Accounting PDF

SHEET 1
Basic Concepts of Accounting

Md. Mahabbat Hossain
Faculty Member, BIBM
Phone: 01716373565
Email: mahabbat_mba@yahoo.com
 Definition of Accounting
In The Accounting Principles book, Weygandt, Kieso and Kimmel say that- ‘Accounting is an
information system that identifies, records, and communicates the economic events of an organization
to interested users.’
1. Identifying economic events involves selecting the economic activities relevant to a particular
organization.
2. Recording consists of keeping a systematic, chronological diary of events, measured in
money. In recording, economic events are also classified and summarized.
3. The identifying and recording activities are of little use unless the information is communicated
to interested users. Financial information is communicated through accounting reports, the
most common of which are called financial statements.
American Accounting Association [AAA] – ‘Accounting is defined as the process of identifying,
measuring, and communicating economic information to permit informed judgements, and decisions by
users of the information.’
American Institute of Certified Public Accountants [AICPA]- ‘Accounting is the art of recording,
classifying and summarizing in a significant manner and in terms of money, transactions and events,
which are in part at least, of a financial character and interpreting the results thereof.’
Financial Accounting Standard Board (FASB)- ‘Accounting is the service activity of financial recording
and reporting.’
 Transaction & Event

Event: Event refers to a process or part of a process having a particular moment and a place of
occurrence.
1. Non Monetary Event: Which is not related to money or not measurable in monetary term. In other
word, the event that does not change the financial position of an enterprise, e.g., place an order,
win the match etc.
2. Monetary Event: Events that are related to money. In other word, events which change the
financial position of an enterprise, e.g., daily exp., salary paid, goods purchase etc.
Transaction: Transaction is recordable event that affects the assets, liabilities, owner’s equity,
revenues or expenses of an enterprise, e.g. salary paid, paid to creditors, drawings. Transactions are
events that (i) cause in an immediate change in the financial resources or obligations of the business
and (ii) can be measured objectively in money terms.
Page 1 of 18
 Characteristics of transaction
 Transaction must be expressed in terms of money

 Every transaction must be independent
 Every transaction must has two parties
 Transactions change in the financial resources or obligations
 Transactions must have source documents
 Transactions may be invisible
 Purposes of Accounting
 Maintain the permanent record of business transactions.
 Ascertain the net profit or loss of the enterprise for the accounting period.
 Determine the value of business assets and liabilities of the enterprise.
 Disclose the financial position of the enterprise in the Balance Sheet date.
 Cost control
 Give necessary information to management for decision making.
 Delivery information to various users in useful format
 Help to make a future plan
 Determine income tax, sales tax, VAT etc.
 Accounting Cycle
The sequence of accounting procedures used to record, classify, and Summarize accounting
information is known as the Accounting Cycle. The term cycle indicates that these procedures must be
repeated continuously to prepare new up-to-date financial statements at reasonable intervals. The
following are the steps in accounting cycle:
1. Identification and Measurement of Transactions and Other Events
2. Recording the transactions in Journal
3. Classifying the transactions through Ledger
4. Summarizing the transactions using Trial Balance
5. Making Adjustment Entries
6. Preparation of Adjusted Trial Balance
 Preparation of worksheet (Optional step)
7. Preparation of Financial Statements
8. Making Closing Entries
9. Preparation of Post Closing Trial Balance
10. Reversing Entries (Optional)
Page 2 of 18
Identification and
Measurement of Transactions
and Other Events
Reversing Entries
Journalization
Post-closing Trial
Balance
THE
ACCOUNTING Posting / Classifying
CYCLE
Ledger
Closing
Trial Balance
Statement
Preparation Work Sheet
Adjustments
Adjusted Trial Balance
(When the steps have been completed, the sequence starts over again in the next accounting period)
Page 3 of 18
 Qualitative Characteristics of Accounting Information
1. Relevance: Helping users to make predictions about the outcome to past, present and future
events or to confirm or correct prior expectations
2. Reliability: Information is reliable if it is free from error and bias, and faithfully represents and
users can depend upon the information to represent the economic conditions.
3. Timeliness: Having information available to decision maker before it loses its capacity to
influence decisions
4. Comparability: The quality of information that enables users to identify similarities in and
differences between two sets of economic phenomena.
5. Consistency: Conformity from period to period with unchanging policies and procedures.
Useful
Financial
Information
has:
Relevance Reliability
1 Predictive value 1 Verifiable
2 Feedback value 2 Faithful representation
3 Timeliness 3 Neutral
Comparability Consistency
 Users of Accounting Information
A. Internal Users B. External Users

 Marketing Manager  Investors
 Production supervisor  Prospective Investors
 Finance Director  Creditors
 Company officers  Tax authorities
 Regulatory agencies
 Customers
 Labor Unions
 Economic planners
 Competitors
Page 4 of 18
 Double Entry System
The first systematic presentation of the double-entry system appears in a mathematics textbook,
Summa de Arithmetica, Geometria, Proportione et Proportionalite, written by Luca Pacioli
published in 1494. The double-entry system is an accounting system to record the business
transactions in the book of account in both side, debit and credit, in equal amount.
 Equal debits and credits made accounts for each transaction
 Total debits always equal the total credits
 Accounting equation always stays in balance, Assets = Liabilities + Owner’s Equity
 Debit and Credit
 Debit indicates left and Credit indicates right
 Recording amount on the left side of an account is debiting the account
 Recording amount on the right side is crediting the account
 If the total of debit amounts is bigger than credits, the account has a debit balance
 If the total of credit amounts is bigger than debits, the account has a credit balance
 Determination of Debit and Credit
Assets Liabilities Owner’s Equity

Debit for Credit for Debit for Credit for Debit for Credit for
Increase (+) Decrease (-) Decrease (-) Increase (+) Decrease (-) Increase (+)
Normal Normal Normal
Balance (Dr) Balance (Cr) Balance (Cr)
Revenue Expense Owner’s Drawings
Debit for Credit for Debit for Credit for Debit for Credit for
Decrease (-) Increase (+) Increase (+) Decrease (-) Increase (+) Decrease (-)
Normal Normal Normal
Balance (Cr) Balance (Dr) Balance (Dr)
 The Recording Process
o Analyze each transaction
o Enter transaction in a journal
o Transfer journal information to ledger (Posting)
Journal: Transactions are initially recorded in chronological order before they are transferred to the
ledger accounts. A general journal has Space for dates, Account title and
explanations, References and Two amount columns.
The Account: An account is an individual accounting record of changes in financial position. There
are separate accounts for the items we used in transactions such as cash, salaries
expense, accounts payable, etc.
The Ledger: A Group of accounts maintained by a company is called the ledger. A general ledger
contains all the assets, liabilities, owner’s equity, revenue and expense accounts.
The Trial Balance: The trial balance is a list of accounts and their balances at a given time. The
primary purpose of a trial balance is to prove the equality between debits and credits after
posting. If sum of debits and credits do not agree, the trial balance can be used to
discover errors in journalizing or in posting.
Page 5 of 18
 Some Definitions
 Assets: An asset is a resource controlled by the enterprise and from which future economic
benefits are expected to inflow to the enterprise. Simply, assets are resources owned by the
enterprise.
i) Current Assets: Current assets are cash and other resources that are reasonably expected to
be realized in cash or sold or consumed in the business within one year of the balance sheet
date or the company’s operating cycle, whichever is longer. For example, accounts receivable,
inventory etc.
ii) Fixed Assets: Fixed assets are resources that are not expected to be realized in cash or sold
or consumed in the business within one year of the balance sheet date or the company’s
operating cycle. For example, land, building, machinery, furniture etc.
 Liabilities: A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise. Simply, liabilities are
claims against assets i. e. liabilities are existing debts and obligations.
i) Current Liabilities: Obligations expected to be paid within one year or an operating cycle,
whichever is longer, are classified as current. For example, accounts payable, salaries payable,
interest payable etc.
ii) Long-term Liabilities: Obligations expected to be paid after one year or an operating cycle,
whichever is longer, are classified as long-term liabilities. For example, bonds payable,
Mortgages payable etc.
 Capital: That amount which is supplied by the owner(s) of the business is known as capital.
 Owner’s equity: The ownership claim on total assets is known as owner’s equity. Equity is the
residual interest in the assets of the enterprise after deducting all its liabilities. The ownership claim
on total assets is known as owner’s equity. The revenue and expenses change owner’s equity.
 Cost: Cost is related to assets. By incurring cost we can get any type of assets. It represents the
exchange price or monetary consideration given for acquiring goods or services. On the other
hand, expenses are the using or consuming of goods and services in the process or obtaining
revenues.
 Expense: Expenses are a decrease in the economic benefits during the accounting period in the
form of outflows or depletion of assets. Expenses are the cost of assets consumed or services used
in the process of earning revenue. The amount that is incurred to operate a business or for
generate revenue.
 Revenue: Revenue is an increase in economic benefits during the accounting period in the form of
inflows or enhancements of assets. Revenues are the gross increase in owner’s equity resulting
from business activities.
 Net Income: The excess of revenues over expenses.
 Net Loss: The excess of expenses over revenues.
Page 6 of 18
 Accounting Equation or Balance Sheet or Basic Equation (Larson,9th ed.p17, Kieso,6th ed, p12)
We know that the sum of the assets shown on the balance sheet must equal liabilities plus the equity of
the owner or owners of the business. This equality may be expressed in equation form as follows:
Assets = Liabilities + Owner’s equity or
A=L+C Where,
A = Assets
L = Liabilities
C = Owner’s equity
When balance sheet equality is expressed in equation form, the resulting equation is called the balance
sheet equation. It is also known as the accounting equation, since all double-entry accounting is
based on it. And like any mathematical equation, its elements may be transposed and the equation
expressed:
Assets – Liabilities = Owner’s equity
The equation in this form illustrates the residual nature of the owner’s equity. An owner’s claims are
secondary to the creditors’ claims. Now, we are in a position to say- when the equality between assets
and liabilities plus owner’s equity are expressed in the form of equation is called Basic Accounting
Equation.
 Expansion of Basic Accounting Equation

Already, we have known that the expression of equality between assets and liabilities plus owner’s
equity of a business in the form of equation is called basic accounting equation. The basic accounting
equation is expressed as;
Assets = Liabilities + Owner’s equity
There are some other accounts, which affect the owner’s equity, e.g., Revenues, Expenses and
Drawings. Revenues increase owner’s equity and Expenses & Drawings decrease owner’s equity. If we
show the effect of these additional accounts on the basic accounting equation, the new equation will be
treated as Expanded Basic Accounting Equation. The expanded basic accounting equation is
expressed as;
Assets = Liabilities + Owner’s equity + Revenue – Expenses – Drawing or
A=L+C+R-E-D
Where,
A = Assets R = Revenues
L = Liabilities E = Expenses
C = Owner’s equity D = Owner’s Drawing
Page 7 of 18
 Illustration
Preparation of Income Statement, Balance Sheet and Owner’s Equity Statement after showing the
effects of transactions on accounting equation.
1. Investment by owner Tk. 15000
2. Purchase of equipment Tk. 7000
3. Purchase of supplies on credit Tk. 1600
4. Services provided for cash Tk. 1200
5. Purchase of advertising on credit Tk. 250
6. Services provided for cash Tk. 1500 and credit Tk. 2000
7. Payment of expenses; rent Tk. 600, salaries Tk. 900utilities Tk. 200
8. Payment of accounts payable Tk. 250
9. Receipt of cash on account Tk. 600
10. Withdrawal of cash by owner Tk. 1300
Owners’
Transaction Assets = Liabilities +
Equity
Accounts Office Accounts
Cash + + + Equipment = + Capital
Receivable Supplies Payable
1 +15000 = +15000 Investment
2 -7000 +7000
Balance 8000 + 7000 = 15000
3 +1600 +1600
Balance 8000 + 1600 + 7000 = 1600 + 15000

Services
4 +1200 +1200
Revenue
Balance 9200 + 1600 + 7000 = 1600 + 16200
Advertising
5 +250 -250
Expenses
Balance 9200 + 1600 + 7000 = 1850 + 15950
Service
6 +1500 +2000 +3500
Revenue
Balance 10700 + 2000 + 1600 + 7000 = 1850 + 19450
-600 Rent Exp.
7 -1700 -900 Salaries Exp.
-200 Utilities Exp.
Balance 9000 + 2000 + 1600 + 7000 = 1850 + 17750
8 -250 -250
Balance 8750 + 2000 + 1600 + 7000 = 1600 + 17750
9 +600 -600
Balance 9350 + 1400 + 1600 + 7000 = 1600 + 17750

10 -1300 -1300 Drawings
Balance 8050 + 1400 + 1600 + 7000 = 1600 + 16450
18050 = 18050
Page 8 of 18
SOFTBYTE
Income Statement
For the Month Ended September 30, 2005
Revenues
Service revenue Tk.4,700
Expenses
Salaries expense Tk. 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income Tk.2,750
SOFTBYTE
Owner’s Equity Statement
Capital, September 1 Tk. 0

Add: Investments Tk.15,000
Net income 2,750
17,750
17,750
Less: Drawings 1,300
Capital, September 30
Tk.16,450
SOFTBYTE
Balance Sheet
September 30, 2005
C. Assets
Cash Tk.8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets
Tk.18,050
D. Liabilities and Owner’s Equity
Liabilities
Accounts payable Tk.1,600
Owner’s equity
Capital 16,450
Total liabilities and owner’s equity
Tk.18,050
Page 9 of 18
 Problem 1
The following transactions were engaged during the month of March by Dr. Rafiqul Islam:
(1) Opened his practice by investing Tk.1,00,000 in the business
(2) Bought office equipment for Tk. 70,000 on account from Medical Products, Inc.
(3) Paid Tk.20,000 for various medical supplies for the office
(4) Received Tk.16,000 in fees earned during the first month of operations
(5) Paid office rent for the month, Tk. 2,000
(6) Paid medical assistant salary for the month, Tk. 4,000
(7) Paid to Medical Products, Inc., Tk. 30,000 on account
(8) Withdrew Tk.5, 000 for personal use
Requirement
a) Enter each transaction in the following form:
Cash + Supplies + Equipment = Liabilities + Capital
b) Prepare an Income Statement for the month of March, 200X.
c) Prepare an Owner’s Equity Statement for the month of March, 200X.
d) Prepare a Balance Sheet on March 31, 200X.
 Problem 2
Rahim Mia started the Good Cleaning Service on July 1, 200X, and had the transactions listed below
for the month of July. Record them in the blank form, which follows.
July 1 Started business; invested Tk.10,000 cash and equipment with book value of Tk.2,500.
5 Purchased Tk.300 of cleaning supplies on account.

7 Received Tk.2,700 for cleaning services (Fees Income).
9 Paid Tk.200 of the Tk.300 owned for purchase of cleaning supplies from July 5 transaction.
13 Paid Tk.310 rent for month.
15 Paid employee 2 weeks wages of Tk.540 (Salaries Expense).
21 Purchased new cleaning machines for Tk.3,000 on account.
24 Withdrew Tk.1,000 for personal use (use Drawing).
30 Took inventory; found he had Tk.125 worth of supplies left (Tk.300 - Tk.175 = Tk.125).
Cash + Supplies + Equipment = Liabilities + Capital Account
Requirement
(a) Prepare a Tabular Analysis of the above transactions according to the given format.
(b) Prepare an Income Statement for the month of July, 200X.
(c) Prepare an Owner’s Equity Statement for the month of July, 200X.
(d) Prepare a Balance Sheet on July 31, 200X.
Page 10 of 18
 Problem 3
Moinul Islam opens his own law office on July 1, 2005. During the first month of operations, the
following transactions occurred:
1. Invested Tk. 1,00,000 in cash in the law practice
2. Paid Tk. 8,000 for July rent on office space
3. Purchased office equipment on account, Tk. 30,000
4. Rendered legal services to clients for cash, Tk. 15,000
5. Borrowed Tk.7000 cash from a bank on a note payable
6. Rendered legal services to client on account, Tk. 20,000
7. Paid monthly expenses: salaries, Tk. 5,000; utilities, Tk. 3,000; and telephone, Tk. 1,000
Instructions
(a) Prepare a Tabular Summary of the transactions.
(b) Prepare the Income Statement, Owner’s Equity Statement, and Balance Sheet on July 31 for
Moinul Islam, Bar at Law.
 Problem 4
George Kanaan opened a law office, Gofur Khan, Bar at Law, on July 1, 1999. On July 31, the balance
sheet showed cash Tk.40,000, Accounts Receivable Tk.15,000, Supplies Tk.5,000, Office Equipment
Tk.50,000, Accounts Payable Tk.42,000, and Gofur Khan, Capital, Tk.68,000. During August the
following transactions occurred:
1. Collected Tk.14,000 of accounts receivable.

2. Paid Tk.27,000 cash on accounts payable.
3. Earned revenue of Tk.64,000, of which Tk.30,000 is collected in cash and the balance is due in
September.
4. Purchased additional office equipment for Tk.10,000, paying Tk.4,000 in cash and the balance on
account.
5. Paid salaries Tk.25,000, rent for August Tk.900, and advertising expenses Tk.3,500.
6. Withdrew Tk.5,500 in cash for personal use.
7. Received Tk.20,000 from Standard Federal Bank- money borrowed on a note payable.
8. Incurred utility expenses for month on account, Tk.2,500.
Instructions
(a) Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column
heading should be as follows:
Cash + A / R + Supplies + Office Equipment = Notes Payable + A / P + Capital
(b) Prepare an Income Statement for August, an Owner’s Equity Statement for August, and a
Balance Sheet at August 31.
Page 11 of 18
 Problem 5
Account balances for Good Luck Company on June 30 are given below in accounting equation form:
Assets = Liabilities + Owners’ Equity
Cash + Accounts + Office + Equipment = Accounts Notes + Capital
Receivable Supplies Payable Payable Stock
Balance 24,000 + 2,16,000 + 1,000 + 35,000 = 1,11,000 + 15,000 + 1,50,000
During July Good Luck Company entered into the following transactions.
1. Collected Tk. 1,25,000 of accounts receivable.

2. Paid Tk. 40,000 on accounts payable.
3. Billed to customers for services performed in the amount of Tk. 1,14,000
4. Purchased equipment for Tk. 80,000. Paid Tk. 20,000 in cash and signed a note payable for the
balance.
5. Paid expenses of Tk. 78,000 in cash (advertising, Tk. 8,000; rent, Tk. 30,000; employees’ wages,
Tk. 40,000).
6. Collected Tk. 90,000 of accounts receivable.
7. Used office supplies in the amount of Tk. 890 during the month.
8. Paid Tk. 30,000 on notes payable.
9. Depreciation on the equipment for July is computed to be Tk. 10,000.
10. On July 31, paid interest for July in the amount of Tk. 2,250.
Required
A) Prepare a schedule with a column for numbering the transactions, a column for each account listed
above, and a column for identifying the capital transactions. Enter the June 30 balance for each
asset, liability, and owners’ equity account in the schedule.
B) Record the effects of each transaction. Show the total of each column after recording each
transaction.
C) Prepare an income statement and retained earnings statement for the month of July, and a balance
sheet as of July 31 for Good Luck Company.
Page 12 of 18
 Problem 6
Rahim Ali owns and operates the Car Repair Shop. A list of the transactions that took place in August
2002 follows:
August 1 Rahim began the business by depositing Tk. 50,000 of his personal funds in the
business bank account.
August 2 Rahim rented space for the shop and paid August rent of Tk. 8,000.
August 3 The shop purchased supplies for cash, Tk. 30,000.
August 4 The shop paid ‘Daily News’, a local newspaper, Tk.3,000 for an advertisement.
August 5 Rahim repaired a car for a customer. The customer paid cash of Tk.13,000 for
services rendered.
August 11 Car Repair Shop repaired a car for a customer, Mr. Nazrul Islam, on credit, Tk.
5,000.
August 13 The shop purchased supplies for Tk. 9,000 by paying cash of Tk. 2,000 and
charging the rest on account.
August 14 The shop repaired a car for Zonab Ali, for Tk.19,000. Rahim collected Tk.10,000
in cash and put the rest on account.
August 22 Rahim took home supplies from the shop that had cost Tk. 1,000 when purchased
on August 3.
August 24 The shop collected cash of Tk. 4,000 from Mr. Nazrul Islam.
August 26 The shop paid of Tk. 2000 for clearing expense.
August 29 Rahim repaired a car for Abul Kashem for Tk. 12,000 on account.
August 31 Rahim transferred Tk. 5,000 from the business bank account to his Personal bank
account.
Instructions
(e) Prepare a tabular analysis of the transactions.

(f) Prepare an income statement for the month of August, 2002.
(g) Prepare an owner’s equity statement for the month of August, 2002.
(h) Prepare a balance sheet on August 31, 2002.
Page 13 of 18
 Transaction Analysis and Making Journal Entries
1. Mr. Ray Neal decides to open a computer programming service which he names Softbyte. On
September 01, 2005, he invests Tk. 15,000 cash in the business.
2. September 01, 2005, he places an order to ABC Co. for purchasing a computer for Tk. 7,000.
3. On September. 02, 2005, Softbyte has purchased computer equipment for Tk. 7,000 cash.
4. Softbyte purchases computer paper for Tk. 1,600 on credit on September 07, 2005.
5. Softbyte receives Tk. 1,200 cash from customers for programming services on Sep. 15, 2005
6. Softbyte receives a bill for Tk. 250 on Sep. 20, from The Daily Star for advertising but was not
paid.
7. Softbyte provides Tk. 3,500 of programming services for customer on Sep. 23, 2005 (receives
Tk. 1,500 in cash and the balance of Tk. 2,000 on credit).
8. Office Expenses paid in cash for Tk. 1,700 on September 28, 2005.
9. Softbyte pays its Tk. 250 advertising bill in cash on September 29, 2005.
10. On Sep. 30, 2005, Tk. 600 in cash is received from customer who has previously been billed.
11. Ray Neal withdraws Tk. 1,300 from the business for his personal use on Sep. 30, 2005.
Page 14 of 18
SOFTBYTE
General Journal J1
Date Account Titles and Explanation Ref. Debit Credit
2005 Cash 01 15,000
Sep. 01 Mr. Ray Neal’s Capital 06 15,000
(Owner’s investment of cash in business)
Sep. 01 No Transaction
Sep. 02 Computer Equipment 04 7,000

Cash 01 7,000
(As purchase of computer in cash)
Sep. 07 Office Supplies 03 1,600
Accounts Payable 05 1,600
(As purchase of computer paper on credit)
Sep. 15 Cash 01 1,200
Service Revenue 08 1,200
(As received cash by providing service)
Sep. 20 Advertising Expense 10 250
Advertising Bills Payable 11 250
(As advertising bill received but not paid)
Sep. 23 Cash 01 1,500
Accounts Receivable 02 2,000
Service Revenue 08 3,500
(As service provided in cash and on credit)
Sep. 28 Office Expense 09 1,700
Cash 01 1,700
(As office expense paid in cash)
Sep. 29 Advertising Bills Payable 11 250
Cash 01 250
(As accrued bill paid)
Sep. 30 Cash 01 600
Accounts Receivable 02 600
(As cash received from accounts receivable)
Sep. 30 Drawings 07 1,300
Cash 01 1,300
(As withdraw by owner)
Page 15 of 18
SOFTBYTE
General Ledger
Cash A/c No. 01
Date Explanation Ref. Debit Credit Balance
2005
Sep. 01 Mr. Ray Neal’s Capital J1 15,000 15,000
02 Computer Equipment J1 7,000 8,000
15 Service Revenue J1 1,200 9,200
23 Service Revenue J1 1,500 10,700
28 Office Expense J1 1,700 9,000
29 Advertising Bills Payable J1 250 8,750
30 Accounts Receivable J1 600 9,350
30 Drawings J1 1,300 8,050
Mr. Ray Neal’s Capital A/c No. 06

2005
Sep. 01 Cash J1 15,000 15,000
Computer Equipment A/c No. 04

2005
Sep. 01 Cash J1 7,000 7,000
XXXX A/c No. XX

2005
Sep. XX XXXXXXXX J1 ………. ……… …………
SOFTBYTE
TRIAL BALANCE
September 30, 2005
SL Accounts Title Debit Credit
01 Cash 8,050
02 Accounts Receivables 1,400
03 Office Supplies 1,600
04 Computer Equipment 7,000
05 Accounts Payable 1,600
06 Mr. R. Neal’s Capital 15,000
07 Mr. R. Neal’s Drawings 1,300
08 Service Revenue 4,700
09 Office Expenses 1,700
10 Advertising Expenses 250
Total 21,300 21,300
Page 16 of 18
 Some Common Transactions
1. Investment by owner in Cash Tk. 50,000
2. Investment of Assets (Building) by owner Tk. 100,000
3. Purchase of inventory in cash Tk. 10,000
4. Purchase of inventory on credit Tk. 8,000
5. Sale of inventory in cash Tk. 12,000
6. Sale of inventory on credit Tk. 9,000
7. Purchase of Assets (Computer) in cash Tk. 30,000
8. Payment of expense (Salary) in Cash Tk. 5,000
9. Incur expense (Rent) on credit Tk. 7,000
10. Revenue (Dividend) received in cash Tk. 2,000
11. Revenue (Interest) earned on credit Tk. 3,000
12. Withdraw by owner in Cash Tk. 1,000
13. Received from Accounts Receivable Tk. 7,000
14. Payment to Accounts Payable Tk. 6,000
General Journal
Date Accounts Title Ref Dr Cr.
1 Cash 50,000
Capital 50,000
(To record investment by owner in cash)
2 Assets (Building) 100.000
Capital 100,000
(To record…………………………….)
3 Purchase 10,000
Cash 10,000
(As/Since……………………………..)
4 Purchase 8,000
Accounts Payable (A/P) 8,000
5 Cash 12,000
Sales 12,000
6 Accounts Receivable (A/R) 9,000
Sales 9,000
7 Assets (Computer) 30,000
Cash 30,000
8 Expense (Salary) 5,000
Cash 5,000
9 Expense (Rent) 7,000
Expense Payable (Rent Payable) 7,000
10 Cash 2,000
Revenue (Dividend) 2,000
11 Revenue Receivable (Interest Receivable) 3,000
Revenue (Interest Revenue) 3,000
12 Drawing 1,000
Cash 1,000
13 Cash 7,000
A/R 7,000
14 A/P 6,000
Cash 6,000
Page 17 of 18
General Ledger
Cash
Date Explanation Ref Dr Cr Balance
1 Capital 50,000 50,000
3 Purchase 10,000 40,000
5 Sales 12,000 52,000
7 Computer 30,000 22,000
8 Salary 5,000 17,000
10 Dividend 2,000 19,000
12 Drawing 1,000 18,000
13 A/R 7,000 25,000
14 A/P 6,000 19,000
Capital
1 Cash 50,000 50,000
2 Building 100,000 150,000
Building
2 Capital 100,000 100,000
Purchase
3 Cash 10,000 10,000
4 A/P 8,000 18,000
A/P
4 Purchase 8,000 8,000
14 Cash 6,000 2,000
Sales
5 Cash 12,000 12,000
6 A/R 9,000 21,000
A/R
6 Sales 9,000 9,000
13 Cash 7,000 2,000
In this way we are to create an account for each new title

………………………..
Page 18 of 18
SHEET 2
Regulatory Framework of Accounting
Phone: 01716373565
 Introduction
Different types of organizations are operating their activities in Bangladesh. These
organizations are being regulated by several national and international regulatory authorities.
A single firm may be regulated, directed and supervised by different regulators and agencies.
Therefore, Bangladeshi companies are to follow several rules, regulations, standards and
directives issued by the external bodies along with their internal policies. The following parts
of this chapter depicts legal framework for the companies regarding their disclosure in
Bangladesh.
 National Regulatory Body

The extent and nature of corporate disclosure of Bangladeshi companies may be regulated by
Ministry of Finance (MoF), Ministry of Commerce (MoC), Registrar of Joint Stock
Companies and Firms (RJSCF), Bangladesh Securities and Exchange Commission (BSEC),
Bangladesh Bank (BB), Insurance Development and Regulatory Authority (IDRA), Micro-
credit Regulatory Authority (MRA), Dhaka Stock Exchange (DSE), Chittagong Stock
Exchange (CSE), Institute of Chartered Accountants of Bangladesh (ICAB), and/or Institute
of Cost and Management Accountants of Bangladesh (ICMAB).
Table 1: List of national regulatory bodies and concerned companies in Bangladesh

Regulator Nature of Companies
1. Ministry of Finance (MoF) 1. Banks
2. Non-Bank Financial Institutions
3. Capital Market
4. Insurance Sector
5. Microcredit Sector, etc.
2. Ministry of Commerce (MoC) Trade and commerce related activities of
Bangladesh and deals with Companies Act,
Partnership Act, Societies and Trade Organization
Ordinance and Law of Insurance.
3. Registrar of Joint Stock 1. Private Companies

Companies and Firms (RJSCF) 2. Public Companies
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3. Foreign Companies
4. Trade Organizations
5. Partnership Firms, etc.
4. Bangladesh Securities and 1. Listed Companies

Exchange Commission (BSEC) 2. DSE and its OTC Market
3. CSE and its OTC Market
4. Capital Market Intermediaries
5. Credit Rating Agencies, etc.
5. Bangladesh Bank (BB) 1. Scheduled Banks
2. Non-scheduled banks
3. Non-Bank Financial Institutions, etc.
6. Insurance Development & 1. Non-life Insurance Companies
Regulatory Authority (IDRA) 2. Life Insurance Companies
3. Insurance Companies in Public Sector, etc.
7. Microcredit Regulatory Authority 1. Micro Finance Institutions (MFIs)
(MRA)
8. Dhaka Stock Exchange Limited 1. Companies Listed on DSE
(DSE)
9. Chittagong Stock Exchange 1. Companies Listed on CSE
Limited (CSE)
Source: Researcher’s own analysis based on related documents
 International Regulatory Body

Different international bodies issue regulations and guidelines regarding corporate disclosure.
The IFRS Foundation is an independent, not-for-profit private sector organisation working in
the public interest. The principal objectives of the IFRS Foundation are to develop a single
set of high quality, understandable, enforceable and globally accepted International Financial
Reporting Standards (IFRSs) through its standard-setting body, the International Accounting
Standards Board (IASB); to promote the use and rigorous application of those standards; to
take account of the financial reporting needs of emerging economies and small and medium-
sized entities (SMEs); and to promote and facilitate adoption of IFRSs (www.ifrs.org). The
International Accounting Standards Board (IASB) is the independent standard-setting body of
the IFRS Foundation. IASB, based in London, began operations in 2001. After 2001 the
Accounting Standards issued by IASB are known as International Financial Reporting
Standards (IFRSs). Before establishment of IASB, standards were issued by International
Accounting Standard Committee (IASC) and those standards are known as International
Accounting Standards (IASs). Up to 2001, a total of 41 IASs have been issued by IASC
whereas a total of 15 IFRSs have been issued by IASB from 2001 to June 2014
(www.ifrs.org). Financial Accounting Foundation (FAF) is an independent, private sector
organization responsible for the oversight, administration, and finance of the Financial
Accounting Standards Board (FASB). FASB has been the designated organization in the
private sector since 1973 for establishing standards of financial accounting that govern the
preparation of financial reports by non-governmental organizations. These standards have
been officially recognized as authoritative ones by the U.S. Securities and Exchange
Page 2 of 24
Commission (SEC) and the American Institute of Certified Public Accountants
(www.fasb.org).
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an
Islamic international autonomous non-for-profit corporate body that prepares accounting,
auditing, governance, ethics and Shariah standards for Islamic financial institutions and the
industry. AAOIFI was registered on March 27, 1991 in the State of Bahrain. Accounting and
Auditing Standards Board (AASB) is the standards-setting body of AAOIFI. A total of 88
standards have been issued by AAOIFI - (a) 48 on Shariah standards, (b) 26 accounting
standards, (c) 5 auditing standards, (d) 7 governance, and (e) 2 codes of ethics
(www.aaoifi.com). Islami Bank Bangladesh Limited is a member of AAOIFI. The Islamic
Financial Services Board (IFSB), based in Kuala Lumpur, started operations on March 10,
2003. It serves as an international standards-setting body of regulatory and supervisory
agencies that have vested interest in ensuring the soundness and stability of the Islamic
financial services industry. Bangladesh Bank is a member of IFSB. Up to June 2014, IFSB
has published 16 standards, 5 guidance notes and 1 technical note (www.ifsb.org).
The Bank for International Settlements (BIS) is to serve central banks in their pursuit of
monetary and financial stability, to foster international cooperation in those areas and to act
as a bank for central banks. The BIS is the world's oldest international financial organization
established on May 17, 1930. The Basel Committee on Banking Supervision (BCBS) is the
primary global standards-setter for the prudential regulations of banks and provides a forum
for cooperation on banking supervisory matters. The secretariat of BCBS is provided by the
BIS (www.bis.org). There are additional disclosure requirements in guidelines issued by
BCBS.
South Asian Federation of Accountants (SAFA) was formed in the year 1984 to promote and
accelerate development of the accountancy profession in the South Asian Region and uphold
its eminence in the world of accountancy (www.esafa.org). SAFA offers award for corporate
governance disclosures based on Best Presented Annual Report (BPA) of listed companies.
International Federation of Accountants (IFAC) is the global organization for the
accountancy profession dedicated to serving the public interest by strengthening the
profession and contributing to the development of strong international economies
(www.ifac.org). IFAC deals with international regulatory convergence, global adoption of
high quality international reporting and professional standards, standard-setting in the public
interest, sustainability and integrated reporting, public sector reporting and transparency, etc.
Its formal policy positions are issued as Policy Position Papers. IFAC submits comment
letters and recommendations to global and regional organizations including the IFRS
Foundation.
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 National Regulation
List of regulations for the concerned companies of Bangladesh

S/N Name of Regulation Important Provision
1 The Securities and Exchange Sec. 2CC: Power to impose conditions
. Ordinance 1969 Sec. 2E: Power to call for information
Sec. 2F: False information
Sec 6: Accounts, Annual Reports, Returns, etc.
Sec. 11: Submission of Returns
Sec. 12. Submission of Statements of Beneficial Owners
Listed Equity Securities.
Sec. 18: Prohibition of false statements, etc.
BSEC Notification (No. SEC/CMRRCD/2006-
158/134/Admin/44, dated August 07, 2012)
2 The Securities and Exchange Rule 5: Maintenance of accounts and audit
. Rules 1987 Rule 7: Maintenance of books of accounts and other
documents by stock exchange
Rule 8: Maintenance of books etc. by members
Rule 12: Submission of annual report by issuers
Rule 13: Submission of periodical reports by issuer
Rule 14: Mode of filing or submission of returns/reports
3 The Companies Act 1994 Sec. 181: Books to be kept by company and penalty for not
. keeping them
Sec. 182: Inspection of books of accounts, etc. of companies
Sec. 183: Annual balance sheet
Sec. 184: Board’s report
Sec. 185: Form and contents of balance sheet and profit and
loss accounts
Sec. 186: Balance sheet of holding company to include
certain particulars as to its subsidiary
Sec. 187: Financial year of holding company and subsidiary
Sec. 189: Authentication of balance sheet, profit and loss
accounts, etc.
Sec. 190: Copy of balance sheet etc. to be filed with registrar
Sec. 191: Rights of members to copies of accounts and
reports
Sec. 192: Statement to be published by banking and certain
other companies
4 The Bank Companies Act 1991 Sec. 18: Transaction related to directors should be disclosed
. Sec. 36: Half yearly returns
Sec. 37: Power for publishing information
Sec. 38: Accounts and balance sheets
Sec. 39: Audit
Sec. 40: Report submission
Sec. 40: Sending balance sheet etc. to the registrar
Sec. 42: Display of audited balance sheet by the banking
company operating in Bangladesh
Sec. 43: Accounting provisions not retrospective
BB Circular (BRPD Circular No. 14/2003; BRPD Circular
No. 15/2009)
5 The Financial Institution Act Sec. 11: Balance sheet exhibition
. 1993 Sec. 12: Furnishing information
Sec. 23: Accounts and audit submission to the bank (BB)
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BB Circular (DFIM Circular No. 11/2009)
6 The Insurance Act 2010 Sec. 26: Separation of accounts and funds
. Sec. 27: Accounts and balance sheet
Sec. 28: Audit
Sec. 29: Special audit
Sec. 30: Actuarial report and abstract
Sec. 32: Submission of returns
Sec. 34: Furnishing reports
Sec. 36: Custody and inspection of documents and supply of
copies
Sec. 37: Powers of Chief Controller of Insurance regarding
returns
Sec. 39: Evidence of documents
Sec. 40: Returns to be published in statutory forms
7 The Partnership Act 1932 It is expedient to define and amend the law relating to
. partnership
8 Micro Credit Regulatory Rules Rule 13: Bookkeeping and other activities
. 2010 Rule 41: Maintaining register and records
Rule 43: General rules for preparation of financial statements
Rule 46: Internal audit of accounts
Rule 47: External audit
Rule 48: Submission of statements, reports, returns, etc.
9 The Listing Regulations of Listing Regulation no. 36 titled Continuing Listing
. Dhaka Stock Exchange Limited Requirements
1 The Listing Regulations of the Listing Regulation no. 36 titled Continuing Listing
0 Chittagong Stock Exchange Requirements
. Limited
Source: Researcher’s own analysis based on concerned regulations
 International Regulation
Along with local regulations, listed companies of Bangladesh are to comply with a number of
international regulations. International Financial Reporting Standards (IFRSs) have been
issued by IASB whereas International Accounting Standards (IASs) had been issued by
IASC. IFRSs and IASs have been adopted in Bangladesh by ICAB as Bangladesh Financial
Reporting Standards (BFRSs) and Bangladesh Accounting Standards (BASs) respectively.
Status of IASs (BASs) and IFRSs (BFRSs) in Bangladesh as on January 1, 2013 is depicted
in Table 2.3. All of the listed companies are to maintain these standards for preparing their
general purpose financial statements. Bangladeshi companies are also following some US
GAAP (Generally Accepted Accounting Principles) issued by FASB. More than 150
Statement of Financial Accounting Standards (FAS) have been issued by FASB. In July
2009, FASB released Accounting Standards Codification codifying all authoritative US
GAAP in one spot with roughly 90 topics (FAF, 2014). There are some other non-
authoritative US GAAPs as well.
Page 5 of 24
Islamic financial institutions (IFIs) like bank, insurance, non-bank financial institutions have
to follow standards issued by AAOIFI. Among others, Financial Accounting Standard No. 1:
General Presentation and Disclosure in the FSs of Islamic Banks and Financial Institutions
is more relevant for the preparation of financial statements. As per BB guidelines, Islamic
banks are to comply with Shariah rules issued by AAOIFI. The IFSB, an international
standard-setting organization, issues standard, guidance note and technical note. IFSB-4:
Disclosures to Promote Transparency and Market Discipline for Institutions offering Islamic
Financial Services, is more relevant with preparation of financial statements of banks under
Islamic Shariah. Pillar-3, Market Discipline, of Basel-II issued by the Basel Committee on
Banking Supervision (BCBS) requires additional disclosure. In line with Basel II, BB has
issued a revised guideline for banks titled “Guidelines on Risk Based Capital Adequacy
(RBCA)” in December 2010. RBCA has come fully into force from January 01, 2010 with its
subsequent supplements/revisions (BB, 2010b).
Status of IASs (BASs) and IFRSs (BFRSs) in Bangladesh

BAS/ BAS/BFRS Title BAS Effective Date
BFRS
BAS 1 Presentation of Financial Statements on or after 1 January, 2010
BAS 2 Inventories on or after 1 January, 2007
BAS 7 Statement of Cash Flows on or after 1 January, 1999
BAS 8 Accounting Policies, Changes in Accounting on or after 1 January, 2007
Estimates and Errors
BAS 10 Events after the Reporting Period on or after 1 January, 1999
BAS 11 Construction Contracts on or after 1 January, 1999
BAS 12 Income Taxes on or after 1 January, 1999
BAS 16 Property, Plant & Equipment on or after 1 January, 2007
BAS 17 Leases on or after 1 January, 2007
BAS 18 Revenue on or after 1 January, 2007
BAS 19 Employee Benefits on or after 1 January, 2013
BAS 20 Accounting of Government Grants and on or after 1 January, 1999
Disclosure of Government Assistance
BAS 21 The Effects of Changes in Foreign Exchange on or after 1 January, 2007
Rates
BAS 23 Borrowing Costs on or after 1 January, 2010
BAS 24 Related Party Disclosures on or after 1 January, 2007
BAS 26 Accounting and Reporting by Retirement on or after 1 January, 2007
Benefit Plans
BAS 27 Separate Financial Statements on or after 1 January, 2013
BAS 28 Investments in Associates and Joint Ventures on or after 1 January, 2013
IAS 29 Financial Reporting in Hyperinflationary on or after 1 January, 2015
Economics
BAS 31 Interest in Joint Ventures on or after 1 January, 2007
BAS 32 Financial Instruments: Presentation on or after 1 January, 2010
BAS 33 Earnings per Share on or after 1 January, 2007
BAS 34 Interim Financial Reporting on or after 1 January, 1999
BAS 36 Impairment of Assets on or after 1 January, 2005
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BAS 37 Provisions, Contingent Liabilities and on or after 1 January, 2007
Contingent Assets
BAS 38 Intangible Assets on or after 1 January, 2005
BAS 39 Financial Instruments: Recognition and on or after 1 January, 2010
Measurement
BAS 40 Investment Property on or after 1 January, 2007
BAS 41 Agriculture on or after 1 January, 2007
BFRS 1 First-time adoption of International financial 1 January, 2009
Reporting Standards
BFRS 2 Share-based Payment 1 January, 2007
BFRS 3 Business Combinations 1 January, 2010
BFRS 4 Insurance Contracts 1 January, 2010
BFRS 5 Non-current Assets Held for Sale and 1 January, 2007
Discontinued Operations
BFRS 6 Exploration for and Evaluation of Mineral 1 January, 2007
Resources
BFRS 7 Financial Instruments: Disclosures 1 January, 2010
BFRS 8 Operating Segments 1 January, 2010
IFRS 9 Financial Instruments NA (Not yet adopted but
under review process)
BFRS 10 Consolidated Financial Statements 1 January, 2013
BFRS 11 Joint Arrangements 1 January, 2013
BFRS 12 Disclosure of Interests in other Entities 1 January, 2013
BFRS 13 Fair Value Measurement 1 January, 2013
IFRS 14* Regulatory Deferral Accounts 1 January, 2016
(Not yet adopted by ICAB)
IFRS 15* Revenue from Contracts with Customers 1 January, 2017
(Not yet adopted by ICAB)
Source: www.icab.org.bd; *www.ifrs.org
Page 7 of 24
 Recognition of the Elements of Financial Statements
An item that meets the definition of an element should be recognized if- (a) it is probable that
any future economic benefit associated with the item will flow to or from the entity; and (b)
the item has a cost or value that can be measured with reliability.
• Recognition of assets: An asset is recognized in the balance sheet when it is probable
that the future economic benefits will flow to the entity and the asset has a cost or
value that can be measured reliably.
• Recognition of liabilities: A liability is recognized in the balance sheet when it is
probable that an outflow of resources embodying economic benefits will result from
the settlement of a present obligation and the amount at which the settlement will take
place can be measured reliably. In practice, obligations under contracts that are
equally proportionately unperformed (for example, liabilities for inventory ordered
but not yet received) are generally not recognized as liabilities in the financial
statements. However, such obligations may meet the definition of liabilities and,
provided the recognition criteria are met in the particular circumstances, may qualify
for recognition. In such circumstances, recognition of liabilities entails recognition of
related assets or expenses.
• Recognition of income: Income is recognized in the income statement when an
increase in future economic benefit related to an increase in an asset or a decrease of a
liability has arisen that can be measured reliably. This means, in effect, that
recognition of income occurs simultaneously with the recognition of increases in
assets or decreases in liabilities (for example, the net increase in assets arising on a
sale of goods or services or the decrease in liabilities arising from the waiver of a debt
payable).
• Expense Recognition: Expenses are recognized in the income statement when a
decrease in future economic benefit related to a decrease in an asset or an increase of
a liability has arisen that can be measured reliably. This means, in effect, that
recognition of expenses occurs simultaneously with the recognition of an increase in
liabilities or a decrease in assets (for example, the accrual of employee entitlements or
the depreciation of equipment). Expenses are recognized in the income statement on
the basis of a direct association between the costs incurred and the earning of specific
items of income.
 Measurement of the elements of financial statements

A number of different measurement bases are employed to different degrees and in varying
combinations in financial statements. However, the measurement basis most commonly
adopted by entities in preparing their financial statements is historical cost.
• Historical Cost: Assets are recorded at the amount of cash or cash equivalents paid
or the fair value of the consideration given to acquire them at the time of their
acquisition. Liabilities are recorded at the amount of proceeds received in exchange
for the obligation, or in some circumstances (for example, income taxes), at the
amounts of cash or cash equivalents expected to be paid to satisfy the liability in the
normal course of business.
• Current Cost: Assets are carried at the amount of cash or cash equivalents that would
have to be paid if the same or an equivalent asset was acquired currently. Liabilities
are carried at the undiscounted amount of cash or cash equivalents that would be
required to settle the obligation currently.
Page 8 of 24
• Realizable (Settlement) Value. Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the asset in an orderly disposal.
Liabilities are carried at their settlement values; that is, the undiscounted amounts of
cash or cash equivalents expected to be paid to satisfy the liabilities in the normal
course of business.
• Present Value: Assets are carried at the present discounted value of the future net
cash inflows that the item is expected to generate in the normal course of business.
Liabilities are carried at the present discounted value of the future net cash outflows
that are expected to be required to settle the liabilities in the normal course of
business.
 FASB (US GAAP)

Since 1973, the Financial Accounting Standards Board (FASB) has been the designated
organization in the private sector for establishing standards of financial accounting that
govern the preparation of financial reports by nongovernmental entities. Those standards are
officially recognized as authoritative by the Securities and Exchange Commission (SEC) and
the American Institute of Certified Public Accountants (AICPA). Such standards are
important to the efficient functioning of the economy because decisions about the allocation
of resources rely heavily on credible, concise, and understandable financial information. The
SEC has statutory authority to establish financial accounting and reporting standards for
publicly held companies under the Securities Exchange Act of 1934. Throughout its history,
however, the Commission’s policy has been to rely on the private sector for this function to
the extent that the private sector demonstrates ability to fulfill the responsibility in the public
interest.
Generally Accepted Accounting Principles, US GAAP or simply GAAP are terms for the
"generally accepted accounting principles". Although the SEC (Securities and Exchange
Commission) has a stated goal of moving from US GAAP to the International Financial
Reporting Standards (IFRS), the provisions of which differ considerably from GAAP -
progress has been slow and uncertain. Accounting standards have historically been set by the
American Institute of Certified Public Accountants (AICPA) subject to Securities and
Exchange Commission regulations. The AICPA first created the Committee on Accounting
Procedure in 1939, and replaced that with the Accounting Principles Board in 1959. In 1973,
the Accounting Principles Board was replaced by the Financial Accounting Standards Board
(FASB) under the supervision of the Financial Accounting Foundation with the Financial
Accounting Standards Advisory Council serving to advise and provide input on the
accounting standards. The FASB issued the FASB Accounting Standards Codification, which
reorganized the thousands of US GAAP pronouncements into roughly 90 accounting topics.
To achieve basic objectives and implement fundamental qualities GAAP has four basic
assumptions, four basic principles, and four basic constraints.
Assumptions
1. Accounting Entity: Accounting entity assumes that the business is separate from its
owners or other businesses. Revenue and expense should be kept separate from
personal expenses.
2. Going Concern: It is assumed that the business will be in operation indefinitely. This
validates the methods of asset capitalization, depreciation, and amortization. Only
Page 9 of 24
when liquidation is certain this assumption is not applicable. The business will
continue to exist in the unforeseeable future.
3. Monetary Unit principle: Monetary unit principle assumes a stable currency is going
to be the unit of record. The FASB accepts the nominal value of the US Dollar as the
monetary unit of record unadjusted for inflation.
4. Periodicity Concept: The Time-period principle implies that the economic activities
of an enterprise can be divided into artificial time periods.
Principles
1. Historical Cost Principle: Historical cost principle requires companies to account
and report based on acquisition costs rather than fair market value for most assets and
liabilities. This principle provides information that is reliable (removing opportunity
to provide subjective and potentially biased market values), but not very relevant.
Thus there is a trend to use fair values. Most debts and securities are now reported at
market values.
2. Revenue Recognition Principle: Revenue recognition principle holds that companies
may not record revenue until (1) it is realized or realizable and (2) when it is earned.
The flow of cash does not have any bearing on the recognition of revenue. This is the
essence of accrual basis accounting. Conversely, however, losses must be recognized
when their occurrence becomes probable, whether or not it has actually occurred. This
comports with the constraint of conservatism, yet brings it into conflict with the
constraint of consistency, in that reflecting revenues/gains is inconsistent with the way
in which losses are reflected.
3. Matching Principle: Expenses have to be matched with revenues as long as it is
reasonable to do so. Expenses are recognized not when the work is performed, or
when a product is produced, but when the work or the product actually makes its
contribution to revenue. Only if no connection with revenue can be established, cost
may be charged as expenses to the current period (e.g. office salaries and other
administrative expenses). This principle allows greater evaluation of actual
profitability and performance (shows how much was spent to earn revenue).
Depreciation and Cost of Goods Sold are good examples of application of this
principle.
4. Full Disclosure Principle: Amount and kinds of information disclosed should be
decided based on trade-off analysis as a larger amount of information costs more to
prepare and use. Information disclosed should be enough to make a judgment while
keeping costs reasonable. Information is presented in the main body of financial
statements, in the notes or as supplementary information
Constraints
1. Objectivity Principle: the company financial statements provided by the accountants
should be based on objective evidence.
2. Materiality Principle: The principle indicates that the significance of an item should
be considered when it is reported. An item is considered significant when it would
affect the decision of a reasonable individual.
3. Consistency principle: It means that the company uses the same accounting
principles and methods from period to period.
Page 10 of 24
4. Conservatism principle: When choosing between two solutions, the one which has
the less favorable outcome is the solution which should be. In other word, accountant
should be conservative in determining the amount of profit and asset value.
Page 11 of 24
 AAOIFI Framework
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an
Islamic international autonomous non-for-profit corporate body that prepares accounting,
auditing, governance, ethics and Shari'a standards for Islamic financial institutions and the
industry. Accounting & Auditing Standards Board (AASB) of AAOIFI is responsible for
setting accounting and auditing standards. AAOIFI was established in accordance with the
Agreement of Association which was signed by Islamic financial institutions on 26 February,
1990 in Algiers. Then, it was registered on 27 March, 1991 in the State of Bahrain. As an
independent international organization, AAOIFI is supported by institutional members (200
members from 40 countries, so far) including central banks, Islamic financial institutions, and
other participants from the international Islamic banking and finance industry, worldwide.
AAOIFI carries out its objectives in accordance with the precepts of Islamic Shari’a which
represents a comprehensive system for all aspects of life, in conformity with the environment
in which Islamic financial institutions have developed. This activity is intended both to
enhance the confidence of users of the financial statements of Islamic financial institutions in
the information that is produced about these institutions, and to encourage these users to
invest or deposit their funds in Islamic financial institutions and to use their services. Total of
88 standards are issued by AAOIFI-(a) 48 on Shari’a, (b) 26 accounting, (c) 5 auditing
standards, (d) 7 governance, (e) 2 codes of ethics. In addition, new standards are being
developed and existing standards reviewed. AAOIFI standards are followed – as part of
regulatory requirement or IFIs’ internal guidelines – in jurisdictions that offer Islamic finance
across Middle East, Asia Pacific, South Asia, Central Asia, Africa, Europe, and North
America; and Islamic Development Bank Group. Consequently, AAOIFI standards have
introduced greater harmonization of Islamic finance practices across the world.
 IAS 1: Presentation of Financial Statements

 Objective of IAS 1: This Standard prescribes the basis for presentation of general
purpose financial statements to ensure comparability both with the entity’s financial
statements of previous periods and with the financial statements of other entities. It sets
out overall requirements for the presentation of financial statements, guidelines for their
structure and minimum requirements for their content.
 Scope of IAS 1
o An entity shall apply this Standard in preparing and presenting general
purpose financial statements in accordance with International Financial Reporting
Standards (IFRSs).
o Other IFRSs set out the recognition, measurement and disclosure requirements
for specific transactions and other events.
o This Standard does not apply to the structure and content of condensed interim
financial statements prepared in accordance with IAS 34. This Standard applies
equally to all entities, including those that present consolidated financial statements
and those that present separate financial statements as defined in IAS 27.
Page 12 of 24
o This Standard uses terminology that is suitable for profit-oriented entities,
including public sector business entities. If entities with not-for-profit activities in the
private sector or the public sector apply this Standard, they may need to amend the
descriptions used for particular line items in the financial statements and for the
financial statements themselves.
o Similarly, entities that do not have equity as defined in IAS 32 Financial
Instruments: Presentation (e.g. some mutual funds) and entities whose share capital is
not equity (e.g. some co-operative entities) may need to adapt the financial statement
presentation of members’ or unit-holders’ interests.
 Definitions of Terms used in IAS 1

o General purpose financial statements (referred to as ‘financial statements’)
are those intended to meet the needs of users who are not in a position to require an
entity to prepare reports tailored to their particular information needs.
o Impracticable Applying a requirement is impracticable when the entity cannot
apply it after making every reasonable effort to do so.
o International Financial Reporting Standards (IFRSs) are Standards and
Interpretations adopted by the International Accounting Standards Board (IASB).
They comprise:
• International Financial Reporting Standards (IFRSs);
• International Accounting Standards (IASs); and
• Interpretations developed by the International Financial Reporting
Interpretations Committee (IFRIC) or the former Standing Interpretations
Committee (SIC).
o Material Omissions or misstatements of items are material if they could,
individually or collectively, influence the economic decisions that users make on the
basis of the financial statements. Materiality depends on the size and nature of the
omission or misstatement judged in the surrounding circumstances. The size or nature
of the item, or a combination of both, could be the determining factor.
o Notes contain information in addition to that presented in the statement of
financial position, statement of comprehensive income, separate statement of
comprehensive income (if presented), statement of changes in equity and statement of
cash flows. Notes provide narrative descriptions or disaggregations of items presented
in those statements and information about items that do not qualify for recognition in
those statements.
o Other comprehensive income comprises items of income and expense
(including reclassification adjustments) that are not recognized in profit or loss as
required or permitted by other IFRSs. The components of other comprehensive
income include:
• changes in revaluation surplus (see IAS 16 Property, Plant and Equipment and
IAS 38 Intangible Assets);
Page 13 of 24
• actuarial gains and losses on defined benefit plans recognized in accordance
with paragraph 93A of IAS 19 Employee Benefits;
• gains and losses arising from translating the financial statements of a foreign
operation (see IAS 21 The Effects of Changes in Foreign Exchange Rates);
• gains and losses on remeasuring available-for-sale financial assets (see IAS 39
Financial Instruments: Recognition and Measurement);
• the effective portion of gains and losses on hedging instruments in a cash flow
hedge (see IAS 39).
o Owners are holders of instruments classified as equity.
o Profit or loss is the total of income less expenses, excluding the components
of other comprehensive income.
o Reclassification adjustments are amounts reclassified to profit or loss in the
current period that were recognized in other comprehensive income in the current or
previous periods.
o Total comprehensive income is the change in equity during a period resulting
from transactions and other events, other than those changes resulting from
transactions with owners in their capacity as owners. Total comprehensive income
comprises all components of ‘profit or loss’ and of ‘other comprehensive income’.
Although this Standard uses the terms ‘other comprehensive income’, ‘profit or loss’
and ‘total comprehensive income’, an entity may use other terms to describe the totals
as long as the meaning is clear. For example, an entity may use the term ‘net income’
to describe profit or loss.
 Financial Statements
Financial statements are a structured representation of the financial position and financial
performance of an entity. The objective of financial statements is to provide information
about the financial position, financial performance and cash flows of an entity that is useful to
a wide range of users in making economic decisions. Financial statements also show the
results of the management’s stewardship of the resources entrusted to it. To meet this
objective, financial statements provide information about an entity’s:
(a) assets;
(b) liabilities;
(c) equity;
(d) income and expenses, including gains and losses;
(e) contributions by and distributions to owners in their capacity as owners; and
(f) cash flows.
Information to be presented either in the statement of financial position or in the notes. This
information, along with other information in the notes, assists users of financial statements in
predicting the entity’s future cash flows and, in particular, their timing and certainty.
 Components of a Complete Set of Financial Statements
(a) A statement of financial position as at the end of the period;
(b) A statement of comprehensive income for the period;
(c) A statement of changes in equity for the period;
(d) A statement of cash flows for the period;
Page 14 of 24
(e) Notes, comprising a summary of significant accounting policies and other explanatory
information; and
(f) A statement of financial position as at the beginning of the earliest comparative period
when an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements, or when it reclassifies items in its
financial statements.
An entity may use titles for the statements other than those used in this Standard. An entity
shall present with equal prominence all of the financial statements in a complete set of
 General Features of FS
• Fair presentation and compliance with IFRSs: Financial statements shall present
fairly the financial position, financial performance and cash flows of an entity. Fair
presentation requires the faithful representation of the effects of transactions, other
events and conditions in accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the Framework. The application of
IFRSs, with additional disclosure when necessary, is presumed to result in financial
statements that achieve a fair presentation.
• Explicit Compliance: An entity whose financial statements comply with IFRSs shall
make an explicit and unreserved statement of such compliance in the notes. An entity
shall not describe financial statements as complying with IFRSs unless they comply
with all the requirements of IFRSs. An entity cannot rectify inappropriate accounting
policies either by disclosure of the accounting policies used or by notes or explanatory
material. In the extremely rare circumstances in which management concludes that
compliance with a requirement in an IFRS would be so misleading that it would
conflict with the objective of financial statements set out in the Framework, the entity
shall depart from that requirement in the manner set out in this standard if the relevant
regulatory framework requires, or otherwise does not prohibit, such a departure.
When an entity departs from a requirement of an IFRS it shall disclose that
management has concluded that the financial statements present fairly the entity’s
financial position, financial performance and cash flows and it has complied with
applicable IFRSs, except that it has departed from a particular requirement to achieve
a fair presentation. The title of the IFRS from which the entity has departed, the
nature of the departure, including the treatment that the IFRS would require, the
reason why that treatment would be so misleading in the circumstances that it would
conflict with the objective of financial statements set out in the Framework, and the
treatment adopted.
• Going concern: When preparing financial statements, management shall make an

assessment of an entity’s ability to continue as a going concern. An entity shall
prepare financial statements on a going concern basis unless management either
intends to liquidate the entity or to cease trading, or has no realistic alternative but to
do so. When management is aware, in making its assessment, of material uncertainties
related to events or conditions that may cast significant doubt upon the entity’s ability
to continue as a going concern, the entity shall disclose those uncertainties. When an
entity does not prepare financial statements on a going concern basis, it shall disclose
Page 15 of 24
that fact, together with the basis on which it prepared the financial statements and the
reason why the entity is not regarded as a going concern.
• Accrual basis of accounting: An entity shall prepare its financial statements, except
for cash flow information, using the accrual basis of accounting.
• Materiality and aggregation: An entity shall present separately each material class
of similar items. An entity shall present separately items of a dissimilar nature or
function unless they are immaterial.
• Offsetting: An entity shall not offset assets and liabilities or income and expenses,
unless required or permitted by an IFRS.
• Frequency of reporting: An entity shall present a complete set of financial
statements (including comparative information) at least annually. When an entity
changes the end of its reporting period and presents financial statements for a period
longer or shorter than one year, an entity shall disclose, in addition to the period
covered by the financial statements:
I. the reason for using a longer or shorter period, and
II. the fact that amounts presented in the financial statements are not entirely
comparable.
• Comparative information: Except when IFRSs permit or require otherwise, an
entity shall disclose comparative information in respect of the previous period for all
amounts reported in the current period’s financial statements. An entity shall include
comparative information for narrative and descriptive information when it is relevant
to an understanding of the current period’s financial statements.
• Reclassification: When the entity changes the presentation or classification of items
in its financial statements, the entity shall reclassify comparative amounts unless
reclassification is impracticable. When the entity reclassifies comparative amounts,
the entity shall disclose:
I. the nature of the reclassification;
II. the amount of each item or class of items that is reclassified; and
III. the reason for the reclassification.
When it is impracticable to reclassify comparative amounts, an entity shall disclose
the reason for not reclassifying the amounts, and the nature of the adjustments that
would have been made if the amounts had been reclassified.
• Consistency of presentation: An entity shall retain the presentation and classification
of items in the financial statements from one period to the next unless:
I. it is apparent, following a significant change in the nature of the entity’s
operations or a review of its financial statements, that another presentation or
classification would be more appropriate having regard to the criteria for the
selection and application of accounting policies in IAS 8; or
II. an IFRS requires a change in presentation.
• Structure and Content: This Standard requires particular disclosures in the
statement of financial position or of comprehensive income, in the separate statement
of comprehensive income (if presented), or in the statement of changes in equity and
requires disclosure of other line items either in those statements or in the notes. IAS 7
Page 16 of 24
Statement of Cash Flows sets out requirements for the presentation of cash flow
information. This Standard sometimes uses the term ‘disclosure’ in a broad sense,
encompassing items presented in the financial statements. Disclosures are also
required by other IFRSs. Unless specified to the contrary elsewhere in this Standard
or in another IFRS, such disclosures may be made in the financial statements.
• Identification of the FSs: An entity shall clearly identify the financial statements and
distinguish them from other information in the same published document. An entity
shall clearly identify each financial statement and the notes. In addition, an entity
shall display the following information prominently, and repeat it when necessary for
the information presented to be understandable:
I. the name of the reporting entity or other means of identification, and any change in
that information from the end of the preceding reporting period;
II. whether the financial statements are of an individual entity or a group of entities;
III. the date of the end of the reporting period or the period covered by the set of
financial statements or notes;
IV. the presentation currency; and
V. the level of rounding used in presenting amounts in the financial statements.
• Statement of Financial Position: As a minimum, the statement of financial position
shall include line items that include property, plant and equipment; investment
property; intangible assets; financial assets; inventories; trade and other receivables;
cash and cash equivalents; trade and other payables; provisions; financial liabilities;
liabilities and assets for current tax; deferred tax liabilities and deferred tax assets;
non-controlling interest, presented within equity; and issued capital and reserves
attributable to owners of the parent. An entity shall present additional line items,
headings and subtotals in the statement of financial position when such presentation is
relevant to an understanding of the entity’s financial position. When an entity presents
current and non-current assets, and current and non-current liabilities, as separate
classifications in its statement of financial position, it shall not classify deferred tax
assets (liabilities) as current assets (liabilities).
• Information to be presented either in the statement of financial position or in the
notes: An entity shall disclose, either in the statement of financial position or in the
notes, further sub-classifications of the line items presented, classified in a manner
appropriate to the entity’s operations.
• Information regarding Share Capital: An entity shall disclose either in the
statement of financial position or the statement of changes in equity, or in the notes
for each class of share capital. A description of the nature and purpose of each reserve
within equity should be disclosed.
I. the number of shares authorized;
II. the number of shares issued and fully paid, and issued but not fully paid;
III. par value per share, or that the shares have no par value;
IV. a reconciliation of the number of shares outstanding at the beginning and at the
V. end of the period;
VI. the rights, preferences and restrictions attaching to that class including restrictions
on the distribution of dividends and the repayment of capital;
VII. shares in the entity held by the entity or by its subsidiaries or associates; and
Page 17 of 24
VIII. shares reserved for issue under options and contracts for the sale of shares,
including terms and amounts; and
An entity without share capital, such as a partnership or trust, shall disclose
information equivalent showing changes during the period in each category of equity
interest, and the rights, preferences and restrictions attaching to each category of
equity interest.
• Statement of Comprehensive Income: An entity shall present all items of income
and expense recognized in a period in a single statement of comprehensive income, or
in two statements: a statement displaying components of profit or loss (separate
statement of comprehensive income) and a second statement beginning with profit or
loss and displaying components of other comprehensive income (statement of
comprehensive income). Information to be presented in the statement of
comprehensive income or in the notes. When items of income or expense are material,
an entity shall disclose their nature and amount separately.
• Profit or loss for the period: An entity shall recognize all items of income and
expense in a period in profit or loss unless an IFRS requires or permits otherwise. An
entity shall present an analysis of expenses recognized in profit or loss using a
classification based on either their nature or their function within the entity,
whichever provides information that is reliable and more relevant. An entity
classifying expenses by function shall disclose additional information on the nature of
expenses, including depreciation and amortization expense and employee benefits
expense.
• Other comprehensive income for the period: An entity shall disclose the amount of
income tax relating to each component of other comprehensive income, including
reclassification adjustments, either in the statement of comprehensive income or in the
notes. An entity may present components of other comprehensive income either net of
related tax effects, or before related tax effects with one amount shown for the
aggregate amount of income tax relating to those components.
• Statement of Changes in Equity: An entity shall present a statement of changes in
equity. The statement of changes in equity includes the information:
I. total comprehensive income for the period, showing separately the total
amounts attributable to owners of the parent and to non-controlling interest;
II. for each component of equity, the effects of retrospective application or
retrospective restatement recognized in accordance with IAS 8; and
III. for each component of equity, a reconciliation between the carrying amount at
the beginning and the end of the period, separately disclosing changes
resulting from:
 profit or loss;
 other comprehensive income; and
 transactions with owners in their capacity as owners, showing
separately contributions by and distributions to owners and changes in
ownership interests in subsidiaries that do not result in a loss of
control.
IV. An entity shall present, either in the statement of changes in equity or in the
notes, the amounts of dividends recognized as distributions to owners during
the period, and the related amount of dividends per share.
Page 18 of 24
• Statement of Cash Flows: Cash flow information provides users of financial
statements with a basis to assess the ability of the entity to generate cash and cash
equivalents and the needs of the entity to utilize those cash flows. IAS 7 sets out
requirements for the presentation and disclosure of cash flow information.
• Notes to the FS: An entity shall, as far as practicable, present notes in a systematic
manner. An entity shall cross reference each item in the statements of financial
position and of comprehensive income, in the separate statement of comprehensive
income (if presented), and in the statements of changes in equity and of cash flows to
any related information in the notes.
I. information about the basis of preparation of the financial statements and the
specific accounting policies used;
II. information required by IFRSs that is not presented elsewhere in the financial
statements; and
III. information that is not presented elsewhere in the financial statements, but is
relevant to an understanding of any of them.
An entity normally presents notes to assist users to understand the financial statements
and to compare them with financial statements of other entities:
IV. statement of compliance with IFRSs;
V. summary of significant accounting policies applied;
VI. supporting information for items presented in the statements of financial
position and of comprehensive income, in the separate statement of
comprehensive income (if presented), and in the statements of changes in
equity and of cash flows, in the order in which each statement and each line
item is presented; and
VII. other disclosures, including contingent liabilities and unrecognized contractual
commitments, and non-financial disclosures, eg the entity’s financial risk
management objectives and policies.
• Sources of Estimation Uncertainty: An entity shall disclose information about the
assumptions it makes about the future, and other major sources of estimation
uncertainty at the end of the reporting period, that have a significant risk of resulting
in a material adjustment to the carrying amounts of assets and liabilities within the
next financial year. In respect of those assets and liabilities, the notes shall include
details of their nature, and their carrying amount as at the end of the reporting period.
• Other Disclosures: An entity shall disclose in the notes the amount of dividends
proposed or declared before the financial statements were authorized for issue but not
recognized as a distribution to owners during the period, and the related amount per
share; and the amount of any cumulative preference dividends not recognized. An
entity shall disclose the following, if not disclosed elsewhere in information published
with the financial statements
I. the domicile and legal form of the entity, its country of incorporation and the
address of its registered office (or principal place of business, if different from
the registered office);
II. a description of the nature of the entity’s operations and its principal activities;
the name of the parent and the ultimate parent of the group; and
III. if it is a limited life entity, information regarding the length of its life.
Page 19 of 24
Page 20 of 24
 IFRS 1: First-time Adoption of IFRSs
The objective of this IFRS is to ensure that an entity’s first IFRS financial statements, and its
interim financial reports for part of the period covered by those financial statements, contain
high quality information that:
(a) is transparent for users and comparable over all periods presented;
(b) provides a suitable starting point for accounting in accordance with
International Financial Reporting Standards (IFRSs); and
(c) can be generated at a cost that does not exceed the benefits.
An entity shall prepare and present an opening IFRS statement of financial position at the
date of transition to IFRSs. This is the starting point for its accounting in accordance with
IFRSs. An entity shall use the same accounting policies in its opening IFRS statement of
financial position and throughout all periods presented in its first IFRS financial statements.
Those accounting policies shall comply with each IFRS effective at the end of its first IFRS
reporting period. In particular, the IFRS requires an entity to do the following in the opening
IFRS statement of financial position that it prepares as a starting point for its accounting
under IFRSs:
(a) recognize all assets and liabilities whose recognition is required by IFRSs;
(b) not recognize items as assets or liabilities if IFRSs do not permit such recognition;
(c) reclassify items that it recognized in accordance with previous GAAP as one type of
asset, liability or component of equity, but are a different type of asset, liability or
component of equity in accordance with IFRSs; and
(d) apply IFRSs in measuring all recognized assets and liabilities.
The IFRS grants limited exemptions from these requirements in specified areas where the
cost of complying with them would be likely to exceed the benefits to users of financial
statements. The IFRS also prohibits retrospective application of IFRSs in some areas,
particularly where retrospective application would require judgments by management about
past conditions after the outcome of a particular transaction is already known. The IFRS
requires disclosures that explain how the transition from previous GAAP to IFRSs affected
the entity’s reported financial position, financial performance and cash flows.
• Comparative Information: An entity’s first IFRS financial statements shall include
at least three statements of financial position, two statements of profit or loss and
other comprehensive income, two separate statements of profit or loss (if presented),
two statements of cash flows and two statements of changes in equity and related
notes, including comparative information for all statements presented.
• Explanation of Transition to IFRSs: An entity shall explain how the transition from
previous GAAP to IFRSs affected its reported financial position, financial
performance and cash flows.
• Reconciliations: To comply with this IFRS, an entity’s first IFRS financial
statements shall include:
(a) reconciliations of its equity reported in accordance with previous GAAP to its
equity in accordance with IFRSs for both of the following dates:
o the date of transition to IFRSs; and
Page 21 of 24
o the end of the latest period presented in the entity’s most recent annual
financial statements in accordance with previous GAAP.
(b) a reconciliation to its total comprehensive income in accordance with IFRSs for
the latest period in the entity’s most recent annual financial statements. The
starting point for that reconciliation shall be total comprehensive income in
accordance with previous GAAP for the same period or, if an entity did not
report such a total, profit or loss under previous GAAP.
(c) if the entity recognized or reversed any impairment losses for the first-time in
preparing its opening IFRS statement of financial position, the disclosures that
IAS 36 Impairment of Assets would have required if the entity had recognized
those impairment losses or reversals in the period beginning with the date of
transition to IFRSs.
• Definition of Terms used in IFRS
Date of transition to IFRSs: The beginning of the earliest period for which an entity
presents full comparative information under IFRSs in its first IFRS financial
statements.
Deemed Cost: An amount used as a surrogate for cost or depreciated cost at a given date.
Subsequent depreciation or amortization assumes that the entity had initially
recognized the asset or liability at the given date and that its cost was equal to the
deemed cost.
Fair Value: Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (See IFRS 13.)
First IFRS Financial Statements: The first annual financial statements in which an entity
adopts International Financial Reporting Standards (IFRSs), by an explicit and
unreserved statement of compliance with IFRSs.
First IFRS Reporting Period: The latest reporting period covered by an entity’s first IFRS
First-time Adopter: An entity that presents its first IFRS financial statements.
International Financial Reporting Standards (IFRSs): Standards and Interpretations
issued by the International Accounting Standards Board (IASB). They comprise:
(a) International Financial Reporting Standards;
(b) International Accounting Standards;
(c) IFRIC Interpretations; and
(d) SIC Interpretations.
Opening IFRS Statement of Financial Position: An entity’s statement of financial position
at the date of transition to IFRSs.
Previous GAAP: The basis of accounting that a first-time adopter used immediately before
adopting IFRSs.
Page 22 of 24
 IAS 7: Statement of Cash Flows
The objective of this Standard is to require the provision of information about the historical
changes in cash and cash equivalents of an entity by means of a statement of cash flows
which classifies cash flows during the period from operating, investing and financing
activities. Cash flows are inflows and outflows of cash and cash equivalents. Cash comprises
cash on hand and demand deposits. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash and which are subject to
an insignificant risk of changes in value.
Information about the cash flows of an entity is useful in providing users of financial
statements with a basis to assess the ability of the entity to generate cash and cash equivalents
and the needs of the entity to utilize those cash flows. The economic decisions that are taken
by users require an evaluation of the ability of an entity to generate cash and cash equivalents
and the timing and certainty of their generation. The statement of cash flows shall report cash
flows during the period classified by operating, investing and financing activities.
A. Operating activities
Operating activities are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities. Cash flows from operating activities
are primarily derived from the principal revenue-producing activities of the entity. Therefore,
they generally result from the transactions and other events that enter into the determination
of profit or loss. The amount of cash flows arising from operating activities is a key indicator
of the extent to which the operations of the entity have generated sufficient cash flows to
repay loans, maintain the operating capability of the entity, pay dividends and make new
investments without recourse to external sources of financing.
An entity shall report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed; or
(b) the indirect method, whereby profit or loss is adjusted for the effects of transactions of
a non-cash nature, any deferrals or accruals of past or future operating cash receipts or
payments, and items of income or expense associated with investing or financing cash
flows.
Examples of cash flows from operating activities are:

(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance entity for premiums and claims,
annuities and other policy benefits;
(f) cash payments or refunds of income taxes unless they can be specifically identified
with financing and investing activities; and
(g) cash receipts and payments from contracts held for dealing or trading purposes.
Page 23 of 24
B. Investing activities
Investing activities are the acquisition and disposal of long-term assets and other investments
not included in cash equivalents. The separate disclosure of cash flows arising from investing
activities is important because the cash flows represent the extent to which expenditures have
been made for resources intended to generate future income and cash flows. The aggregate
cash flows arising from obtaining and losing control of subsidiaries or other businesses shall
be presented separately and classified as investing activities.
Examples of cash flows arising from investing activities are:

(a) cash payments to acquire property, plant and equipment, intangibles and other long-
term assets. These payments include those relating to capitalised development costs
and self-constructed property, plant and equipment;
(b) cash receipts from sales of property, plant and equipment, intangibles and other long-
term assets;
(c) cash payments to acquire equity or debt instruments of other entities and interests in
joint ventures (other than payments for those instruments considered to be cash
equivalents or those held for dealing or trading purposes);
(d) cash receipts from sales of equity or debt instruments of other entities and interests in
joint ventures (other than receipts for those instruments considered to be cash
equivalents and those held for dealing or trading purposes);
(e) cash advances and loans made to other parties (other than advances and loans made
by a financial institution);
(f) cash receipts from the repayment of advances and loans made to other parties (other
than advances and loans of a financial institution);
(g) cash payments for futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the
payments are classified as financing activities; and
(h) cash receipts from futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the
receipts are classified as financing activities.
A. Financing activities
Financing activities are activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity. The separate disclosure of cash flows arising
from financing activities is important because it is useful in predicting claims on future cash
flows by providers of capital to the entity. An entity shall report separately major classes of
gross cash receipts and gross cash payments arising from investing and financing activities.
Examples of cash flows arising from financing activities are:

(a) cash proceeds from issuing shares or other equity instruments;
(b) cash payments to owners to acquire or redeem the entity’s shares;
(c) cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short
or long-term borrowings;
(d) cash repayments of amounts borrowed; and
(e) cash payments by a lessee for the reduction of the outstanding liability relating to a
finance lease.
Page 24 of 24
Non-cash transactions
Investing and financing transactions that do not require the use of cash or cash equivalents
shall be excluded from a statement of cash flows. Such transactions shall be disclosed
elsewhere in the financial statements in a way that provides all the relevant information about
these investing and financing activities.
Foreign currency cash flows
Cash flows arising from transactions in a foreign currency shall be recorded in an entity’s
functional currency by applying to the foreign currency amount the exchange rate between
the functional currency and the foreign currency at the date of the cash flow. The cash flows
of a foreign subsidiary shall be translated at the exchange rates between the functional
currency and the foreign currency at the dates of the cash flows. Unrealized gains and losses
arising from changes in foreign currency exchange rates are not cash flows. However, the
effect of exchange rate changes on cash and cash equivalents held or due in a foreign
currency is reported in the statement of cash flows in order to reconcile cash and cash
equivalents at the beginning and the end of the period.
Cash and cash equivalents
An entity shall disclose the components of cash and cash equivalents and shall present a
reconciliation of the amounts in its statement of cash flows with the equivalent items reported
in the statement of financial position. An entity shall disclose, together with a commentary by
management, the amount of significant cash and cash equivalent balances held by the entity
that are not available for use by the group.
Interest and dividends
a) Cash flows from interest and dividends received and paid shall each be disclosed
separately. Each shall be classified in a consistent manner from period to period as
either operating, investing or financing activities.
b) The total amount of interest paid during a period is disclosed in the cash flows
statement whether it has been recognized as an expense in profit or loss or capitalized
as Borrowing Costs.
c) Interest paid and interest and dividends received are usually classified as operating
cash flows for a financial institution. However, there is no consensus on the
classification of these cash flows for other entities. Interest paid and interest and
dividends received may be classified as operating cash flows because they enter into
the determination of profit or loss. Alternatively, interest paid and interest and
dividends received may be classified as financing cash flows and investing cash flows
respectively, because they are costs of obtaining financial resources or returns on
investments.
d) Dividends paid may be classified as a financing cash flow because they are a cost of
obtaining financial resources. Alternatively, dividends paid may be classified as a
component of cash flows from operating activities in order to assist users to determine
the ability of an entity to pay dividends out of operating cash flows.
Page 25 of 24
 Reference
Bangladesh Bank (BB). (2003), Circular, BRPD Circular No. 14, dated June 25, 2003.
Bangladesh Bank (BB). (2009), Circular, BRPD Circular No. 15, dated November 09, 2009
Bangladesh Bank (BB). (2009b), Circular, DFIM Circular No. 11, dated December 23, 2009.
Bangladesh Securities and Exchange Commission (BSEC). (2012), Notification, No.
SEC/CMRRCD/2006-158/134/Admin/44, dated August 07, 2012.
Bangladesh Securities and Exchange Commission (BSEC). (2013), Annual Report 2012-2013, BSEC,
Dhaka.
Dhaka Stock Exchange (DSE) (1996), Listing Regulations of the Dhaka Stock Exchange Limited,
Notification No. SEC/Member-II, dated April 8, 1996.
Financial Accounting Foundation (FAF). (2014), “About the Codification”, FASB Accounting
Standards Codification, v. 4.9, available at www.fasb.org.
www.aaoifi.com, website of the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI), cited on June 30, 2014.
www.bangladesh-bank.org, website of Bangladesh Bank (BB), cited on June 30, 2014.
www.bfid.gov.bd, website of the Bank and Financial Institutions Division of Ministry of Finance
(MoF), Government of the People's Republic of Bangladesh, cited on June 30, 2014.
www.bis.org, website of the Bank for International Settlements (BIS), accessed on June 30, 2014.
www.cse.com.bd, website of the Chittagong Stock Exchange (CSE), accessed on June 30, 2014.
www.dsebd.org, website of the Dhaka Stock Exchange (DSE), accessed on June 30, 2014.
www.esafa.org, website of the South Asian Federation of Accountants (SAFA), accessed on June 30,
2014.
www.fasb.org, website of the Financial Accounting Standards Board (FASB), accessed on June 30,
2014.
www.icab.org.bd, of the Institute of Chartered Accountants of Bangladesh (ICAB, accessed on June
30, 2014.
www.icmab.org.bd, website of the Institute of Cost and Management Accountants of Bangladesh
(ICMAB), accessed on June 30, 2014.
www.idra.org.bd, website of Insurance Development & Regulatory Authority Bangladesh (IDRA),
accessed on June 30, 2014.
www.ifac.org, website of the International Federation of Accountants (IFAC), accessed on June 30,
2014.
www.ifrs.org, website of the IFRS Foundation, accessed on July 22, 2014.
www.ifsb.org, website of the Islamic Financial Services Board (IFSB), accessed on June 30, 2014.
www.mincom.gov.bd, website of the Ministry of Commerce (MoC), Government of the People’s
Republic of Bangladesh, accessed on June 30, 2014.
www.mra.gov.bd, website of the Microcredit Regulatory Authority (MRA), accessed on June 30,
2014.
www.roc.gov.bd, website of the Registrar of Joint Stock Companies and Firms (RJSC), accessed on
June 30, 2014.
www.sec.gov.bd, website of the Bangladesh Securities and Exchange Commission (BSEC), accessed
on June 30, 2014.
website of IFSB, cited on February 19, 2013 at 4.35 pm
Page 26 of 24
SHEET 3
Preparation of Worksheet
Phone: 01716373565
 Worksheet
A worksheet is a multiple column form that may be used in the adjustment process and in preparing
financial statements. As its name suggests, the worksheet is a working tool. A work sheet is not a
permanent accounting record; it is neither a journal nor a part of the general ledger. The worksheet is
merely a device used to make it easier to prepare adjusting entries and the financial statements. The
use of worksheet is optional.
 Steps in Preparing Worksheet
1. Prepare a Trial Balance on the Work Sheet
2. Enter the adjustments in the Adjustments columns
3. Enter adjusted balances in the Adjusted Trial Balance columns
4. Extend adjusted trial balance amounts to appropriate Financial Statement columns
5. Total the statement columns, compute the Net Income or Net Loss
Work Sheet
Accounts Adjusted Income

Trial Balance Adjustments Balance Sheet
Titles Trial Balance Statement
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
 
 
 
1. Prepare 2. Enter the
3. Enter adjusted 4. Extend adjusted
Trial adjustments
balances in the trial balance amounts
Balance in the
Adjusted Trial to appropriate
on the Work Adjustments
Balance columns Financial Statement
Sheet columns
columns
Page 1 of 11
5. Total the statement
columns, compute the
Net Income or Net Loss
Page 2 of 11
 Problem 1
The following is the trial balance of Pioneer Advertising Agency on October 31, 2011
Pioneer Advertising Agency
Trial Balance
October 31, 2011
Accounts Accounts Title Debit Credit

No. Taka Taka
1 Cash 15,200
2 Advertising supplies 2,500
3 Prepaid Insurance 600
4 Office Equipment 5,000
5 Notes Payable 5,000
7 Unearned Revenue 1,200
8 Capital 10,000
9 Drawing 500
11 Salaries Expense 4,000
12 Rent Expense 900
Total 28,700 28,700
An analysis of the accounts shows the following adjustment
1. Advertising supplies on hand at October 31 total Tk.1000
2. Expired Insurance for the month is Tk.50
3. Depreciation for the month is Tk.40
4. Unearned revenue in October total Tk.400
5. Advertising services provided but not billed at October 31, Tk.200
6. Interest accrued at October 31 is Tk.50
7. Accrued Salaries at October 31 are Tk.1200
Requirement
1. P
repare a 10 column Work Sheet for the month of October, 2011
2. P
repare an Income Statement for the month of October
Page 3 of 11
3. O
wners Equity Statement for the month of October
4. P
repare a Balance Sheet as on October 31, 2011
5. M
ake necessary adjusting entries and closing entries
Page 4 of 11
Req. 1 Pioneer Advertising Agency
Work Sheet
For the month ended October 31, 2011
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 1500 15200 15200
Advertising Supplies 2500 (a) 1500 1000 1000
Prepaid Insurance 600 (b) 50 550 550
Office Equipment 5000 5000 5000
Notes Payable 5000 5000 5000
Accounts Payable 2500 2500 2500
Unearned Revenue 1200 (d) 400 800 800
Capital 10000 10000 10000
Drawing 500 500 500
Service Revenue 10000 (d) 400 10600 10600
(e) 200
Salaries Expenses 4000 (g) 1200 5200 5200
Rent Expenses 900 900 900
28700 28700
Advertising Supplies Exp. (a) 1500 1500 1500

Insurance Expenses (b) 50 50 50
Accum. Dep. Equipment (c) 40 40 40
Depreciation Expenses (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expenses (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries Payable (g) 1200 1200 1200
Totals 3440 3440 30190 30190 7740 10600 22450 19590
Net Income 2860 2860
Totals 10600 10600 22450 22450
Page 5 of 11
Page 6 of 11
Req. 2
Income Statement
Revenues
Service Revenue Tk. 10600
Expenses:
Salaries Expenses Tk. 5200
Advertising Supplies Expenses 1500
Rent Expenses 900
Insurance Expenses 50
Interest Expenses 50
Depreciation Expenses 40
Total Expenses 7740
Net Income Tk. 2860
Req. 3
Capital, October 1, 2004 Tk. 10000
Add: Net Income 2860
12860
Less: Drawings 500
Capital, October 31, 2004 Tk. 12360
Page 7 of 11
Req. 4
Balance Sheet
October 31, 2011
Assets
Cash Tk. 15200
Accounts Receivable 200
Advertising 1000
Prepaid Insurance 550
Office Equipment 5000
Less: Accumulated Depreciation 40
4960
Total Assets Tk.21910
Liabilities and Owner’s Equity
Liabilities
Notes Payable Tk. 5000
Accounts Payable 2500
Interest Payable 50
Unearned Revenue 800
Salaries Payable 1200
9550
Owner’s Equity
Capital 12360
Total Liabilities and Owner’s Equity Tk.21910
Req. 5
Adjusting Entries
Closing Entries
Page 8 of 11
Problem 2
Han Solo started his own consulting firm, Solo Company, on June 1, 2002. The Trial balance at June
30 is as follows.
Solo Company
Trial Balance
June 30, 2002

No. Taka Taka
01 Cash 7750
02 Account Receivable 6000
04 Supplies 2000
05 Office Equipment 15000
06 Accounts Payable 4500
07 Unearned Service Revenue 4000
08 Capital 21750
09 Service Revenue 7900
10 Salaries Expenses 4000
11 Rent Expensed 1000
Total Tk. 38150 Tk. 38150
Other Data:
1. Supplies on hand on June 30 are Tk. 1300.
2. A Utility bill for Tk. 150 has not been recorded and will not be paid until next month
3. The insurance policy is for a year
4. Tk. 2500 of unearned service revenue has been earned at the end of the month
5. Salaries of Tk. 1500 are accrued at June 30
6. The office equipment has a 5year life with no salvage value.
7. Invoice representing Tk. 3000 of service performed during the month have not been recorded
as of June 30
Page 9 of 11
Instructions
1. P
repare a 10 column Work Sheet for the month of June
2. P
repare an Income Statement for the month of June
3. O
wners Equity Statement for the month of June
4. P
repare a Balance Sheet as on June 30, 2002
Page 10 of 11
 Problem 3
Muddy River Resort opened for business on June 1 with eight airconditioned units. Its trial balance
before adjustment on August 31 is as follows
Muddy River Resort
Trial Balance
August 31, 2002

No. Taka Taka
01 Cash 19600
02 Supplies 3300
04 Land 25000
05 Cottage 125000
06 Furniture 26000
08 Unearned Revenue 7400
09 Mortgage Payable 80000
10 P.Jovorek, Capital 100000
11 P.Javorek, Drawing 5000
12 Rent Revenue 80000
13 Repair Expense 3600
14 Salaries Expense 51000
15 Utilities Expense 9400
Total Tk. 273900 Tk. 273900
Other Data
1. Insurance expired at the rate of Tk. 400 per month
2. A count on August 31 shows Tk. 900 of supplies on hand
3. Annual Depreciation is Tk. 4800 on cottages and Tk. 2400 on furniture
4. Unearned rent of Tk. 5100 was earned prior on to August 31
5. Salaries of Tk. 400 were unpaid at August 31
6. Rentals of Tk. 800 were due from tenants at August 31 (Use Accounts Receivable)
7. The mortgage interest rate is 12% per year. The mortgage was taken out on August 1
Page 11 of 11
Requirement
1. Prepare a tencolumn work sheet
2. P
repare an Income Statement for the quarter
3. Owners Equity Statement for the quarter
Page 12 of 11
 Problem 4
Julie Brown started her own consulting firm, Astromech Consulting, on May 1 2002. The trial balance at
May 31 is as follows
Astromech Consulting
Trial Balance
May 31, 2002

No. Taka Taka
101 Cash 6500
102 Accounts Receivable 4000
103 Supplies 1500
205 Office Furniture 12000
307 Unearned Service Revenue 3000
408 Service Revenue 6000
309 Capital 19100
511 Rent Expense 1000
Total Tk. 31600 Tk. 31600
Other Data
1. Tk. 500 of supplies have been used during the month
2. Travel Expense incurred but not paid on May 31, 2001, Tk. 200
3. The insurance policy is for 2 years
4. Tk. 1000 of the balance in the unearned service revenue account remains unearned at the end of
the month
5. Salaries was paid for two months
6. The office furniture has a 5year fife with no salvage value
7. Invoice representing Tk. 2000 of services performed during the month have not been recording as
of May 31
Page 13 of 11
Requirement
1. P
repare a 10 column Work Sheet for the month of May
2. P
repare an Income Statement for the month of May
3. Prepare a Balance Sheet as on May 31, 2002
Page 14 of 11
 Problem 5
The Roach Motel opened for business on May 1, 2002. Its trial balance before adjustment on May 31 is
as follows
Roach Motel
Trial Balance
May 31, 2002

No. Taka Taka
101 Cash 2500
102 Supplies 1900
204 Land 15000
205 Lodge 70000
206 Furniture 16800
308 Unearned Rent 3600
409 Mortgage Payable 35000
410 Capital 60000
501 Rent Revenue 9200
602 Advertising 500
604 Utilities Expense 1000
Total Tk. 113100 Tk. 113100
Other Data
1. Insurance expires at the rate of Tk. 200 per month
2. A count of supplies shows Tk. 900 of unused supplies on May 31
3. Annual depreciation is Tk. 3600 on the lodge and Tk. 3000 on furniture
4. The mortgage interest rate is Tk. 12%. (The mortgage was taken out on May 15)
5. Unearned rent of Tk. 1500 has been earned
6. Salaries of Tk. 300 are accrued and unpaid at May 31
Page 15 of 11
Requirement
Prepare a tencolumn work sheet
Page 16 of 11
 Problem 6
The following is the trial balance of Ruposh Ad. Co. on October 31, 2004
Ruposh Ad. Co.
Trial Balance
October 31, 2004
Accounts Title Debit Credit

Taka Taka
Cash in hand 11000
Account Receivable 6020
Office supplies 1050
Prepaid Insurance 2400
Office Equipment 40000
Notes Payable 12000
Capital 27000
Drawing 600
Service Revenue 13620
Salaries Expenses 2100
Travel Expenses 1400
Rent Expense 1100
Miscellaneous Expenses 300
Total Tk. 65970 Tk. 65970
An analysis of the accounts shows the following adjustment
1. Supplies on hand at the end of the month Tk. 550
2. Salaries was paid for 1.5 months
3. Interest accrued on notes payable Tk. 500
4. Prepaid insurance was remain Tk. 1500
5. Service provided on credit Tk. 340, which was not recorded
6. Charge depreciation on equipment @ 15%
Page 17 of 11
Requirement
1. Prepare a tencolumn work sheet
2. Give necessary adjusting entries
3. Make Closing entries to close all temporary accounts
Page 18 of 11
 Problem 7
Mr. M Rahman started his own repairing shop, OVERNIGHT AUTO SERVICE, on July 1 2005. The trial
balance at July 31 is as follows:
OVERNIGHT AUTO SERVICE
Trial Balance
July 31, 2005
Accounts Title Debit Credit
Taka Taka
Cash 8900
Accounts Receivable 4100
Shop Supplies 1500
Unexpired Insurance 3600
Furniture 13000
Wages Expenses 3500
Utilities Expenses 1500
Drawing 1000
Unearned Revenue 3000
Capital 22100
Service Revenue 7000
Total 37100 37100
Additional Information:
a) A count of supplies shows Tk. 900 of unused supplies on July 31.
b) Travel Expense on account Tk. 200 is not yet recorded.
c) Insurance policy is for 3 years.
d) The furniture has a 5year life with salvage value Tk. 1000
e) Invoices representing Tk. 1500 of service performed during the month have not been
recorded as of July 31.
Instructions:
1. P
repare a 10 column Work Sheet for the month of July
2. P
repare an Income Statement for the month of July
Page 19 of 11
3. O
wners Equity Statement
4. P
repare a Balance Sheet
Page 20 of 11
Sheet 4
ACCOUNTING FOR PLANT ASSETS AND DEPRECIATION
Phone: 01716 – 37 35 65
Email: mahabbat@bibm.org.bd
 Plant assets (Three Characteristics)
1. Have physical substance (a definite size and shape)
2. Used in the operations of a business
3. Not intended for sale to customers
 Plant assets are subdivided into four classes:
1. Land
2. Land Improvements
3. Buildings
4. Equipment
 Cost of Plant Assets
 Plant assets are recorded at cost in accordance with the cost principle.
 Cost consists of all expenditures necessary to acquire the asset and make it ready for its
intended use
 Cost includes purchase price, freight costs, and installation costs.
 Expenditures that are not necessary recorded as expenses, losses, or other assets
 The cost of land includes:
 Cash purchase price
 Closing costs such as title and attorney’s fees
 Real estate brokers’ commissions
 Accrued property taxes and other liens on the land assumed by the purchaser.
 All necessary costs incurred to make land ready for its intended use are debited to the Land
account.
Page 1 of 6
Sometimes purchased land has a building on it that must be removed before construction of a new
building. In this case, all demolition and removal costs, less any proceeds from salvaged materials are
debited to the Land account
Land
Cash price of property 100,000
Net removal cost of warehouse 6,000
Attorney’s fee 1,000
Real estate broker’s commission 8,000
Cost of land 115,000
Page 2 of 6
 Land Improvements
The cost of land improvements includes all expenditures needed to make the improvements ready
for their intended use such as:
 Parking lots
 Fencing
 Lighting
 Cost of Buildings
 The cost includes all necessary expenditures relating to the purchase or construction of a
building
 The costs include the purchase price, closing costs, and broker’s commission
 Costs to make the building ready for its intended use include
o expenditures for remodeling and replacing or
o repairing the roof, floors, wiring, and plumbing
 If a new building is constructed, costs include contract price plus payments for architects’ fees,
building permits, interest payments during construction, and excavation costs
 Cost of Equipment
 Cost of equipment consists of the cash purchase price and certain related costs.
 Costs include sales taxes, freight charges, and insurance paid by the purchaser during transit.
 Cost includes all expenditures required in assembling, installing, and testing the unit.
 Recurring costs such as licenses and insurance are expensed as incurred.
Factory Machinery
Cash price 50,000
Sales taxes 3,000
Insurance during shipping 500
Installation and testing 1,000
Cost of factory machinery 54,500
Factory Machinery 54,500
Cash 54,500
 Cost of Delivery Truck
Page 3 of 6
Motor vehicle licenses and accident insurance on company cars and trucks are expensed as
incurred, since they represent annual recurring events that do not benefit future periods.
Delivery Truck
Cash price 2,200,000
Sales taxes 50,000
Painting and lettering 50,000
Cost of delivery truck 2,300,000
Page 4 of 6
 Depreciation
 Depreciation is the allocation of the cost of a plant asset to expense over its useful (service) life
in a rational and systematic manner.
 Cost allocation provides for the proper matching of expenses with revenues in accordance with
the matching principle.
 Usefulness may decline because of wear and tear or obsolescence.
 Depreciation does not result in an accumulation of cash for the replacement of the asset.
 Land is the only plant asset that is not depreciated.
 Factors in Computing Depreciation
 Cost: All expenditures necessary to acquire the asset and make it ready for intended use
 Useful life: Estimate of the expected life based on need for repair, service life, and vulnerability
to obsolescence
 Salvage value: Estimate of the asset’s value at the end of its useful life
 Depreciation Methods
 Straightline
 Units of activity
 Decliningbalance and
 SumoftheYearDigits Method
Each method is acceptable under GAAP. Management selects the method that is appropriate in
the circumstances. Once a method is chosen, it should be applied consistently. Uses of different
methods are
o Straightline = 82%
o Units of activity = 5%
o Decliningbalance = 4%
o Other = 9%
 StraightLine Method
 Depreciation is the same for each year of the asset’s useful life.
 It is measured solely by the passage of time.
 It is necessary to determine depreciable cost.
 Depreciable cost is the total amount subject to depreciation and is computed as follows:
Cost of asset salvage value
Page 5 of 6
 UnitsofActivity
 Useful life = total units of production or total expected use expressed in hours, miles, units, etc.
 Depreciation Cost per Unit = Depreciable Cost ÷ Total Units of Activity.
 Annual Depreciation Expense = Depreciation Cost per Unit x Units of Activity During the Year.
 It is often difficult to make a reasonable estimate of total activity.
 When productivity varies from one period to another, this method results in the best matching
of expenses with revenues.
Page 6 of 6
 DecliningBalance
 Decreasing annual depreciation expense over the asset’s useful life.
 Periodic depreciation is based on a declining book value (cost accumulated depreciation)
 To compute annual depreciation expense multiply the book value at the beginning of the year
by the decliningbalance depreciation rate
 Depreciation rate remains constant from year to year but book value declines each year.
 Book value for the first year is the cost of the asset.
 Balance in accumulated depreciation at the beginning of the asset’s useful life is zero
 In subsequent years, book value is the difference between cost and accumulated depreciation
at the beginning of the year.
 Formula is
Book Value at Beginning of Year x Declining Balance Rate = Annual Depreciation Expense
 Method compatible with the matching principle because the higher depreciation in early years
is matched with the higher benefits received in these years.
 Unlike the other depreciation methods, salvage value is ignored in determining the amount to
which the declining balance rate is applied.
 A common application of the decliningbalance method is the doubledecliningbalance
method, in which the declining balance rate is double the straightline rate.
 Office Equipment Data
Compare the three depreciation methods, using the following data for office equipment purchased
by Badal on January 1, 2005.
Cost Tk. 13,000
Expected salvage value Tk. 1,000
Estimated useful life in years 5
Estimated useful life in units 100,000
 SumoftheYearDigit
 The sumoftheyeardigit method provides decreasing charges by applying a series of
fractions, each of a smaller value, to depreciable assets.
n(n + 1)
Denominator for the fraction =
2
Page 7 of 6
n = useful life of the assets
 Numerator for the fraction = Weight assigned to the specific year (remaining period the asset
will be used)
 Revising Periodic Depreciation
 Changes should be made if excessive wear and tear or obsolescence indicates that annual
depreciation estimates are inadequate.
 When a change is made no correction of previously recorded depreciation expense. Only the
depreciation expenses for current and future years are revised
 To determine the new annual depreciation expense the depreciable cost at the time of the
revision is divided by the remaining useful life.
Page 8 of 6
Badal decides on January 1, 2008, to extend the useful life of the equipment one year because of
its excellent condition. The company has used the straightline method to depreciate the asset to
date, and book value is (Tk. 13,000 – Tk. 7,200 = Tk. 5,800). The new annual depreciation will be;
Book Value (1/1/2008) Tk. 5,800
Less: Salvage Value Tk. 1,000
Depreciable Cost Tk. 4,800
Remaining useful life (20082010) 3 Years
Revised Annual Depreciation (Tk. 4,800/3) Tk. 1,600
 Example
At the beginning of 2003, Belal & Co. acquired equipment costing Tk. 60,000. It was estimated that
this equipment would have a useful life of 6 years and a residual value of Tk. 6,000 at that time.
During 2005, the company’s engineers reconsidered their expectations, and estimated that the
equipment’s useful life would probably be 7 years instead of 6 years. The residual value was not
changed at that time. However, during 2008 the estimated residual value was reduced to Tk. 3,000.
How much depreciation expense should be recorded for this equipment each of the year under
straightline method?
 Expenditures During Useful Life

 Ordinary repairs:
The expenditures to maintain the operating efficiency and productive life of the unit. Such
repairs are debited to Repairs Expense as incurred and are often referred to as revenue
expenditures.
 Capital expenditures:
Additions and improvements increase the operating efficiency, productive capacity, or useful
life of a plant asset
o Usually material in amount and occur infrequently.
o Increase the company’s investment in productive facilities.
 Capital expenditure is debited the plant asset affected.
Exercise 1
Cost Price 940,000
Salvage Value 45,000
Useful Life 5 Years
Useful Life 53,000 Units
Activity Level (units) 2002 2003 2004 2005 2006
Page 9 of 6
13,000 12,500 12,000 9,500 6,000
Solution
Depreciation Under Straight-line Method:
Year Computation Depreciation Accu. Dep Book Value
2002 (Cost - SV) ÷ Useful Life 179,000 179,000 761,000
Total Depreciation 895,000
Depreciation under Double-Declining-Balance Method:

Depreciation Rate = (100% ÷ Useful Life) x 2
2002 940,000 40% 376,000 376000 564,000
2003 564,000 40% 225,600 601600 338,400
2004 338,400 40% 135,360 736960 203,040
2005 203,040 40% 81,216 818176 121,824
2006 121,824 76,824 895000 45,000
Depreciation under 150%-Declining-Balance Method:

Depreciation Rate = (100% ÷ Useful Life) x 150%
2002 940,000 30% 282,000 282000 658,000
2003 658,000 30% 197,400 479400 460,600
2004 460,600 30% 138,180 617580 322,420
2005 322,420 138,710 756290 183,710
2006 183,710 138,710 895000 45,000
Total Depreciation 895000
Depreciation Under Units-of-activity Method:

Depreciation per unit = (Cost - SV) ÷ Total Units = 16.89
2002 13,000 16.88679245 219,528 219,528 720,472
2003 12,500 16.88679245 211,085 430,613 509,387
2004 12,000 16.88679245 202,642 633,255 306,745
2005 9,500 16.88679245 160,425 793,679 146,321
2006 6,000 16.88679245 101,321 895,000 45,000
Depreciation Under Sum-of-the-Year-Digit Method:

Depreciable Value = (Cost Price - Salvage Value ) = 895000
Denominator = (n(n + 1)/2) = 15
2002 1/3 895000 298,333 298,333 641,667
2003 4/15 895000 238,667 537,000 403,000
2004 1/5 895000 179,000 716,000 224,000
2005 2/15 895000 119,333 835,333 104,667
2006 1/15 895000 59,667 895,000 45,000
Summary of Depreciation under different methods:
Page 10 of 6
2002 2003 2004 2005 2006
Straight-line 179,000 179,000 179,000 179,000 179,000
Double-declining 376,000 225,600 135,360 81,216 76,824
150%-declining 282,000 197,400 138,180 138,710 138,710
Unit-of-activity 219,528 211,085 202,642 160,425 101,321
Sum-of-the-year-degit 298,333 238,667 179,000 119,333 59,667
Page 11 of 6
Financial and Management
Accounting (MBA 5103)
Chapter 05
ACCOUNTING FOR CURRENT ASSETS:
INVENTORY

Faculty Member
BIBM
February 26, 2012 1
INVENTORY BASICS
• Balance sheet of merchandising and

manufacturing companies
– inventory is significant current asset
• Income statement
– inventory is vital in determining results
• Gross profit
– (net sales - cost of goods sold)
• watched by management, owners, and others
February 26, 2012 2
Page 1
MERCHANDISE INVENTORY
Merchandise inventory
1. Owned by the company
2. In a form ready for sale
February 26, 2012 3
MANUFACTURING INVENTORY
• Manufacturing inventories
– may not yet be ready for sale
• Classified into three categories:

1. Finished goods
ready for sale
2. Work in process
various stages of production (not completed)
3. Raw materials
components on hand waiting to be used
February 26, 2012 4
Page 2
DETERMINING INVENTORY
QUANTITIES
To prepare financial statements determine

1. The number of units in inventory by taking a
physical inventory of goods on hand
2. The ownership of goods
February 26, 2012 5
DETERMINING COST OF
INVENTORY
1. Apply unit costs to the total units on

hand for each item
2. Total the cost of each item of inventory to
determine total cost of goods on hand
February 26, 2012 6
Page 3
OWNERSHIP OF GOODS IN
TRANSIT
• Goods in transit:
included in the inventory of the party that has legal
title to the goods
• FOB (Free on Board) shipping point:
ownership of the goods passes to the buyer when the
public carrier accepts the goods from the seller
• FOB destination point:
legal title to the goods remains with the seller until
the goods reach the buyer
February 26, 2012 7
TERMS OF SALE
February 26, 2012 8
Page 4
CONSIGNED GOODS
Consignment:
the holder of the goods (consignee) does not
own the goods
– ownership remains with the consignor of the
goods until the goods are sold
– consigned goods should be included in the
consignor’s inventory, not the consignee’s
inventory
Owned by a consignor; do not

count in consignee inventory
February 26, 2012 9
Consignee Company
INVENTORY ACCOUNTING
SYSTEMS
1. Perpetual
• detailed records
• cost of each item maintained
• cost of each item sold is determined when
sale occurs
2. Periodic
• cost of goods sold is determined at the end of
accounting period
February 26, 2012 10
Page 5
INVENTORY VALUATION
METHODS
1. Specific Identification Method

2. Assumed Cost Flow Methods
1. First-in, First-out (FIFO)
2. Last-in, First-out (LIFO)
3. Average Cost
SPECIFIC IDENTIFICATION
METHOD
• If each unit is unique

• Best suited to Inventories of
• high-priced, low-volume items
Page 6
SPECIFIC IDENTIFICATION
METHOD
FIFO
• The FIFO method
– earliest goods purchased are the first to be sold.
– often parallels the actual physical flow of merchandise.
– the costs of the earliest goods purchased are the first to
be recognized as cost of goods sold.
Page 7
FIFO
LIFO
• The LIFO method assumes that the latest goods
purchased are the first to be sold.
• Under LIFO, the costs of the latest goods

purchased are the first goods to be sold.
Page 8
LIFO
AVERAGE COST
• The average cost method

– assumes goods available for sale are homogeneous.
– the cost of goods available for sale is allocated on the
basis of the weighted average unit cost incurred.
– weighted average unit cost is applied to the units on
hand to determine cost of the ending inventory.
Page 9
AVERAGE COST
USE OF COST FLOW METHODS IN

MAJOR U.S. COMPANIES
Companies adopt different inventory cost flow methods for various

reasons. Usually one of the following factors is involved:
1) income statement effects

2) balance sheet effects or
3) tax effects. 21%
Average
5% Other
Cost 44%
FIFO
30%
LIFO
Page 10
USING INVENTORY COST FLOW
METHODS CONSISTENTLY
• Consistency
– Companies needs to use its chosen cost
flow method from one period to another.
– Consistent application makes financial
statements comparable over successive
time periods.
– If a company adopts a different cost flow
method:
• The change and its effects on net income must
be disclosed in the financial statements
INVENTORY ERRORS - INCOME

STATEMENT EFFECTS
• both beginning and ending inventories appear
on the income statement
• ending inventory of one period automatically
becomes the beginning inventory of the next
period
• inventory errors
– affect the determination of cost of
goods sold and net income
Page 11
EFFECTS OF INVENTORY ERRORS ON
CURRENT YEAR’S INCOME STATEMENT
Cost of
Inventory Error Goods Sold Net Income
Understate beginning inventory Understated Overstated
Overstate beginning inventory Overstated Understated
Understate ending inventory Overstated Understated
Overstate ending inventory Understated Overstated
An error in ending inventory of the current period will have a reverse

effect on net income of the next period.
ENDING INVENTORY ERROR -

BALANCE SHEET EFFECTS
Errors in the ending inventory have the

following effects on these components:
Ending Inventory
Error Assets Liabilities Owner’s Equity
Overstated Overstated None Overstated

Understated Understated None Understated
Page 12
INVENTORY DISCLOSURES
• Inventory
– classified as a current asset after receivables in
the balance sheet
• Cost of goods sold
– subtracted from sales in the income statement
• Disclosure either in the balance sheet or in

accompanying notes for:
1 major inventory classifications
2 basis of accounting (cost or lower of cost or market)
3 costing method (FIFO, LIFO, or average cost)
LCM – PERIODIC
• Value of inventory is lower than its cost

– The inventory is written down to its market value
• Known as the lower of cost or market (LCM)
method
• LCM basis
– Market is defined as current replacement cost, not
selling price
Page 13
COMPUTATION OF LOWER OF
COST OR MARKET
Lower of
Cost or
Cost Market Market
Television sets
Consoles 60000 55000 55000
Portables 45000 52000 45000
Total 105000 107000
Video equipment
Recorders 48000 45000 45000
Movies 15000 14000 14000
Total 63000 59000
Total inventory 168000 166000 159000
SHRINKAGE LOSS - PERPETUAL
Shrinkage Losses:
• Theft
• Spoilage
• Breakage
Valuation:
• LIFO
• FIFO or
• Average Cost
Recording Shrinkage Losses:
• COGS A/c Dr. (if small amount) or
• Inventory Shrinkage Losses Dr. (if material amount)
Page 14
EXERCISE
March 1 Beginning Inventory 200 Units @ Tk. 4

March 10 Purchase 500 Units @ Tk. 4.50
March 15 Sale 500 Units ?
March 20 Purchase 400 Units @ Tk. 4.75
March 25 Sale 400 Units ?
March 30 Purchase 300 Units @ Tk. 5
March 31 Ending Inventory ? ?
EXERCISE 2
Date Particulars No. of Rate per unit Amount
Unit (Tk.) (Tk.)
January 1, 2010 Beginning 1000 3.00 3000
Inventory
January 10, 2010 Purchase 1500 4.00 6000
February 20, 2010 Purchase 2000 5.00 10000
February 28, 2010 Sales 3000 6.00 18000
March 15, 2010 Purchase 1000 4.50 4500
June 20, 2010 Purchase 500 3.00 1500
August 20, 2010 Sales 1500 5.50 8250
September 30, 2010 Purchase 2000 3.50 7000
December 10, 2010 Purchase 1200 4.50 5400
December 30, 2010 Sales 4000 5.00 20000
Page 15
THANKING YOU ALL

Faculty Member
BIBM
Page 16
Sheet 6
FINANCIAL STATEMENTS: INCOME STATEMENT AND BALANCE SHEET
Phone: 01716 – 37 35 65
 Accounting
Accounting is an information system that identifies, records, and communicates the economic events of an
organization to interested users.
 Financial Statements
Financial Statements (FS) are the output of accounting system. Accounting communicates the financial
information to the interested users through FS. “General purpose financial statements are those intended to
meet the needs of users who are not in a position to demand reports tailored to meet their particular
information needs” (IAS 1, 2006, p. 691). FSs are a structured representation of the financial position and
financial performance of an entity. The objective of general purpose FSs is to provide information about the
financial position, financial performance and cash flows of an entity that is useful to a wide range of users in
making economic decisions. To meet this objective, FSs provide information about an entity’s:
(a) Assets,
(b) Liabilities
(c) Equity
(d) Income and Expenses, including gains and losses
(e) Other changes in Equity
(f) Liquidity of assets and liabilities (for banks) and
(g) Cash Flows
 Components of Financial Statements (FSs)
After transactions are identified, recorded and summarized, a set of FSs are prepared from the summarized
accounting data. A complete set of FSs comprises:
(a) A Balance Sheet
Page 1 of 13
(b) An Income Statement
(c) A Statement of Changes in Equity showing
(d) A Cash Flow Statement
(e) Liquidity Statements (for banks) and
(f) Notes, comprising a summary of significant accounting policies and other explanatory notes.
Note: The Income Statement, Statement of Change in Equity, and Cash Flows Statement are all for a
period of time, whereas the Balance Sheet is for a point in time.
Page 2 of 13
 Nature of Companies and Concern Laws
Nature of Company Primary Law
1. Nonfinancial companies Companies Act 1994
2. Banking Financial Institutions (BFIs) Bank Companies Act 1991
3. NonBanking Financial Institutions (NBFIs) Financial Institutions Act 1993
4. Insurance Company Insurance Act 2010
5. MicroFinance Institution MRA Rules 2010
Additional laws and regulations for listed companies
1. Securities and Exchange Ordinance 1969
2. Securities and Exchange Rules 1987
3. International Accounting Standards
4. International Financial Reporting Standard
5. Bangladesh Accounting Standard
6. Bangladesh Financial Reporting Standard
7. The Listing Regulations of DSE/CSE
 Nature of Companies and Regulators
Nature of Company Regulatory Authority
Nonfinancial companies The Registrar of Joint Stock Companies and Firms
(RJSC)
Banking Financial Institutions (BFIs) Bangladesh Bank (BB)
NonBanking Financial Institutions (NBFIs) Bangladesh Bank (BB)
Insurance Company Insurance Development & Regulatory Authority (IDRA)
Listed Companies Securities and Exchange Commission (SEC)
MicroFinance Institution Microcredit Regulatory Authority (MRA)
Page 3 of 13
 Income Statement
An Income Statement presents the revenues and expenses and resulting net income or net loss for a

specific period of time. The Income Statement is sometimes referred to as the Statement of Operations,
Earnings Statement or profit and Loss Statement. There are two format of Income Statement;
1. Single Step Income Statement
2. MultipleStep Income Statement
 Single Step Income Statement
ABC Co. Ltd.
Income Statement (Single Step)
For the year ended 31st December. 200X
Particulars Taka Taka
Income :
Net sales/service income ***
Gain on Sales of Equipment ***
Interest Income ***
Dividend Income ***
Commission Income ***
Miscellaneous Income ***
Total Income ***
Expenses :
Cost of goods sold ***
Selling expenses ***
Operating expenses ***
Financial expenses ***
Accidental loss ***
Total Expenses ***
Net Income ***
 MultipleStep Income Statement
ABC Co. Ltd.
Income Statement (Multiple Steps)
For the year ended December 31, 200X
Page 4 of 13
Sales ****
Cost of Goods Sold ****
Gross Profit ****
Operating Expenses
Salaries Expense ****
Depreciation Expense ****
Miscellaneous General Expense ****
Total Expenses ****
Income from operation ****
Other Income and Expenses:
Add: Interest Revenue ****
Less: Interest on notes payable (***)
Net Income ****
Calculation of Cost of Goods Sold (For Merchandising Concern)
Beginning Merchandise Inventory ****
Purchases ****
Add: TransportationIn ****
****
Less: Purchase Returns ****
Net Purchase ****
Cost of Goods Available for Sale ****
Less: Ending Merchandise Inventory ****
Total cost of Goods Sold ****
Cost of Goods Sold (For Manufacturing Concern)
Beginning Raw Material XXX
Add, Raw Material Purchase XXX
Raw Material Available for use XXX
Ending Raw Material XXX
Cost of Direct Material Used XXX
Direct Labor XXX
Prime Cost XXX
Factory Overhead XXX
Page 5 of 13
Total Manufacturing Cost XXX
Add: Beginning WorkinProcess XXX
Total Goods in Process XXX
Less: Ending WorkinProcess XXX
Cost of Goods Manufactured XXX
Add: Beginning Finished Goods XXX
Cost of Goods Available for Sale XXX
Less: Ending Finished Goods XXX
Cost of Good Sold XXX
 Owner’s Equity Statement
An Owner’s Equity Statement summarizes the changes in owner’s equity for a specific period of time.
ABC Co. Ltd.
For the year Ended December 31, 200X
Capital, January 1 Tk. XXX
Add: New Investments Tk. XXX
Net income XXX
XXX
XXX
Less: Drawings XXX
Capital, December 31 Tk. XXX
Page 6 of 13
 Balance Sheet
Balance Sheet is a formal statement of assets, liabilities and owner’s equity of a specific date. Considering
the presentation, there are two types of Balance Sheet;
1. Unclassified Balance Sheet and 2. Classified Balance Sheet
 Unclassified Balance Sheet
ABC Co. Ltd.
Balance Sheet (Unclassified)
December 31, 200X
Taka Taka
Assets
Cash ***
Accounts Receivable ***
Merchandise Inventory ***
Prepaid expenses ***
Machinery ***
Buildings ***
Total Assets ***
Liabilities
Accounts Payable ***
Notes payable ***
Mortgage Loan ***
Capital / Owner’s Equity ***
Total Liabilities ***
 Classified Balance Sheet
ABC Co. Ltd.
Balance Sheet (Classified)
December 31, 200X
Assets Taka Liabilities and Owner’s Equity Taka
Current Assets Current Liabilities
Cash xxx Accounts Payable xxx
Accounts Receivable xxx Notes Payable xxx
Inventory xxx Accrued Expenses xxx
Prepaid Expenses xxx Longterm Liabilities
Longterm Investments LongTerm Notes Payable
Investment in Share/ Debenture xxx LongTerm Bank Loan
Page 7 of 13
Property, plant and Equipment (Net) Debenture
Land & Building xxx Owner’s Equity
Plant and Machinery xxx Capital xxx
Furniture and Fixture xxx Retained Earnings xxx
Intangible Assets (Net) Reserve xxx
Goodwill xxx
Trade Mark xxx
Other Assets
Noncurrent receivable xxx
Preliminary xxx
Total Assets xxx Total Liabilities and Owner’s Equity xxx
 Cash Flows Statement
The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting
from the operating, investing, and financing activities of an enterprise during a particular period.
Net Profit for the Current year XXX
Add, Net Cash Provided by Operating Activities XXX
Add, Net Cash Provided by Investing Activities XXX
Add, Net Cash Provided by Financing Activities XXX
XXX
Net Change in Change Balance XXX
Add, Cash at the beginning of the period XXX
Cash at the end of the period XXX
 Illustration
Suppose, you are given an adjusted trial balance of SOFTBYTE of Mr. Nehal Ahmed at the end of
accounting period. You are to prepare an income statement, owner’s equity statement and a balance sheet.
Trial Balance
September 30, 2008
Page 8 of 13
SL Accounts Title Debit Credit
01 Cash 8,050
02 Accounts Receivables 1,400
03 Office Supplies 1,600
04 Computer Equipment 7,000
06 Mr. R. Neal’s Capital 15,000
07 Mr. R. Neal’s Drawings 1,300
09 Office Expenses 1,700
10 Advertising Expenses 250
Total 21,300 21,300
SOFTBYTE
Income Statement
Revenues
Service revenue Tk.4,700
Expenses
Office expenses Tk. 1,700
Advertising expense 250
Total expenses 1,950
Net income Tk.2,750
Page 9 of 13
SOFTBYTE
Capital, September 1 Tk.15,000
Add: Net income 2,750
17,750
Less: Drawings 1,300
Capital, September 30 Tk.16,450
SOFTBYTE
Balance Sheet
September 30, 2008
A. Assets
Cash Tk.8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets Tk.18,050
B. Liabilities and Owner’s Equity
Liabilities
Accounts payable Tk.1,600
Owner’s equity 16,450
Total liabilities and owner’s equity Tk.18,050
 Problem
The accounts and their balances in the M. Rahman Company ledger on December 31, 2008, the end of the
fiscal year, are as follows:
Debit Credit
Tk. Tk.
Cash 46000
Accounts Receivable & Accounts Payable 69000 61100
Merchandise Inventory 283000
Supplies 7500
Prepaid Rent 18000
Equipment 160000
Page 10 of 13
Accumulated Depreciation, Equipment 19000
M Rahman, Capital and Drawing 129000 482000
Purchases and Sales 910000 1280000
Advertising Expense 32000
Salaries Expense 166000
Miscellaneous 21600
Total 1842100 1842100
Adjustment Data
(a) Merchandise inventory as of December 31, Tk. 3,34,000 and supplies on hand, Tk. 2,500
(b) Depreciation for the period, Tk. 6,000 and
(c) Accrued salaries, Tk.12,500
Page 11 of 13
 Solution to Problem
M. RAHMAN COMPANY
Income Statement
For the year ended December 31, 2008
Sales Tk.12,80,000
Cost of Goods Sold
Merchandise Inventory, January 1, 2008 Tk.2,83,000
(+) Purchases 9,10,000
Goods Available for Sale Tk.11,93,000
() Merchandise Inventory, December 31, 2008 3,34,000 8,59,00
Gross Profit Tk. 4,11,000
Expenses
Advertising Expense Tk.32,000
Salaries Expense 1,78,500
Supplies Expense 5,000
Depreciation Expense 6,000
Miscellaneous Expense 21,600 2,43,100
Net Income Tk.1,77,900
Statement of Owner’s Equity
December 31, 2008
M. Rahman, Capital, January 1, 2008 Tk. 482,000
Add, Net Income for year 2008 177,900
Less, M. Rahman, Drawing for Year 2008 129,000
Page 12 of 13
M. Rahman, Capital, December 31, 2008 Tk. 530,900
Balance Sheet
December 31, 2008
ASSETS
Current Assets
Cash Tk.46,000
Accounts Receivable 69,000
Merchandise Inventory 3,34,000
Supplies 2,500
Prepaid Rent 18,000 4,69,500
Property, Plant and Equipment
Equipment Tk.160,000
Less: Accumulated Depreciation 25,000 1,35,000
Total Assets Tk.6,04,500
LIABILITIES AND OWNER’S EQUITY
Current Liabilities
Accounts Payable Tk.61,100
Salaries Payable 12,500
Total Liabilities Tk.73,600
Owner’s Equity 5,30,900
Total Liabilities and Capital Tk.6,04,500
Page 13 of 13
Sheet 7
CVP: BREAK EVEN ANALYSIS
Phone: 01716 – 37 35 65
 Costvolumeprofit (CVP) Analysis (Managerial Accounting, Garrison, 10th edition, p. 234)
Costvolumeprofit (CVP) analysis is one of most powerful tool that helps management to make their
decision. It helps them understand the interrelationship between cost, volume and profit in an
organization by focusing on interactions among the following five elements:
1. Prices of products
2. Volume or level of activity
3. Per unit variable cost
4. Total fixed costs
5. Mixed of product sold
As CVP analysis helps managers understand the interrelationships among cost, volume, and profit, it is
a vital tool in many business decisions. These decisions include, for example, what products to
manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of
productive facilities to acquire.
 Contribution Margin
Contribution margin is the amount remaining from sales revenue after variable expenses have been
deducted. It is used first to cover the fixed expenses and then whatever remains goes toward profits. If
the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs for the period.
Activity Level Activity Level Activity Level

500 Units 600 Units 700 Units
Sales @ Tk. 10 per unit Tk. 5000 Tk. 6000 Tk. 7000
Less, Variable Expenses @ Tk. 8 per unit Tk. 4000 Tk. 4800 Tk. 5600
Contribution Margin @ Tk. 2 per unit Tk. 1000 Tk. 1200 Tk. 1400
Less, Fixed Expenses Tk. 1200 Tk. 1200 Tk. 1200
Net Operating Income (Loss) Tk. (200) Tk. 0 Tk. 200
Page 1 of 20
In the above example, at activity level 500 units, contribution margin is Tk. 1000, which is less than the
fixed expenses Tk. 1200. So, operating loss at this level Tk. 200 ( Tk. 1200 1000). At activity level 600
units, the contribution margin and fixed expenses are equal i. e., Tk. 1200 = Tk. 1200 and it is break
even level of activity where there is no profit or loss. And at activity level 700 units, the contribution
margin is more than the fixed expenses by Tk. 200, which indicate the operating income for the period.
Page 2 of 20
 Contribution Margin Ratio
Contribution Margin 1200
CM ratio = = = 20 %
Total Sales 6000
or
Unit Contribution Margin 2
CM ratio = = = 20 %
Unit Selling Price 10
Here, contribution margin is 20% of total sales. If sales increase then contribution margin will increase
by 20% of the sales increased.
 BreakEven Point
Breakeven point is that level of activity where there is no profit or loss. At this level, total revenue
equals to total expenses and company’s profit is zero, i.e., Total Sales Revenue = Total Variable Costs
+ Total Fixed Costs. If the company exceed breakeven level, then the company earns profit and if the
activity level is under the breakeven point, company suffers a loss. There are two methods for
calculating breakeven point, which are as follows:
A. The Equation Method:
Profit = (Sales – Variable Expenses) – Fixed Expenses
Sales = Variable Expenses + Fixed Expenses + Profits
Example
Let, Selling price per unit = Tk. 10, Variable Expense per unit = Tk. 8, Total Fixed Expenses =
Tk. 1200, Break even Quantity of sales (Q) =? What would be the breakeven sales in amount
(Taka)?
Tk. 10Q = Tk. 8Q + Tk. 1200 + Tk. 0
Tk. 10Q – Tk. 8Q = Tk. 1200
Tk. 2Q = Tk. 1200
Q = 600
Therefore, Breakeven point in units = 600 Units or

Breakeven point in amount = Tk. 10 x 600 Units = Tk. 6000
B. The Contribution Margin Method:
Page 3 of 20
Fixed Expenses 1200
Breakeven point in units = = = 600 Units
or
Fixed Expenses 1200
Breakeven point in Taka = = = Tk. 6000
Contribution Margin Ratio 0.2
Page 4 of 20
 BreakEven Point as a Percentage of Capacity
Breakeven point as % of capacity output shows at which % of the capacity level the firm reaches its
breakeven point.
BEP
BEP as % of Capacity = x 100
Total Capacity
Suppose,
Total Capacity = 1000 Units or Tk. 10000
BEP = 600 or Tk. 6000
BEP as % of Capacity = ?
600 units
BEP as % of Capacity = x 100 = 60%
1000 units
or
Tk. 6000
BEP as % of Capacity = x 100 = 60%
Tk. 10000
 Target Profit Analysis
Target profit is that amount of profit that the company wants to earn for this period. CVP formulas can
be used to determine the sales volume needed to achieve a target profit.
A. The Equation Method
Example
Let, Selling price per unit = Tk. 10, Variable Expense per unit = Tk. 8, Total Fixed Expenses =
Tk. 1200, Expected Profit = Tk. 200. What will be the expected Quantity of sales (X) =? What
will be the expected sales in amount (Taka)?
Tk. 10X = Tk. 8X + Tk. 1200 + Tk. 200
Page 5 of 20
Tk. 10X – Tk. 8X = Tk. 1400
Tk. 2X = Tk. 1400
X = 700
Therefore,
Expected sales in units to achieve the target profit = 700 Units or
Expected sales in amount to achieve the target profit = Tk. 10 x 700 Units = Tk. 7000
B. The Contribution Margin Method
Fixed Expenses + Profit 1200+200
Expected sales in units = = = 700 Units
or
Fixed Expenses + Profit 1200+200
Expected sales in Taka = = = Tk. 7000
 The Margin of Safety
The margin of safety is the excess of budgeted (or actual) sales over the breakeven volume of sales.
The higher the margin of safety, the lower the risk of not breaking even. The formula is:
Margin of Safety = Total Budgeted (or actual) sales – Breakeven Sales
Margin of Safety in amount
Margin of Safety Percentage =
Total Budgeted (or actual) Sales
Example (From previous example)
Sales 700 units @ Tk. 10 Tk. 7000
Breakeven sales 600 units @ 10 Tk. 6000
Margin of Safety in Taka Tk. 1000
Margin of Safety as a percentage of sales 14.29%
This margin of safety means that at the current level of sales and with the company’s current prices and
cost structure, a reduction in sales of Tk. 1000 or 14.29%, would result in just breaking even
 Operating Leverage
Page 6 of 20
Operating leverage is a measure of how sensitive net operating income is to percentage changes in
sales. Operating leverage acts as a multiplier. If operating leverage is high, a small percentage increase
in sales can produce a much larger percentage increase in net operating income.
Contribution Margin
Degree of Operating Leverage =
Net Operating Income
The degree of operating leverage is a measure, at a given level of sales, of how a percentage change
in sales volume will affect profits.
Example

700 Units(100%) 770 Units(110%) 840 Units(120%)
Net Operating Income (Loss) Tk. 200 Tk. 340 Tk. 480
Contribution Margin 1400
Degree of Operating Leverage = = = 7
Net Operating Income 200
In the above example, degree of operating leverage at activity level 700 units is 7. If sales increase by
10%, then we can expect the net operating income to increase by seven times i.e., 10% x 7 = 70% (Tk.
200 x 170% = Tk. 340). If sales increase by 20%, then we can expect the net operating income to
increase by seven times i.e., 20% x 7 = 140% (Tk. 200 x 240% = Tk. 480).
 Preparing the CVP Graph
The relationship among revenue, cost, profit and volume can be expressed graphically by preparing a
CVP graph.
Suppose, Selling Price Per unit Tk. 10, Variable Cost Per unit Tk. 8, Total Fixed Cost Tk. 1200.
Calculate the Break Even Point using CVP graph.
Page 7 of 20
We are given
Total Fixed Cost = Tk. 1200 (Draw a Fixed Cost Line)
VC (for 0 Unit) = Tk. 0
Total Cost (for 0 Units, FC + VC) = Tk. 1200 (Put a Point (.) for Total Cost at O Unit)
VC (for 800Units) = Tk. 6400
Total Cost (for 800 Units, FC + VC) = Tk. 7600 (Put a Point (.) for Total Cost at 800 Unit and
add with previous Point at 0 unit)
Total Revenue (for 0 Units) = Tk. 0 (Put a Point (.) for Total Revenue at O Unit)
Total Revenue (for 800 Units) = Tk. 8000 (Put a Point (.) for Total Revenue at 800 Unit
and add with previous Point at 0 unit)
10000
9000
Total Revenue / Total Cost
8000
7000
6000
5000
4000
3000
2000
1200
1000
0 200 400 600 800 1000

Output (Unit)

500 Units 600 Units 700 Units
Page 8 of 20
Net Operating Income (Loss) Tk. (200) Tk. 0 Tk. 200
 Importance of CVP Analysis
1. What minimum level of sales is needed to avoid losses?
2. What should be the sales level to earn a target profit?
3. What will be the effect of changes in prices, costs and volume of profits? What will be the new
BEP then?
4. What will be the impact of plant expansion on costvolumeprofit relationship?
5. Which product is the most profitable and which one is the least profitable?
 Assumptions of CVP Analysis
1. Selling price is constant. The price of a product or service will not change as volume
changes.
2. Costs are linear and can be accurately divided into variable and fixed elements.
3. In multiproduct companies, the sales mix is constant
4. In manufacturing companies, inventories do not change. The number of units produced
equals the number of units sold.
 Limitation of CVP Analysis
1. Selling price may not remain unchanged over a period of time
2. Difficult to segregate costs into fixed and variable component
3. It is not correct to assume that total fixed costs will remain unchanged over the entire range of
activity
4. The assumption of constant unit variable costs in not valid (Discount)
Page 9 of 20
5. It is a short term concept and has a limited use of longrange planning
Page 10 of 20
 The Concept of Sales Mix
Sales mix is the relative proportion in which a company’s products are sold. Different products have
different selling prices, cost structures, and contribution margins.
Let’s assume ABC Company sells ‘X’ and ‘Y’ and that the sales mix between the two products remains
the same.
ABC Co. provides the following information
Product X Product Y Total

Taka % Taka % Taka %
Sales 250,000 100% 300,000 100% 550,000 100.0%
VC 150,000 60% 135,000 45% 285,000 51.8%
CM 100,000 40% 165,000 55% 265,000 48.2%
FC 170,000
NOI 95,000
Sales Mix 250,000 45% 300,000 55% 550,000 100%
Contribution Margin 265,000
CM ratio = = = 48.2 % (Rounded)
Total Sales 550,000
Product X Product Y Total

Taka % Taka % Taka %
Sales 158,714 100% 193,983 100% 352,697 100.0%
VC 95,228 60% 87,293 45% 182,521 51.8%
CM 63,485 40% 106,691 55% 170,176 48.2%
FC 170,000
NOI Rounded Error 176
Sales Mix 158,714 45% 193,983 55% 352,697 100%
Fixed Expenses 170,000
Breakeven point in Amount = = = Tk. 352,697
Contribution Margin Ratio 48.2%
Page 11 of 20
 Problem 1
The average selling price of a cup of coffee is Tk, 20 and the average variable expense per cup is Tk.
12. The average fixed expense per month is Tk. 2500. 1000 cups are sold each month on average.
What is the CM Ratio?
a. 40%
b. 60%
c. 50%
d. 70%
e. None of the above
 Problem 2
What is the Breakevent Point in units (rounded)?
a. 78 cups
b. 313 cups
c. 125 cups
d. 208 cups

 Problem 3
What is the Breakevent Point in Amount?
a. Tk. 6250
b. Tk. 4160
c. Tk. 2500
d. Tk. 3129
 Problem 4
How many cups of coffee would have to be sold to attain target profits of Tk. 6500 per month?
a. 925 cups
b. 1125 cups
c. 1215 cups
Page 12 of 20
d. 2125 cups
 Problem 5
What is the margin of safety?
a. 866 cups
b. 868 cups
c. 686 cups
d. 688 cups
Page 13 of 20
 Problem 1
The average selling price of a cup of coffee is Tk, 1.49 and the average variable expense per cup is Tk.
0.36. The average fixed expense per month is Tk.1,300. 2,100 cups are sold each month on average.
What is the CM Ratio?
a. 1.319, b. 0.758, c. 0.242, d. 4.139
 Problem 2
The average SP = Tk. 1.49 and VC = Tk. 0.36. FC per month is Tk. 1,300. 2,100 cups are sold each
month on average. BEP in units = ?
a. 872 cups b. 3,611 cups c. 1,200 cups d. 1,150 cups
 Problem 3
The average SP = Tk. 1.49 and VC = Tk. 0.36. The average fixed expense per month is Tk. 1,300.
2,100 cups are sold each month on average. BEP in Amount = ?
a. Tk. 1,300 b. Tk. 1,715 c. Tk. 1,788 d. Tk. 3,129
 Problem 4
The average SP = Tk. 1.49 and VC = Tk. 0.36. The FC per month is Tk. 1,300. 2,100 cups are sold
each month on average. How many cups of coffee would have to be sold to attain target profits of Tk.
2,500 per month?
a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups
 Problem 5
each month on average. What is the margin of safety?
a. 3,250 cups b. 950 cups c. 1,150 cups d. 2,100 cups
 Problem 6
each month on average. What is the operating leverage?
Page 14 of 20
a. 2.21 b. 0.45 c. 0.34 d. 2.92
 Problem 7
each month on average. If sales increase by 20%, by how much should net operating income increase?
a. 30.0% b. 20.0% c. 22.1% d. 44.2
Page 15 of 20
 Problem
A Company manufactures and sells a telephone answering machine. The company’s contribution
format income statement for the most recent year is given below:
Taka
Sales (2000 units @ Tk. 60 per unit) 120000
Less, Variable Expenses @ Tk. 45 per unit 90000
Contribution Margin @ Tk. 15 per unit 30000
Less, Fixed Expenses 24000
Net Operating Income 6000
Required
1. Compute the company’s Contribution Margin Ratio and Variable Expense Ratio
2. Compute the company’s breakeven point in both units and amount using (i) equation method and
(ii) contribution margin method
3. Assume that sales increase by Tk. 40000 next year. If cost behavior patterns remain unchanged by
how much will the company’s net operating income increase? (Use contribution margin ratio)
4. If the company’s target profit is Tk. 9000, how many units will have to be sold and what will be
targeted sales in amount [Use (i) equation method and (ii) contribution margin method]
5. Refer to the original data, compute the company’s margin of safety in both amount and percentage
form
6. (a) Compute the company’s degree of operating leverage at the present level of sales
(b) If sales increase by 10% what percentage would you expect net operating income to increase?
(c) Prepare a comparative income statement showing 10% increase in sales with the original data.
 Solution to Problem
Req. 1
a) Contribution Margin Ratio
Contribution Margin TK. 30000
CM ratio = = = 25 %
Total Sales Tk. 120000
or
CM ratio = Unit Contribution Margin = Tk. 15 = 25 %
Page 16 of 20
Unit Selling Price Tk. 60
b) Variable Expenses Ratio
Variable Expenses TK. 90000
VE ratio = = = 75 %
Total Sales Tk. 120000
or
Variable Expense Per Unit Tk. 45
VE ratio = = = 75 %
Unit Selling Price Tk. 60
Page 17 of 20
Req. 2
i) BreakEven Point (Equation Method)
We Know that
Tk. 60Q = Tk. 45Q + Tk. 24000 + Tk. 0
Tk. 60Q – Tk. 45Q = Tk. 24000
Tk. 15Q = Tk. 24000
Q = 1600
Therefore, Breakeven point in units = 1600 Units or

Breakeven point in amount = Tk. 60 x 600 Units = Tk. 96000
ii) BreakEven Point (Contribution Margin Method)
Fixed Expenses Tk. 24000
Breakeven point in units = = = 1600 Units
Unit Contribution Margin Tk. 15
or
Fixed Expenses Tk. 24000
Breakeven point in Taka = = = Tk. 96000
Req. 3
Sales increase by Tk. 40000
CM Ratio = 25%
Net Operating income increase by Tk. 40000 X 25% = Tk. 10000 (As FC will not increase)
Req. 4
i) Target Sales to earn profit Tk. 9000 (Equation Method)
Let, Target Sales = Q Units
Tk. 60Q = Tk. 45Q + Tk. 24000 + Tk. 9000
Tk. 60Q – Tk. 45Q = Tk. 33000
Tk. 15Q = Tk. 33000
Q = 2200
Therefore,
Page 18 of 20
Expected sales in units to achieve the target profit = 2200 Units or
Expected sales in amount to achieve the target profit = Tk. 60 x 2200 Units = Tk. 132000
ii) Target Sales to earn profit Tk. 9000 (Contribution Margin Method)
Fixed Expenses + Profit Tk. 24000+9000
Expected sales in units = = = 2200 Units
or
Fixed Expenses + Profit Tk. 24000+9000
Expected sales in Taka = = = Tk. 132000
Page 19 of 20
Req. 5
i) Margin of Safety
Margin of Safety = Total Budgeted (or actual) sales – Breakeven Sales
Tk. 120000 Tk. 96000 = Tk. 24000 or
2000 Units – 1600 Units = 400 Units
Margin of Safety Tk. 24000
ii) Margin of Safety Percentage = = = 20%
Budgeted (Actual) Sales Tk. 120000
Req. 6
Contribution Margin Tk. 30000
a) Degree of Operating Leverage = = = 5
Net Operating Income Tk. 6000
b) If Sales increase by 10%, operating income will increase by 10% X 5 = 50%
C) Comparative statement
2000 Units 2200 Units
(100%) (110%)
Sales @ Tk. 60 per unit Tk. 120000 Tk. 132000
Less, Variable Expense @ Tk. 45 per unit Tk. 90000 Tk. 99000
Contribution Margin @ Tk. 15 per unit Tk. 30000 Tk. 33000
Less, Fixed Expenses Tk. 24000 Tk. 24000
Net Operating Income (Loss) Tk. 6000 Tk. 9000
 Sales increase by 10% = 2000 Units X 110% = 2200 Units
 Profit Increase to 150% = Tk. 6000 X 150% = Tk. 9000
Page 20 of 20
Sheet 8
Relevant Costing
Phone: 01716373565
 Relevant & Irrelevant Cost (Managerial Accounting, Garrison, 10th edition, p. 586)
Relevant costs are considered for making decision. A relevant cost is a cost that differs between
alternatives. Only those costs that differ in total between alternatives are relevant in a decision. If a
cost will be the same regardless to the alternative selected, then the decision has no effect on the cost
it can be ignored. For example, if you are trying to decide whether to go to a movie or to rent a video
CD for the evening, the rent on your apartment is irrelevant. On the other hand, the cost of the movie
ticket and the cost of renting the video CD would be relevant in the decision.
 Sunk Cost (Managerial Accounting, Garrison, 10th edition, p. 57)
A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made
now or in the future. Since sunk costs cannot be changed by any decision, they are not differential
costs. Therefore, they can and should be ignored when making a decision. For example, a company
paid Tk. 50,000 before 5 years for purchase a machine.
 Opportunity Costs (Managerial Accounting, Garrison, 10th edition, p. 57)
Opportunity cost is the potential benefit that is given up when one alternative is selected over another.
Opportunity cost is not usually entered in the accounting records of an organization, but it is a cost that
must be considered in making decision by management. For example, Tk. 100,000 can be invested @
10% interest in bond or deposited into bank @ 7% interest, if the amount is invested in bond then the
bank interest (100,000X 7%) Tk. 7000 will be the opportunity cost of bond interest.
 Nonroutine Decision (Cost Accounting, Jawahar Lal, 2nd edition, p. 1000)
1. The make or buy decision (p.598)
Page 1 of 13
2. Special order (p. 601)
3. Sell or process further (p.607)
4. Add or Drop Products
5. Operate or Temporary Shutdown
6. Replacement or Retain Plant & Equipment
7. Introduce shifting
8. Buy or lease etc.
Page 2 of 13
 Problem 1 (Discontinuance of a Product)
The costs and revenue data of three products, A, B & C of a company are given below:
Product
A B C
Selling Price Per Unit Tk. 64 Tk. 60 Tk. 52
Variable Cost Per Unit 40 40 36
Contribution Margin per unit 24 20 16
No. of units produced 10,000 5,000 8,000
Total fixed costs the company Tk. 122,000
Production arrangements are such that if one product is given up the production of the others can be
raised by 50%. The directors propose that Product C should be given up because the contribution from
that product is the lowest. Present suitable analysis of the data indicating whether the proposal should
be accepted.
 Solution to Problem 1 (Cost Accounting, Jawahar Lal, 2nd edition, p. 1021)
1. Calculation of total profit of the company:
Product A Product B Product C Total
Units 10,000 5,000 8,000
Contribution Margin per unit Tk. 24 Tk. 20 Tk. 16
Contribution (Taka) 240,000 100,000 128,000 468,000
Fixed Costs 122,000
Net Operating income 346,000
2. Calculation of total profit if Product A is given up:
Product
Tatal
A B C
Units 5,000 8,000
Add, increased units 2,500 4,000
Total units 7,500 12,000
Contribution (Taka) 150,000 192,000 342,000
Fixed Costs 122,000
Page 3 of 13
3. Calculation of total profit if Product B is given up:
Product
Tatal
A B C
Units 10,000 8,000
Fixed Costs 122,000
4. Calculation of total profit if Product C is given up:
Product
Tatal
A B C
Units 10,000 5,000
Fixed Costs 122,000
Comment
If Product B is given up, the net operating income is the maximum since the total contribution of B is
lowest. And also increase the net operating income by Tk. 84,000 (430,000 346,000) if Product B is
given up. The proposal to give up product C, therefore, is not advisable.
 Problem 2 (Introduce new product)
Millon Company produces Paint and Varnish. The costs and revenue data of these products in 200X
are as follows:
Paint Varnish
Selling Price per kg Tk. 40 Tk. 60
Direct Material 10 14
Direct Labor 8 16
Manufacturing Overhead (50% Fixed) 8 16
Page 4 of 13
In 200X the company produced and sold Paint 4000 kg and Varnish 6000 kg. Manufacturing overhead
is charged on the basis of normal production, Paint 5000 kg and Varnish 7500 kg. Administrative selling
expenses are Tk. 36,000 and 22,000 respectively.
Company decides to expand its product line by introducing new product Ink. Expected costs and

revenue data of the new product are as follows:
Selling Price per kg Tk. 40
Direct Material 16
Direct Labor 12
Manufacturing Overhead (50% Fixed) 12
Total costs Tk. 40
If the Ink is produced, fixed manufacturing overhead will increase by Tk. 2000 and addition selling
expenses Tk. 3000. The market demand of ink is 3000 kg. If the present situation remains unchanged,
whether the production of ink is profitable? (Show computation).
Page 5 of 13
 Solution to Problem 2 (Management Accounting, Mondol, 4th edition, p. 170)
1. Calculation of net operating income before introducing new product, Ink:
Product Total
Paint Varnish Taka
Sales Tk. 160,000 Tk. 360,000 Tk. 520,000
Less, Production Costs:
Direct Material 40,000 84,000 124,000
Direct Labor 32,000 96,000 128,000
Manufacturing Overhead:
Fixed* 20,000 60,000 80,000
Variable** 16,000 48,000 64,000
Total Production Costs 108,000 288,000 396,000
Grass Margin 52,000 72,000 124,000
Administrative Expenses 36,000
Selling and Distribution Expenses 22,000
58,000
Net Income (Loss) 66,000
* Fixed Overhead: Paint = 5000 units x Tk. 4 = Tk. 20,000, Varnish = 7500 units x Tk. 8 = Tk. 60,000
** Variable Overhead: Paint =4000 units x Tk. 4 =Tk. 16,000, Varnish = 6000 units x Tk. 8 =Tk. 48,000
2. Differential Statement
Without Ink Ink With Ink

Sales Tk. 520,000 Tk. 120,000 Tk. 640,000
Less, Production Costs:
Direct Material 124,000 48,000 172,000
Direct Labor 128,000 36,000 164,000
Manufacturing Overhead:
Fixed 80,000 2,000 82,000
Variable 64,000 18,000 82,000
Selling and Distribution Expenses 22,000 3,000 25,000
Total Relevant Cost 418,000 107,000 525,,000
Irrelevant Cost and Revenue 102,000 13,000 115,000
Income from Ink 13,000
Net Income (Loss) 115,000 115,000
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* Administrative expense is treated as irrelevant costs.
Comment
If the new product, Ink, produce and sold then net operating income will increase by Tk. 13,000. That
means, total net operating income will be Tk. (66,000 + 13,000) = Tk. 79,000. So, management is
appreciated to introduce the new product.
Page 7 of 13
 Problem 3 (Make or Buy Decision)
Shima Tools Manufacturers wants to purchase a part for the equipment that it produces. Because the
market price of the part is lower then production by Tk. 8. The annual demand of this part is 5,000 units
and production costs per unit are as follows:
Paint
Direct Materials Tk. 21
Direct Labor 12
Manufacturing Overhead (125% of Direct Labour) 15
Total costs Tk. 48
Company may collect this part from an outside supplier by Tk. 40 per unit. If the company produce this
part, fixed manufacturing overhead Tk. 4000. If purchase from outside, carriage inward Tk. 500,
warehousing cost Tk. 1200, labor compensation Tk. 1000. 40% of manufacturing overhead is variable.
1. Determination of costs the two alternatives
Cost for Buy Taka Cost for Production Taka

Purchase Price (5000x40) 200,000 Direct Material (5000 x21) 105,000
Carriage inward 500 Direct Labor (5000 x12) 60,000
Warehouse Cost 1,200 Fixed Manufacturing Overhead 4,000
Labor Compensation 1,000 Variable Manufacturing Overhead* 30,000
Total Cost 202,700 Total Relevant Cost 199,000
Total Cost for purchase from outside Tk. 202,700
Total Cost for production 199,000
Loss on purchase from outside Tk. 3,700
* Variable manufacturing overhead cost per unit for production = Tk. 15 x 40% = Tk. 6.
Comment
The cost of purchase from outside customer is higher than that of cost of production and loss on
purchase from outside by Tk. 3,700. So the company should produce the part rather than purchase
from outside.
Page 8 of 13
 Problem 4 (Sell or Process Further)
A manufacturing company produces three products. The related data are given below:
Product
A B C
Production (kg) 3,000 4,000 6,000
Selling Price per kg Tk. 40 Tk. 45 Tk. 30
Joint Cost 98,000 156,000 160,000
Administrative Expenses 5,000 6,000 7,000
Selling Expenses 2,000 4,000 4,000
If product B is future processed it can be sold @ Tk. 64 per kg. Due to future processing, weight will
reduce by 10% and future processing cost Tk. 40,000. Selling expenses will increase by Tk. 1200.
Administrative expenses will remain unchanged. Whether Product B should process further?
Before After
Further Process B Further Process B
Sales Tk. 180,000 Tk. 230,400*
Relevant Cost:
Addition processing cost 40,000
Selling cost 4,000 5,200
Total Relevant Cost 4,000 45,200
Irrelevant cost and revenue 176,000 185,200
Processing Income 9,200
185,200 185,200
* Sales Revenue after processing = 4000 units x 90%= 3,600 units x Tk. 64 = Tk. 230,400
Comment
Incremental net operating income of process further Product B is Tk. 9,200. So, Product B process
further is advisable.
 Problem 5 (Make or Buy a Component)
Climate Control, Inc., manufactures a variety of heating and airconditioning units. The company is
currently manufacturing all of its own component parts. An outside supplier has offered to sell a
Page 9 of 13
thermostat to ClimateControl for Tk. 20 per unit. To evaluate this offer, ClimateControl Inc., has
gathered the following information relating to its own cost of producing the thermostat internally:
Per Unit 15,000 units
per year
Direct Material Tk. 6 Tk. 90,000
Direct Labor 8 120,000
Variable Manufacturing Overhead 1 15,000
Fixed Manufacturing Overhead, traceable 5* 75,000
Fixed Manufacturing Overhead, Common but allocated 10 150,000
Total Cost Tk. 30 Tk. 450,000
* 40% supervisory salaries and 60% depreciation of special equipment (no resale value)
Required
1. Assume that the company has no alternative use for the facilities now being used to produce the
thermostat, should the outside supplier’s offer be accepted? Show all computation.
2. Suppose that if the thermostat were purchased, ClimateControl Inc., could use the freed capacity
to launch a new product. The Segment margin of the new product would be Tk. 65,000 per year.
Should ClimateControl Inc., accept the offer to buy the thermostats from the outside supplier for
Tk. 20 each? Show computation.
 Solution to Problem 5 (Make or Buy a Component) Garrison, p. 614
Calculation of Production Cost for 15,000 units
Per Unit Total
Fixed Manufacturing Overhead, traceable (Tk. 5 x 40%) 2 30,000
Total Cost of Production Tk. 17 Tk. 255,000
Req. 1: Determination of Differential gain or loss
Total Cost for purchase from outside @Tk. 20 Tk. 300,000
Total Cost for production 255,000
Difference in favor of continuing to make the parts Tk. 45,000
Page 10 of 13
Comment
The cost of purchase from outside customer is higher than that of cost of production and gain on
production by Tk. 45,000. So the company should produce the part rather than purchase from outside.
Req. 2: Determination of Differential gain or loss
Make Buy
Cost of Purchasing Tk. 300,000
Cost of Making Tk. 255,000
Opportunity cost Segment Margin forgone
on potential new product line 65,000
Total Cost Tk. 320,000 Tk. 300,000
Difference in favor of purchasing Tk. 20,000
Comment
The cost of purchase from outside customer is lower than that of cost of production and gain on
purchasing by Tk. 20,000. So the company should accept the offer and purchase from outside.
Page 11 of 13
 Problem 6 (Make or Buy a Component)
Royal Company manufactures 20,000 units of part R3 each year for use on its production line. The
cost per unit for part R3 follows:
Direct Material Tk. 5
Direct Labor 7
Variable Manufacturing Overhead 3
Fixed Manufacturing Overhead 10
Total Cost Tk. 25
An outside supplier has offered to sell 20,000 units of part R3 each year to Royal Company for Tk.
23.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part
R3 could be rented to another company at an annual rental of Tk. 150,000. However, Royal Company
has determined that Tk. 6 of the fixed manufacturing overhead being applied to part R3 would continue
even if part R3 were purchased from the outside supplier.
Required
Prepare computations to show the net amount advantage or disadvantage of accepting the outside
supplier’s offer.
 Solution to Problem 6 (Make or Buy a Component) Garrison, p. 617
1. Calculation of Production Cost for 20,000 units
Per Unit Total
Fixed Manufacturing Overhead, traceable (Tk. 10 6) 4 80,000
Total Cost of Production Tk. 19 Tk. 380,000
2. Determination of Differential gain or loss
Make Buy
Cost of Purchasing (20,000 units x Tk. 23.50) Tk. 470,000
Cost of Making Tk. 380,000
Opportunity cost Rental Revenue 150,000
Total Cost Tk. 530,000 Tk. 470,000
Page 12 of 13
Net advantages in favor of buying Tk. 60,000
Comment
The cost of purchase from outside customer is lower than that of cost of production and gain on buying
by Tk. 60,000. So the company should accept the offer and buy from outside.
Page 13 of 13
Sheet 9
Financial Statement Analysis under Financial Spread Sheet
Phone: 01716 – 37 35 65
 Financial Statements Analysis
Financial statement analysis means application of analytical tools and techniques to financial statements
and other relevant data to obtain useful information. This information reveals significant relationships
between data and trends in those data that assess the company’s past performance and current financial
position. The information shows the results or consequences of prior management decisions. In addition,
analysts use the information to make predictions that may have a direct effect on decisions made by users
of financial statements.
Analyzing financial statements involves evaluation three characteristics of a company: its liquidity, its
profitability, its solvency and cash flows. Liquidity indicates the ability to meet the shortterm obligation from
current assets of the firm. Through profitability we come to know the operating efficiency or operating
success of the firm. Solvency measures the ability to pay external liability from total assets of the firms.
 Tools of Financial Statement Analysis
Various tools are used to evaluate the significance of financial statement data. The commonly used tools
are follows;
1. Horizontal Analysis
Horizontal analysis is called trend analysis. It is a technique for evaluating a series of financial
statement data over a period of time. It is used primarily in intracompany comparisons. Its
purpose is to determine the increase or decrease that has taken place, expressed as either an
amount or a percentage.
Page 1 of 16
Current Year Amount – Base Year Amount
Formula to calculate change =
Base Year Amount
Two features in published financial statements facilitate this type of comparison: First, each of
the basic financial statements is presented on a comparative basis for a minimum of two years.
Second, a summary of selected financial data is presented for a series of 5 to 10 years or
more.
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2. Vertical Analysis
Vertical analysis is a technique for evaluating financial statement data that expresses each
item in a financial statement in terms of a percent of a base amount. Sometimes it is referred to
as common size analysis. The value of total assets is used as the base amount for balance
sheet items and the value of sales for income statement items. Vertical analysis is used in both
intracompany and intercompany comparison.
3. Ratio Analysis
Ratio analysis expresses the relationship among selected items of financial statement data. A
ratio expresses the mathematical relationship between one quantity and another. By observing
financials at a glance one cannot immediately understand the actual financial condition of a
firm i.e. whether the financial condition of the firm is improving or not. Ratio analysis is used in
all three types of comparison; intracompany, intercompany and industry average. Ratio can
be expressed as a percentage, rate or simple proportion.
4. Cash Flow Statement
Though Cash Flow Statement (CFS) is a separate statement it can help to analyze the cash
inflows and out flows. The statement of cash flows reports the cash receipts, cash payments,
and net change in cash resulting from the operating, investing, and financing activities of an
enterprise during a particular period. The main aim to prepare the statement is to identify and
analyze the causes of differences between cash amount in the beginning and ending balance
sheet. It provides the answer of three questions, such as:
 Where did the cash come from during the period?
 What was the cash used for during the period?
 What was the change in the cash balance during the period?
 Basis for comparison
Every item reported in a financial statement has significance. It is necessary to compare each item of
Page 3 of 16
financial statement with other financial statement data. Comparisons can be made on a number of different
bases. Such as:
1) Intracompany basis: This basis compares an items or financial relationship within a
company in the current year with the same item or relationship in one or more prior years.
2) Industry averages: It compares an item or financial relationship of a company with
industry averages published by financial rating organizations.
3) Intercompany basis: This basis compares an item or financial relationship of one
company with the same item or relationship in one or more competing companies.
(4) Ideal Ratio: The calculated ratios may be compared with ideal ratios. Experts have laid
down some standard ratios after making numerous experiments in various companies and
at various places.
 Some tips for FSS analysis
 Financial Spread Sheet (FSS) is a technique that helps to analyze financial statements.
 It is a customized excel program.
 There are two types of sheet; input sheet and output sheet.
 Two input sheet: one for balance sheet and other for income statement.
 Input sheet should be filled up from traditional financial statements.
 Recent year data should be presented in the most righthand column.
 Four output sheets (B/S, I/S, Ratio and CFS) will be generated automatically.
 Prepaid expense should be treated as noncurrent asset.
 Fixed assets should be presented at cost price.
 Accumulated depreciation should be deducted from cost price of fixed assets.
 The following assets (if any) should be excluded from assets and will be deducted the
same amount from retained earnings:
 All intangible assets: Goodwill, patent, trademark, copyright, etc.
 Fictitious assets: P/L A/c debit balance or accumulated loss
 Deferred revenue expense: Preliminary expense, preoperative cost, etc.
 The current maturity portion of long term debt (CMLTD) should be included in current
liabilities.
Page 4 of 16
 Subordinated loan for directors will be presented under equity.
 Total depreciation should be presented separately and should not be included in COGS,
administrative or selling expenses.
 To get a complete output we are to insert three years data.
Page 5 of 16
 Fundamental classification of Ratio
According to Financial Spread Sheet (FSS) there are six types of ratios, which are as follows:
1. Growth Ratio: Growth ratios measure the company’s potentiality, performance. It also measures
whether the company will survive. Example of growth ratios are sales growth, assets growth etc.
2. Profitability Ratio: Profitability indicates the efficiency of the unit in generating surplus. In order to
have a ratio, we can compare profit to the factors which regulate the quantum of profit directly, like
sales and the total assets or equity. Profitability ratios measure the income or operating success of
an enterprise for a given period of time e.g., gross profit margin, operating profit margin etc.
3. Coverage Ratio: These ratios measure the ability of a company to generate cash to pay interest
and principal repayments e.g., interest coverage ratio.
4. Activity Ratio: It has been widely accepted that the profitability of an enterprise to a large extent
depends on its efficient asset utilization or activity performed. Activity ratios measure how efficiently
the assets are employed by the firm. These ratios are also called efficiency ratios or asset
management ratios. For examples, inventory turnover, total assets turnover etc.
5. Liquidity Ratio: The liquidity or shortterm solvency of an organization can be measured with the
help of current ratio and quick ratio. Liquidity implies to the ability of an organization to pay off its
shortterm obligations with the current assets.
6. Leverage Ratio: Ratios, which measures the extent to which a firm has been financed by debt. It is
also known as debt management ratios. Examples of leverage ratios are debt ratio, etc.
1. Growth Ratios
Name of Ratio Components or Formula Use
1. Sales Growth, Sales % [(CY.S PY.S) / PY.S] x 100 Rule of Thumb= Higher is better, comparing with
previous years or industry average
2. Net Sales Growth, Composite % [(CY.NS PY.NS) / PY.NS] x 100 Rule of Thumb= Higher is better, comparing with
3. Net Income Growth, % [(CY.NI PY.NI) / PY.NI] x 100 Rule of Thumb= Higher is better, comparing with
4. Total Assets Growth, % [(CY.A PY.A) / PY.A] x 100 Rule of Thumb= Higher is better, comparing with
Page 6 of 16
5. Total Liabilities Growth, % [(CY.L PY.L) / PY.L] x 100 Rule of Thumb= Lower is better, comparing with
6. Net Worth Growth, % [(CY.W PY.W) / PY.W] x 100 Rule of Thumb= Higher is better, comparing with
Note: CY= Current Year, PY= Previous Year, N= Net, S= Sales, A= Total Assets, L= Total Liabilities, W= Net Worth
Page 7 of 16
2. Profitability Ratios
1. Gross Margin, Composite % (GP / Sales) x 100 Indicates the efficiency of management in turning over the
company’s goods at a profit.
Rule of Thumb= 25% to 30%, higher is better
2. SG & A, % (SG & A / Sales) x 100 Rule of Thumb= Lower is better, comparing with previous
years
3. Cushion (GPSG&A), % {(GPSG&A) / Sales} x 100 Rule of Thumb= Higher is better
4. Depreciation. Amortization,% (Depreciation / Sales) x 100 Rule of Thumb= Lower is better
It is used to discuss the general profitability
5. Operating Profit Margin, % (EBITDA / Sales) x 100
Rule of Thumb= 20% to 25%, higher is better
6. Interest Expense, % (Interest / Sales) x 100 Rule of Thumb= Lower is better
7. Operating Margin, % (Profit before tax & Extra Rule of Thumb= Higher is better
Income / Sales) x 100
8. Net Margin, % (NP / Sales) x 100 This ratio is used to measure the overall profitability.
Rule of Thumb= Higher is better
9. Return on Assets, % (NP / Assets) x 100 It measures the profitability of investments.
10. Return on Equity, % (NP / Net Worth) x 100 Measures earning power on shareholders’ equity
11. Dividend pay out rate, % (Dividend / NP) x 100 Rule of Thumb= Lower is better to long term creditors.
Note: EBITDA= Earning Before Interest, Tax, Depreciation & Amortization, SG & A= Selling, General & Administrative Exp
3. Coverage Ratios
This ratio shows how many times the interest
1. Interest Coverage (x) (EBIT / Total Interest) charges are covered by EBIT.
Rule of Thumb= higher is better
2. Debt Service Coverage (x) [EBITDA / (Total Interest + CMLTD)] It reflects the company’s ability to serve longterm debt.
Rule of Thumb= Must be Greater than one.
Note: EBIT= = Earning Before Interest & Tax, CMLTD= Current Funded Portion of Term Debts.
4. Activity Ratios
1. Receivable in Days (AR / Sales) x 365 Shows average number of days receivables are outstanding
before being collected.
Rule of Thumb= Lower is better. Should not more than 1/3rd
greater than the company’s term of sales.
2. Payable in days (AP / COGS) x 365 Indicates the average length of time trade debt is outstanding
Rule of Thumb= Higher indicates the creditors are not paid in
Page 8 of 16
time and lower shows that the business is not taking the full
advantage of credit period allowed by the creditors.
3. Inventory in Days (Inventory / COGS) x 365 Shows the average no. of days the inventory is held before it is
turned into accounts receivable through sales.
Rule of Thumb= Lower is better, compare with previous years.
4. Sales to Total Assets, (x) (Sales / Total Assets) Shows how efficiently assets are used to generate sales.
Rule of Thumb= Higher is better.
Note: Sales= Total Sales Revenue, AR= Account Receivable, AP= Account Payable, COGS= Cost Of Goods Sold
Page 9 of 16
5. Liquidity Ratios
1. Working Capital CA – CL It is a measure of company’s liquidity
position.
Rule of Thumb= Larger is better
2. Quick Ratio Cash & Cash Equivalent + Receivables / CL Measures ability to meet current debts
with most liquid (quick) assets.
Rule of Thumb= 1:1, higher is better
Measures ability to meet current
3. Current Ratio CA / CL debts with current assets.
Rule of Thumb= 2:1, higher is better
4. Sales to Net Working Capital Sales / Net Working Capital Rule of Thumb= Higher is better
Note: CA= Current Assets, CL= Current Liabilities
6. Leverage Ratios
Indicates the extent to which debt financing is
used relative to equity financing.
1. TL / NW (x) TL / NW
Rule of Thumb= 1:1, Higher indicates less
protection for lender
2. Affiliate Exposure / NW, % (Affiliate Exposure / NW) x 100 Rule of Thumb=
3. TL / (NW –Affiliates) (x) TL / (NW –Affiliates) Rule of Thumb=
Note: TL= Total Liabilities, NW= Net Worth
As per CRG score sheet, a bank officer must calculate the following four ratios for understanding the
financial risk of a business.
Types Formula Implications
Leverage: Total liabilities to Highest score (15) if it is less than 0.25. Lowest
Debt equity ratio (times) tangible net worth score (0) if it is more than 2.75.
Liquidity: Current assets to Highest score (15) if it is greater than 2.74.
Current Ratio (times) current liabilities Lowest score (0) if it is less than 0.70.
Profitability Operating profit to net Highest score (15) if it is greater than 25%.
Operating Profit margin (%) sales Lowest score (0) if it is less than 1%.
Coverage: Highest score (5) if it is greater than 2. Lowest
EBIT/ Interest on debt
Interest Coverage (times) score (0) if it is less than 1.
[Our Lord! We have wronged ourselves. If You forgive us not, and bestow not upon us
Your mercy, we shall certainly be of the losers]
Page 10 of 16
(Al Quran_Sura Araf 7:23)
Reference:
Bangladesh Bank (1993), Financial Spread Sheet and Credit Scoring Manual, Financial Sector
Reform Project, Bangladesh, Bangladesh Bank, Dhaka.
Weygandt, J.J., Kieso, D.E. and Kimmel, P.D. (2005), Accounting Principles, 7th Edition, John
Wiley & sons, Inc.
Page 11 of 16
 Exercise on FSS
AHMED TOYS (PVT.) LIMITED
Balance Sheet
As on 31st December
Particulars 2011 2010 2009
Page 12 of 16
ASSETS
A. Current Assets
Stock & Stores 90,000 88,000 88,000
Advances & Deposits (including L/C Margin) 35,000 32,000 5,000
Prepaid Expenses 16,000 14,000 10,000
Account Receivables 200,000 70,000 25,000
Marketable securities 76,000 40,000 nil
Cash in hand 54,000 4,000 3,000
Cash at bank 93,000 29,000 4,000
Total Current Assets (A) 564,000 277,000 135,000
B. NonCurrent Assets
Investment in Associated Company 100,000 nil nil
Investment in Subsidiary Company 50,000 40,000 40,000
Tangible Fixed Assets (As per Annex 5) 2566,000 2928,000 3238,000
Preliminary Expenses nil 5,000 10,000
Total Noncurrent Assets (B) 2716,000 2973,000 3288000
Total Assets (A+B) 3280,000 3250,000 3423,000
LIABILITIES
C. Current Liabilities
Due to directors
nil 10,000 20,000
Cash Credit
161,000 142,000 300,000
Expenses Accruals
7,000 38,000 40,000
Accounts Payable
21,000 9,000 29,000
Proposed Dividend
36,000 26,000 17,000
Tax Provision
20,000 15,000 11,000
Total Current Liabilities (C)
245,000 240,000 417,000
D. NonCurrent Liabilities
1350,000 1450,000 1550,000
Long Term Loans
1595,000 1690,000 1967,000

E. Total Liabilities (C+D)
CAPITAL
F. Shareholders’ Equity
1250,000 1250,000 1250,000
Share Capital
161,000 125,000 96,000
General Reserve
274,000 185,000 110,000
Retained Earnings
1685,000 1560,000 1456,000
Total shareholders equity (F)
Page 13 of 16
Note: Contingent liability of the company is Tk.9.00 lac and annual installment on long term loan is Tk.1.0 lac each year.
Income Statement
For the year ended 31st December

1. Net sales 1325,000 1245,000 1132,000
2. Cost of Goods Sold (Annex 1) 1072,000 1032,000 965,000
3. Gross Profit (1 2) 253,000 213,000 167,000
4. Operating Expenses:
Admn. & General ( Annex 2 ) 42,000 39,000 25,000
Selling & Distribution (Annex 3) 16,000 16,000 15,000
58,000 55,000 40,000
5. Operating profit (3 – 4) 195,000 158,000 127,000
6. Nonoperating Expense (Annex 4) 14,000 13,000 13,000
7. Profit before tax (5 6) 181,000 145,000 114,000
8. Provision for Taxation 20,000 15,000 11,000
9. Net profit after tax (7 8) 161,000 130,000 103,000
10. Add, Balance of profit b/f from previous year 185,000 110,000 47,000
11. Surplus Available for Appropriations (9+10) 346,000 240,000 150,000
12. Appropriations:
Transferred to General Reserve 36,000 29,000 23,000
Proposed Dividend 36,000 26,000 17,000
72,000 55,000 40,000
13. Balance of profit /Retained Earnings tr. to B/S (11 – 12) 274,000 185,000 110,000
Annex 1
Cost of Goods Sold
1. Opening Stock of Finished Goods 40,000 40,000 51,000
2. Cost of Goods Manufactured (Annex 1.1 1072,000 1032,000 954,000
3. Cost of Goods Available for Sales (1+2) 1112,000 1072,000 1005,000
4. Closing Stock of Finished Goods (40,000) (40,000) (40,000)
Page 14 of 16
5. Cost of Goods Sold (1+2 – 3) 1072,000 1032,000 965,000
Annex 1.1
Cost of Goods Manufactured
1. Opening Stock of Workinprocess 11,000 12,000 22,000
2. Raw Materials Used (Annex 1.2) 575,000 612,000 598,000
3. Manufacturing Cost (Annex 1.3) 496,000 419,000 346,000
4. Closing Stock of Workinprocess (10,000) (11,000) (12,000)
5. Cost of Production/Manufacturing Cost 1072,000 1032,000 954,000
Page 15 of 16
Annex 1.2
Cost of Materials Used
1. Opening Stock of Raw Materials 37,000 36,000 36,000
2. Add, Net Purchase of Raw Materials 578,000 613,000 598,000
3. Raw materials Available 615,000 649,000 634,000
4. Less, Closing Stock of raw Materials 40,000 37,000 36,000
5. Cost of Raw Materials Used 575,000 612,000 598,000
Annex 1.3
Manufacturing Cost
Wages, Bonus & Allowances 15,000 13,000 13,000
Power, Fuel & Gas 15,000 15,000 15,000
Godown Rent 2,000 2,000 2,000
Repairs & Maintenance 3,000 3,000 3,000
Excise Duty 21,000 20,000 20,000
Depreciation 430,000 356,000 284,000
Others manufacturing cost 10,000 10,000 9,000
Total 496,000 419,000 346,000
Annex 2
Administration and General Expenses
1. Salaries & Allowances 13,000 12,000 10,000
2. Office Rent 4,000 3,000 3,000
3. Tel., Telex & Fax 2,000 2,000 1,000
4. Stationery 2,000 2,000 2,000
5. Travelling & Conveyance 3,000 2,000 1,000
6. Donation 1,000 1,000 1,000
7. Audit & Legal Fees 1,000 2,000 1,000
8. Bad Debts 2,000 2,000 2,000
9. Misc. Expenses 3,000 2,000 1,000
10. Depreciation 6,000 6,000 3,000
11. Preliminary Expense Writeoff 5,000 5,000 nil
Page 16 of 16
Total 42,000 39,000 25,000
Page 17 of 16
Annex 3
Selling and Distribution Expense
Sales Commission 5,000 5,000 5,000
Sales Promotion Expenses 3,000 3,000 2,000
Advertisement 3,000 3,000 3,000
Travelling 2,000 2,000 2,000
Carriage Outwards 3,000 3,000 3,000
Total 16,000 16,000 15,000
Annex 4
Nonoperating Expenses: Financial
Bank Interest 10,000 10,000 10,000
Bank Charge & Commission 4,000 3,000 3,000
Total 14,000 13,000 13,000
Annex 5
Schedule of Fixed Assets
(Tk.’000)
Items 31st Dec., 2011 31st Dec., 2010 31st Dec., 2009
W.D.V Addition Acc. W.D.V Addition. Acc. W.D.V Acc.
Dep. Dep Dep.
Land 125 0 0 125 0 0 125 0
Factory Building 378 0 162 420 0 120 460 80
Plant & Machinery 1838 0 992 2198 23 632 2383 424
Equipment 161 72 154 117 0 126 225 18
Furniture & Fixture 64 2 18 68 29 12 45 6
2566 74 1326 2928 52 890 3238 528
Note: Cost of the Fixed Assets = W.D.V + Accumulated Dep.
Written Down Value (W.D.V) = Cost – Accumulated Depreciation.
Page 18 of 16
Input of Balance Sheet Items
Auditor AUDITED AUDITED AUDITED

Analyst M. Hossain M. Hossain M. Hossain
FYE Dec 31,2009 Dec 31,2010 Dec 31,2011
Period 12 Mths 12 Mths 12 Mths
Amount in (000) Taka in (000) Taka in (000) Taka
CURRENT ASSETS

Cash/Bank Balances 7 33 147
L/C margin 5 32 35
Fixed Deposits/Marketable Securities 0 40 76
Acc. ReceivablesTrade 25 70 200
Accounts Receivable Others
Goodsintransit 0 0 0
Inventory 88 88 90

Due from Affiliates Current

FIXED ASSETS
Gross Fixed Assets 3,766 3,818 3,892
Less: Depreciation 528 890 1,326

NONCURRENT ASSETS
Due from Principal, Emp, Affiliate, & Investment 40 40 150
Advance Income Tax
Deferred Charges,Prepymts & Adv. 10 14 16

CURRENT LIABILITIES

Short Term Bank Borrowings 300 142 161
Current Funded Portion of Term Debt (CMLTD) 100 100 100
Account Payable Trade 29 9 21
Accrued Items (Exp + Dues to Directors) 60 48 7
Provision for Income Tax/Def. I/T Liabilities 11 15 20
Advance Payment
Dividends Payable 17 26 36

LONG TERM LIABILITIES
Term Loan 1,450 1,350 1,250

NET WORTH
Paid up Capital 1,250 1,250 1,250
Directors Loan(subordinated)
Retained Earnings 100 180 274
Page 19 of 16
Reserves 96 125 161

BALANCE TRUE TRUE TRUE
Difference (if any) 0 0 0
Input of Income Statement Items

Auditor AUDITED AUDITED AUDITED

Analyst M. Hossain M. Hossain M. Hossain
FYE Dec 31,2009 Dec 31,2010 Dec 31,2011
Amount in (000) Taka in (000) Taka in (000) Taka
INCOME STATEMENT
Gross Sales 1,132 1,245 1,325

Less:VAT 0 0
Add: Other Operating Income 0 0 0
Less :Cost of Goods Sold 681 676 642
Less: Selling. Gen. & Admin. Expenses 37 44 47
Less: Depreciation 287 362 436

Less: Interest Expense 13 13 14
Add: Other Income 0 0 0
Income Taxes 11 15 20
Reserve 23 29 36
Cash Withdrawals/Dividend 17 26 36
BALANCE TRUE TRUE
Difference (if any) 0 0
Page 20 of 16
Output of Balance Sheet
Auditor AUDITED % AUDITED % AUDITED %
Analyst M. Hossain TBS M.Hossain TBS M. Hossain TBS
FYE Dec 31,09 Dec 31,10 Dec 31,11
Amount Tk. (000) Tk. (000) Tk. (000)
CURRENT ASSETS

Cash/Bank Balances 7 0 33 1 147 4
L/C margin 5 0 32 1 35 1
Fixed Deposits/Marketable Securities 0 0 40 1 76 2
Acc. ReceivablesTrade 25 1 70 2 200 6
Accounts Receivable Others 0 0 0 0 0 0
Goodsintransit 0 0 0 0 0 0
Inventory 88 3 88 3 90 3
Total Inventory 88 3 88 3 90 3
Due from Affiliates Current 0 0 0 0 0 0
TOTAL CURRENT ASSETS 125 4 263 8 548 17

FIXED ASSETS 0 0 0
Gross Fixed Assets 3,766 110 3,818 118 3,892 119
Less: Depreciation 528 15 890 27 1,326 40
NET FIXED ASSETS 3,238 95 2,928 90 2,566 78

NONCURRENT ASSETS 0 0 0
Due from Principal, Emp, Affiliate, &
40 1 40 1 150 5
Investment
Advance Income Tax 0 0 0 0 0 0
Deferred Charges,Prepymts & Adv. 10 0 14 0 16 0
TOTAL NONCURRENT ASSETS 3,288 96 2,982 92 2,732 83
0 0
TOTAL ASSETS 3,413 100 3,245 100 3,280 100

Short Term Bank Borrowings 300 9 142 4 161 5

Current Funded Portion of Term Debt 100 3 100 3 100 3
Account Payable Trade 29 1 9 0 21 1
Accrued Items + Dues to Directors 60 2 48 1 7 0
Provision for Income Tax/Def. I/T 11 0 15 0 20 1
Advance Payment 0 0 0 0 0 0
Dividends Payable 17 0 26 1 36 1
TOTAL CURRENT LIABILITIES 517 15 340 10 345 11

LONG TERM LIABILITIES 0 0 0
Term Loan 1,450 42 1,350 42 1,250 38
TOTAL LIABILITIES 1,967 58 1,690 52 1,595 49
NET WORTH 0 0 0
Paid up Capital 1,250 37 1,250 39 1,250 38
Directors Loan(subordinated) 0 0 0 0 0 0
Retained Earnings 100 3 180 6 274 8
Page 21 of 16
Reserves 96 3 125 4 161 5
NET WORTH 1,446 42 1,555 48 1,685 51
LIABILITIES & NET WORTH 3,413 100 3,245 100 3,280 100
Page 22 of 16
Output of Income Statement
Auditor AUDITED % AUDITED % AUDITED %

M. M.
Analyst M. Hossain Sales Sales Sales
Hossain Hossain
Dec Dec
FYE Dec 31,2009
31,2010 31,2011
in (000) in (000) in (000)
Amount
Taka Taka Taka

INCOME STATEMENT

Gross Sales 1,132 100 1,245 100 1,325 100
Less:VAT 0 0 0 0 0 0
Net Sales 1,132 100 1,245 100 1,325 100
Add: Other Operating Income 0 0 0 0 0 0
Total Sales Revenue 1,132 100 1,245 100 1,325 100
Less :Cost of Goods Sold 681 60 676 54 642 48
GROSS PROFIT/REVENUE 451 40 569 46 683 52
0 0 0 0 0 0 0
Less: Selling. Gen. & Admin.
37 3 44 4 47 4
Expenses
0 0 0 0 0 0 0
TOTAL OPERATING PROFIT
414 37 525 42 636 48
(EBITDA)
0 0 0 0 0 0 0
Less: Depreciation 287 25 362 29 436 33
Less: Interest Expense 13 1 13 1 14 1
0 0 0 0
0 0 0 0
PROFIT BEFORE TAXES & EXTR
114 10 150 12 186 14
ITEM
Add: Other Income 0 0 0 0 0 0
0 0 0 0 0 0 0
Income Taxes 11 1 15 1 20 2
0 0 0 0 0 0 0
NET PROFIT 103 9 135 11 166 13
Reserve 23 2 29 2 36 3
Cash Withdrawals/Dividend 17 2 26 2 36 3
0 0 0 0
TOTAL CHANGES IN RETAINED 63 6 80 6 94 7
Page 23 of 16
EARNINGS
Page 24 of 16
Output of Ratios
FINANCIAL RATIOS Dec 31,2009 Dec 31,2010 Dec 31,2011
% % %
GROWTH RATIOS:
Sales Growth, Sales% N/A 9.98 6.43
Net Sales Growth, Composite % N/A 9.98 6.43
Net Income Growth, % N/A 31.07 22.96
Total Assets Growth, % N/A 4.92 1.08
Total Liabilities Growth, % N/A 14.08 5.62
Net Worth Growth, % N/A 7.54 8.36

PROFITABILITY RATIOS:
Gross Margin, Composite % 39.84 45.70 51.55
SG & A, % 3.27 3.53 3.53
Cushion (Gross Margin SG&A), % 36.57 42.17 48.00
Depreciation, Amortization, % 25.35 29.08 32.91
Operating Profit Margin, % 36.57 42.17 48.00
Interest Expense, % 1.15 1.04 1.06
Operating Margin, % 10.07 12.05 14.04
Net Margin, % 9.10 10.84 12.53
Return on Assets, % 3.02 4.16 5.06
Return on Equity, % 7.12 8.68 9.85
Cash Withdrawal/Dividend Payout Rate, % 16.50 19.26 21.69

COVERAGE RATIOS:
Interest Coverage (EBIT/Total Interest) 9.77 12.54 14.29
Debt Ser.Coverage(EBITDA/Total Interest+CMLTD) 3.66 4.65 5.58

ACTIVITY RATIOS:
Receivables in Days 8 21 55
Payables in Days 16 5 12
Inventory in Days 47 48 51
Sales/Total Assets (X) 0.3 0.4 0.4

LIQUIDITY RATIOS:

Working Capital 392 77 203

Quick Ratio (X) 0.07 0.51 1.33
Current Ratio (X) 0.24 0.77 1.59
Sales/ Net Working Capital (X) 2.89 16.17 6.53

LEVERAGE RATIOS:
Total Liabilities/ Net Worth (X) 1.36 1.09 0.95
Page 25 of 16
Affiliate Exposure/Net Worth (%) 2.8 2.6 8.9
Total Liabilities/(Net WorthAffiliates) (X) 1.40 1.12 1.04
Page 26 of 16
Output of Cash Flow Statement
FYE Dec 31,2010 Dec 31,2011
Period 12 Mths 12 Mths
Amount in (000) Taka in (000) Taka

CASH FLOW STATEMENT
Profit Before Tax and Extra Items 150 186
Add: Interest Expense 13 14
Add: Depreciation 362 436
Add/Minus: Change in Deferred Taxes 4 5

EBITDA Cash Flow 529 641

Less: Interest Expense 13 14

Less: Taxes 15 20
Less: Dividends 26 36

CF Before Investing Activities 475 571

Less: Capital Expenditures 52 74

CF Before Working Capital Changes 423 497

Plus/Minus: Change in Accts Receivable 45 130

Plus/Minus: Change in Inventory 0 2
Plus/Minus:Change in Prepaid Expense 4 2
Plus/Minus:Change in Mkt. Securities 40 36
Plus/Minus: Change in Accounts Payable 20 12
Plus/Minus: Change in Accued Expenses 12 41
Plus/Minus: Change in Dividends Payable 9 10
Total Working Capital Changes 112 189

CF Before Intercompany Transaction 311 308

Plus/Minus: Inter Trade Rec from/to Affil. 0 110

CF Before Other B/S Movements 311 198

Plus/Minus: Other B/S Movements 0 0

Financing Needs/Surplus 311 198

Share Capital/Directors Loan 0 0
Plus/Minus: ST Bank Debt 158 19
Plus/Minus: LT Bank Debt 100 100
Total Financing 258 81

CF after Financing 53 117
Plus/Minus: Change In Cash 53 117

Difference 0 0
[Our Lord! We have wronged ourselves. If You forgive us not, and

bestow not upon us Your mercy, we shall certainly be of the losers]
Page 27 of 16
(Al Quran_Sura Araf 7:23)
Page 28 of 16
Sheet 10
BANK RECONCILIATION
Phone: 0171637 35 65
Reconciling Bank Statement
Because the bank and the depositor maintain independent records of the depositor’s checking account,
we might assume that the respective balances will always agree. In fact, the two balances are seldom
the same at any given time, and it is necessary to make the balance per books agree with the balance
per bank. This process is known as reconciling the bank account and a bank reconciliation statement is
prepared for this purpose. The lack of agreement between the two balances is due to:
1. Time lags that prevent one of the parties from recording the transaction in the same period.
2. Errors by either party in recording transactions.
Steps in the Reconciliation Procedure
To obtain maximum benefit from bank reconciliation, the reconciliation should be prepared by an
employee who has no other responsibilities pertaining to cash. In reconciling the bank account, it is
customary to reconcile the balance per books and balance per bank to their adjusted cash balances.
The following steps should reveal all the reconciling items that cause the difference between the two
balances.
1. Determine deposits in transit and are added to the balance per bank.
2. Determine outstanding checks and are deducted from the balance per bank.
3. Trace bank debit memoranda and are deduct from the balance per book.
4. Trace bank credit memoranda and are added to the balance per book.
5. Any error identified should be adjusted with balance as per bank or book.
Exercise 1
The bank statement for the Laird Company shows a balance per bank of $ 15,907.45 on April 30, 2005.
On this date the balance of cash per books is $ 11,589.45. From the forgoing steps, the following
reconciling items are determined.
1. Deposit in transit: April 30 deposit (received by bank on May 1) $ 2,201.40
2. Outstanding checks: No. 453 $ 3,000; No. 457 $ 1,401.30; No. 460 $ 1502.70
Page 1 of 9
3. Errors: Check No. 443 was correctly written by Laird for $ 1,226.00 and
was correctly paid by the bank. However, it was recorded for $ 1,262.00 by Laird Company.
4. Bank memoranda:
Debit –NSF check from J. R. Baron $ 425.60
Debit –Printing company checks charge $ 30.00
Credit –Collection of note receivable for $ 1,000.00
plus interest earned $ 50,less bank collection fee $ 1,035
Instruction
(a) Prepare a Bank Reconciliation Statement
(b) Make the necessary journal entries
Page 2 of 9
Solution to Exercise 1
W. A. LAIRD COMPANY
Bank Reconciliation
April 30, 2005
Cash balance per bank statement $ 15,907.45
Add: Deposits in transit 2,201.40
18,108.85
Less: Outstanding checks
No. 453 $ 3,000.00
No. 457 1,401.30
No. 460 1,502.70 5,904.00
Adjusted cash balance per bank $ 12,204.85
Cash balance per books $ 11,589.45
Add: Collection of $1,000 note receivable plus interest earned
$50, less collection fee $15 $ 1,035.00
Error in recording check 443 36.00 1,071.00
12,660.45
Less: NSF check 425.60
Bank service charge 30.00 455.60
Adjusted cash balance per book $ 12,204.85
General Journal
Date Account Titles and Explanation Debit Credit
April 30 Cash/Bank 1035
Bank Service Charge 15
Notes Receivable 1000
Interest Revenue 50
(To record collection of N/R)
April 30 Cash/Bank 36
Accounts Payable 36
(To correct the error in recording check No. 443)
April 30 Accounts Receivable 425.60
Cash/Bank 425.60
(To record NSF check)
April 30 Bank Service Charge 30
Page 3 of 9
Cash/Bank 30
(To record printing charge)
Page 4 of 9
Problem 1
Pavel Company’s Bank statement for May 2007 shows the following data:
Credit Balance on May 01, 2007 Tk. 12,650
Debit Balance on May 31, 2007 Tk. 720
The cash balance per books shows a credit balance at May 31, 2007 is Tk. 1,681. Your review of the
data reveals the following:
1. NSF Check Tk. 175
2. The Note collected by the bank was a Tk. 500, 3 –month, 12% note. The bank charges a
Tk. 10 collection fee. No interest has been accrued
3. Outstanding checks at May 31, 2007 total Tk. 2,410
4. Deposits in transit at May 31, 2007 total Tk. 1,752
5. Pavel Company check for Tk. 352 dated May 10 cleared the bank on May 25. This check,
which was a payment on account, was journalized for Tk. 325.
Instruction
(b) Prepare a bank reconciliation statement at May 31, 2007
(c) Journalize the entries required by the reconciliation
Problem 2
The cash book of Natasha Ltd. Showed a balance of Tk. 2791 on the 31 st December, 2005. When the
bank statement is received in the first week of January 2006, the following data were available for
reconciling the statement:
a) A draft deposited but not credited for Tk. 520
b) A check issued to a supplier was not presented for encashment Tk. 2500
c) Bank charges debited in the bank statement Tk. 35
d) A check issued for Tk. 84 on account of advertising expenses was not yet paid by bank
e) Bank directly collected a bill for Tk. 500 and bank charge was Tk. 5
f) Interest credited by the bank was Tk. 185
g) Bank statement balance was Tk. 5500
Problem 3
The cash in bank account for Matin Co. at July 31, of the current year indicated a balance of Tk.
12,192.50 after both the cash receipts journal and check register for July had been posted. The bank
statement indicated a balance of Tk. 19,955.65 on July 31. Comparison with the records revealed the
following reconciling items:
Page 5 of 9
1. A deposit of Tk. 4,015.20, representing receipts of July 31, had been made too late to
appear on the bank statement.
2. Checks outstanding total Tk. 9090.75.
3. The bank had collected for Matin Co. Tk. 3,045.00 on a note left for collection. The face
value of the note was Tk. 3,000.00.
4. A check drawn for Tk. 470.00 had been erroneously charged by the bank as Tk. 740.00
5. A check for Tk. 72.50 had been recorded in the check register as Tk. 7.25. The check was
for the payment of an obligation to Shams Equipment Co. for the purchase of office
equipment on account
6. Bank service charges for July amounted to Tk. 22.15
Prepare a Bank Reconciliation Statement and make necessary journal entries.
Page 6 of 9
Problem 4
The cash in bank account for Iqbal Company on December 31, 2005 indicated a balance of Tk. 3600
after both the cash receipts and the check register for December had been posted. The statement
indicated a balance of Tk. 40,000 on December 31, 2005. Comparison of the bank statement and the
accompanying cancelled checks and memorandum with the records, revealed the following reconciling
items:
1. Total checks outstanding Tk. 25,000
2. A deposit of Tk. 10,000 representing receipts of December 31 had been made to late to
appear on the bank statement.
3. A check for Tk. 20,000 drawn by Imad Company had been erroneously charged the bank
to Iqbal Company’s account.
4. A check for Tk. 21,000 had been recorded in the check register of Iqbal Co. as Tk. 12,000
5. The bank had collected for Iqbal Co. Tk. 50,500 on a note left for collection. The face value
of the note was Tk. 50,000
6. Bank service charge for December amounted to Tk. 100.
Instruction
a) Prepare a Bank Reconciliation Statement
b) Make the necessary journal entries.
Problem 5
Mario Tizani Company’s bank statement from Last National Bank at August 31, 2005, shows the

following information:
Balance, August 1 Tk. 17,400 Bank Credit Memoranda:
August deposits 73,110 Collection of note receivable
plus Tk. 90 interest Tk. 5,090
Checks cleared in August 69,660 Interest earned 32
Balance, August 31 25,932 Bank Debit Memoranda:
Safety deposit box rent 40
A summary of the Cash account in the ledger for August shows: Balance, August 1, Tk. 16,900;
receipts Tk. 77,000; disbursements Tk. 73,570; and balance August 31, Tk. 20,330. Analysis reveals
that the only reconciling items on the July 31 bank reconciliation were a deposit in transit for Tk. 4,000
and outstanding Tk. 4,500. The deposit in transit was the first deposit recorded by the bank in August.
In addition, you determine that there were two errors involving company checks drawn in August: (1) A
Page 7 of 9
check for Tk. 400 to a creditor on account that cleared the bank in August was journalized and posted
for Tk. 420. (2) A salary check to an employee for Tk. 275 was recorded by the bank for Tk. 278.
Page 8 of 9
Problem 6
Cell Ten Company maintains a checking account at the Commerce Bank. At July 31, selected data
from the ledger balance and the bank statement are as follows:
Cash in Bank
Per Book Per Bank
Balance, July 1 Tk. 17,600 Tk. 18,800
July Receipts 81,400
July Credits 80,470
July Disbursements 77,150
July Debits 74,756
Balance, July 31 Tk. 21,850 Tk. 24,514
Analysis of the bank data reveals that the credits consist of Tk. 79,000 of July deposits and a credit
memorandum of Tk. 1,470 for the collection of a Tk. 1,400 mote plus interest revenue of Tk. 70.
The July debits per bank consist of checks cleared Tk. 74,700 and a debit memorandum of Tk. 56 for
printing additional company checks.
You also discover the following errors involving July checks:
(1) A check for Tk. 230 to a creditor on account that cleared the
bank in July was journalized and posted as Tk. 320.
(2) A salary check to an employee for Tk. 255 was recorded by the
bank for Tk. 155.
The June 30 bank reconciliation contained two reconcile items:
(a) deposits in transit Tk. 5,000 and
(b) outstanding checks of Tk. 6200.
Problem 7
The cash book of Nishu (Pvt.) Ltd. showed a balance of Tk. 3950 on the May 31, 2008. When the
bank statement is received in the first week of June 2008, the following data were available for
reconciling the statement:
a) A draft deposited but not credited for Tk. 2800
b) Bank directly collected a bill for Tk. 5000 on behalf of the company
Page 9 of 9
c) A check issued to a supplier was not presented for encashment Tk. 2750
d) Bank charges debited in the bank statement Tk. 550
e) Total NSF Check was Tk. 3000
f) Bank statement balance on May 31, 2008 was Tk. 5350
Instruction:
(a) Prepare a Bank Reconciliation Statement using corrective balance method
(b) Make the necessary journal entries
Page 10 of 9
Solution Problem 1
PAVEL COMPANY
Bank Reconciliation
May 31, 2007
Cash balance per bank statement (720)
Add: Deposits in transit 1,752
Less: Outstanding checks (2,410)
Adjusted cash balance per bank (1378)
Cash balance per books (1681)
Add: Collection of $ 500 note plus interest $ 15, less charge $ 10 505
Less: NSF check 175
Error in recording check 27 (202)
Adjusted cash balance per book (1378)
General Journal
May 31 Cash/Bank 505
Bank Service Charge 10
Interest Revenue 15
May 31 Accounts Receivable 175
Cash/Bank 175
(To record NSF check)
May 31 Accounts Payable 27
Cash/Bank 27
(To correct the error in recording check)
Solution Problem 2
NATASHA LTD
Bank Reconciliation Statement
December 31, 2005
Bank balance as per bank 5500 Bank Balance as per book 2791
Add. Deposit in transit 520 Add. Collection by bank 495
6020 Interest Revenue 185
Page 11 of 9
3471
Less. Outstanding Check Tk. 2500 Less. Bank Charge (35)
Outstanding Check 84
. (2584)
Adjusted balance as per bank 3436 Adjusted balance as per book 3436
1. Cash/Bank 495 2. Cash/Bank 185

Bank Services Charge 5 Interest Revenue 185
Notes Receivable 500 3. Bank Charge 35
Cash/Bank 35
Page 12 of 9
Solution 3
MATIN COMPANY
July 31, 2006
Bank balance as per bank 19955.65 Bank Balance as per book 12192.50
Add. Deposit in transit 4015.20 Add. Collection by bank 3045.00
Overcharge by bank (740470) 270.00
24240.85 15237.50
Less. Outstanding Check (9090.75) Less. Error in recording (72.507.25) (65.25)
Bank Charge (22.15)
Adjusted balance as per bank 15150.10 Adjusted balance as per book 15150.10
General Journal
July 31 Cash/Bank 3045.00
Notes Receivable 3000.00
Interest Revenue 45.00
July 31 Bank Charge 22.15
Cash/Bank 22.15
(To record bank charge)
July 31 Accounts Payable 65.25
Cash/Bank 65.25
(To correct the error)
Solution 4
Bank balance as per bank 40,000 Bank Balance as per book 3600

Add. Deposit in transit 10,000 Add. Collection by bank 50,500
Error by bank 20,000
70,000 54,100
Less. Outstanding Check (25,000) Less. Error in recording (2100012000) (9,000)
Bank Charge (100)
Adjusted balance as per bank 45,000 Adjusted balance as per book 45,000
General Journal
Page 13 of 9
December 31 Cash/Bank 50500
Interest Revenue 500
December 31 Accounts Payable 9000
Cash/Bank 9000
December 31 Bank Charge 100
Cash/Bank 100
Page 14 of 9
Solution 5
MARIO TIZANI COMPANY
August 31, 2005
Bank balance as per bank 25,932 Bank Balance as per book 20,330

Add. Deposit in transit Add. Collection by bank 5,090
(77,000(73,1104000)) 7,890 Interest 32
Error by bank (278275) 3 Error in recording (420400) 20
Less. Outstanding Check Less. Bank Charge (40)

(73,57020(6966034500)) (8,393)
General Journal

August 31 Cash/Bank 5090
Interest Receivable 90
(To record collection of N/R with interest)
Interest Revenue 32
(To record Interest revenue credited by bank)
Accounts Payable 20
August 31 Bank Charge 40
Cash/Bank 40
Page 15 of 9
Solution 6
CELL TEN COMPANY
July 31, 2005
Bank balance as per bank 24,514 Bank Balance as per book 21,850
Add. Deposit in transit Add. Collection by bank 1,470
(81,400(79,0005,000)) 7,400 Error in recording (320230) 90
Less. Outstanding Check
((77,15090)(74700+1006200)) (8,460)
Error by bank (255155) (100) Less. Bank Charge (56)
General Journal
Interest Receivable 70
(To record collection of N/R with interest)
Accounts Payable 90
August 31 Bank Charge 56
Cash/Bank 56
(To record the bank charge)
Solution to 7
Bank balance as per bank 5350 Bank Balance as per book 3950

Add. Deposit in transit 2800 Add. Collection by bank 5000
Less. Outstanding Check 2750 Less. Bank Charge (550)

NSF (3000)
Adjusted balance as per bank 5400 Adjusted balance as per book 5400
General Journal
Page 16 of 9
May 31 Cash/Bank 5000
May 31 Bank Charge 550
Cash/Bank 550
May 31 A/R 3000
Cash/Bank 3000
(To record NSF)
Page 17 of 9
SHEET 11
PREPARATION OF FINANCIAL STATEMENTS OF BANKS*
 Definition of Accounting
Accounting is an information system that identifies the business transactions, records and
process those transactions and communicates the accounting information of an organization
to the interested users through the Financial Statements.
 Financial Statements
Financial Statements are the output of accounting system. Accounting communicates the
financial information to the interested users through FS. The objective of Financial
Statements is to provide information about the financial position, financial performance
and cash flows of an entity.
 Components of Financial Statements

As per the Bank Companies Act, 1991 (Amendment, BRPD Circular # 14/2003) and BRPD
Circular # 15/2009, a complete set of Financial Statements comprises:
(a) A Balance Sheet
(b) An Income Statement
(c) A Statement of Changes in Equity
(d) A Cash Flow Statement
(e) Liquidity Statement (Assets & Liabilities Maturity Statement) and
(f) Explanatory Notes to the Financial Statements.
 Laws and Regulations

For preparing the Financial Statements of banks, the following lows and regulations act as
guidelines:
 The Companies Act, 1994

 The Banking Companies Act, 1991
 The Securities and Exchange Ordinance 1969
 Securities and Exchange Rules 1987
 International Accounting Standards (IAS)
 Bangladesh Accounting Standards (BAS)
 International Financial Reporting Standards (IFRS)
 Bangladesh Financial Reporting Standards (BFRS)
 The Listing Regulations of DSE and CSE
 Bangladesh Bank Circular (BCD and BRPD Circular)
 Accounting Standards for Islamic Financial Institutions developed by AAOIFI
 Standards issued by Islamic Financial Service Board (IFSB)
*Compiled by Md. Mahabbat Hossain, BIBM, Phone: 01716 37 35 65; Email: mahabbat@bibm.org.bd
1
 Major Regulators of Banking Companies in Bangladesh for disclosure issues
1. Bangladesh Bank (BB)

2. The Registrar of Joint Stock Companies and Firms (RJSC)
3. Bangladesh Securities Exchange Commission (BSEC)
4. Dhaka Stock Exchange Limited (DSE)
5. Chittagong Stock Exchange Limited (CSE)
6. Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI)
7. Islamic Financial Service Board (IFSB)
 Major Disclosure Provision under Banking Companies Act, 1991
Section 2 of Banking Companies Act, 1991 states that the provisions bearing of this Act shall
be in addition to and not , save as hereinafter express by provided, in derogation of, the
Companies Act, 1994 and any other laws for the time being in force. Besides, the banking
companies should comply with provisions of the Companies Act 1994 as the banking
companies are registered with the registered joint stock companies as a company, if
otherwise expressed in the Banking Companies Act, 1991. As per section 24 of this Act,
every bank shall make a reserve fund and if the amount in that fund together with amount in
the share premium account is below the amount than its paid up capital Bank will transfer to
the reserve fund not less than 20 percent on profit before tax and it should be disclosed in the
profit and loss account made under section 38 of this Act. According to Section 38, the
accounts and balance sheet of a banking company will be prepared as per BRPD circular
14/2003 and also the provision of the Companies Act, 1994. Financial audit of the financial
statement of the banking companies is mandatory by a person who is qualified according to
the Bangladesh Chartered Accountants Order, 1973 and auditor is required to state whether
or not adequate provisions have been made, financial reports has been made in accordance
with the standard issued by the Bangladesh Bank (As per section 39).
 Major Disclosure Provisions under IAS 30 (BAS 30)
Paragraph 8 of IAS 30 states that like other business entity, banks may use different methods
for recognition and measurement of items in their financial statements. Therefore, for better
understanding of the users of accounting information, banks should disclose the accounting
policies that are followed for preparing financial statements. Banks should disclose the policy
regarding the recognition of the principal types of income; policy regarding the valuation of
investment and dealing securities; the distinction between those transactions and other events
that result in the recognition of assets and liabilities on the balance sheet and those
transactions and other events that only give rise to contingencies and commitments; the basis
for the determination of losses on loans and advances and for writing off uncollectable loans
and advances; the basis for the determination of charges for general banking risks and the
accounting treatment of such charges.
2
As per Paragraph 9, income and expenses should be presented in the income statement as
grouped by nature and principal types of income and expenses and should be disclosed
separately. It is no longer required to group the assets and liabilities as currents and non-
currents (Paragraph 20). According to Paragraph 23, bank should not offset any asset or
liability with other liability or asset unless a legal right of set-off exists and the offsetting
represents the expectation as to the realization or settlement of the asset or liability. It is
mentioned in the Paragraph 24 that a bank should disclose the fair values of each class of its
financial assets and liabilities. Financial assets should be presented by classification as loans
and receivables originated by the enterprise, held to maturity investments, held for trading,
and available-for-sale (Paragraph 25). According to Paragraph 26, Bank should disclose the
amount and nature of contingent liabilities and commitments. It is mentioned in the
Paragraph 30 that a bank shall disclose an analysis of assets and liabilities into relevant
groupings based on the remaining period at the balance sheet date to the contractual maturity
date.
Paragraph 33 has provided the maturity grouping of assets and liabilities as: up to 1 month,
from 1 month to 3 months, from 3 months to 1 year, from 1 year to 5 years and from 5 years
and above. Paragraph 34 states that in the maturity grouping, maturity period of assets and
liabilities should be same. As mention in the Paragraph 35, maturity could be expressed in
terms of the remaining period to the repayment date, the original period to the repayment
date, or the remaining period to the next date at which interest rates may be changed. A bank
should disclose an analysis expressed in terms of contractual maturities (Paragraph 36) and if
there is no contractual maturity date, bank should assume the expected date on which the
assets will be realized (Paragraph 37). Paragraph 39 prescribes that management may
provide, in its commentary on the financial statements, information about the effective
periods and about the way in manages and controls the risks and exposures associated with
different maturity and interest rate profiles.
 Major Disclosure Provisions under IFRS 7 (BFES 7)
IASB issued IFRS 7 in August 2005 that supersedes IAS 30 (IFRS 7). In Bangladesh, ICAB
adopted it as BFRS 7 and made it effective from on or after January 1, 2010. Bangladesh
Bank did not issue any circular requiring compliance with BFRS 7. Therefore, it is
mandatory for listed banking companies to comply with BFRS 7 but not mandatory for all
schedule banks. Now banks are using different techniques for measuring and managing
exposure to risks arising from financial instruments. The users of financial statements need
information about an entity’s exposure to risks and how those risks are managed (IFRS 7).
For ensuring greater transparency regarding risks this standard was issued.
BFRS 7 requires disclosure of qualitative and quantitative information about exposure to
risks arising from financial instruments, including credit risk, liquidity risk and market risk.
Management’s objectives, policies and processes for managing the risks should be disclosed
qualitatively. The quantitative disclosures include information about the extent to which the
entity is exposed to risks (IFRS 7).
3
 Major Disclosure Provisions under BRPD Circular (BRPD #14/2003, Dated June 25,
2003)
BRPD Circular was issued by Bangladesh Bank to replace the BRPD Circular No. 03 dated
18 April 2000. It has been decided to amend the forms of financial statements and directives
for preparation thereof with a view to bringing in more disclosure in the financial statements
of the bank companies. The forms of the first schedule of the Bank Companies Act, 1991 as
amended under sub-section 38(4) of the act have been annexed with this circular. The
financial statements to be prepared as per the amended forms and instructions taking effect
from the last working day of the year 2003 will help the users of the statements get adequate
and transparent idea about the concerned bank company.
It will be applicable for all bank companies and other financial institutions working in
Bangladesh. Financial statements should include clear and concise disclosure of all
significant aspects of accounting principles and procedures, which have been followed. The
disclosure of all the significant accounting principles adopted shall be an integral part of the
financial statements. The notes to the financial statements shall provide relevant details of the
items included in balance sheet, profit and loss account, cash flow statement, liquidity
statement and statement of changes in equity, so that adequate disclosures are made for clear
understanding of the users. The liquidity statement should be prepared according to the
remaining maturity grouping.
A bank whose ordinary shares are publicly traded should present Earning Per Share (EPS) on
the face of Profit and Loss Account, both in case of profit or loss per share. The bank should
make a disclosure by way of note to the financial statements of the calculation of Earning Per
Share in accordance with IAS-33. The financial statements should disclose the relationship
and transactions between the bank and its related parties till the date on which the statements
are prepared. Names of the members of the audit committee formed by the board of directors
of the bank and their qualifications should be disclosed. Confirmation as to the number of
meetings of the audit committee held with the bank's senior management to consider and
review the bank's financial statements, the nature and scope of audit reviews and the
effectiveness of the system of internal control and compliance thereof should be made.
The income items should be treated as income when there exists no risk or uncertainty
regarding its realization. Figures should be rounded off to nearest Taka. Highlights of the
bank should be presented in the annual report. Copies of financial statements including the
Balance Sheet should be preserved in each of the bank branches, so that the customers of the
bank may readily use those on request. Besides, the Highlights and Balance Sheet should be
affixed in a visible place of each bank branch. The financial statements should be published
in widely circulated one Bangla and one English daily newspapers within one week of
submission of the statements to Bangladesh Bank. These should also be disclosed in the
bank's website.
4
Balance Sheet as at ……………………….
Current Previous
Particulars Note Year Year
(Taka) (Taka)
PROPERTY AND ASSETS
Cash
Cash in hand (including foreign currencies)
Balances with BB and Sonali Bank (including foreign
currencies)
Balances with other Banks and Financial Institutions
In Bangladesh
Outside Bangladesh
Money at call and short notice
Investments
Government
Others
Loans and advances
Loans, Cash Credits, Overdrafts etc.
Bills purchased & discounted
Fixed assets including land, building, furniture etc.
Other assets
Non-banking assets
TOTAL ASSETS
LIABILITIES AND CAPITAL

Borrowings from other Banks, Financial Institutions and
agents
Deposits and other accounts:
Current Deposits and other accounts, etc
Bills payable
Savings Bank Deposits
Bearer Certificates of Deposits
Term Deposits
Other deposits
Other liabilities
TOTAL LIABILITIES
Shareholders Equity/Capital
Paid up capital
Statutory reserve
Other reserves
Balance of Profit and Loss Account
TOTAL SHAREHOLDERS' EQUITY
5
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Previous
(Taka) (Taka)
Off Balance Sheet Items
Contingent Liabilities
Acceptances and endorsements
Letters of Guarantees
Irrevocable letter of credit
Bills for collection
Other Contingent Liabilities
Total Contingent Liabilities
Other commitments
Documentary Credits and short term trade-related
transactions
Forward assets purchased and forward deposits placed
Undrawn note issuance and revolving facilities
Undrawn formal standby facilities, credit lines and other
commitments
Sport and forward foreign exchange rate contracts
Other exchange contracts
Total off Balance Sheet items
Income Statement, For the year ended ……………………

Current Previous
(Taka) (Taka)
Interest income
Less: Interest paid on deposits and borrowings
Net Interest income
Income from investments
Commission, exchange and brokerage
Other operating income
Total operating income
Less: Operating Expenses
Salary and allowances
Rent, taxes, insurance, electricity etc fees
Legal expenses
Postage, stamp, telecommunication etc
Audit fees
Stationery, printing, advertisement, etc.
Managing Director's Salary and allowances
6
Directors' fees
Loan losses
Repairs, maintenance and depreciation
Other expenses
Total Operating Expense
Profit before provisions
Provision for loans and advances
Specific Provision
General Provision
Provision for diminution in value of investments
Provision against other classified assets
Other Provisions
Total Provision
Profit before tax for the year (PBT)
Provision for tax
Current Tax
Deferred tax
Net Profit after tax for the year
Appropriations:
Statutory reserve
General Reserve
Proposed cash dividend
Total Appropriations
Retained Earnings
Earnings Per Share
Reference:
Bangladesh Bank (2003), Amendments to the forms of the First Schedule of the Bank
Companies Act 1991, BRPD Circular No. 14/2003 dated June, 25, 2003.
Government of the People’s Republic of Bangladesh (1987), Securities and Exchange Rules,
1987, The Bangladesh Gazette No. S.R.O 237-L/87, Dhaka, the 28th September, 1987.
Government of the People’s Republic of Bangladesh (1991), The Banking Companies Act, 1991,
Act No. 14 of 1991.
Government of the People’s Republic of Bangladesh (1994), The Companies Act, 1994, Act No.
18 of 1994.
The Chittagong Stock Exchange (CSE) (1997), Listing Regulations of the Chittagong Stock
Exchange Limited-CSE, dated May 29, 1997.
The Dhaka Stock Exchange (DSE) (1996), Listing Regulations of the Dhaka Stock Exchange
Limited, Notification No. SEC/Member-II, dated April 8, 1996.
The Institute of Chartered Accountants of Bangladesh (ICAB) (2006), Bangladesh Accounting
Standards (BAS) and Bangladesh Financial Reporting Standards (BFRS), Vol. 1 & 2,
published in July 2006.
Website of Bangladesh bank, http://www.bangladesh-bank.org

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SHEET 1

Basic Concepts of Accounting

 Transaction & Event

 Transaction must be expressed in terms of money

 Users of Accounting Information

A. Internal Users B. External Users

 Determination of Debit and Credit

Assets Liabilities Owner’s Equity

 Expansion of Basic Accounting Equation

Balance 8000 + 7000 = 15000

Balance 8000 + 1600 + 7000 = 1600 + 15000

Balance 8750 + 2000 + 1600 + 7000 = 1600 + 17750

Balance 9350 + 1400 + 1600 + 7000 = 1600 + 17750

Net income Tk.2,750

Capital, September 1 Tk. 0

5 Purchased Tk.300 of cleaning supplies on account.

Cash + Supplies + Equipment = Liabilities + Capital Account

1. Collected Tk.14,000 of accounts receivable.

1. Collected Tk. 1,25,000 of accounts receivable.

(e) Prepare a tabular analysis of the transactions.

Sep. 02 Computer Equipment 04 7,000

Mr. Ray Neal’s Capital A/c No. 06

Computer Equipment A/c No. 04

XXXX A/c No. XX

In this way we are to create an account for each new title

Date Explanation Ref Dr Cr Balance

 National Regulatory Body

Table 1: List of national regulatory bodies and concerned companies in Bangladesh

3. Registrar of Joint Stock 1. Private Companies

4. Bangladesh Securities and 1. Listed Companies

 International Regulatory Body

List of regulations for the concerned companies of Bangladesh

Source: Researcher’s own analysis based on concerned regulations

Status of IASs (BASs) and IFRSs (BFRSs) in Bangladesh

 Measurement of the elements of financial statements

 FASB (US GAAP)

 IAS 1: Presentation of Financial Statements

 Definitions of Terms used in IAS 1

• Going concern: When preparing financial statements, management shall make an

Examples of cash flows from operating activities are:

Examples of cash flows arising from investing activities are:

Examples of cash flows arising from financing activities are:

Foreign currency cash flows

Cash and cash equivalents

Interest and dividends

Accounts Adjusted Income

Accounts Accounts Title Debit Credit

Advertising Supplies Exp. (a) 1500 1500 1500

Accounts Accounts Title Debit Credit

Accounts Accounts Title Debit Credit

Accounts Accounts Title Debit Credit

Accounts Accounts Title Debit Credit

Accounts Title Debit Credit

Depreciation under Double-Declining-Balance Method:

Depreciation under 150%-Declining-Balance Method:

Depreciation Under Units-of-activity Method:

Depreciation Under Sum-of-the-Year-Digit Method:

Summary of Depreciation under different methods:

Md. Mahabbat Hossain

• Balance sheet of merchandising and

February 26, 2012 2

February 26, 2012 3

• Classified into three categories:

Therefore, Breakeven point in units = 600 Units or

Therefore, Breakeven point in units = 1600 Units or