you bought a patent from Swenska and you paid Rs 5 cr for it,
I will be happy to recognize this patent as an Asset

Are IPL Players assets - are they bought and sold - are human beings assets
Are employees of L&T assets in L&T Bal Sheet
Answer No
People were assets once upon a time in a sector called slavery sector
They were indeed bought and sold

Today they are not

NRN - people, my biggest assets, can walk out of the door, anytime

Chairman - from the podium will say - people are my biggest assets
Off the podium - all these are my biggest liabilities

Do we own them - can we buy them, sell them, lease them, dispose them off ?
Legally speaking no

What about IPL

Do they BUY players
No

They buy their services, rights to play, apply restrictions on those rights
Virat Kohli wants to play gully cricket in his society
Can he play
Yes
Can he play on a beach in Mauritius
Yes

Only with in the IPL framework, he cannot play for other teams for x months

Can he get married

Yes

Those rights are assets (measurable / transferable)

Clothing ?
There is something called 'materiality'
Don’t sweat about the small stuff
Don’t do PhD on a mosquito
While small stuff might be assets, it may be expensive to treat them as assets
Assets need to be recorded, depreciated, tracked till sold, asset number, physically
verified, all this costs money
If small stuff are not treated as assets, then what are they
They are treated as expenses

An MLA is Pune had a gold shirt - clothing - that would be most likely an asset
But other regular clothing - may be treated as expenses

Some companies have a policy - any asset under Rs 10,000 is expensed

Any asset under Rs 5,000 is expensed

Measurement of Assets
You bott a house in the year 2005 for Rs 20 lakhs and today it is worth Rs 120 lakhs
What would the Balance Sheet show
This is a fight between 'cost' and 'value'
Cost is a fact, a historical event, evidenced by documents
Value is an opinion, no evidence, somebody said so, no event has happened

Accountants know the cost of everything and the value of nothing

We love cost, we love facts, we are terrified of opinions

Most of the Bal Sheet runs on cost

Nowadays some new principles have come in (IFRS, Ind AS) where value has made
in-roads into the Balance Sheet
But for our initial discussions, we will ignore these developments

Your house will appear at Rs 20 lakhs, it may even appear at Rs 16 lakhs

How
Bcoz of something called depreciation

You may say - then the Bal Sheet is old, ancient, unreal, useless
We are happy with all these comments
The other alternative is to allow you to show what you like - 120, 520, 820 - you paid 20

We are anchored in history

Taj Mahal in Shah Jahan's Bal Sheet will appear at Rs 21 lakhs

If you wish to know the current value of those assets, the Bal Sheet is your starting poin
not your final goal - you start with Bal Sheet, you do your research, you do your surveys
you may decide that this house is worth Rs 120, 110, 105 or whatever

The Bombay Dyeing Bal Sheet will have tons of land at Dadar, Parel, Worli, Prabhadevi
all bought in Jinnahs' time in the 1940s - at what cost - some small rupee paisa - today
thousands of crores - that Bal Sheet will still carry those lands at those pennies

LIABILITIES
Most of the time, people mix up liabilities with expenses
Liabilities are point in time Balance Sheet numbers
Expenses are period of time P&L numbers
But they look similar, they may overlap, they cause confusion

You are new to Mumbai and you have taken up acco on rental basis at Rs 9,000 pm
from 1 April 2018. You have entered into a 5 year agreement and your financial year
end is March. You have paid the landlord Rs 5,000 so far and today is 30 June 2018

What is your expense 5 5 5 5 5

What is your liability 22 4 0 10 13

What is your expense 27 5

What is your liability 22 535

Accountants are historians, they record financial history

History means past, actual events - financial events that are called 'transactions'
Which means he cannot 'record' the future - nobody can record the future
We can estimate the future - these are called - budgets, plans, forecasts, estimates, pro
Past - financial statements, Bal Sheet, P&L, etc etc - based on facts

What is past and what is future depends on today's date

If today is 30 June 2018, then anything from 1 July 2018 cannot be 'recorded'
In this case, you can account for numbers from 1 April 2018 to 30 June 2018

My year ending is 31 March 2019

That’s fine
Let that date come - what if dinosaurs come back before that time
I have a 5 year agreement - agreed - but those same dinos ?

Second principle
Principle of 'accrual'
1 Expense is expense whether paid or not
2 Income is income whether recd or not

Most of the time, in our simple personal lives, when we 'incur' an expense, we also 'pay'
Bcoz they happen together most of the time, our brain believes that there is only one ev
In reality, there are two events - incurrence and payment

We may pay in advance, we may pay later, we may pay at the same moment

You consumed chai today for Rs 15

You paid the canteenwala in August

This is expense of when

Today

You booked a train ticket today online for your travel in Diwali for Rs 896
This is expense of when Nov-18
This is payment of when Jun-18

Human brain thinks that expense happens whenever payment happens

But this is wrong thinking

Expense happens independent of payment

Expense may be driven by some actions, some events, passage of time

What is your expense 27,000

What is your liability 22,000

Expense here is driven by two factors

1 You have an agreement whereby you will incur an expense of Rs xxxx per mo
 2 Time has passed

1 9,000
2 3
Expense 27,000

Liability is what you owe

I had to pay him Rs 27,000 of which I have already paid him Rs 5,000, so I owe him
Rs 22,000

Variant of this example

Had you paid the landlord Rs 1 lakh

What is your expense 27,000

What is your asset 73,000
What is your liability -

What is rent ? Is it an expense or is it a liability ?

Prima facie it is an expense for the tenant, however, the rent that is not yet paid could
also show up as your liability
In fact ALL EXPENSES that you have incurred, but not yet paid, are your liabilities

A B C D E
Assets 100 100 100 100 100
Liabilities 0 22 72 92 192
Own Capital 100 78 28 8 -92
al Sheet, P&L

from zero
 to generate money,

ansferable
in practice
ansferable
ansferable
ansferable
ansferable
ansferable
is an asset
ansferable
belongs to P&L
ansferable

man life, but that

body says - KPMG says

for a 20 sec ad
somebody wrote a

e happy to recognize

ransferable

de measurable/

id Rs 5 cr for it,

an beings assets

them off ?
 x months

as assets
mber, physically

y an asset

rth Rs 120 lakhs

value has made

20, 820 - you paid 20

is your starting point

you do your surveys,

, Worli, Prabhadevi
rupee paisa - today
se pennies

at Rs 9,000 pm
our financial year
is 30 June 2018

ransactions'

casts, estimates, proforma

'recorded'
une 2018

pense, we also 'pay'

there is only one event

e moment

se of Rs xxxx per month

00, so I owe him

not yet paid could

your liabilities
Profit & Loss Account
period of time statement
Quarter, Year - for external reporting purposes
Month - for internal reporting

Why not daily, why not every hour, why not at the push of a button
Is it possible
Nothing is impossible so long as you don’t have to do it

It is expensive
By looking at the P&L every two minutes, what wil you achieve
Will it add value or destroy value

Your P&L for the period 1 April 2018 to 22 June 2018

Incomes
Salary
Interest
Rent
Dividends
Pocket Money
Casino Gains
Capital Gains (you bott a buffalo for Rs 100, sold it for Rs 102)
Gifts, Inheritances
15.00

Expenses
Regular bills - water, electricity
Capital Losses (you bott that buffalo and it ran away)
Rent
Interest on loans taken
Taxes
Fees
Depreciation
Food, clothing, shopping
Medical
Travel
Repairs of equipments
Fuel
Many many many (Misc Exps)
12.00
Profit - savings of this period 3.00
This profit will be transferred to your Capital / Equity and become part of your
accumulated savings

Are these Incomes

Cash backs ? These smart marketeers make you buy stuff that you don’t need fo
Gift coupons ? Rs 5,000 and make you spend and give you back Rs 11.25 from yo
Discounts ? own Rs 5,000 and make you feel good - is this income - rather this
is reduction of your expense

You bott a pair of socks for Rs 825 and got a discount of Rs 3, you
net price is an overwhelming Rs 822

Classes are looting the masses

Return of loans given ?

When you have lent Rs 1,000 to a friend what was it - it was an Asset
Now, it has come back - it is a reduction of that Asset (Bal sheet number)

But when you lend Rs 1,000 and you get Rs 1,065 - that extra Rs 65 (interest) is Income

Principle of Accrual
You have placed a fixed deposit of Rs 10 lakhs on April 1, 2018 with Dena Bank at 7%, o
a 5 year cumulative basis. What is your income in the above P&L

Zero
Interest for that period ??
Inflation also ??

Income is income whether received or not

We should apply that principle
Recd nothing - you will receive after 5 years on a fine morning
Does that income belong to that one fine morning - was it earned on that day
No - it accrued over 5 years and was merely received on that day

This period 22-Jun-18

1-Apr-18
 82
365
1000000
7%
15,726 Accrued Income - this will be recognized as Income in
This is also the basis for income tax
You are required to pay tax on this

The accountant is a simple soul - he does not understand nor seek to understand compli
stuff like inflation, economy, floating rates, trade wars with China

What is real interest

Did we do a wise thing by investing in FD
Is Dena Bank reliable
Is a floating rate instrument better than fixed rate instrument

In a cricket match, there is a scorekeeper

What is his job
Record the score

Impact of Accrual
Bcoz the P&L is driven by accrual (without receving or paying, we recognize incomes and
Profit does not indicate your cash surplus
Profit is coming from theory

Some people mistakenly believe that if we open your locker, we will find Rs 3 lakhs there
That is not likely to be true

Profit and cash are pretty far away in most real life situations

You bott a laptop for Rs 40,000 and you sold it for Rs 62,000
The customer will pay you after 4 months

What is your profit ? Rs 22,000

What is your cash position ? Vendor is calling and you are not picking up the phone
Profit is on paper

Your uncle has given you Rs 50 lakhs - please invest on my behalf

He does not know that you don’t know
You have tons of cash
Profit ? Loss Rs 5 lakh ?
TRANSACTION / EQUATION
Transaction is the basic unit of accounting
We account for transactions
Millions of transactions happen
The aggregate of all these transactions produces one Bal Sheet and one P&L

In cricket, the basic unit of score-keeping is one ball

Transactions are financial events

Basic equation applicable for every transaction whether you buy chai at the railway statio
Rs 10 or Sun Pharma buys Ranbaxy for Rs 5,000 cr

Assets + Expenses = Liabilities + Incomes

Assets + Exps = Liab +

Examples of transactions
You bott a laptop for Rs 40,000 Laptop Laptop Vendor Payable
and you will pay later 40,000 - 40,000

You went for lunch, spent Rs 400 Misc Exps CC Payable

and paid by credit card - 400 400

You also paid a tip of Rs 15 in Cash Bal Misc Exps

cash -15 15 -

You dropped into an ATM and Cash Bal

withdrew Rs 2,500 2,500
Bank Bal
-2,500 - -

Let us imagine a company (trading company)

One of you becomes an entrepreneur and we will take guidance from you
We will record all those transactions in this 4 column format
We will also update your Bal Sheet and P&L

Assets + Exps = Liab +

Vasvika starts a trading company - umbrellas
She sets up a company called Vasvika Umbrellas Pvt Ltd (VUPL)
VUPL is the entity we are accounting for (and not madam Vasvika)
A company construct is the human being's leap towards immortality
Vasvika invests Rs 5 lakhs into Indian Bank Bal Sh Cap
shares of VUPL, which opens 500,000 - 500,000
an account with Indian Bank

She withdraws Rs 4,000 from Cash Bal

the bank 4,000
Indian Bank Bal
-4,000 - -

V identifies an office premises, Indian Bank Bal

and enters into a 4 year agreemen -100,000 - -
where the monthly rental is Deposit for Office
Rs 10,000 and she pays a deposit 100,000 - -
of Rs 100,000

VUPL buys Furniture, Computers, FurnComTel FCT Vendor Payable

Telephones for Rs 70,000 which 70,000 - 70,000
they will pay later

V says I need people - she This is a promise to perform, not a transaction

interviews 20 people and recruits
5 people at a monthly salary of
Rs 5,000 each - they will join
next Monday

VUPL places an order for 1,000 This is a promise to perform, not a transaction
umbrellas at Rs 200 per unit

After 3 days, the vendor calls and Indian Bank Bal

says we don’t know you, so please -60,000
send us 30% advance and we Vendor Advances
send this advance 60,000 - -

After 2 days, they send the Inventories

umbrellas 200,000
Vendor Advances Umb Vend Pble
-60,000 - 140,000

VUPL sells 200 umbrellas at a

price of Rs 250 each on credit
of 10 days
a Invoice value Trade Receivables
50,000 - -

b Cost Inventories Cost of Goods Sold (COGS)

-40,000 40,000 -

Monthly closing - notes on 2 July 2018

Several accounting entries need to be recognized during month ends
Many transactions already effected have some accrual issues
Sometimes, things happen but documents don’t arrive on time

Assets + Exps = Liab +

Rent - 10,000 10,000
Depreciation on FCT -700 700 -
Salary - 25,000 25,000
Interest Income 1,200 - -
Utility Bills, Misc Exps - 4,000 4,000

If you don’t have information, you have two options

a Wait for the information
If you wait, then your financial reporting gets delayed
I will give you the exact profit after around 15 years from today

b You estimate whatever is not available and produce results early

It is a fight between accuracy and timeliness

We prefer timeliness over accuracy

These have not been posted in the financial statements

Assets + Exps = Liab +
A fire breaks out and inventories Inventories LossbyFire
of Rs 16,000 are destroyed -16,000 16,000 -

Suppose our Vendor has invoiced us in USD and the vendor payable works out to
Rs 5,000 more when converted at the closing rate
Forex Loss Vendor Payable
- 5,000 5,000

It could have reduced also - in that case I will recognize an income

Accounting in the next monthAssets + Exps = Liab +
The landlord demand Rs 500 moreBank Bal Rent Rent Payable
for some damages which we -10,500 500 -10,000
agreed and paid

The actual salaries paid were Bank Bal Salaries Sal Payable
Rs 23,200 -23,200 -1,800 -25,000

In engineering, if a + b = c, then a - c = -b

In finance, an income is different from a saving in expense

Income attracts TDS, GST, Octroi duty, stamp duty which a saving in expense may not

If something huge is missed out or is wrong, we will republish the financials

We will tell the management - that version was wrong, please ignore - this is the right ve

Estimates are subject to management whims / called 'judgement' in literature

This is a culture problem - we cant help it
art of your

hat you don’t need for

ack Rs 11.25 from your
s income - rather this

discount of Rs 3, your

5 (interest) is Income

h Dena Bank at 7%, on

n that day
ognized as Income in your P&L

to understand complicated

ecognize incomes and exps)

l find Rs 3 lakhs there

ng up the phone
d one P&L

ai at the railway station for

es + Incomes

Incomes

p Vendor Payable
-

Incomes
 Liabilities - Sources of Funds
- Equity Share Capital
Reserves / Retained Earnings

-
FCT Vendor Payable
Umbrella Vendor Payable
- Rent Payable
Salaries Payable
- Utility Bills / Misc Payable

endor Payable
-
Profit & Loss of VUPL
Incomes
a transaction Sales Revenues
Interest Income

Expenses
a transaction Cost of Goods Sold
Rent
Salaries
Utility / Misc

- Depreciation

Vend Pble
- Profit
 Sales Revenue
50,000

(COGS)
-

Incomes
-
-
-
1,200
-

Incomes

e works out to

r Payable
-
 Incomes

in expense may not

inancials
re - this is the right version

n literature
 Balance Sheet of VUPL
of Funds Assets - Application of Funds
500,000 Office Deposit 100,000
-27,200 Furniture, Comps, Telephones 69,300

Trade Receivables 50,000

Inventories 160,000
70,000 Advances to Vendors -
140,000 Indian Bank Balance 302,300
- Cash Balance 4,000
- Interest Receivable 1,200
4,000

686,800 686,800

50,000
1,200

51,200

40,000
10,500
23,200
4,000

700

78,400

-27,200
Agenda
1 Your expeditions into Monopoly and the results / question arising therefrom
2 Concept of carry forward, brought forward
3 Cash flow statements

Conceptual doubts / questions

Trade-in allowance is American jargon
Means exchange
You buy a new car from me and I will buy back your old car

We will recognize a new asset (value of the old car) - as Inventories

We will recognize sale of our car - regular sales accounting

If I sell a car for Rs 15 lakhs, of which you pay me Rs 14.25 lakhs in cash and you hand
over to me an old car worth Rs 75,000 - what is my accounting entry

Assets Exps Liab

Sale of new car - partly Cash
settled in kind 14.25 - -
Inventories
0.75

What is the cost of any asset

The cost of an asset is all expenses incurred on it till it is ready for use
You bott an elephant and you want to use the elephant to generate income from elepha
Your rides happen at Thekkady
You bought the elephant from Mysore
What is the cost of the elephant

1 You paid the vendor

2 Transport to Thekkady
3 Food on the way for the elephant, mahout, driver, cleaner
4 Taxes when you cross from one state to another
5 Saddle for the elephant
6 Consulted a vet for certifying the health of the elephant
7 You borrowed from Elephant Bank a few lakhs of rupees
Interest on this loan till the elephant starts operations - elephant takes time to
adjust - it took 6 months - interest for the 6 month period
8 You paid prof fees to a consultant who arranged the bank loan
One fine day, the elephant kicks off
From that day, food, interest, maintenance all that is an expense in the P&L
Till that day, these costs are 'capitalized' - added to asset cost

Car 10.00 Car cost

GST 1.80 If refundable, this is another asset
Regn, taxes 0.65 If for one year, this is another asset - advances
If for lifetime, then it is part of the cost of the car itself

Marion Boats example

Stones were discovered in our backyard and the value attributed is USD 2,000
Our contractor was to be paid USD 9,000 who takes the stones from us and we pay him
This cost is being capitalized in the larger story
We will capitalize USD 7,000 - that’s it

You could argue that we paid him USD 9,000 - we added this USD 9,000 to our asset co
Then the asset generated USD 2,000 which we reduced from the asset cost and thus cam
to USD 7,000

Somebody renders a service to us against which we could have paid cash

But we chose to issue shares

This service (on its own) is an expense or an asset ?

Let us assume that you are expensing it

Assets Exps Liab

Serv Fees Sh Cap
Issued shares - 10.00 10.00

Had we paid cash Cash Serv Fees

-10.00 10.00 -

Now, if these service fees were to be capitalized for some reason, then what accounting
Serv Fee Sh Cap
10.00 - 10.00

Depreciation
Why should humanity have depreciation
Cant humanity without depreciation
Long lived assets (generally those with life over one year) have limited lives (at least mo
If you buy a car that has a life of 8 years, and you don’t depreciate it - Cost Rs 24 lakhs
What will happen
The car will sit at Rs 24 lakhs all thro and one fine day it will stop working
On that fine day or not so fine day, what happens - you will recognize a huge loss
This is expense over the 8 year period, so let us try and expense it over that period
This practice is called depreciation

You may choose not to depreciate land - it has a life of 30 billion years or so as per Step

Bank of England built its headquarters in London 250 years ago

They depreciated it over 100 years
It is sitting in their Bal Sheet GBP 1.00000, since the last 150 years

Property taxes will be driven by municipal rules

Whether kindness extends to your Bal Sheet number is highly questionable
Their taxes are possibly based on your location, the square footage, etc

There are more taxes than human beings

If there are 700 cr people, the number of taxes is around 900 crore taxes
I have only spoken about 'property taxes'

Accountants love cost, they hate value

You can do a PhD on useful lives, changes in estimates of useful lives, methods of depn,
changes in methods of depn, residual values, changes in estimates of residual values

Cash Flow Statement

Cash is a statement of 'reality'
Profit, reserves, margins, returns, financial ratios - these are PPT stuff
Superficial, shallow, meaningless, created by people who have no idea
Owner - the guy whose money is invested - has a deep eye on his cash and cash flow
The others - employees, consultants, auditors, advisors, investment bankers, analysts, T
sebi - these guys look at profit, loss, returns, margins etc
For 1 owner, there are around 533 parasites - all these people
The noise they make is far higher than the quiet hardworking silent owner
So you hardly see discussions about cash flow on CNBC - while this is the core of busine

Do you want a high CTC or a high Take Home

Profit is not cashflow

Why - profit runs on accrual basis

Where did you generate your cash inflows from

Where did you apply all that cash
Over the years, cash flow statements have gotten more management friendly
Once upon a time, we used to list sources and applications and nobody read them
Then one fine day, the FASB provided a new format - useful to CEOs

We divide all activities into three types

a Operating activities
Day to day business - if you make chemicals, then regular chemicals
i. You earn a profit
ii. You manage your working capital
What is working capital ? Your current assets and current liabilities
What is current ? Short term stuff
You buy, you mfg, you sell
Then what
You buy, you mfg, you sell
Then what
You buy, you mfg, you sell

b Investing activities
New factory, new road, new aeroplane, new refinery, new office, new
acquisition of a company
Divestments - sell off your factory, sell off your aeroplane

c Financing activities
Avail of new loans, raise new equity
Repay old loans, repay equity (buy back), pay dividends

A cash flow statement is the difference between two Bal Sheets

Balance Sheet of VUPL

Liabilities - Sources of Funds Assets - Application of Funds
Equity Share Capital 500,000 Office Deposit
Reserves / Retained Earnings -28,500 Furniture, Comps, Telephones

Trade Receivables
Inventories
FCT Vendor Payable 70,000 Advances to Vendors
Umbrella Vendor Payable 140,000 Indian Bank Balance
Rent Payable 10,000 Cash Balance
Salaries Payable 25,000 Interest Receivable
Utility Bills / Misc Payable 4,000

720,500

Balance Sheet - Month One

Liabilities - Sources of Funds Assets - Application of Funds
Equity Share Capital 500,000 Office Deposit
Reserves / Retained Earnings -28,500 Furniture, Comps, Telephones

Current Liabilities 249,000 Current Assets (other than cash)

Cash and Bank Balances

720,500

Profit & Loss of VUPL

Incomes
Sales Revenues 50,000
Interest Income 1,200

51,200
Expenses
Cost of Goods Sold 40,000
Rent 10,000
Salaries 25,000
Utility / Misc 4,000

Depreciation 700
 79,700

Profit -28,500

Balance Sheet - Month Two

Liabilities - Sources of Funds
Equity Share Capital
Reserves / Retained Earnings
Bank Loan
Current Liabilities
Assets - Application of Funds
500,000 Office Deposit
-15,000 Furniture, Comps, Telephones
New Garment Factory
4,920,000
120,100 Current Assets (other than cash)
Cash and Bank Balances

5,525,100

Profit & Loss of VUPL

Incomes
Sales Revenues 500,000
Interest Income 200

500,200
Expenses
Cost of Goods Sold 411,000
Rent 10,000
Salaries 30,000
Utility / Misc 35,000

Depreciation 700

486,700

Profit 13,500

Cash flow statement is for a period of time (for a month)

Sources of Funds Activity Application of Funds
Profit for the month Operating 13,500 Decrease in Curr Liab
New Bank Loan Financing 4,920,000 New Garment Factory
Depreciation Operating 700 Increase in Current Assets
4,934,200

Surplus/(deficit) for the month -275,000

Opening cash balance 340,000
Closing cash balance 65,000 65,000

Cash flow statement

Cash from operating activities
Profit 13,500
Add back depreciation 700 14,200
Changes in working capital
Decr in Current Liab -128,900
Incr in Current Assets -80,300 -209,200 -195,000

Cash from investment activities

New garment factory -5,000,000

Cash from finance activities

Factory loan 4,920,000
Deficit for the month -275,000
ion arising therefrom

s in cash and you hand

Incomes
Sales Revenues
15.00

ate income from elephant rides

- elephant takes time to

in the P&L
set - advances
e cost of the car itself

is USD 2,000
om us and we pay him USD 7,000

D 9,000 to our asset cost

asset cost and thus came

Income

, then what accounting will happen

mited lives (at least most of them)

te it - Cost Rs 24 lakhs

working
gnize a huge loss
it over that period

years or so as per Stephen Hawking

estionable

re taxes

lives, methods of depn,

es of residual values

s cash and cash flow

ent bankers, analysts, TV experts,

nt owner
his is the core of business
ment friendly
obody read them

ular chemicals

ent liabilities

new office, new

tion of Funds
100,000
Telephones 69,300

50,000
160,000
-
336,000
4,000
1,200

720,500

tion of Funds
100,000
Telephones 69,300

her than cash) 211,200

340,000

720,500
tion of Funds
100,000
Telephones 68,600
5,000,000

her than cash) 291,500

65,000

5,525,100

Activity
Operating 128,900
Investing 5,000,000
Operating 80,300
5,209,200
Corporate Balance Sheet
Corporate P&L

Personal Bal Sheet

Personal P&L
Accounting equation
Sample transactions
Your company
Monopoly
Cash Flow Statement

Corporate Balance Sheet

Corporate P&L

This will be something hitting us badly - more complexity, tons of terms, GAAP

Don’t be enamoured with all of that

Core - numbers, some basic terms

Annual Report
Has some 50,000 items - nobody knows what all
It also includes a Bal Sheet, P&L, Cash Flow Statement, Notes to these Statements
It includes an Auditors Report - true and fair
Directors Report
Management Discussion & Analysis
Tons of other charts, graphs, photographs, environment, pictures of Jupiter and what no

We follow what is called as IFRS - International Financial Reporting Standards

These are made by IASB, London
We started IFRS around 2 years ago
Large companies (those with net worth over Rs 250 cr) follow IFRS
Smaller ones - they follow Indian GAAP

IFRS is called Ind AS (Indian version of IFRS - 99% IFRS and 1% Andheri local)

Standalone financials vis-à-vis Consolidated financials

Tata Steel Ltd - the Indian entity - stand alone financials
Consolidated - Tata Steel family - includes subsidiares, joint ventures and associates

Very simply stated - a subsidiary is one where we have more than 50% stake - but this n
not always be true - but we should 'control' that entity
Associate - an entity where we have more than 20% stake - presumption is that we hav
signficant influence
Joint venture - we have joint control - there is us and there is them - we cant do great t
if they don’t allow - we will make sure that they cant do great things either

Indian annual reports will contain both

International annual reports will contain only consolidated
If you want to know how is Coca Cola India doing - that is not available
Coca Cola US is also not available
Coca Cola Consol is available

Current assets will be realized within 12 months Our belief, God knows
Current liabilities will be paid off within 12 months Our belief, God knows

Non current are long term - could be 12 months and 1 day, could be 100 years

Capital WIP means PPE that are being constructed, installed

On completion, this will move into PPE and depreciation will start
A huge Capital WIP - what does it indicate - expansion
If someone tells you that my sales will grow 30%, 35%, 40% and you look at the capita
which is hardly anything - then you should be scared

Intangible assets - software, patents, copyrights, trade marks

What does 'Others' mean

There are millions of line items, each individually tiny - I don’t want to make a long list
What do these contain - go the Notes and read up

Story
There is a factory in New Zealand owned by Tim Richards
Tim Richards and Amitabh got together and set up a JV named Tim Amit Ltd
This TAL owns a factory
Tim wants more stake in TAL - now he owns 50%, he wants another 30%
If Tim invests more and Amitabh does not invest, then Tim would end up owning more
This incremental investment would show up in TAL Bal Sheet as incremental equity capit

Another method could be that Tim buys some shares from Amitabh
In this transaction, TAL is not impacted at all

Reliance Industries Ltd bought 90% of shares of XYZ Ltd from Mr X

Y owns 5% and Z owns 5%
This transaction will have no impact on the Bal Sheet of XYZ Ltd - its shareholders list w
X Reliance
Y Y
Z Z

XYZ has become a subsidiary of Reliance Industries Ltd

From the next year, it will get consolidated

You got a tip that L&T will go up

In the break, you bott 5 shares
What is the accounting in L&T today
Nothing

Consolidation Parent Sub Consol

PPE 100 8 108

I told you that accountants love cost and hate value - this is what they did for 550 years
Then they said - fashion should change sometime
Someone said - that time has arrived
So the accountants under IFRS have chosen value over cost in some line items (especial
in financial assets)

While PPE will be at cost, mutual funds, shares, some bonds, derivatives are more likely
be carried at fair value (under this new IFRS) than at cost

Equity Share Capital

If the face value per share is Rs 10 and you have issued 5 cr shares, then your equity sh
capital will be Rs 50 cr
You could have issued these shares not at Rs 10 but at Rs 500
Rs 490 is then called as the share premium
That share premium will be classified as Other Equity

Reserves & Surplus

Retained Earnings
Now all that is called Other Equity (which subsumes your Reserves, Retained Earnings)

A perpetual bond is a bond which has no maturity date

A company has three sources of funds

a Owners, shareholders - equity Equity Shares
b Lenders, bankers - loans Loans, Bonds, Debentures
c Vendors - products / servcies

A bondholder is lending to the company (like a bank)

The company issues bonds
Many times, these bonds can be traded

Tata Steel goes to SBI and borrows Rs 500 cr - this is a loan

It is a pvt transaction between Tata Steel and SBI

Tata Steel goes to the market and issues bonds of Rs 500 cr - this is also a loan
But you subscribed to 10 bonds of Rs 1,000 each
After 4 days, you sold them off at Rs 1,003.55
Someone bought and he also sold and so on
Bonds create a market - traders, brokers, analysts, buyers, sellers, experts, NSE, CNBC,
they build careers around

Perpetual bond - there is NO maturity date

When will Tata Steel repay - whenever - if they feel like

They have a coupon of say 7%

But this coupon is also not obligated - they may pay if they feel like it

When Kingfisher gets liquidated who will get what

Reality - nobody nothing
Theory Very crude list
a Liquidator's charges
b Taxes
c Providend Fund, ESIC
d Labour dues
e Secured lenders (mortgage of properties, hypothecation, lien)
f Unsecured creditors
g Preference shareholders
h Equity shareholders

What are 'provisions'

Provisions are liabilities - but the amounts are not clearly known
There is an element of management estimate

While coming down today, you knocked down somebody

That somebody is complaining of mental agony etc - he is demanding USD 10 mio
What is your liability
Your lawyer says USD 10
You may create a 'provision' for USD 10 and disclose in the Notes about the litigation - c
against the company not acknowledged as debts USD 10 million
USD 10 is on Bal Sheet and USD 10 mio is off Bal Sheet (disclosure)

Electricity dispute

Retirement benefit obligations - pensions, gratuity, medical post retirement - again most
the time, these are estimates - nobody knows
Unknown numbers - when you don’t know, you invite people who know - this tribe of
knowledgeable experts are called 'actuaries' - they know everything

Deferred tax
You make a profit before tax of Rs 100
Your tax rate is 34%
So the simple minds in the world would believe that you will pay a tax of Rs 34
But if life is so simple, then how will lakhs of people find employment
Tax may be Rs 24.15 for this year - current tax
The balance of Rs 9.85 is 'deferred' - postponed - pay later - Govt kindness on humanity

Why is Govt so kind - huge subject

The same law might be unkind to some others - for those unfortunate corporates, this it
may appear as a Def Tax Asset (what you had pay after 3 years, you have paid now)

Tax law is complicated and accounting is no less

When two complex pieces of literature clash, then these are consequences

Capitalization of expenses
Till the asset is ready to be used, expenses get capitalized
So my engineers worked on installing a machine for 83 man months - salary was Rs 95 l
I am including their salaries in my total salaries and then from here, I am transferrring
this much to assets

Change in Inventory
We always thought Inventories are Balance Sheet items
Why should the P&L have some of these numbers

Lets imagine a simple trader - trading in water bottles

He bought 10 bottles at Rs 10 each
He sold 8 bottles at Rs 12 each
What is his profit or loss
Sales 8 12 96 What is wrong about this
Purchases 10 10 100 We are not comparing apples to apples
Profit -4

Sales 8 12 96

Purchases 10 10 100
Change in Inventories -2 10 -20
COGS 80

Profit 16

Whenever closing inventories > opening inventories, the change number has to be nega

Next month, he bought 20 bottles at Rs 10 each

He sold 21 bottles at Rs 12 each
What is his profit
How will you present

Sales 21 12 252

Purchases 20 10 200
Change in Inventories 1 10 10
COGS 210

Profit 42

Your closing inventory is how much 1

Your opening was 2
Change in inventory - reduction of 1 (positive)

If inventory increases, that is negative number (month 1)

If inventory reduces, that is a positive number (month 2)

We used to stop at PAT under Indian GAAP

But IFRS has made life a bit complex
IFRS brings in fair valuation in some of the line items
Traditionally we were anchored to cost

If you bott an elephant for Rs 50 lakhs and the fair value is say Rs 58 lakhs and they pus
to recognize fair value, then suddenly your assets shoots up by Rs 8 lakhs
How does the accounting equation match up

One answer is that this is Income

Assets + Exps = Liab + Income
Fair valuation 8.00 - - 8.00

Many corporates are not happy with this answer

What is their grouse
1. We may pay tax on it
2. Not yet recd, so a bit notional
3. Earnings volatility - this quarter gain, next quarter loss

What do people want on our earnings

desire

reality

diff is life

Another answer is take this to Reserves directly (bypassing the P&L)

Assets + Exps = Liab + Income
Fair valuation 8.00 - 8.00 -

Such incomes that are taken to Reserves directly - that area of the Reserves is called
OTHER COMPREHENSIVE INCOME (OCI)
 Comrehensive Income

P&L Other CI
Other than thro P&L

In Indian GAAP, we were quite happy with PAT as the end game

Example
You bott a bond for Rs 99
This bond is fair valued with gains and losses being recognized in the OCI
At the year end, the fair value was Rs 99.25

Bond increases by Rs 0.25

OCI (Reserves) increases by Rs 0.25

Next year, we sell this bond for Rs 99.40

What is the accounting

What is our gain - 40 paise - is it a valuation gain or a realized gain - realized gain
So, the 40 paise income gets into P&L and the OCI is cleaned up

Assets + Exps = Liab + Income

Bott the bond Cash
-99.00
Bond
99.00 - - -

Year end - fair valuation Bond OCI

0.25 - 0.25 -

Sold the bond Cash OCI Realized Gain

99.40 - -0.25 0.40
Bond
-99.25
We are moving the valuation gain from the OCI into the P&L as it has been now realized
This activity is called RE-CLASSIFICATION

The OCI area has two types of valuation gains / losses

a Those that will be reclassified into P&L (like the above example)
b Those that will not (even after realization, they will come into the P&L)
terms, GAAP

hese Statements

of Jupiter and what nots - PR

g Standards

Andheri local)

res and associates

50% stake - but this need

 mption is that we have

m - we cant do great things

ngs either

od knows
od knows

be 100 years

you look at the capital WIP

nt to make a long list

m Amit Ltd

end up owning more

ncremental equity capital

its shareholders list will change

they did for 550 years

me line items (especially

vatives are more likely to

es, then your equity share

s, Retained Earnings)
 is also a loan

experts, NSE, CNBC, banks

ding USD 10 mio

about the litigation - claims

etirement - again most of

know - this tribe of

tax of Rs 34

kindness on humanity

nate corporates, this item

ou have paid now)

equences

hs - salary was Rs 95 lakhs

e, I am transferrring
apples to apples

umber has to be negative

 58 lakhs and they push you

e Reserves is called
her than thro P&L

n - realized gain

ealized Gain
 has been now realized

example)
me into the P&L)
 1 Corporate Cash Flow Statement
2 Balance Sheet - management point of view
3 P&L - management point of view
4 Little bit of GAAP related stuff
5 Role of Auditors
6 Guidance on next steps - what is the next level - what might be good for you

Contingent Assets
Contingent Liab, Provisions, Liabilities
Dividends and how they affect equity
How to record software development costs
How does Retained Earnings move - what are its drivers
Trade discounts, warranties, returns from customers

Contingent Liab, Provisions, Regular Liabilities

Does it Can we
exist todayquantify it
clearly
Regular Liabilities Yes Yes
Provision Yes No
Contingent Liability No NA

What is a contingent liability

Your friend asks you for a loan - you have money you don’t feel like it
You tell him - I am myself looking for a loan - can you help me
He comes back after a week - can you please sign this paper for me
What paper
Guarantee - XYZ Bank is ready to lend some funds to me - but they want a gurantor
While you don’t like it, you are unable to refuse
You sign - loan of Rs 20 lakhs
Are you liable - is it a liability for you today evening - in your Bal Sheet
It is not a liabiilty today
But can it become a liab tomm
Yes, that is contingent upon - whether he picks up the phone or not
They will call you - on that day, it becomes YOUR liability
But if he were not to default, then maybe never
We don’t account for it - but we should DISCLOSE in the Notes
Recently in the last one month, we had Shriram Transport

What is a Contingent Asset

You have filed a case on Sun Pharma - that I had your drug and I developed headache
Earlier I had only tummy ache
Now you pay me Rs 5 cr
If you win, then you have a lottery
Can you recognize this asset / income in your books
No - first you win and then lets see
We do not account and we do not disclose also

Dividends
Dividends are discretionary distributions of accumulated profits to shareholders
Your shareholders equity (share capital + other equity/reserves/retained earnings) is Rs
The directors pay a dividend of Rs 2
Your bank balance reduces and your shareholders equity reduces
Within shareholders equity which line item reduces ? Retained earnings
If share capital was Rs 15 and retained earnings were Rs 85, now they reduce to Rs 83

How much dividends to pay ? Whether to pay ?

These are policy questions

Today the Board of Directors had a meeting and they recommended a dividend of Rs 2 -
At the AGM (shareholders), the members resolved to declare the dividend - 16 Aug 2018
On that day, we will (a) reduce Retained Earnings and (b) recognize a Current Liability (
Then we paid out these dividends on 20 Aug 2018
On that day, we will (a) reduce Bank Balance and (b) reduce Current Liab
Sometimes, some shareholders are missing - it comes back - these will sit in Curr Liab
I will wait for 3 years and then I will transfer to Unclaimed Dividends
After sometime, if nobody claims, I will pay this off to SEBI - Investors Education Fund

How to record software development costs

Most of the time, when we are fighting between whether a payment is an EXPENSE or a
the accounting community favours EXPENSE treatment
When not sure, treat it as an Expense
If something is an Asset, then it should inherently be valuable (you own something - tan
intangible right)
You spend on developing software, patent, R&D - we are unsure - whether a commercia
product will emerge - nobody knows
The day the product technical viability and commercial viability is established, we will sta
capitalizing

How does Retained Earnings move - what are its drivers

Goes up due to profits
Goes down if you suffer losses
Goes down due to dividend payouts
Goes up and down due to Other Comprehensive Income (OCI) - fair valuation challenges

Sh Equity

Sh Cap Oth Equity

Retained
Earnings

Trade discounts, warranties, returns from customers

Trade discounts
Generally not accounted separately
If you buy 10 dozens from me, I will send you 11 dozens out of kindness
We will record 11 dozens inventory, a sale price for 10 dozens

Cash Discount
I invoive you Rs 100
If you pay me after 30 days, you pay me Rs 100
But if you pay me in 15 days, I will give you one rupee discount
Someone pays in 15 days
Bank Balance goes up Rs 99
Discount Expense is recognized Re 1
Trade Receivables goes down Rs 100

Warranties
I don’t know what my warranty expense will be
What do I do
I create a provision (estimated liability)

Assets Exps Liab Income

Warranty Provn - 100 100 -

We spend in reality, Rs 102

Bank Bal
-102 2 -100 -
Customer Returns
Sales Accounting Assets Exps Liab Income
Sales Rec'bls Sales Revenue
100 0 0 100
COGS InventoriesCOGS
-80 80 0 0

Return is the opposite

Sales Price Rec'bls Sales Revenue
-100 0 0 -100
InventoriesCOGS
80 -80 0 0

This inventory is worthless or that it can be sold for only Rs 15

That is called a write-off or a write-down
InventoriesLoss on Inv write off
-65 65 0 0

There is old GAAP - Indian GAAP and there is IFRS / US GAAP - new GAAPs
These new GAAPs ask us to not only account for returns but also account for expected r

If you have a policy of accepting returns within 30 days, then on 31 March, you have an
obligation to accept returns of all stuff sold from 2 March onwards
They say - you estimate how much will be returned - could be based on history
So you may account for such returns at say 2.25% of the sales

Balance Sheet - management point of view

Liabilities Assets
Share Capital Property Lazy, slow, static, nothin
Retained Earnings Plant and Equipment Owners, Board of Dir, CE
Long term Investments Huge impact, few decisio
Long Term Loans Time taken to decide - m
Skills - vision, foresight,
Tons of thought, not mu
Playing chess

Current Liabilities Current Assets

Trade Payables Trade Receivables Working Capital manage
Expense Payables Inventories Mid level management
Short Term Loans Advances, Deposits Millions of decisions
Short Term Provisions Cash and Bank Balances Impact of going wrong -
Skills - shouting, scream
Follow up, follow up, fol
 Sheer hard work - come
Playing Formula F1 car r
Focus is on efficiency, sp

Buy Buy
Pay Buy Buy
Pay Buy RM
Trade Pbls

Mfg
Collect Working Mfg
Collect Capital Mfg
Collect Chakra WIP
Rec'bls

FP
Sell
Sell
Sell

Once upon a time, paint distributors used to get their paints within 7 days from the indu
Asian Paints delivered in 3 days
Now others deliver in 2 days
Asian Paints delivers in hours

P&L - management point of view

Sales Revenue 1000

Domain journey or Business

The business people run this part of the P&L
Business - cement guys, garment guys, jewel
They are responsible to generate the EBIDTA

EBIDTA 350

Depn/Int/Tax This is handled by finance / senior manageme

Not much domain oriented / more policy orien
 More a money journey

PAT 100

Corporate Cash Flow Statement

Operating activities
Investing activities
Financing activities

We start from PBT and adjust for

a Items that do not involve cash flow - depreciation, amortization - we add them
b Items that we are moving from the operating basket to some other basket

Which basket
Dividend Income Investing
Interest Income Investing
Dividend paid Financing
Interest paid Financing

The above position is Indian GAAP position and Ind AS position

What is Ind AS
Indian GAAP is the GAAP that we have been following since around 1450 AD till today at
some sectors in India
Ind AS is the Indian version of IFRS which we have started following for large companie
around 2 years ago

Original IFRS which operates in other countries (not India) does allow interest paid and
paid to be classified as either Financing or Operating

What is the relationship between PAT and CFO activtiies

If your PAT is say Rs 100, how much of this PAT translates into CFO activities

PAT 4
Depn 4
Int 3
EBIDTA without tax 11

CFO (before depn, before int, after tax) 12

This is pretty good - your profits are indeed translating into cash - they are not getting s
in working capital

If EBIDTA after tax were Rs 100 and CFO were Rs 20, what would that mean
All your profits are getting lost somewhere in working capital - they are not turning into

You earned a super profit, but your customers are paying you after 6 months
Where are the profits stuck - in Receivables (not yet translated into cash)

Your boss gives you 100% increment which you can collect after 3 years

Company A B C D
Cash Profit 100 100 100 100
Working Capital -140 -25 -5 -30

Cash from Operations -40 75 95 70

Investing -10 -240 -15 -800
Financing 50 165 -80 730

Can you express each of the companies through some adjectives

Company A
Mismanagement - against a profit of Rs 100, if your working capital gorilla takes away R
then you have a very expensive gorilla
It is borrowing to survive
If you borrow to expand, that is understandable

Company C
Well managed, great CFO
What is the problem - not ambitious - hardly any investing happening
In 5 years, industry may overtake them and they may become a marginal player
May be it is run by an 85 year old Parsi gentleman who needs to go to Willingdon at 330
play bridge
Cosy nice job, what you do today is what you will do tomm and day after and next year
next decade
Work life balance and all that - 900 am to 500 pm sharp
Systems will be well defined

Company D
For every 85 year old Parsi there is a 29 year old Sindhi
He wants to conquer the world from Panama to Liberia
Is this a gamble - if you pull it off, you are the next Dhirubhai
If you don’t, then London

No systems, no policies, nothing defined

5 people close to the owner will dictate
Major decisions will be taken on the staircase

Company B
Balanced
might be good for you

y want a gurantor
 developed headache

shareholders
tained earnings) is Rs 100

they reduce to Rs 83

ed a dividend of Rs 2 - 15 July 2018

dividend - 16 Aug 2018
ze a Current Liability (Div Payable)

e will sit in Curr Liab

stors Education Fund

nt is an EXPENSE or an ASSET

u own something - tangible,

whether a commercial

established, we will start

air valuation challenges

h Equity

Complex
things
ew GAAPs
account for expected returns

31 March, you have an

ed on history

zy, slow, static, nothing happening

wners, Board of Dir, CEO, top top management
uge impact, few decisions
me taken to decide - months, years
kills - vision, foresight, long term economic understanding, India 2040
ons of thought, not much action
aying chess

orking Capital management

d level management
llions of decisions
mpact of going wrong - small
kills - shouting, screaming, bad words in the local language
ollow up, follow up, follow up
heer hard work - come at 800 pm and don’t go before 1000 pm
aying Formula F1 car racing
ocus is on efficiency, speed

n 7 days from the industry

n this part of the P&L

, garment guys, jewelry guys
generate the EBIDTA

ce / senior management
ted / more policy oriented
rtization - we add them back
some other basket

d 1450 AD till today at least in

ng for large companies since

low interest paid and dividend

FO activities
 they are not getting stuck

that mean
y are not turning into cash

r 6 months

al gorilla takes away Rs 140,

marginal player
go to Willingdon at 330 pm to

ay after and next year and