B75C0 - FA - Course Pack

Financial Accounting Pre Foundation Phase – Batch 75C0
Credit: 1 Faculty : Sessions :

Dr. Suresh G Lalwani Class sessions – 6 Group works - 2 Total - 8
Course Introduction
Not everything that can be counted counts, and not everything that counts can be counted.” -
Albert Einstein
This course is designed to provide you with a business orientation on the concepts in preparing and analyzing
financial statements issued by publicly held Companies. The teaching process for the course would pursue a ‘buildin
understanding of a business through its financials. You know that to be a good manager, it’s imperative that
you understand the key financial metrics of a business. You need to know, read and understand the numbers. Mana
The course ‘Financial Accounting’ gives you an understanding of reading & interpreting Financial Statements.
Themes
The following are the themes for Financial Accounting
Contact 0
Theme No: Topic Session/GW No:

Theme 1 Introduction and Concepts in Accounting Session 1
Theme 2 Introduction to 5 types of Accounts-: Session 2
Assets, Liabilities, Capital, Income and Expenses
Theme 3 Introduction to the Financial Statements— Balance Sheet, Session 3 and Session 4
Statement Of Income, Cash
Flows
Theme 4 Accounting Equation- From Transactions to Financial Session 5
Statements
Theme 5 Understanding Cash flows from P&L and B/S Session 6
Theme 6 Monopoly Group Work Session 7 and Session 8
Course Learning Outcomes

At the end of the course, the participant should be able:
1. To be familiar with the fundamentals of accounting concepts & conventions.
2. To understand the rationale of the accounting process.
3. To relate accounting to common financial transactions and to be able to track the eventual impact of financial tra
4. To understand and construct Financial statements-Income Statement, Balance Sheet
5. To gain confidence for reading, understanding, Corporate Financial Statements/annual reports.
Pedagogy
Class lectures, Power point presentations, Use of Excel Worksheets
Class Exercises, Group Work and Assignments
Resources
Prescribed text:
‘Financial ACCT’ by Godwin, Alderman, Sanyal. 2e
Reference Texts:
1. Financial Accounting – A Managerial Perspective By R. Narayanswamy 5th Ed..
2. Financial Accounting: By Libby, Libby and Short
Evaluation Pattern
Monopoly group work 10%
Pre Foundation exam 50%
Off campus conceptual and application 40%
assignments
Course Outline
Theme 1 – Introduction and Concepts in Accounting
Session/ GW Theme/Topic Activity in Compulsory Pre- reads

class
Session 1 • What is Accounting? Class
• Who uses Financial Discussion
Information? The need for & practice
financial statements. Questions
Practice (Not to be submitted)
Exercise TEXT: Financial ACCT by Godwin, Alderman, Sanyal. 2e: Chapter 1
• Multiple Choice pg16
• Exercises. Nos.-10,12,14,17 pg18 & 19
• Problems: Nos-26,27,28 pg21
Theme 2 – Introduction to 5 types of Accounts-:Assets, Liabilities, Capital, Income and Expen
Session/ GW Theme/Topic Activity in class Compulsory Other reading

Pre-reads
Session 2 1. Introduction to 5 heads Class Discussion& • Interview with M
in Balance sheet. practice Questions
2. Income • TEXT: Financial AC
statement. Alderman, Sanyal. 2e, Chapt

LO3, LO4 pg 5-
onwards.
o Chapter 2:LO3,LO4,LO5,LO
6,LO7

Exercise TEXT: Financial ACCT by Godwin, Alderman, Sanyal. 2e: Chapter 2
• Exercises. Nos.-11,12,13,16 pg49
• Cases Nos-35,36 pg55
Theme 3 – Introduction to Financial Statements
Session/ GW Theme/Topic Activity in Compulsory Pre-reads Other read

class
Session 3 & 4 • Introduction to the Class Discussion Article: Facin
Financial Statements & Which Numb
• Corporate Financial practice why?
Statements Questions TEXT: Financ
Godwin, Alde
Chapter 3, 4
• Chapter
pg 62-
onwards (Ple
that this chapter’
your class discu
accounting equat
the text)
• Chapter 4:
the topics
Handout-Fina
The Ele
Managerial F

Exercise TEXT: Financial ACCT by Godwin, Alderman, Sanyal. 2e: Chapter 3 & 4
• Brief Exercises. Nos.-1,8 pg78
• Cases Nos-33 pg84
Theme 4 – Accounting Equation- From Transactions to Financial Statements
Session/ GW Theme/Topic Activity in Compulsory Pre– Other reading

class reads
Session 5 • Accounting Equation-the Class Discussion& TEXT: Financial ACCT by G
process and practice Questions Sanyal. 2ed
analyzing the impact • Browse through Chapter
of these 6,7,8,9,10..and relate clas
transactions onBalance the topics
sheet & discussed in the text
Income statement
Practice Exercise (Not to be submitted)

TEXT: Financial ACCT by Godwin, Alderman, Sanyal. 2e
• Exercises: -17 pg 289
• Problems: Nos 32 pg 226
Theme 5 – Understanding Cashflows from P&L and B/S
Session/ GW Theme/Topic Activity in Compulsory Pre –reads Other read
class
Session 6 Cash flows from Operating Class • Article: In
activities, investing activities, Discussion Professor S
financial activities and & practice University
analysing companies cash Questions • TEXT: Fin
flows Godwin
Alderman, S
through
Chapters 11
classroom l
the
topics discu

Practice Exercise (Not to be submitted)

TEXT: Financial ACCT by Godwin, Alderman, Sanyal. 2e
• Exercises:-15,21 pg 318,319
• Problems: Nos 35 pg 322
Theme 6 – Monopoly Group Work
Session/ GW Theme/Topic Activity in Compulsory Pre -reads Other read
class
Session Understanding the Monopoly game Monopoly Game
7 and accounting process cycle : Objectives, Pedagogy and
Session 8 Recording of business Guidelines of the game.
transaction
Draft the general purpose of
financial statements
All the activities through a
group session

Exercise
OFF-CAMPUS ASSIGNMENTS
al Guidelines for Assignments
• Application assignments are given to encourage participants to relate their classroom learning with their actual experience in
• Participants are expected to bring in relevant concepts and theoretical frameworks in their answers to the application assign
• While participants may discuss their ideas with their peers and may refer to different sources of information, they
should ensure that their answers most definitely reflect their own thinking & analysis.
• If other sources of data / information have been quoted in your submissions then it should be referenced.
• All assignment submissions should be through Ekosh.
• Plagiarism will be strictly penalized.
• Assignments must be derived in MS - Excel
Conceptual Assignment I (30 Marks) (submission in excel only)

(Assignment to be submitted)
Question 1: The following are the business transactions of Weston Traders for the month of May 2019 (15 m)
Date Transactions
May-01 Started in business with capital of Rs.7,500 in the bank
May-01 Appointed Salesman
May-03 Bought goods, Rs. 1,000, paying by cheque
May-04 Sold goods Rs.1,750, a cheque being received
May-04 Cash withdrawn of Rs. 250 for personal purposes
May-06 Bought shop fittings forRs.2,000, paying by cheque
May-07 Bought goods Rs.1,250, on credit from Bristol Supplies Limited
May-10 Paid rent Rs.750, by cheque

May-12 Sold goods Rs.2,000, on credit to Gordano Giftware
May-16 Paid wages Rs.1,500, by cheque
May-18 Paid the amount owing to Bristol Supplies Limited by cheque
May-21 Purchased asset of Rs. 2500
May-24 Received a cheque from Gordano Giftware for the amount owing
May-29 Received interest on bank deposit of Rs. 2550
May-30 Tax payable at the rate @ 30%

Using the format given below, state weather each transaction resulted in increase or decrease or had no effect
on the company’s assets, liabilities and equity. Consider the total effect on assets, liabilities and equity.
Transaction Assets Liabilities Equity
1
2
3
4
.
.
Question 2: (5 m)
Evita Group was organized on January 1. At the end of the year, the company used a first-year accounting student
to prepare the following income statement: (5 marks)
Evita Group
Income Statement
December 31
Income from Services Rs 17,00,000
Accounts Receivable Rs 4,00,000
Total Income Rs 21,00,000
Less: Expenses
Salaries Rs 5,70,000
Advertising Rs (1,40,000)
Dividends Rs 1,00,000
Utilities Rs 2,20,000
Total expenses Rs 7,50,000
Net Income Rs 13,50,000
Required: List all of the deficiencies that you can identify in this income statement and prepare a proper income
statement
Question 3: Match each of the qualitative characteristics of accounting with the proper description. (10 m)
1. Consistency
2. Economic Entity
3. Time Period Assumption
4. Full Disclosure
5. Conservatism
6. Materiality
7. Revenue Recognition Principle
8. Money Measurement Concept
9. Matching Principle
10. Industry Practice
1. The ability to compare and contrast the financial activities of the same company over a period of time.
2. Inventory with a cost of Rs. 186,400 and market value of Rs. 235,600 is reported at whichever is lower
3. Harbor’s CEO purchased a yacht for personal use and charged it to the company
4. The company underwent a major management overhaul this would have no effect on the accounting records
5. The John Marketing Company provides advertising services to an investment company in year A but receives advertising fe
6. The life of a business can be divided into equal time periods.
7. Sony, a multinational electronics corporation, rounds dollar amounts in its financial statements to the nearest Rs.1,000
8. The auditor noticed that the financial statements of Meta Company were missing some footnotes important for
users for decision making.
9. Which principle/guideline directs a company to show all the expenses related to its revenues of a specified period even if th
10. Public utilities' balance sheets list the plant assets before the current assets.
Conceptual Assignment II (20 Marks) (submission in excel only)

(Assignment to be submitted)
Analyzing the effects of Business Transactions:
Serena Consulting Inc. was established on May 1 and during May, Serena entered into the following transactions
(in lakhs):
Date Transactions
01 05 2018 Issued INR 10,000 common stock in exchange for cash.
03 05 2018 Purchased INR 300 of supplies on account.

07 05 2018 Prepaid INR 1,500 total for June, July and August
rent
08 05 2018 Paid INR 175 towards the May 3 purchase of
supplies
11 05 2018 Billed customers INR 5,780 for services rendered
12 05 2018 Paid INR 700 for May Advertising
25 05 2018 Received INR 4,500 from customers billed on May
11
28 05 2018 Paid INR 200 in dividends to stockholders
29 05 2018 Paid INR 1,200 for May salaries
29 05 2018 Paid INR 760 for May utilities
For this question prepare the transaction statement as discussed in class/monopoly sessions. Also prepare the
income statement and the Balance Sheet) PLEASE MAKE SUBMISSIONS IN EXCEL
Conceptual Assignment III- 20 Marks (submission in excel only)

Question 1. (NSDL)National Securities Depository Ltd is a depository in India. The following items are taken from
the recent financial statement from the company (10 m)
1. Deferred Tax Asset
2. Share Capital
3. Trade Payables
4. Employee Benefit Expense
5. Depreciation & Amortization
6. Contribution to Investor Protection Fund
7. Current Tax
8. Investment in Debentures or Bonds
9. Investment in Equity Instruments of subsidiary
10. Capital Advances
11. Share Capital
12. Investor Protection Reserve
13. Dividend
14. Custody Fees
15. Transaction Fees
16. Profit on sale of Investments
17. Seminar & Business Promotion
18. Property Plant & Equipment
19. Trade Receivables
20. Cash & Cash Equivalent
Bifurcate whether the above items are assets (fixed or current), liabilities (Reserves and liabilities, Non current/current
liabilities) income or expenses.
Dr. Suresh G. Lalwani Class sessions – 6 Group works - 2 Total - 8
Question 2 : A company enters into the following transactions: (10 m)

1. Interest is paid on a note payable
2. Salaries are paid to the company’s employees
3. Bonds are issued in exchange for cash
4. Income taxes are paid by the company
5. Convertible bonds are issued in exchange for land
6. Cash dividends are paid to stockholders.
7. The common stock of another company is purchased as an investment
8. The company purchases its own common stock
9. An amount due from a customer is collected
10. Intangible assets are purchased from another company for cash
Indicate whether each transaction would appear under operating activity, investing activity, or financing activity.
Also note if a transaction is a significant non-cash transaction that would require additional disclosure
Application Assignment (25marks) (submission in excel only)

 On an individual basis each participant should study the financial statements of their own company and report the
following: (be sure to send the scanned copy /excel file of the financial statements ALONG WITH YOUR SUBMISSION. You can
Those of you whose company is not listed and hence data not available, should select either a competitive
company or any other where you have some stake holding) For the most recent year’s data available:
• What is the major source of revenue of your company? What is its % to the total income?
• What is the major chunk of expenses? Express it in % terms (% to Total income). Has there been any change over the yea
• Comment on the asset mix w.r.t need/importance/typicality of your industry? What are the top three assets
by size? Are they the top three in your kind of industry? Why? What percentage is each of them to total assets? (Calculated as a
• Has the Balance sheet size increased over the last three years? Can you identify some of the reasons for this?
• Similarly has the PAT amount changed over the last three years? Could you identify the major reasons for this?
(Please use different sheets in excel for pasting/attaching your company’s financial statements/notes to accounting etc.
Please DO NOT send separate pdf documents. Workings must be derived in MS-excel itself)
Theme 6: Session 7 and Session 8

Monopoly game (Group Work)
f the Game and Learnings envisaged
• To understand the accounting process;
• To understand and record business transactions in the form of accounting equation;
• To draft the general-purpose financial statements viz. Income Statement and Balance Sheet.
Pedagogy
• Duration of the play time will be 2 sessions
• The class will be split into groups of 7 participants each
• Of the 7 participants, there will be 1 banker and 3 teams of 2 players each (to be called Company A,
Company B, and Company C respectively).
• One player of each Company will be playing (front office) and the other player will record the
transactions in the given format. (back office). Both players will continuously discuss their strategies as well as keep
• The banker will act as cashier and regulator. He will record all cash related transactions in his books-
(column wise for all the companies in his group)
• At the end of the game, based on the transactions generated you will prepare the Income Statement
and Balance Sheet
• The Banker will then upload the excel file on Ekosh for evaluation. The file should be named ‘PGEMP
BATCH NO_FA_monopoly_group01’.
Please follow the guidelines given below while playing the game:
Preparation
Each Company chooses one metal- like token to represent their company, and the game starts by positioning these
pounds as initial Capital to start their business (NOTE this is company’s OWN capital and not borrowed from the ban
The Bank
Besides the Bank's money, the Bank holds the Title Deed cards as well as Houses and Hotels prior to purchase and u
their proper Title Deed cards; it sells Houses and Hotels to the players and loans money when required on mortgage
The Play
Start the game by throwing the dice and proceeding to the intended site as the numbers on the dice exhibit. Accord
be obliged to pay rent, pay taxes, draw a Chance or Community Chest card, "Go to Jail" etc.
After you have completed your play, the turn passes to the next Company in your group. The tokens remain on the
time.
Go
Each time the teams token lands on or passes over GO, whether by throw of the dice or by drawing a card, the Ban
Buying Property
Whenever you land on an unowned property you may buy that property from the Bank at its printed price. (mention
option of buying it at the printed price, may bid at a reasonable price decided by the banker.
You can also (if you have a lot of cash) offer to buy other properties of other teams. The price can be
negotiated. The banker will be paid a 10% brokerage by the buyer alone for his help in the transaction.
Chance And Community Chest Cards
When you land on either of these spaces, follow the instructions. The "Get out of Jail Free" card is held until used. I
price agreeable to both.
(cards once used should be disregarded for further use)
Income Tax
If you land here, assume this to be a toll tax of 50 payable to the Bank, and treated as an expense.
Jail
You get out of Jail by paying a fine of 50 pounds before you roll the dice on your next turn.
Houses
The House you buy must be erected on one of the properties owned by your team. (could be done along with purch
Houses as your judgment and financial standing will allow.
Hotels
When you have four Houses on each property, you may buy a Hotel from the Bank and erect it. You return the four
card. You may erect only one Hotel on any one property.
(We may not be able to follow this rule due to shortage of time)
Mortgages
Properties can be mortgaged to the Bank at any time. Before a property can be mortgaged, you will need to sell an
printed on each Title Deed card. Rent can be collected on mortgaged properties or utilities. In order to lift t
Other Reading:
A BRIEF REGARDING THE ACCOUNTING PRINCIPLE FRAUD:
Accounting Fraud in 2000s
Company Concept Violated Result
Business Entity Concept: Rigas family Bankruptcy, Rigas family memb

treated their assets as their own fraud and lost their investment
Adelphia
Business Entity Concept:
Compensation .Transactions with an off-
CEO (Chief Executive Officer) r
shore company
paid
that
$126 million in fines.
should have been disclosed on AIG’s
AIG books.
Civil charges filed against senio
Matching Concept: Back-dated contracts both companies.
to inflate revenues. $500 million fine.
AOL and Purchase Pro
Matching Concept: Recognized $10 million fine to SEC. Six exe
$3 billion in revenue in periods earlier $22 million.
than should have been
Xerox recognized.
Bankruptcy. Criminal conviction
Matching Concept: Improperly treated CFO. Over $100 billion in stock
expenses as assets Directors fined $18 million.
WorldCom
"I want our shareholders to treat us first as trustworthy people and then as smart people. Our desire is to deliuer whqteuer wt promise ·.
Question: How Important is financial reporting to a technology company like lnfosys!
Answer: First of all, the raison d'etre of a corporation is to maximize the shareholder value on a sustainable basis, while ensurin
Question: What is the disclosure philosophy of lnfosys!
Answer: Well, our philosophy has been When in doubt, disclose and Under-promise and ouer-deliver, throughout the 20 years of
Question: How can financial reporting become a part of a company's business strategy?
Answer : The annual report covers the major aspects of our business operations. Our prospects and our customers use this docu
Question : Does the practice of earnings guidance result in excessive pressure on managers' performance?
Answer: Yes and·no. My view has been that management is all about our ability to make considered judgments under a situati
down from tS,OOO + to 1,500 or tl,GOO. I did not lose my sleep. Our view was that we had a fairly good system of collection
Question: Does providing voluntary financia l disclosures result in competitive disadvantage to companies like yours
Answer: Providing voluntary disclosures, trans)Jarency and following principles of good governance have always created good
Qu estion : Many technology companies have argued against expensing stock options. What is your view?
Atlswer: I personally believe that there should be some norm for allocating stock. That is, the regulator should fix a certain cap
Hli
Interview
the total number of outstanding stocks. There should be no other restrictions includir
expensing of options. If we can incentivizo our employees to perform better, then O\ earnings per share will likely be better. So, even though w
Question: How do the shareholders of a company benefit from the presence of lndepender directors on the boardl
Answer: The shareholders benefit in many ways. Good corporate governance i minimization of agency costs. The role of the in
Question: Given that many retail investors do not have any formal accounting training, woulo
it not be better for them to have a summary annual report?
Answer: This is a question that we have debated often. Determining t.he level of det.ai
t.o disclose is noL easy. At the end of t.he day, shareholder democracy is like democrac: in a nation. Eve1·y vote is as important whether th
Question: Docs quarterly reporting discourage risk-taking as the horizon is very shortl
Answer: No. There will be activities that are going to take a long time. It is important for the management of a corporation to tell the investo
n.1 years, and that the profits would likely be increasing by a multiple of x percentage in the ensuing n2 years following the period of reduced
that, in most cases, most CEOs are not. certain whether their investments will indeed bear fruit. So, they want to moko investment in a clande
Question: Has globalization raised the standards of corporate governance in India?
Answer: Corporate governance is all about maximizing shareholder value on a sustainable basis, while ensuring fairness, transparency and
lEl
Note: Reference to funds / money in numerical terms is

neutral on currency. (e.g. Rs. / US $ / SGD / UAE Dh) unless specifically mentioned
MANAGERIAL ACCOUNTING & FINANCIAL ANALYSIS – AN ORIENTATION
It is an art of recording, classifying & summarizing, in a significant manner and in terms of
money - transactions and events that are at least in part of a financial character. Financial Accounting also concerns itself with t
BranchesofFinancialAccounting: - In order to satisfy the needs of different people in
accounting information, different branches of accounting have developed. They can broadly be classified into two categories,
FinancialAccouting : - It is the original form of accounting.It is mainly confined to the
preparation of financial statements for the use of outsiders like shareholders,debenture holders,creditors,banks and financial ins
ManagementAccounting: It is accounting for the management i.e. accounting which provides
necessary information to the management for discharging its functions. Management accounting covers various areas such as C
ACCOUNTING PRINCIPLES:
It may be defined as those rules of action or conduct, which are adopted by the accountants universally while recording account
Accounting Concepts
Accounting Conventions
AccountingConcepts: The term ‘Concept’ includes those basic assumptions or conditions upon which the science of accounting
Separate Entity Concept
Going Concern Concept
Money Measurement Concept Historical Cost Concept
Dual Aspect Concept
Accounting Period Concept
Periodic Matching of Cost & Revenue Concept Realization Concept
AccountingConventions: The term ‘Conventions’ includes those customs or traditions, which guide the accountant while prepar
 Convention of Conservatism
 Convention of Full Disclosure
 Convention of Consistency
 Convention of Materiality
Each of the above concepts and conventions are being explained below: CONCEPTS
SeparateEntityConcept: This concept is applicable to all forms of business organization. In
accounting, business is considered to be a separate entity, distinctive from its proprietor(s). It may appear to be ludicrous that o
applies to the business as whole. The enterprise will not be considered as a going concern when it has gone into liquidation or i
creditors or final buyer for the sale of the business as a going concern, the going concern status of the concern stands terminated
MoneyMeasurementConcept: Accounting records only monetary transaction. Events or transactions which cannot be expressed
Example: - If a business has got a team of dedicated and trusted employees, it is definitely an asset to the business but since the
CostConcept: This concept is closely related to going concern concept. According to this
concept: An asset is ordinarily entered in the accounting records at the price paid to acquire it,
&This cost is the basis for all the subsequent accounting for the assets
.Example: - If in a business, a plot of land is purchased for 50,000, the asset would be recorded in the books at 50,000 even if it
Example: If ‘A’ starts a business with a capital of 10,000 .There are 2 aspects of the transaction. On one hand the business has a
Source of funds = Assets
AccountingPeriodConcept: The life of the business is divided into appropriate segments for
studying the results shown by the business after each segment. This is because though the life of the business is considered to b
At the end of each accounting period an Income Statement and a Balance Sheet are prepared. The
Income Statement discloses the profit or loss made by the business during the accounting period while the Balance Sheet depict
PeriodicMatchingofCostsandRevenuesConcept: This is based on accounting period concept. The paramount objective of runn
Example: - If a salesman is paid Commission in Jan ’ 2006, for sales made by him in Dec ‘2005.This means that revenues of De
RealizationConcept: This concept states that to recognize revenue it has to be “realized”. Realization principle does not demand
CONVENTIONS
Conservatism: In the initial stages of accounting certain anticipated profits, which were
recorded, did not materialize. This resulted in less acceptability of accounting figures by the end user. On account of this reason
cost or market price whichever is less.’ Similarly a provision is made for possible bad and
doubtful debts out of the current year’s profits. This concept affects principally the category of current assets.
It has become a target of serious criticism these days especially on the ground that it goes against the convention of full disclosu
FullDisclosures: According to this convention accounting reports should disclose fully and fairly the information they purport t
and investors .The convention is gaining more importance because most of big business are run by Joint Stock Companies whe
Consistency: According to this convention, accounting practices should remain unchanged from one period to another.
Example: If an Inventory is valued at ‘cost or market price which ever is less’, this principle should be followed year after year.
This is necessary for the purpose of comparison. However, consistency does not mean inflexibility. It does not forbid introducti
Materiality: According to this convention the accountant should attach importance to material details and ignore insignificant d
Example: While sending each debtor “a statement of his account’. Complete details have to be given. However when a stateme
The term ‘Materiality’ is a subjective term. The accountant should regard an item as material if there is reason to believe that kn
A BRIEF ON SYSTEMS OF BOOK KEEPING
SingleEntrySystem: An incomplete double entry can be termed as a single entry system. It is a
system of bookkeeping in which, as a rule, only records of cash and personal accounts are maintained; it is always incomplete d
been developed by some business houses, which for their convenience, keep only some essential
records. Since all records are not kept, the system is not reliable and can be used only by very small business firms.
DoubleEntrySystem: The system of ‘Double entry’ book-keeping which is believed to have
originated with Venetian merchants of the fifteenth century, it is the only system of recording the two-fold aspect of the transact
Example: If some one receives something then either some other person must have given it, or the first mentioned person must
AccountingEquation: - The system of double entry system of book-keeping can very well be
explained by the ‘accounting equation’ given below: -
The properties owned by business are called “ASSETS”. The rights to the properties are called
“Equities”. Equities may be sub-divided into two principal types:
Creditor
Right of the Owner Right of the
The equity of creditors represents debts of the business and are called LIABILITIES.
The equity of the owners is called CAPITAL or Proprietorship or Owner’s Equity.
Thus:
Assets = Liabilities + Capital or
Assets – Liabilities = Capital
The following Transactions will help us to understand the Accounting Equation:-
‘A’ starts business with a capital of 10,000.
There are 2 aspects of the transaction. The business has received cash of 10,000, it is its asset but
on the other hand it has to pay a sum of 10,000 to ‘A’, the proprietor.
‘A’ purchases furniture for cash worth 2000.
‘A’ borrows cash of 20000 from city bank.
‘A’ purchases cotton bales from ‘B’ for 5, 000 on credit.
He sells for cash cotton bales costing 3000 for 4,000 and 1,000 for 1, 500 on credit to ‘P’. As a
result of these transaction the business makes a profit of 1, 500 (i.e.5, 500-4, 000) this will increase A’s Capital to 11, 500. The
‘A’ hires a few employees to help him in the business.
‘A’ withdraws cash of 1, 000 and cotton bales of 200 for his personal use. The amount and the goods withdrawn will decrease re
‘A’ pays 10000 as salary to his employees by cash. ‘A’ leases a truck.
‘A’ pays 1000 towards insurance.
The effects of these transactions are reflected on the next sheet:
Suresh G. Lalwani - Managerial Accounting & Financial Analysis – An Orientation Page 7 of 15
29
CLASSIFICATION OF ACCOUNTS
CAPITAL & REVENUE ITEMS
Classification of Income
CapitalIncome: - The tem ‘Capital Income’ means an income which does not grow out or pertain
to the running of the business proper. It is synonymous to the term ‘Capital Gain’. For example: - If a building costing 10,000 p
& loss Account of the earlier year and any profit which is now made on the sale of a fixed assets (not exceeding the original cos
RevenueIncome: - Revenue Income means an income which arises out and in the course of
regular business transactions of a concern. For example, in the course of running business, the profit is made on sale of goods, i
Classification of Expenditure
CapitalExpenditure: It means an expenditure, which has been incurred for the purpose of
obtaining a long-term advantage for the business. Such expenditure is incurred either for acquisition of an asset (tangible or inta
Examples: Purchase of additional Furniture, Plant, and Building for permanent use in the business.
Expenditure incurred in increasing the quantity of Fixed asset.
Examples: Expenditure incurred for increasing the useful life or capacity or efficiency of a Fixed asset.
Expenditure incurred for substitution of a new asset for an existing asset.
Expenditure incurred in connection with the purchase, receipt, and erection of a fixed asset. Examples: The cartage charged pai
Expenditure incurred for acquiring the right for carrying on a business.
Example: Purchase of patent rights, erection charges, copyrights, goodwill etc.
It should be noted that an expenditure cannot be taken as an capital expenditure merely because
the amount is large or the amount has been paid in lump sum or the amount has been paid out the proceeds received on account
RevenueExpenditure: An expenditure that arises out of and in the course of regular business
transactions of concern is termed as revenue expenditure. It may simply be termed as “Expenses”. Following are some the exam
Expenditure incurred in the normal course of running business.
Examples: Expenses of administration, cost incurred in manufacturing and selling of products. Expenditure incurred to maintai
Examples: Money spent for repairs for existing fixed assets or cost of stores consumed, etc.
Cost of goods purchased for resale.
fixed assets, interest on loans for the business.
FINAL ACCOUNTS
The accuracy of the books of accounts is determined by means of preparing a Trial Balance.
Having determined the accuracy of the books of accounts every businessman is interested in knowing about two more facts. Th
Whether he has earned a profit or suffered a loss during the period covered by the Trial Balance. Where does he stand now?
In other words, what is his financial position?
The determination of the Profit or Loss is done by preparing a Trading & Profit & Loss Account
(or an Income Statement), while the financial position is judged by means of preparing a Balance Sheet of the business. The tw
Trading&Profit&LossAccount: It is the Final summary of such accounts which affect the
profit or loss position of the business. In other words, the account contains the items of Income and Expenses relating to a part
Trading Account Profit & Loss Account
Trading Account gives the overall result of trading, i.e., purchasing and selling of Goods. In other
words, it explains whether purchasing of goods and selling them has proved to be profitable for the business or not. It takes in t
Opening&ClosingInventory: - At the end of the year, a trader may be left with certain unsold
goods. Such Inventory of goods with a trader unsold at the end of the accounting period is termed as Closing Inventory.
Closing Inventory is valued on the basis of “cost or market price whichever is less”. Such an
Inventory will become the Opening Inventory for the next period. While calculating the amount of profit or loss on account of t
Equation for Preparing Trading Account:
 Gross Profit = Sales – Cost of goods sold
 Cost of goods sold = Opening Inventory + Purchases of Inventory during
the year – Closing Inventory.
Therefore, Gross Profit = Sales – (Opening Inventory + Purchases of Inventory
during the year - Closing Inventory)
Trading Account simply tells about the Gross profit or loss made by a businessman on Purchasing
and Selling of goods. It does not take into account the other operating Expenses incurred by him during the course of running th
For example: The trader has to maintain an office for getting orders and executing them, taking
Policy decision and implementing them. All such expenses are charged to Profit & Loss Account. Besides this a businessman m
BalanceSheet: Having prepared the Trading and Profit & Loss Account, a businessman will like
to know the financial position of his business. For this purpose, he prepares a statement of his assets and liabilities as on particu
Balance sheet has two sides. On the left hand side, the “Liabilities” of the business are shown while on the right hand side the “
CASH FLOW STATEMENTS
The statement of cash flows is really a very useful part of the set of three statements companies
are required to prepare. Practically it tells us more about what is actually happening in a business than either the balance sheet o
Cash flow Statement summarizes the changes in the amount of cash for a particular period. It
indicates the sources from which cash was obtained and the uses to which cash was put. It concentrates only on the movement o
Operating activities, investing activities, financing activities
Each section shows the cash inflows and cash outflows associated with that type of activity Operating activities shows the inflo
Investing activities show cash flows for the purchase and sale of assets not generally held for resale and for making and collecti
Financing activities shows the cash flows associated with increasing or decreasing the firm’s fund mobilizing activities.
Activity Examples Cash flow
Operating Receipts from goods, services, debtors Payments towards goods, Cash Inflow Cash Outflow
services, creditors
Investing Receipts from sale of fixed assets/investments Payments towards Cash Inflow Cash Outflow
purchase of fixed assets/investments
Financing Receipts from fresh shares/debentures/loans Repayments of Cash Inflow Cash Outflow
shares/debentures/loans
Questions to ponder:
Interest payments on loans -should it be included in financing activity or operating activity?
Operating activities is the cash flow engine of the company. When the engine is working
effectively it provides the cash needs of operations. In a healthy growing company, it is expected that there will be a growth in t
What will be the cash flow of operating activity in start up companies? and in cyclical industries?
Investing activities are a different story altogether. A healthy growing company is expected to
continually invest in more fixed assets either a) to replace the existing ones that have been either used up or become technically
Thus there will be negative net cash investing flows for a growing company.
When will there be positive cash flow in the investing activity?
Financing activities: Cash flows from this activity could easily be positive or negative in a healthy
company and they are likely to change back and forth. If the need for cash is not fully generated from the operating activities th
There are basically two methods of depicting the cash flow statement
a) The direct method which may look like a summary of the operating cash account and is pretty simple to calculate.
b) The indirect method where the net profit is taken as the starting figure and all non cash expenses/ incomes are adjusted for Q
Depreciation is an expense but not an outflow of cash. Can you think of examples where there is a flow but it cannot be taken a
The cash flow statement is an important tool of financial analysis it provides information, which
is not readily available in the final accounts of a company. The cash flow statement indicates the change in liquidity and solven
Cash Flow statements are used by management for planning, forecasting and budgeting
erally help finding answers to the following questions:
1) How a concern may make profits but not money?
2) How a concern may pay dividends in spite of losses?
3) The movement of cash received from issue of equity/receipt of loan?
4) Why is a bank loan necessary to purchase new plants and machinery?
FINANCIAL STATEMENT ANALYSIS
The Need:
Financial Statement analysis involves the examination of both the relationships among financial statement numbers and the tren
For external user of financial statement such as investors and creditors, financial statement
analysis plays the same role in the decision making process. Whereas management uses the analysis to help in making operatin
Ratio refers to the relationship between two variables expresses either in percentage or in
multiples or in periods. The variables can be taken from financial statements or from external sources (e.g. Capital Markets).
If both the variables (numerator as well as denominator) are taken from the balance sheets, the resultant ratio is called a “balanc
If one or both the variables are taken from external sources, the resultant ratio is called “market
related ratio”. (e.g. Price earning ratio). Financial Ratios helps to analyze the financial performance of a Firm.
The performance of a company can be gauged from four angles.
P
ro fit a bi lit
y
Long – term Solvency
(Capital Structure)
The above figure shows the interdependence of these four factors. The overall performance of a firm is a function of these facto
Liquidity(Short-termSolvency): It refers to the ability of the firm to meet its short terms
obligations that will mature within the next 12 months. Such ability will come from holding of liquid assets, which are readily c
Current Ratio
Quick Ratio (Acid Test Ratio)
Efficiency: - The term “efficiency” denotes effective utilization of assets of a firm. How
efficiently can a firm use its assets to generate revenue? It indicates how effectively the capital employed in the business has he
Profitability: The real test of various business activities is their ultimate impact on the bottom line
(or profit). One needs to understand the difference between the terms ‘Profit’ &
‘Profitability’. Profit is an absolute term whereas ‘Profitability’ is a ratio. Profitability represents the financial performance of a
1
2. 2. 2
3
CapitalStructure: - It refers to the long – term financing pattern. There are two broad sources of
financing a company’s long-term investment needs – Shareholders funds and Loan funds. Shareholders funds consist of share c
Debt Equity Ratio
Debt Service coverage Ratio Interest Coverage Ratio
DU PONT FRAME WORK
Dupont Analysis is a detailed analysis of a company’s strengths and weaknesses
Dupont Analysis is the decomposition of the Return on Equity or Return on Net Worth into Three Areas mentioned below. It is
RONW or ROE= PAT/NW
This can be broken down into the following attributes:
RONW = PAT/Sales x Sales/CE x CE/NW
The fit leg indicates Profitability The second leg indicates Efficiency
The third leg indicates Solvency/Gearing
PITFALLS OF FINANCIAL STATEMENT ANALYSIS:
Financial Statement Analysis usually does not give answers but instead, points in directions where
further investigation is needed. Analysis of Financial Statements can be misleading if statements are not comparable or if statem
b) Financial Statements cannot be properly compared among companies because of differences in classification, industry m
c) Most sets of Financial Statements will not reveal very obvious symptoms, which, when fixed, may solve any type of pro
d) Focus on historical financial statement data may cause us to overlook important current information.
3450
3461
3472
: Which Numbers Matter and Why

“Not everything that can be counted counts, and not everything that counts can be counted.” -Albert Einstein
“What Management is?” by Joan Magretta)
This brief handout prepares the way for those to follow by explaining why numbers are critical to
execution, and by describing the basic numeracy, everyone in an organization needs. Like any profession, manageme
Consider: On July 25, 2000, an Air France Concorde jet exploded shortly after takeoff, when a tire blew out and hit th
Why was the world's fastest passenger jet suddenly taken out of service? There had been only three disintegrating tire
In a word, unacceptable--but that's clear only when you compare the number of incidents to the total number of times
Numbers are essential to organizational performance. But basic managerial numeracy isn't rocket science, and there's
Doing the numbers begins with the simple act of measurement.
If you want to know, objectively, how much you weigh you have to get on the scale. The same is true of. organization
willingly. It's not unusual to be overconfident and insecure at the same time, to think you're doing better
than you are, on the one hand, and to be anxious about what the numbers will reveal, on the other.. It takes discipline
Measurement is necessary but not sufficient, however. Ultimately, the numbers that truly matter are the ones that tell a
Go back to the scale for a moment. If we learn that Tyler weighs 145 pounds we know something objective, but it isn
Sigma is the symbol used by statisticians to represent a standard deviation. One sigma means 68 percent of your outp
This was true whether you were looking at manufacturing operations or the writing up of restaurant bills, payroll proc
Which ratios you look at depends on who you are and why you want to know. An investor thinking about
whether to loan money to a company is especially interested in measures that capture its ability to pay him
back. Someone managing a call center will be more interested in measures that help her reduce the amount of time th
Numbers that reveal trends are related to ratios. A time series follows a measure over time, a company's revenues or c
Despite its small share, of the total market for personal computers, Apple has long been a leader in sales to schools an
It is always helpful to remember that numbers don't have a life of their own. They summarize the behavior of actual p
Most people would have more trouble grasping the concept, however, were it described not as human behavior, but as
chain.
There's nothing magic in the math behind familiar patterns, as long as you don't lose sight of the
underlying human behavior that creates the pattern in the first place. It's easy to focus so intently on the numbers alon
In the end, it's not the math that's hard---at least for most of the work general managers do. Anyone can be taught how
What is harder and takes longer is developing judgment about what the number means. Interpreting a number require
Numbers No Organization can Live Without
Does the story make sense? Is it based on a sound understanding of who the principal characters are and how those ch
If your story about who your customers are and what they value makes sense, it will show up in the top line, in your r
The real story behind many of the failed ventures in the first wave of e-commerce is that this basic business math was
Both a firm grasp of the basics and the ability to make sense of numbers has become more critical than ever, because
have become professions. Computing power makes it feasible to match up numbers from different data
sets. For example, a drug company today can learn precisely which doctors, by name, are prescribing
which drugs.
Not only do managers have more data at their disposal than ever before, they have it faster, in so-called real time. Inst
Consider the legacy of the Whiz Kids. During World War II, a special unit trained at the Harvard Business School in t
Robert McNamara, a leading figure of this generation, brought a management-by-the-numbers approach to the Ford M
In the 1970s, the Ford Pinto taught the nation the basics of cost-benefit analysis. The car had a design flaw in the gas
The lesson at the time seemed pretty clear, and many baby boomers grew up suspicious about
management and its methods. They believed, to paraphrase Oscar Wilde, that managers were people who
knew the price of everything and the value of nothing. That suspicion still lingers, especially in the
nonprofit sector. But the fact is that the same set of tools that created the Ford Pinto defeated fascism in World War II
This is a lesson that needs to be relearned periodically. Dazzled as we are by advances in computing power, it's tempt
LTCM was a hedge fund, run by a team of finance whizzes, including a couple of Noble laureates. They applied their
It is a useful reminder of a critical point: Business and markets are about people and their complex behavior. Thanks t
a contest both should win."
In search of the Universal Measure
It may be the oldest saw in the book, yet it remains absolutely true: What gets measured gets managed. Without meas
the organization, providing a common goal and a common language for talking about it.
For this reason, efforts to find the right way to keep score have been management's version of the search
for the holy grail. Periodically, there is a new claimant for the One Right Measure that will tell managers everything t
Consider the bottom line, certainly one of the acid tests of value creation. It's not a perfect measure, but it is the first p
The bottom line doesn't tell you everything, however. As a longer-term indicator, it's problematic. It says nothing abou
Developing the measures that make organizations manageable has been an evolutionary process. As new managemen
As enterprises grew larger and more complex, owners had to hire supervisors and middle managers: they then needed
efficiency of a factory that makes spark plugs would be like comparing apples to oranges.
Financial measures provided the common denominator that made comparison possible. Thus, Sloan's head
of finance, Donaldson Brown, developed a way to measure the rate of return on the money invested in each business.
As is often the case, however, the success of ROI was also its undoing~ By the 1960s and 1970s, financial measures,
The value revolution of the past two decades addressed this problem. Now, managers use an arsenal of measures aime
As imperfect as anyone measure might be, it's impossible to work systematically on performance without them. Good
Mission Critical
Listen to people in an organization long enough and you will surely hear some acronym-ROI, SVA, ROIC EVA, and
enterprise and the current realities of its situation.
"Turnarounds"---companies in deep trouble----face a very stark current reality. Figure out quickly where
you are, or you will crash and burn. Managers with a track record of bringing failing companies back to life are called
To illustrate, consider this vignette from the turnaround of Continental Airlines, described by its president, Greg Bren
"Why are we going from Greensboro to Greenville six times a day when both customers who want to fly that route ar
"It's strategic," someone told me. "When did it last make money?" "It never did," was the reply.
"How strategic can that be” There was silence. I asked,
"Does someone's boyfriend or girlfriend live there? Why don't we just charter you a Lear jet? It would be cheaper."
The result: This route and other cash drainers were cut.
The turnaround strategy for Continental, says Brenneman, "wasn't complex; it was pure common sense." Stop flying
Changing Measures at GE
Under Jack Welch's leadership, GE's performance has been consistently outstanding for twenty years. What, measure
across many businesses, each with its own business model and strategy. By setting overarching goals for
where GE's revenues and profits should come from, Welch shifted GE’s emphasis from manufacturing to
service, and transformed it from a U.S. company to a global player.
Welch began GE's transformation in the 1980swith clear strategic measures. Convinced that success had left the comp
demanded that every GE business be the number one or number two players in its market, a lesson Welch learned from
face the reality of their business's competitive position and its prospects for superior performance.
In the 1990s, having restructured (and demoralized) GE, Welch shifted to productivity measures as a way
of refocusing on the basics and rebuilding morale and confidence. To win, Welch now said, "we have to find the key t
Then, in the mid-1990s, Welch replaced the number-one, number-two rule with a new strategic goal. He challenged G
In 1996, Welch began his six sigma crusade. The measure itself, as we've explained, is a quality measure. But as it's p
Welch was obsessive about six sigma, characteristically combining numeric measures with broad themes
to focus all of GE's three hundred thousand-plus employees on a common goal. For example, he created a
new "warrior class" of green belts, black belts, and master black belts, based on increasing levels of
training and accomplishment. He also made proficiency in six sigma a requirement for promotion within GE, thereby
h 75C0
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can be counted.” -
g and analyzing
would pursue a ‘building block’ approach and would alternate between micro level accounting transactions to macro level
mperative that
nd the numbers. Managers need to ‘get a sense’ on published financial statements and be able to read between the lines and b
ial Statements.
No:
Session 4
Session 8
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impact of financial transactions on the Statement of Income, Balance Sheet, and Cash-flow statements.
h 75C0
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Other reading
Handout-Managerial
Accounting and
Financial Analysis-An
Orientation by Prof. Suresh
Lalwani
Textbook: Financial ACCT by
Godwin, Alderman, Sanyal.
2e
• Chapter 1: LO1 LO6,
LO7 pg2
onwards
• Chapter 2: LO1 LO2,
LO3 pg26
onwards
• Chapter 10: LO1 pg266
ncome and Expenses
reading
• Interview with Mr. Narayan Murthy:

article
• TEXT: Financial ACCT by Godwin,
man, Sanyal. 2e, Chapter 1&2 o Chapter
1:LO2,
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LO4 pg 5-
ds.
pter 2:LO3,LO4,LO5,LO
Other reading
Article: Facing Reality:
Which Numbers matter and
why?
TEXT: Financial ACCT by
Godwin, Alderman, Sanyal. 2e
Chapter 3, 4
• Chapter 3: LO2, LO3, LO4
pg 62-
onwards (Please note
that this chapter’s readings are to link
your class discussions of the
accounting equation/transactions with
the text)
• Chapter 4: browse through
the topics
Handout-Financial Statements:
The Elements of
Managerial Finance
https://hbsp.harvard.edu
/tu/66e6474d
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her reading
T: Financial ACCT by Godwin, Alderman,
yal. 2ed
owse through Chapters L01, L02,
8,9,10..and relate classroom learnings to
topics
ussed in the text
Other reading
• Article: Interview with

Professor Shyam Sunder, Yale
University
• TEXT: Financial ACCT by
Godwin,
Alderman, Sanyal. 2e Browse
through
Chapters 11,12 and relate
classroom learnings to
the
topics discussed in the text
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Other reading
their actual experience in work setting
to the application assignments.
rmation, they
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ting student
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ut receives advertising fee in year B. The John Marketing Company recognizes this revenue in year A.
e nearest Rs.1,000
pecified period even if the expenses were not paid in that period.
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re taken from
current/current
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nd report the
SUBMISSION. You can refer to the company’s website or else data bases like money control / Bloomberg etc.
any change over the years? (look at least 3 years to see a trend) How do you think there is scope for your organization to reduce the ‘costs
l assets? (Calculated as asset A/Total assets).
accounting etc.
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tegies as well as keep track of what is happening.
his books-
Statement
s by positioning these tokens on ”GO” and then throwing the dice by anyone Company. Each team/company is given 500
borrowed from the bank).
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prior to purchase and use by the players. The Bank pays salaries and bonuses. It sells and auctions properties and hands out
required on mortgages. The Bank collects all taxes, fines, loans and interest, and the price of all properties that it sells and au
he dice exhibit. According to the space/site your token reaches, you may be entitled to buy real estate or other properties or
tokens remain on the spaces/site occupied till your next turn. Two or more tokens may rest on the same space at the same
awing a card, the Bank pays them a 50 pounds Fee
printed price. (mentioned on the board) You receive the Title Deed card showing ownership. If you do not wish to buy the prop
ard is held until used. If the player who draws it does not wish to use it, he/she may sell it, at any time, to another player at a
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done along with purchase of property or later when you arrive at that site) The price you must pay the Bank for each House is
it. You return the four Houses from that property to the Bank and pay the price for the Hotel as shown on the Title Deed
you will need to sell any houses/hotels built on this property to the bank at a mutually negotiated price. The mortgage value is
lities. In order to lift the mortgage, the owner must pay the Bank the amount of the mortgage plus Interest.
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cy, Rigas family members convicted of

d lost their investment in the company
ef Executive Officer) resigned. AIG
lion in fines.
ges filed against senior executives of

mpanies.
lion fine.
on fine to SEC. Six executives fined

on.
cy. Criminal conviction of CEO and
er $100 billion in stock market losses.
fined $18 million.
whqteuer wt promise ·.
able basis, while ensuring fairness, transparency and accountability to every one of the stakeholders: customers, investors, emp loyees, vend
roughout the 20 years of our listed existence. However, we missed our targets during 2011-20 13. In other words, in the last 80 quarters., we
r customers use this document as the definitive instrument to assess our viability in the future because of our strategy, our operation and our
udgments under a situation of competing pressures, and competing priorities. So, we, managers, must accept that there will be pressUl·es. T
ood system of collection of data, and we had people in the trenches with a very good view of what was likely to happen. Our forecasting, a
anies like yours
have always created goodwill for the company. We were the first Indian company to give revenue segmentation details, details of our attritio
r should fix a certain cap on the number of options as a percentage of
be better. So, even though we dilute the total number • shares by a percentage, the overall benefit to Lhe investors is likely to be much mo1 than that perce
costs. The role of the independent directors, if exercise properly, is to ensure that agency costs arc minimized. Second, the independen director
is as important whether the voter is rich or poor, educatec or illiterate, powerful or weak, and Ul·ban or rural. Therefore, iL is best to providt as det
orporation to tell the investors that they would be taking up a major initiative, that it would bring down the profits by x percentage in the ensuing
wing the period of reduced profits. This is what investing for a better fl-tture is all about and the shareholders will accept it. The problem is
oko investment in a clandestine manner, so that they mask their failures and they look great if they succeed. Consequently, they do not even want to repor
fairness, transparency and accountability to customers, investors, employees, vendor-partners, the government of the land, and th e society. Today, interna
so concerns itself with the interpretation of results from such activity.
ed into two categories,
s,banks and financial instituions.The financial statements i.e. the Profit and Loss Account & the Balance Sheet, show them the manner in w
s various areas such as Cost accounting, Budgetary control, Inventory control, Statistical methods, Internal auditing etc.
while recording accounting transaction. “They are a body of doctrines commonly associated with the theory and procedures of accounting,
he science of accounting is based. The following are the important accounting concepts:
accountant while preparing the accounting statements. The following are important accounting conventions:
ear to be ludicrous that one can sell goods to himself but this concept is extremely helpful in keeping business affairs strictly free from the e
one into liquidation or it has become insolvent. Of course the receiver or the liquidator may endeavor to carry on business operations for so
oncern stands terminated from the date of his appointment or will be at least regarded as suspended, pending the results of his efforts.
hich cannot be expressed in money do not find place in the books of accounts though may be useful for the business.
he business but since their monetary measurement is not possible they are not shown in the books of accounts.
ooks at 50,000 even if its market value at the time happens to be 60,000.In case a year later the market value of this asset comes down to 40
e hand the business has asset of 10,000 while on the other hand the business has to pay to the proprietor a sum of 10,000 which is taken as p
siness is considered to be indefinite (according to the going concern concept), the measurement of income and studying the financial positio
the Balance Sheet depicts the financial position of the business as on the last day of the accounting period. While preparing these statement
mount objective of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary t
eans that revenues of Dec’2005 (i.e. Sales) should be matched with costs incurred for earning that revenues (i.e. Salesman Commission) in
rinciple does not demand that the revenue has to be received in cash. For example, revenue from sales transactions should be recognized wh
On account of this reason, the accountants follows the rule ‘anticipate no profit but provide for all possible losses’ while recording business
onvention of full disclosure. It encourages the accountant to create secret reserves. (E.g. – by creating excess provision for bad and doubtful
formation they purport to represent. They should be honestly prepared and sufficiently disclose information which is of material interest to
t Stock Companies where ownership is divorced from Management. The Companies Act, 1956, not only requires that Income Statement an
riod to another.
followed year after year. If depreciation is charged on fixed assets according to diminishing balance method, it should be done year after ye
oes not forbid introduction of improved accounting techniques. However, if adoption of such a technique results in inflating or deflating the
nd ignore insignificant details. This is because otherwise accounting will be unnecessarily overburdened with minute details. The question w
However when a statement of outstanding debtors is prepared for sending to top management, figures may be rounded to the nearest ten or h
reason to believe that knowledge of it would influence the decision of the informed investor. It should be noted that accounting is man-mad
it is always incomplete double entry, varying with circumstances. This system has
siness firms.
old aspect of the transaction.

mentioned person must have lost something or some service etc, must have been rendered by him.
Capital to 11, 500. The business will have a liability of 5,000 to ‘B’ and two more assets in the form of a debtor ‘P’ for 1,500 & Inventory o
ithdrawn will decrease relevant assets and ‘A’s capital. ‘A’ pays 10000 as salary to his employees by cash.
uilding costing 10,000 purchased by a business for its use is sold for 15,000, then 5,000 will be taken a capital profit. However it should be
xceeding the original cost of the fixed asset) is simply recovery of excess provision for depreciation made in the earlier year This is also pro
made on sale of goods, income is received from letting out the business property, dividends are received on business investments etc. All su
an asset (tangible or intangible) which can be later be sold and converted into cash or which results in increasing the earning capacity of th
The cartage charged paid for bringing to the factory plant and machinery purchased erection charges of a new plant.
eds received on account of sale of fixed asset of the receiver of the amount is going to use it for purchase of a fixed asset
owing are some the examples of Revenue Expenditure:
ture incurred to maintain the business.
bout two more facts. They are:

e does he stand now?
of the business. The two statements together (i.e., Income Statement & Balance Sheet) are termed as Final Accounts. As the term indicated
penses relating to a particular period. The account is prepared in two parts: -

iness or not. It takes in to account on one hand the cost of goods sold an on the other the value for which they have been sold away. In case
osing Inventory.
it or loss on account of trading, a trader will have to take such Opening & Closing Inventory into consideration.
the course of running the business.
des this a businessman may have other sources of income. Example: He may receive rent from some of his business properties. He may hav
d liabilities as on particular date. Such a statement is termed as ‘Balance Sheet’. Thus Balance sheet is not an account but only a statement o
the right hand side the “Assets” of the business appear. A balance sheet is an itemized list of assets, liabilities and proprietorship of the busi
either the balance sheet or income statement
only on the movement of cash, the inflows and the outflows of cash. The statement of Cash Flows is divided into three sections:
activities shows the inflows and outflows related to the fundamental operations of the basic line of business that the company is in.
d for making and collecting loans and investments
ilizing activities.
Outflow
Outflow
Outflow
here will be a growth in the operating working capital accounts such as inventory and debtors/receivables as well as in other operating payab
up or become technically obsolete or b) to expand and grow.

he operating activities then extra financing by debt or equity will be required which will depict a positive cash flow. Reversely, if cash from
le to calculate.
comes are adjusted for Questions to ponder:
but it cannot be taken as an expense?
e in liquidity and solvency of the company. In evaluating the cash flow statement, one should remember that many pieces of evidence are ev
ent numbers and the trends in those numbers over time. One purpose of Financial Statement analysis is to use the past performance of the C
help in making operating, investing and financing decisions, investors and creditors analyse finance statements to decide whether to invest
e.g. Capital Markets).

t ratio is called a “balance sheet ratio” (e.g. Current ratio). If the variables are taken from the Profit and Loss statement (Income & Expendi
a function of these factors They have a Multiplier impact on the overall performance. One cannot say profitability depends on liquidity alo
ssets, which are readily convertible into cash. Sometimes a firm leads in cash (i.e., it has cash surplus) and sometimes it lags in cash (i.e. ca
ed in the business has helped in revenue generation. Higher efficiency ratio may be the result of better productivity of fixed assets (for manu
nancial performance of a company. It can be calculated on three bases mentioned below:

funds consist of share capital and internal accruals. Thus accessing finds from shareholders can be through two ways – Fresh issue of share
s mentioned below. It is the best overall indicator of performance
t comparable or if statements exclude significant information. In addition, analysis of historical data may distract our attention from relevan
classification, industry mix and accounting methods.
may solve any type of problems being faced by the Company.
profession, management has developed its own specialized vocabulary, much of it quantitative. This numeric world can be daunti
tire blew out and hit the plane's fuel tank. The crash left 113 people dead. These were the first Concorde fatalities in the superson
hree disintegrating tire incidents over thirty-one years, and none had caused a plane to crash before. How bad a safety record is t
total number of times the Concorde has flown. Because there were so few Concorde jets in service and just a few flights per day
et science, and there's no need for anyone to be intimidated by the math. For at least the past couple of decades, first year M.B.A
is true of. organizations. Taking that first step requires discipline. It's not something most of us do naturally or even
her.. It takes discipline to face reality, and to capture that reality objectively and unambiguously, so that everyone in the organizat
r are the ones that tell a story about how the organization is doing. To turn a piece of data into a meaningful story you must put it
ng objective, but it isn't, to use the managerial term, "actionable." If we learn next that Tyler is a six-foot-tall man the data begins
8 percent of your output is acceptable. Three sigma means that you've succeeded 97 percent of the time. At six sigma, 99.999997
urant bills, payroll processing, and doctor's prescriptions. Airlines were in the 35,000 to 50,000 range with their baggage-handlin
to pay him
the amount of time that customers sit waiting on hold.
mpany's revenues or costs over the past five years, for instance. (Growth. rates are simply ratios that compare today to yesterday
r in sales to schools and universities. When CEO Steve Jobs learned that Apple's share of computer sales to schools was 12.5 per
he behavior of actual people doing real things. Think, for example; about what happens when a new technology hits the market, w
human behavior, but as the slope of an S-curve (or penetration Curve) The mathphobes in the audience would probably have felt
ight of the
y on the numbers alone, that you forget that they reflect what people are doing. At the same time, without the numbers, you wou
yone can be taught how to calculate a basic ratio in a matter of minutes, whether it's an error rate or return on investment. They ca
eting a number requires experience that allows you to develop a set of norms or expectations about what the number should look
s are and how those characters are likely to behave? Numbers take you an important step further. If the narrative makes sense, th
n the top line, in your revenues. If your story about how you will create value makes sense,that will show up in your costs. If you
asic business math was missing. The grocery business, for example, has very thin margins to begin with. So, if customers won't p
cal than ever, because technology is continually increasing the amount of information at our disposal. With the advent of zip cod
o-called real time. Instead of getting information after the fact--often long after---you get it in time to intervene. You get to fix th
d Business School in the latest quantitative approaches to decision making helped the United States achieve extraordinary perfor
approach to the Ford Motor Company, when he was hired by Henry Ford II, Henry's grandson, in 1949. Ford was in bad shape, d
design flaw in the gas tank that caused at least fifty-nine deaths. Rubber liners would have fixed the problem at a cost of $137 m
scism in World War II. Tools are just that.

uting power, it's tempting to think that, because you can assemble and manipulate the numbers as never before, you can also con
tes. They applied their theories about mastering risk to the realities of global capital markets with disastrous results. They used a
plex behavior. Thanks to the co evolution of the discipline of finance and the capabilities of computing devices, we have better to
anaged. Without measurement, there is no performance. Measures help organizations map their course as they venture into uncha
managers everything they need to know to run a business. EVA, short for economic value added, is the most recent candidate and
sure, but it is the first place to look for some objective gauge of how you're doing. You know you've created value for customers
ic. It says nothing about sustainability. It says nothing about whether you've fattened profits by gouging your customers on price
s. As new management challenges arose, new metrics were created to address them. The industrial revolution, for example, gave
gers: they then needed information and reporting systems to guide, control, and evaluate the managers. When Alfred Sloan was t
loan's head
ested in each business. Financial efficiency, how productively each of those operations uses capital, was, and is, the point of ROI
s, financial measures, especially ROI, so dominated management thinking that many managers focused more on the numbers tha
senal of measures aimed not just at toting up, after the fact, how well an organization has done. Instead, a host of finer-grained m
ce without them. Good managers know they can't live without performance measures, but neither can they live by them without
SVA, ROIC EVA, and EBIT that will tell you a lot about the organization's priorities. Thoughtless managers use standard measure
s back to life are called "turnaround artists," but this is a case where discipline matters more than any art. Turnarounds make it ea
s president, Greg Brenneman. The year was 1994, and 18 percent of Continental's flights were cash negative. Aware that the faste
want to fly that route are on the first flight?"
would be cheaper."
on sense." Stop flying 120-seat planes with thirty passengers. Get people and their bags to their destinations on time. Feed them w
years. What, measures did Welch use? It all depended on the state of the company and the state of the global economy. During h
ccess had left the company's management too internally focused and in need of shaking up, he
son Welch learned from Peter Drucker. Market leaders, by virtue of their greater market power and scale, were more likely to ach
e have to find the key to dramatic, sustained productivity growth.'" His overarching message to the organization was "Speed, Sim
goal. He challenged GE's business leaders to redefine their markets broadly---in such a way that they didn't have more than 10 p
y measure. But as it's practiced at GE, six sigma is a program that captures all the elements of value creation, because it takes a sy
e created a
on within GE, thereby sending another clear message as well: Get with the program or you don't belong here.
ctions to macro level
ad between the lines and be able to ‘figure out’ what is important and what is not.
ganization to reduce the ‘costs’ vis a vis increase in sales? (Answer this from your understanding of your organization’s financials).
/company is given 500
properties and hands out

operties that it sells and auctions.
ate or other properties or
same space at the same
do not wish to buy the property, the Bank may sell it at auction to the highest bidder. The buyer pays to the Bank the amount
me, to another player at a

the Bank for each House is shown on the board/ Title Deed card. Following these rules, you may buy and erect on your turn
wn on the Title Deed
ice. The mortgage value is

rs, investors, emp loyees, vendor-partners, the government of lhe land, and the society. The annual report and the quarterly report that Infos
rds, in the last 80 quarters., we have taken the view that we will get market data on what the futm·e is likely to be, we will assess our streng
strategy, our operation and our financial strength. Quite often, our success in selling to our customers and pt·ospects depends on their perce
that there will be pressUl·es. There are different opinions on whether the earnings guidance should be quarterly, six-monthly or yearly, and
to happen. Our forecasting, analytics and tools confirmed that the only sales growth figure we could give our investors was 30 per cent. W
on details, details of our attrition, hiring and many other performance data. I am not sure how much such a focus on transparehcy adds to ou
y to be much mo1 than that percentage. Ihave found that stock ownership by employees brings batt< focus on cost control in the company. For example, ri
Second, the independen directors ensure that the owner-managers do not benefit from the asymmet1·y c information through insider tracling. Th
fore, iL is best to providt as detailed information as possible to every shareholder. If a shareholder is not a: conversant in accounting as he would like t
rcentage in the ensuing

ept it. The problem is
y, they do not even want to report such investments.
d, and th e society. Today, international investors have multiple choices of countries for investing - US, Europe, China, Australia, South East Asia, Africa a
t, show them the manner in which the operation of the business have been conducted during a specific period.
and procedures of accounting, serving as an explanation of current practices and as a guide for selection of conventions or procedures where
affairs strictly free from the effect of private affairs of the proprietor(s). Example: - If one person invests 10,000 into business, it will be d
y on business operations for some period pending arrangements with the
the results of his efforts.
of this asset comes down to 40,000, it will ordinarily continues to be shown as 50,000 and not at 40,000.The cost concept does not mean tha
of 10,000 which is taken as proprietor’s Capital. This expression can be shown in the form of:
d studying the financial position of the business after a very long period would not be helpful in taking proper corrective steps at the approp
hile preparing these statements a proper distinction has to be made between Capital and Revenue expenditures.
uring a period, it is necessary that ‘revenues’ of the period should be matched with the costs (expenses) of the period. The term matching m
i.e. Salesman Commission) in 2005 though paid in Jan 2006). On account of this concept, adjustments are made for all outstanding expense
tions should be recognized when the seller of goods has transferred to the buyer, the property in the goods for a price and that no uncertaint
ses’ while recording business transactions. In other words the accountant follows the policy of ‘playing safe’. On account of this convention
provision for bad and doubtful debts, depreciation etc.) and the financial statements do not depict a true and fair view of state of affairs of th
which is of material interest to proprietor, present and potential creditors
ires that Income Statement and Balance Sheet of a Company must give a true and fair view of the state of affairs of the company but it also
it should be done year after year.

lts in inflating or deflating the figures of profit as compared to the previous period, a note to that effect should be given in the financial stat
minute details. The question what constitutes a material details, is left to the discretion of the accountant.
rounded to the nearest ten or hundred.
ed that accounting is man-made art designed to help man in achieving certain objectives. “The accounting principles therefore cannot be de
or ‘P’ for 1,500 & Inventory of cotton bales of 1,000.
l profit. However it should be noted that only the profit realized over and above the cost of the Fixed assets should be taken as a capital pro
he earlier year This is also provided by the tax Rules. Example: If a plant is originally purchased for 10,000 standing in the books at 6,000(
usiness investments etc. All such incomes are revenue incomes. It should be noted that the terms ‘Revenue, Profits & Revenue Income’ are
sing the earning capacity of the business or which affords some other advantage to the business. In other words, such an expenditure does no
fixed asset
ccounts. As the term indicated Final Accounts means accounts which are prepared at the final stage to give the Financial Position of the bus
have been sold away. In case the sales value is higher than the cost of goods sold, there will be a profit, while in reverse case there will be
siness properties. He may have invested surplus funds of the business in some securities. He might be getting interest or dividends from suc
account but only a statement of assets and liabilities of business on a particular date .It is as a matter of fact, a classified summary of the va
and proprietorship of the business individual at a certain date. It is thus a statement a given date on one side the trader’s property and posse
into three sections:
at the company is in.
well as in other operating payables. This cash flow engine also provides cash for needed investments, to repay debt, and to pay dividends.
h flow. Reversely, if cash from operating activities exceeds the investing needs then the company will have cash to pay of debts or to pay div
many pieces of evidence are evaluated to produce an overall picture. However it is rare to find a company where all of the evidence is positi
the past performance of the Company and to predict how it will do in the future. Another purpose is to evaluate the performance of a Comp
ts to decide whether to invest in, or loan money to, a Company.
statement (Income & Expenditure statement) the resultant ratio is called “profit & loss ratio” (e.g. operating profit margin). If one variable (
bility depends on liquidity alone – a firm may be profitable and yet it may face short-term liquidity crises. But if the firm is efficient in its a
metimes it lags in cash (i.e. cash shortage). When it leads in cash it should invest the surplus find in securities that would maximize the retu
tivity of fixed assets (for manufacturing concern) and /or better working capital management (for manufacturing & trading concern).
wo ways – Fresh issue of shares and /or ploughing back of internal accruals. Long-term loans can either be raises directly form public/other
ract our attention from relevant current information. We must be careful not to base a decision solely on an analysis of Financial Statement
numeric world can be dauntingly forbidding to outsiders. There's no reason that it should be. The numbers that matter are the one
rde fatalities in the supersonic jet's thirty-one-year history. Within days, the Concorde, pride of the European consortium Airbus,
How bad a safety record is that?
and just a few flights per day, the failure rate was extraordinarily high. If that rate were applied to the fleet of U.S. airlines in serv
of decades, first year M.B.A. students at the Harvard Business School have been assigned a short note with the title, "How to Av
turally or even
at everyone in the organization works from a common fact base, and people aren't left to come up with their own interpretations.
ingful story you must put it in context.
oot-tall man the data begins to tell one story. If Tyler is a five-foot-tall woman, it's quite another story. Now add one more piece
me. At six sigma, 99.999997 percent of the products you've made are acceptable. In other words, there are only 3.4 defects per m
with their baggage-handling operations. While we might grumble about that, it still meant that most of us got our bags at the end
compare today to yesterday.) Like ratios, trend data create meaning by putting numbers into context. Consider this example from
ales to schools was 12.5 percent in 1999; he was dismayed, but unless you're an industry analyst who knows the numbers cold, y
echnology hits the market, whether it's a DVD player or a cell phone or e-mail. First, a few people try it. Then, the new thing get
ce would probably have felt that they were now in over their heads, that they had entered a realm that was too hard. True number
thout the numbers, you wouldn't see larger patterns unfolding.

eturn on investment. They can be taught why to do those calculations in a matter of hours. Why is the debt ratio so important, for
hat the number should look like. Experience gives you some feeling for relative and relevant magnitudes--just as everyone know
he narrative makes sense, the numbers will add up.

how up in your costs. If your story about how you are different from other alternatives makes sense, it will show up in your profi
ith. So, if customers won't pay more for their purchases, and you're adding costs in service and delivery without eliminating them
. With the advent of zip codes, area codes, credit card numbers, cookies, and so on, data collection and data mining
o intervene. You get to fix things on the fly. Real-time data about airline bookings, for example, allows sophisticated software to a
achieve extraordinary performance in manufacturing and logistics. Before the war, the Army Air Corps (precursor of the U.S. Air
49. Ford was in bad shape, desperately in need of financial controls, and McNamara was given license to build a large and powe
problem at a cost of $137 million. But careful calculations of the benefits--all the costs associated with those burned and killed do
ver before, you can also control events. Whether finance will ever be a true science, as the finance professors would like to believ
astrous results. They used a technique called "dynamic hedging," which involves offsetting risks by placing bets in opposite dire
g devices, we have better tools for understanding and managing risk. But the tools are only aids to judgment. Simple numbers pr
se as they venture into uncharted territory. Good measures help you to find your way; they signal when you need to make midcou
he most recent candidate and a current buzzword. Return on investment (ROI) has been one of the most persistent .. Would that i
created value for customers if they are willing to foot the bill, and the bill includes the cost of all the resources that go into servin
ng your customers on price, for example. Or whether you decided to cut spending this quarter on new product development or c
volution, for example, gave birth to a host of basic efficiency measures. These were derived by counting inputs and outputs to co
rs. When Alfred Sloan was turning General Motors into a working whole, he realized that in order to replace "management by cr
was, and is, the point of ROI, the best known and most widely used of all the financial measures of performance. It was one of the
sed more on the numbers than on the underlying realities those numbers reflected. The wakeup call came in the form of an influe
ad, a host of finer-grained measures--tailored to the specific organization---are used pro actively to improve performance. Operat
n they live by them without respecting their limitations, as NASA's failures illustrate. They use measures flexibly, as tools, almos
nagers use standard measures as if they had a validity of their own. In well-managed organizations, the critical measures are care
art. Turnarounds make it easy to-see the power of translating what the organization needs to do into simple measures of perform
egative. Aware that the fastest way to make money is to stop losing it, Brenneman "sat the scheduling team down and started ask
nations on time. Feed them when they're hungry. Create an atmosphere in which people like coming to work. What measures did
e global economy. During his years as CEO, Welch moved the company through several phases, each marked by a simple theme
cale, were more likely to achieve superior performance. If you weren't number one or number two you had to fix the business, or
rganization was "Speed, Simplicity, and Self-Confidence." To make the slogan concrete, Welch focused on a handful of key meas
y didn't have more than 10 percent of the market---and to lay out a plan for growth. Why the shift? Welch understood that any "h
reation, because it takes a systems approach to the business. The process begins with asking the customer to define the value he
ganization’s financials).
pays to the Bank the amount of the bid in cash and receives the Title Deed card for that property. Any player, including the on
buy and erect on your turn, as many
nd the quarterly report that Infosys produces are definitive instruments for the investor community to understand our strategy, performance
y to be, we will assess our strengths, weaknesses and our readiness to take advantage of market opportunities, and then we will come out w
pt·ospects depends on their perception of our strength. This document is very helpful in our investors' and customers' understandiiig of our
terly, six-monthly or yearly, and whether it should be only fo1· the top line or both the top and the bottom line. 1am not sure whether the qu
our investors was 30 per cent. We told our investors that Infosys was not the company to invest in if iney were looking for higher than 30 p
focus on transparehcy adds to our market capitalization. This is particularly so because of hedge funds and the tendency of people to move
trol in the company. For example, right from the beginning, people 1 Infosys unde rstood that every rupee saved went to the bottom line and that translate
mation through insider tracling. They are expected to prevent any related part transactions. They review the straLegy of the company and suggest chan
ant in accounting as he would like to be, let him take the report to an cxper and get the expert's opinion on critical issues. The only disadvantage of provid
Australia, South East Asia, Africa and South America. Therefore, they
conventions or procedures where alternatives exist.” These principles can be classified into two categories:
10,000 into business, it will be deemed that the proprietor has given that much of money to the business which will be shown as “liability” i
e cost concept does not mean that asset will always be shown at cost. It has also been stated above that cost becomes the basis for all future
per corrective steps at the appropriate time. It is therefore absolutely necessary that after each segment or time interval the businessman mus
he period. The term matching means appropriate association of related revenues and expenses. In other words, income made by the busines
made for all outstanding expenses, accrued income, prepaid expenses and unearned incomes etc, while preparing the final accounts at the en
for a price and that no uncertainty exists regarding the consideration that is expected to be derived from the sale of the goods. Revenue arisi
e’. On account of this convention, the inventory is valued ‘at
fair view of state of affairs of the business. The Income Statement shows a lower net income & the Balance sheet shows understated assets
affairs of the company but it also gives the prescribed forms in which these statements are to be prepared. The practice of appending notes t
uld be given in the financial statements.
principles therefore cannot be derived from or proven by laws of nature. They are rather in the category of conventions or rules developed b
s should be taken as a capital profit. The profit realized over and above book value of the asset till it does not exceed the original cost of the
0 standing in the books at 6,000(on account of charging depreciation) is sold for 12, 000, there is a profit of 6,000 on the sale of the plant. O
Profits & Revenue Income’ are synonymous.
ords, such an expenditure does not grow out or pertain to the running of the business. Following are some the examples of Capital Expenditu
the Financial Position of the business.

hile in reverse case there will be a loss. The profit disclosed by the Trading Account is termed as Gross Profit. Similarly the loss disclosed b
ng interest or dividends from such investments. In order to ascertain the true profit or loss which the business has made during a particular p
t, a classified summary of the various remaining accounts after accounts relating to Incomes & Expenses have been closed by transfer to Tr
e the trader’s property and possessions and on the other side his liabilities. According to American Institute of Certified Public Accountants
ay debt, and to pay dividends.

cash to pay of debts or to pay dividends which will then produce negative cash flows
where all of the evidence is positive or negative. To do a balanced evaluation, one must search out both the good news and the bad news in e
luate the performance of a Company with an eye towards identifying problem areas. In sum, Financial Statement Analysis is both a diagnos
g profit margin). If one variable (numerator or denominator) is taken from balance sheet and the other from profit & loss statement the resul
But if the firm is efficient in its asset utilization and manages its capital structure well, it would improve profitability.
es that would maximize the return without compromising with the liquidity. There has to be minimum risk of fall in value of investments. T
uring & trading concern).

raises directly form public/other investors by way of public deposit & debentures instruments or be raised through financial intermediaries.(
analysis of Financial Statement numbers because: a) Financial Statements do not contain all the relevant information
umbers that matter are the ones that help you to face reality, and to do something about it.
European consortium Airbus, was grounded indefinitely.
he fleet of U.S. airlines in service, it would produce one serious tire explosion-sending flying debris into the fuselage or engine-p
ote with the title, "How to Avoid Getting Lost, in the Numbers." Given the stereotype of the Harvard M.B.A., most people migh
with their own interpretations. "When everybody gets the same facts," as Jack Welch put it, "they'll generally come to the same co
ory. Now add one more piece of context. Suppose we learn that three months ago, Tyler weighed two hundred pounds. This gives
ere are only 3.4 defects per million operations. In the late 1990s, many companies were operating at around 3.5 sigma, or 35,000
st of us got our bags at the end of a flight. When it comes to safety, however, the airlines exceed six sigma, with less than one fai
xt. Consider this example from Apple Computer.
ho knows the numbers cold, you won't appreciate just how dismayed he was. That's because, in 1998, Apple was the segment lea
try it. Then, the new thing gets better and cheaper. People who tried it early on, and were willing to pay a lot for it, assure the res
hat was too hard. True number crunchers, on the other hand, might be at ease with the sophisticated math behind an Scurve, but·
he debt ratio so important, for example? Because it says something about your ability to payoff your obligations to creditors: The
itudes--just as everyone knows how to react to the figures of Tyler's weight and weight loss. Likewise, experience teaches you to
e, it will show up in your profits and in your ability to generate cash. Revenues, costs, profits, and cash flow are the numbers no o
ivery without eliminating them anywhere else, there's no way you can make the math work, as companies like Webvan discovere
and data mining
ows sophisticated software to adjust fares just in time to fill seats that otherwise would have flown empty. Load management, as i
orps (precursor of the U.S. Air Force) had only about four hundred planes. By war's end, the force commanded 230,000 planes, a
ense to build a large and powerful staff. They were soon dubbed bean counters by the product men who resented both their rapid
with those burned and killed down to the flowers at the funeral-only added up to $49.5 million. Cost-benefit analysis said it just d
professors would like to believe, it is certainly evolving in that direction. However, the spectacular failure in 1998 of Long Term
y placing bets in opposite directions. The technique is a form of insurance that gives investors the confidence to take on investme
judgment. Simple numbers properly used help organizations understand - what's going on, to take their bearings so that they can
when you need to make midcourse adjustments in direction or in speed. They also serve as a kind of beacon for everyone in
most persistent .. Would that it were so simple. It is as if one measure-your blood pressure, say, or your cholesterol levelcould tel
e resources that go into serving them. Profit is one of those costs. A healthy bottom line tells you that the customer values what y
new product development or customer service. Any of those actions will boost the bottom line today, but leave you with a sick bu
unting inputs and outputs to come up with the cost per pound of producing textiles, for instance, or the cost per mile of track, a m
to replace "management by crony, with the divisions operating on a horse-trading basis," he needed measures that could compare
performance. It was one of the metrics that gave managers control over what was to become the world" s largest corporation.
came in the form of an influential Harvard Business Review article by Robert Hayes and William Abernathy, published in 1980
improve performance. Operating measures and financial measures tell managers how well they're using resources, people, physi
asures flexibly, as tools, almost always in combination, and they create new ones as they confront new performance challenges.
, the critical measures are carefully selected from the larger' arsenal for their fit with the mission and strategy of the
o simple measures of performance that everyone can understand.

ing team down and started asking questions."
g to work. What measures did they track to see whether they were translating these goals into performance? The monthly load fa
ach marked by a simple theme and a phrase that could be repeated over and over, coupled with related measures. Because G E is
you had to fix the business, or else close it or sell it. "Fix, close, sell" was the simple message that told everybody where GE was
used on a handful of key measures, which included three "to live by: customer satisfaction, employee satisfaction, and cash flow
Welch understood that any "hard and fast rule ... is too easy to get around." People in organizations are very creative when it com
stomer to define the value he wants (in other words, it starts with an outside-in perspective). Then, GE aligns every element of it
. Any player, including the one who declined the
rstand our strategy, performance, compliance with the generally accepted accounting principles, revenue recognition policies, risk mitigatio
es, and then we will come out with a view of the future that every member of the board has agreed with. We want to make sure that we con
customers' understandiiig of our strategy. Ihave seen many of our customers refer to specific pages of the document an ask us to detail ou
ine. 1am not sure whether the quarterly guidance for both top line and bottom line is any worse than other guidance schemes. My one beli
were looking for higher than 30 per cent sales growth. Many of them left. Our share price came down to 1,500 or 1,600. So, the problem doe
the tendency of people to move quickly from stock to stock. I have always believed and acted according to the adage: When in doubt, di
to the bottom line and that translate lo something like 25 in market capitalization. So, options do create an incentive fc employees to control cost.
y of the company and suggest changes. They woul be Lhe ombudsmen and ombudswomen for risk mitigation. After all, risk mil.igation i extremely impo
ues. The only disadvantage of providing r detailed report is the cost of paper and cost of printing. Let the shareholders decidE what they want. Who am I
ich will be shown as “liability” in the books of the business. In case the proprietor withdraws 2,000 from the business, it will be charged to
t becomes the basis for all future accounting for the asset. It means that asset is recorded at cost at the time of its purchase but it may system
me interval the businessman must “Stop and See back”, how things are going. In accounting such a segment or time interval is called ‘accou
ds, income made by the business during a period can be measured only when the revenue earned during a period is compared with the expe
aring the final accounts at the end of the accounting period.
sale of the goods. Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be r
e sheet shows understated assets and overstates liabilities.
The practice of appending notes to the accounting statements (such as about contingent liabilities or market value of investments) is in pursu
onventions or rules developed by man from experience to fulfill and useful needs and propose in establishing reliable financial and operatin
ot exceed the original cost of the fixed asset should b e taken as revenue profit thought it does not strictly arise out of and in the course of re
6,000 on the sale of the plant. Out of this profit, 2,000(i.e. the amount over and above the cost of the asset) should be regarded a Capital Pr
he examples of Capital Expenditure: Expenditure incurred in increasing the quality of fixed assets.
it. Similarly the loss disclosed by the Trading Account is termed as Gross Loss.
ss has made during a particular period, it is necessary that all such expenses and incomes should be considered. Profit and Loss Account co
ave been closed by transfer to Trading & Profit & Loss account.
of Certified Public Accountants “Balance Sheet is a “list of balances of the assets and liability accounts.” This list depicts the position of as
good news and the bad news in each statement. To reach an overall conclusion it is necessary to judge the relative importance of each piece
ement Analysis is both a diagnosis – identifying where a firm has problems – and prognosis – predicting how a firm will perform in the futu
profit & loss statement the resultant ratio is called a “mixed ratio” (e.g. Return on net worth).
of fall in value of investments. There are two popular ratios that traditionally indicate the short-term solvency of a firm.
hrough financial intermediaries.(Like form banks, financial institutions.)Thus Capital structure reflects the long-term solvency position of t
s into the fuselage or engine-per day. One per day! That's why the Concorde was grounded. And it's why management requires th
rd M.B.A., most people might be surprised to discover that "the numbers" have a lot more to do with common sense than math b
generally come to the same conclusion."
wo hundred pounds. This gives us not just a story, but a call for urgent intervention, at least in the man's case. For the woman, we
at around 3.5 sigma, or 35,000 defects per million.
x sigma, with less than one failure for every two million operations. And that's as it should be--and as the Concorde wasn't.
98, Apple was the segment leader with a market share of 14.6 percent. And, while Apple slipped to the number two spot in 1999
o pay a lot for it, assure the rest of us that it really works. So, more people try it. Soon, it really takes off, and everyone has to hav
math behind an Scurve, but· might not connect the mathematical equation describing the curve. with the human behavior that pr
ur obligations to creditors: The more debt you carry (in relation to your ability to generate cash), the more risk for the lender that
wise, experience teaches you to respond to one number by seeking others that will help to flesh out the story.
cash flow are the numbers no organization can live without.

mpanies like Webvan discovered.
empty. Load management, as it is called, can make the difference between whether an airline makes money or loses it. With so m
commanded 230,000 planes, and the spare parts it took to keep them flying. Moving men and materials on that scale was an enor
who resented both their rapid rise to power and their ignorance of cars. The derisive term has become a permanent part of our lan
t-benefit analysis said it just didn't pay to redesign the Pinto.
failure in 1998 of Long Term Capital Management should serve as a warning.

onfidence to take on investments with which they wouldn't otherwise be comfortable. LTCM's dynamic hedging was based on th
their bearings so that they can get where they're going. They discipline us to face reality. The mathematician John Allen Paulos. p
beacon for everyone in
your cholesterol levelcould tell you and everyone else who has an interest in your health (your family, your employer, your insur
hat the customer values what you do. It probably also tells you that you're doing a reasonable job of keeping your costs in line, be
y, but leave you with a sick business tomorrow.
the cost per mile of track, a measure used, to compare the performance of the men managing a railroad.
d measures that could compare performance across different kinds of activities. Comparing the efficiency of an assembly plant to
orld" s largest corporation.
Abernathy, published in 1980 with the title "Managing our Way to Economic Decline." It argued persuasively that over reliance o
using resources, people, physical facilities, and capital. Measures of employee turnover are an important barometer of the climate
ew performance challenges.
nd strategy of the
rmance? The monthly load factor, revenue per available seat mile, monthly on-time performance, mishandled bags, turnover, and
ted measures. Because G E is a conglomerate, the themes were broad, and the measures were chosen so that they could be applie
told everybody where GE was headed. Welch began with strategy rather than execution, choosing a measure that forced people t
yee satisfaction, and cash flow. High customer satisfaction means you're going to get market share. Satisfied employees will be p
are very creative when it comes to gaming performance systems---and so the lines need to be redrawn periodically. Welch realiz
GE aligns every element of its process, from product design to manufacture to selling and distribution, so that the system is tailo
cognition policies, risk mitigation procedures, systems and controls, human resources policies, and segmentation of revenue. In other word
We want to make sure that we con deliver whatever we have agreed upon. We do not make our decisions based on what the analysts say or th
e document an ask us to detail out what we have said about the company's pllUlB.
r guidance schemes. My one belief is that it is all about the mindset of the management. Because of globalization, there is t.remendous gr
00 or 1,600. So, the problem does not lie in giving quarterly guidance. The challenge lies in dealing with the short-term mindset of investo
o the adage: When in doubt, disclose.
fc employees to control cost.
all, risk mil.igation i extremely important to protect your shareholders. tndopcndent directors also ensu1· lhat there arc proper p1·ocedures ami cont1·
decidE what they want. Who am I to decide? After all, we are spending their own money f01 printing the annual report.
he business, it will be charged to him and the net amount payable by the business will be shown only as 8,000. GoingConcernConcept: A
of its purchase but it may systematically be reduced in its value by charging depreciation. In the absence of this concept the figures shown i
t or time interval is called ‘accounting period’. It is usually of a year.
period is compared with the expenditure incurred for earning that revenue. The question when the payment was received or made is ‘irrelev
s and dividends should only be recognized when no uncertainty exists as to its measurability and collectibles.
value of investments) is in pursuant to the convention of full disclosure.
ng reliable financial and operating information control for business entities. In this respect, they are similar to principles of commercial law
ise out of and in the course of regular business transactions. This is because depreciation against the Asset has already been charged to the P
) should be regarded a Capital Profit while the balance 4,000 should be taken as revenue profit. Capital Profit is transferred to the Capital R
ered. Profit and Loss Account considers all such expenses and incomes and gives the net profit made or loss suffered by a business during a
This list depicts the position of assets and liabilities of a specific business at a specific point of time.”
elative importance of each piece of evidence ands assess its relationship to the overall picture.
ow a firm will perform in the future. Relationships between financial statement amounts are called financial ratios.
ncy of a firm.
long-term solvency position of the firm. Some of these ratio are
s why management requires the discipline of quantification. Simple numbers help us to face reality and to make sense of events i
th common sense than math beyond the high school level. The real skill is making sense of the numbers, not crunching them. So
man's case. For the woman, we'd need to ask for more information to know whether the news was good or bad.Most of the numbe
as the Concorde wasn't.

the number two spot in 1999, Dell grew and took the lead with 15.1 percent. Alone each number is meaningless. Together they s
es off, and everyone has to have it. Then, after everyone has it, the growth slows way down. That's a pattern of consumer behavio
ith the human behavior that produced it. Between these extremes, good managers use numbers to create a common middle groun
e more risk for the lender that you will run short of cash.
s money or loses it. With so much data coming at you so fast, it is more important than ever not to get lost in the numbers, to kee
rials on that scale was an enormous feat. After working such miracles through numbers, the so-called Whiz Kids went on to leav
me a permanent part of our language, referring to those who use numbers without understanding their significance.
amic hedging was based on the historical relationships between markets around the world, the fact that one market tended to go
ematician John Allen Paulos. put it nicely: "Describing the world may be thought of as an Olympic contest between simplifiers--s
ily, your employer, your insurance company) everything they need to know. This is why the holy-grail analogy is apt: It's a noble
keeping your costs in line, because failure to do so will show up in slimmer profit margins. If you do a poor job of creating valu
ciency of an assembly plant to the

ersuasively that over reliance on short-term financial measures like ROI could lead to the slow death of investment in the innovat
ortant barometer of the climate inside an organization. Measures of external performance, such as customer satisfaction and loyal
mishandled bags, turnover, and sick leave. As Brenneman says, "The foundation of any successfully run business is a strategy eve
en so that they could be applied
a measure that forced people to
Satisfied employees will be productive employees. And if you've got cash in the till at the end, the rest is all going to work."
awn periodically. Welch realized that, over time, GE's managers had learned how to redefine markets narrowly so that they came
tion, so that the system is tailored to create the value customers want.
ntation of revenue. In other words, it is a single window for our investors to look into o·ur operations and our aspirations. It is our view and
ed on what the analysts say or the public expects.
ization, there is t.remendous growth and competition in lhe marketplace. Companies are growing much faster today than they were growi
he short-term mindset of investors.
arc proper p1·ocedures ami cont1·ols. But whether this happens in practic depends on how cooperative the owner-managers are.
00. GoingConcernConcept: According to this concept it is assumed that the business will continue for a fairly long time to come. There
this concept the figures shown in the accounting records would have depended on the subjective views of a person. However, on account o
was received or made is ‘irrelevant’.

to principles of commercial laws and other social disciplines.”
has already been charged to the Profit
fit is transferred to the Capital Reserve and shown in the Liabilities side under the head of “Reserves & Surplus” while revenue profit is cre
s suffered by a business during a particular period.
and to make sense of events in ways that our intuition alone cannot do.
mbers, not crunching them. Sometimes, however, you need to understand how the number was crunched to see its significance.
ood or bad.Most of the numbers that seem like so much inside baseball to non-managers are simple ratios that, like the Concorde
s meaningless. Together they spell trouble. If you're Steve Jobs, you see a trend that .you'd better figure out how to reverse. This
a pattern of consumer behavior almost all of us have participated in and anyone can understand. It applied to George Eastman's c
reate a common middle ground of purposeful action. What the numbers do is allow you to see the larger patterns unfolding so th
get lost in the numbers, to keep a clear head about what you're trying to do, and which numbers can help you find your way or st
ed Whiz Kids went on to leave their mark on corporate America.
eir significance.
that one market tended to go up when another went down. In the face of the Asian panic, then crises in Russia, LTCM kept betti
contest between simplifiers--scientists in general, statisticians in particular and complicators--humanists in general, storytellers i
rail analogy is apt: It's a noble quest, but inherently impossible.

do a poor job of creating value for customers, it will show up in lost sales or in downward pressure on your prices. So, the botto
th of investment in the innovation that is the lifeblood of most organizations.
customer satisfaction and loyalty (retention rates, for example, and repeat sales) and market share give managers a handle on how
y run business is a strategy everyone understands coupled with a few key measures that are routinely tracked."
rest is all going to work."

ets narrowly so that they came out number-one or number-two. Welch's new challenge forced them to focus on growth.
ur aspirations. It is our view and not the view of the analysts. It is a statutory document. Obviously, companies will have to ensure that it is
aster today than they were growing 15 yea1·s ago. So, I am not a great believer in the perception that quarterly guidance leads to any extra p
managers are.
a fairly long time to come. There is neither the intention nor the necessity to liquidate the particular business venture in the foreseeable futu
a person. However, on account of continued inflationary tendencies the preparation of financial statements on the basis of historical costs h
rplus” while revenue profit is credited to the Profit & Loss Account.
nched to see its significance.
e ratios that, like the Concorde's failure rate, compare one dimension of performance to some clear reference point. Often express
gure out how to reverse. This isn't number crunching, it's sense making.
applied to George Eastman's cameras 100 years ago, and it's true of cell phones today.
arger patterns unfolding so that you can take appropriate action. If you're in the cell-phone business, for instance, knowing wher
n help you find your way or stay on course. Without measurement, progress would be impossible. That said, however, managers h
es in Russia, LTCM kept betting that those historic relationships would reassert themselves. They didn't, at least not fast enough t
anists in general, storytellers in particular. It is
e on your prices. So, the bottom line is a good indicator of how well you're doing, at least for the short term.
ive managers a handle on how well the organization is doing at creating value for customers, as well as a way of keeping score a
ly tracked."
to focus on growth.
nies will have to ensure that it is truthful and it does not communicate any false hope. Also, when you deal with customers, they want to kno
erly guidance leads to any extra pressure on the managernenL. What kind of a CEO are you if you do not have a plan to achieve a certain t·
s venture in the foreseeable future. On account of this concept, the accountant while valuing the asset does not take into account forced sale
on the basis of historical costs has become largely irrelevant for judging the financial position of the business. DualAspectConcept: This i
reference point. Often expressed as percentages or fractions, these ratios are, in essence, batting averages. They keep track of yo
s, for instance, knowing where you are on the penetration curve will make a big difference in how you think about your marketin
That said, however, managers have also been prone to periodic bouts of hubris, becoming so enamored of the quantitative tools th
didn't, at least not fast enough to prevent LTCM's collapse- from shaking global capital markets.
ell as a way of keeping score against rivals.
with customers, they want to know your strategy, your position in the market, financial strength; who your directors are; your stock movem
ave a plan to achieve a certain t·evenue and a certain profit in the next three months? But, if you know what your future is likely to be in lh
not take into account forced sale value of assets. Moreover, he charges depreciation on fixed assets on the basis of their expected lives rathe
ess. DualAspectConcept: This is the basic concept of accounting. According to this concept every business transaction has dual effect.
erages. They keep track of your successes compared to the number of times you step up to the plate. Consider six sigma, a qualit
you think about your marketing efforts or your supply
red of the quantitative tools they devise that they forget that tools are only aids to judgment. Even the best stopwatch won't tell y
directors are; your stock movemenl; and your segmentation of revenue. In other words, even tr1ugh prospective customers do not buy your
at your future is likely to be in lhe next three months and if you do not shaxe it with your investors at large, then you are creating asymmet
basis of their expected lives rather than on their market values. It rather presumes that the enterprise will continue in operation long enough
s transaction has dual effect.

e. Consider six sigma, a quality measure that has been all the rage for the past decade (and will continue to be so for at least the n
the best stopwatch won't tell you what time it is, let alone how you should be spending your time.
ctive customers do not buy your sh'ares, they want to ensure that they have good understanding of your financial strength because they are
, then you are creating asymmetry of information, particularly in a company where there are several owner-managers. That is not fair to
ntinue in operation long enough to charge against income, the cost of fixed assets over their useful lives, to amortize over appropriate perio
tinue to be so for at least the next decade, if not longer). While it is a religion at companies like Motorola and GE, and Greek to m
ancial strength because they are hinging their future on you to some extent. So, the financial reporting document is very important.
ner-managers. That is not fair to the investors at large. I will give an example. In 2001, we announced that we would grow by 30 per cent. T
amortize over appropriate period other costs which have been deferred under the accrual or matching concept, to pay liabilities when they
otorola and GE, and Greek to most people, six sigma is basically just a batting average that tells you what percentage of your eff
ment is very important.
we would grow by 30 per cent. The previous year, we had grown by 100 per cent. So, I stood up and said, "There is considerable fog on the
ept, to pay liabilities when they become due and to meet the contractual commitments. This Concept
u what percentage of your efforts is error-free.
There is considerable fog on the windshield and we can only promise 30 per cent." Our stock price came

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Financial Accounting Pre Foundation Phase – Batch 75C0

Credit: 1 Faculty : Sessions :

Theme No: Topic Session/GW No:

Course Learning Outcomes

Session/ GW Theme/Topic Activity in Compulsory Pre- reads

Session/ GW Theme/Topic Activity in class Compulsory Other reading

Financial Accounting Pre Foundation Phase – Batch 75C0

Practice (Not to be submitted)

Session/ GW Theme/Topic Activity in Compulsory Pre-reads Other read

Practice (Not to be submitted)

Theme 4 – Accounting Equation- From Transactions to Financial Statements

Session/ GW Theme/Topic Activity in Compulsory Pre– Other reading

Practice Exercise (Not to be submitted)

Financial Accounting Pre Foundation Phase – Batch 75C0

Practice Exercise (Not to be submitted)

Practice (Not to be submitted)

Conceptual Assignment I (30 Marks) (submission in excel only)

May-01 Started in business with capital of Rs.7,500 in the bank

May-01 Appointed Salesman

May-03 Bought goods, Rs. 1,000, paying by cheque

May-04 Sold goods Rs.1,750, a cheque being received

May-04 Cash withdrawn of Rs. 250 for personal purposes

May-06 Bought shop fittings forRs.2,000, paying by cheque

May-07 Bought goods Rs.1,250, on credit from Bristol Supplies Limited

May-10 Paid rent Rs.750, by cheque

May-16 Paid wages Rs.1,500, by cheque

May-18 Paid the amount owing to Bristol Supplies Limited by cheque

May-21 Purchased asset of Rs. 2500

May-29 Received interest on bank deposit of Rs. 2550

May-30 Tax payable at the rate @ 30%

Financial Accounting Pre Foundation Phase – Batch 75C0

Conceptual Assignment II (20 Marks) (submission in excel only)

03 05 2018 Purchased INR 300 of supplies on account.

Conceptual Assignment III- 20 Marks (submission in excel only)

Question 2 : A company enters into the following transactions: (10 m)

Application Assignment (25marks) (submission in excel only)

Theme 6: Session 7 and Session 8

Company Concept Violated Result

Business Entity Concept: Rigas family Bankruptcy, Rigas family memb

Note: Reference to funds / money in numerical terms is

: Which Numbers Matter and Why

“What Management is?” by Joan Magretta)

• Interview with Mr. Narayan Murthy:

• Article: Interview with

l assets? (Calculated as asset A/Total assets).

awing a card, the Bank pays them a 50 pounds Fee

cy, Rigas family members convicted of

ef Executive Officer) resigned. AIG

ges filed against senior executives of

on fine to SEC. Six executives fined

r should fix a certain cap on the number of options as a percentage of

ed into two categories,

old aspect of the transaction.

owing are some the examples of Revenue Expenditure:

ture incurred to maintain the business.

bout two more facts. They are:

penses relating to a particular period. The account is prepared in two parts: -

the course of running the business.