decision-making. It also deals with appucauuss w+ a= OBJECTIVES OF ACCOUNTANC |. Maintaining Accounting records: Systemat step leading o the creation of the financial statements. Once recording is complete, the records are classifiec sic recording of the monetary transactions of the firm is the initia and summarized to depict the financial performance of the enterprise. Calculating the results of Operations: The Income Statement also known as the Profit and Loss Account is prepared to reflect the profits earned or losses incurred. All the expenses incurred in the course of conducting the business are aggregated and deducted from the total reve iv gare: jenues to arrive at the prof i See fit earned or Joss incurrec 3. Ascertaining the fina position: Financial health or position : is ascertained with Sheet. On the right hand c ‘th the help of Jn the right hand side of the Balance Sheet are the Assets or the resource: Moree left hand side ae the Liabilities or the obligations ofthe business to the outsid ee nL On gia i Si portion is called the Capital and is to be distinguished from that of the ae and the owners. The owners et liabilities such as loans a — —ro reditors. All of them are grouped in the respective heads under the Liabilities. This information on the assets ‘and liabilities, with the help of accountancy, provides control over the resources of the firm. Accounting is the precursor to financial reporting: The vital liquidity / solvency position is comprehendec “7, through the Cash and Funds Flow Statement elucidating the capital transactions, obtaining of cash and the way it has been expended, loans and their repayment, cash dividends, etc. 5. Communicating the information to the users: Financial statements so compiled are of great use to a variety of users including the provision of a firm base for the computation of the statutory tax liability and the consequent filing of return of income.and Management Accounting are in place. Cost Accounting: It shows classification and analysis of costs on the basis of functions, processes, product centers etc. It also deals with cost computation, cost saving, cost reduction, ete. Management Accounting: Management Accounting begins where Financial Accounting and Cost Accountin ¥f data generated in financial accounting and cost accounting for manageri ends. It deals with the processing o Jication of managerial economic concepts for decision-making, decision-making. It also deals with appl ae errs OF ACCOUNTANC!— Liabilities side of Balance sheet Depreciation + Depreciation denotes the decrease in the value of an asset due to the we: ‘obsolescence, exhaustion etc., far and tear, lapse of time © Asan adjustment Depreciation A/c Dr To Fixed Asset A/c — Debit side of P&L ale Deduction from the concerned asset account on assets side of balance sheet ‘© Appears in trial balance — Debit side of P&L a/c Bad debtsDefinition of Accounting: According to American Institute of Certified Public Accountants accounting has beer defined as "the art of recording, classifying and summarising in a significant manner and in terms of money transaction and events which are, in part at least, of financial character, and interpreting the results thereof". Accounting Process:FINANCIAL STATEMENTS: oe 1. Profit and Loss A/c: It summarizes the results of the operations of an enterprise for a 8! indi i i ing disclosing the revenues earned and expenses incurred. It indicates the operating success of a business jiven time period by period by measuring the net profit earned by it. 2, Balance Sheet; It presents an enterprise's assets, liabilities, and owners’ equity at a particular point of time ‘It summarizes the resources of an enterprise and the claims to those resources by owners and creditors of the enterprise on a certain date. 3. Statement of Cash Flows: It reflects the major sources of cash receipts and cash payments of an enterprise It reports the cash effects during a period of not only the enterpri $ operations but also its investing anc financing activities.(ANCIAL STATEMENT ANALYSIS. The analysis of financial statement is an important aid to financial analysis. Because, in spite of the limitations o! traditional financial statements, they provide some extremely useful information to the extent the balance shee! mirrors the financial position on a particular date in terms of the structure of the assets, liabilities and owners’ equity, and so on and the profit and loss account shows the results of operations during a certain period of time ir terms of the revenues obtained and the cost incurred during the year. Thus, the financial statements provide « summarized view of the financial position and operations of a firm. OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS Financial Statements are analysed by different users for different purposes. Some of the objectives are as under- 1. To understand and estimate the present and potential profitability/earning capacity of the enterprise To aid in economic decision making To understand and estimate the financial position and performance of the concern To measure the efficiency of business operations To calculate and analyse the various financial ratios and flow of funds/cash To identify areas of mismanagement and potential danger so that corrective actions can be taken To ascertain the maintenance of financial leverage by the enterprise erawneun To determine the movement of inventory in the enterprise To identify diversion of funds ete (Qrevrs AND TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS There are around five techniques of analyzing the Financial Statements. They are : Comparative Financial Statements ‘* Common size Financial Statements © Trend Analysis° Ratio Analysis e Funds Flow and Cash Flow Analysisre eae A ‘Ratio: is defined as an arithmetical/quantitative/numerical relationship between two numbers Ratio analysis is a very important and age old technique of financial analysis. Uses of Ratio Analysis: There are various uses of Ratio analysis, some of which are as follows: 1. Ithelps in managerial decision making 2. Ithelps in financial forecasting and planning2 2. Solveney Ratios (Long Term): These Ratios measure the long term financial condition ofthe firm. Bankers and creditors are most interested in liquidity. But shareholders, debenture holders and financial institutions are concerned with the long-term financial prospects, The various Solvency Ratios are: (i) Debt-Equity Ratio: This Ratio measures the relationship between borrowed Capital to own Capital There are many variations to this Ratio. But, the most popular ones’ are : Debt (or) Outsider’s funds (Ideal Ratio = 1:1) Equity Share holders’ funds (ii) Proprietary Ratio: Share holders’ Funds Total Assets (iii) Assets to Proprietary Ratios: (a) Fixed Assets to Proprietor’s Fund Rati Tivad Accate after Nenraciatinn (Ideal Ratin — KING tn KSG\mainly prepared for internal decision making purposes and may not be of much use to outsiders. Cosh Flow Statement Vs Funds Flow Statement: Both the Funds Flow Statement and the Cash Flow Statement give almost similar picture of the firm, They don’t differ much from each other. However, some of the differences between each other are as follows: 1 The Funds Flow Statement is much wider in purview than the Cash Flow Statement as it indicates the changes in the Working Capital whereas the Cash Flow Statement indicates the inflow and outflow of cash which is only one of the components of the Working Capital Funds Flow Analysis is based on mercantile system of accounting whereas Cash Flow Analysis is based or cash system of accounting Funds Flow Analysis is useful for long term planning as it provides a more comprehensive information thar the Cash Flow analysis which is more useful for short term planning. Funds Flow Analysis traces the inflows and outflows of funds whereas Cash Flow analysis traces the inflows and outflows of cash within the firm Funds Flow analysis analyses the changes in the Working capital under a separate statement known a: schedule for changes in working capital whereas in cash flow analysis, the changes in both current and non- current items is done in a single statement. Aatarmine what transactions caused the castPROCESS-COSTING the production moves from one process to the next until its fina! Process costing is used where mass production of identical units throu gh a series of processing ‘completion and there is a continuous operations. It is applied for a various industries like Chemicals and Drugs, Oil Refining, Food processing, Paints and varnish, Plastics, Soaps, Textiles, Paper etc. CIMA defines process costing as follows: "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or pro Costs are cesses. Co: averaged over the units produced during the period." processes. Costs ar Features of Process Costing: 1. The process cost y in} tre pI cost centres are clearly defined and all costs relating to each each process cost cen! A a es,TARGET COSTING Target costing is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for anew product. Target costing is not just a method of costing, but rather a management technique wherein prices are determined by market conditions, taking into account several factors, such as homogeneous products, level of competition, no/low switching costs for the end customer, ste. When these factors come into the picture, management wants to control the costs, as they have Tittle or no control over the selling price. ‘According to Computer Aided Manufacturing International (CAM-1) “A market-based cost that is calculated using sales price necessary to capture a predetermined market share is known as Target Cost.” In competitive industries, a unit selling price is set independent of initial cost of the product. If target cost is lower than the initial forecast of product cost, the manufacture/producer drives the unit cost to come down over a definite period, so that it should compete. It should be noted that target cost is found by deducting desired profit from predetermined sales price. Hence, ‘Target Costing = Selling Price = Desired Profit Here, sales price is one which is appropriate for a targeted market share. Desired profit is the contributionLiss between Joint Products and By-products ‘The classification of various products from the same process into joint products and by-productsdepends upon the relative importance ofthe products and their value. Ifthe various end products are almost equal in importance and their value is also more or less the same, they may be identified as joint products. But, if one end-product has greater importance and higher value and the other products are of less importance and rather of low value, the hitter may be classified as by-productsMEANING AND DEFINITION OF ACTIVITY BASED COSTING (ABC) Activity Based Costing is an accounting methodology that assigns costs to activities rather than products or services. This enables resources & overhead costs to be more accurately assigned to products & servicesthat consume them. ABC isa technique which involves identification of cost with each cost driving activity and making it as the basis for apportionment of costs over different cost objects/ jobs/ products/ custom- ers or services. ABC assigns cost to activities based on their use of resources. Itthen assigns cost to cost objects, such as products or customers, based on their use of activities. ABC can track the flow of activitiesin organization bycreatingalink between the activity (re- source consumption) and the cost object. CIMA defines ‘Activity Based Costing’ as““An approach to the costing: and monitoring ofactivities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consump- tion estimates. The latter utilise cost drivers to attach activity coststooutputs.”COST-VOLUME & PROFIT ANALYSIS, Cost-Volume-Profit Analysis a technique for studying the relationship between cost, volume and profit. Profits of an undertaking depend upon a large number of factors. The CVP relationship is an important tool used for the profit planning of a business. In cost-volume-profit analysis an attempt is made to analyse the relationship between variations in cost with variations in volume. ‘The cost-volume-profit relationship is of immense utility to management as it assists in profit planning, cost control and decision making. Cost-volume-profit analysis can be used to answer questions such as: 1. How much sales should be made to avoid losses? 2. How much should be the sales to earn a desired profit?: "SN the general price-level . Fixes i ‘d cost remains constant at all volumes of output. 7. Volu ion i me of production is the only factor that influences cost. 8. There is synchronisation between production and sales. BREAK EVEN POINT The break-even point may be defined as that point of sales volume at which total revenue is equal to total cost It is a point of no profit no loss. A business is said to break-even when its total sales are equal to its total costs. At this point contribution, i, sales minus marginal cost equals the fixed costs and hence this point is often called as _ Critical Point‘ or_Equilibrium Point or _Balancing Point’ or no profit no loss. If produetiowSales are increased beyond this level, there shall be profit to the organisation and if it is decrease from this level, there shall be loss to the organisation. Break-even point can be stated in the form of an equation: Sales revenue at break-even point = Fixed Costs + Variable Costs. ALGEBRAIC FORMULA METHOD FOR COMPUTING THE BREAK- EVEN POINT .e computed in terms ‘The break-even point can bisales = P/V Ratio) MARGIN OF SAFETY The excess of actual or budgeted sales over the break-even sales i s known as the margin of safety, Ib isthe difference between actual sales sinus the sales at break-even point. Margin of Safety=Total Sales - Sales at Break Even Point Margin of Safety (M/S) = Profit/P/V Ratio ANGLE OF INCIDENCE ) “The angle of incidence isthe angle between the sales line and the total cost line formed at the preakeven point where the sales line and the total cost ine intersect each other. The angle of incidence sndicates the profit eaming capacity of a business. A large angle of incidence indicates a high rate of profit and, onthe other hand, a smal angle of incidence indicates a low rate of profit.VARIANCE ANALYSIS Variance analysis is the quantitative investigation of the difference between actual and planned behavior. This analysis is used to maintain control over a business through the investigation of areas in which performance was unexpectedly poor. For example, if you budget for sales to be $10,000 and actual sales are $8,000, variance analysis yields a difference of $2,000. Variance analysis is especially effective when you review the amount of a variance ona trend line, so that sudden changes in the variance level from month to month are more readily apparent. Variance analysis also involves the investigation of these so that the outcome is a statement of the difference from expectations, and an differences, interpretation of why the variance occurred. To continue with the example, a complete analysis of the sales variance would be: The Most Common Variances Here are the most commonly-derived variances used in variance analysis (they are linked to more complete descriptions, as well as examples):ACCOUNTING STANDARD Indian pecounting Standard (abbreviated as Ind-AS) is the Accounting standard adopted by companies in India and issued under the supervision of Accounting Standards Board (ASB) which was constituted as a body in the year 1977. ASB is a committee under Institute of Chartered Accountants of India (ICAI) which consists of representatives from government department, academicians, other professional -—bodies.-~—«sviz..««ICAI, ~—_representatives from ASSOCHAM, CII, FICCI, etc. ICAI is an independent body formed under an act of parliament. The Ind AS are named and numbered in the same way as the International Financial Reporting ‘Standards (IFRS). National Financial Reporting Authority (NFRA) recommend these standards to the Ministry of Corporate Affairs (MCA). MCA has to spell out the accounting standards applicable for companies in India. As on date MCA has notified 41 Ind AS. This shall be applied to the companies of financial year 2015-16 voluntarily and from 2016-17 on a mandatory basis. List of Indian Accounting Standards Ind Ae Name of Indian Accounting Standard \ Ind AS 1 _ Presentation of Financial Statements Ind AS 2 _| Inventories Ind AS7 __ Statement of Cash Flows Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors Ind AS 10 _ Events occurring after Reporting PeriodSTANDARD COSTING Standard costing is the practice of estimating the expense of a production process. It's a branch of cost accounting that's used by a manufacturer, for example, to plan their costs for the coming year on various expenses such as direct material, direct labor or overhead. Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records. Subsequently, variances are recorded to show the difference between the expected and actual costs. ... This results in significant accounting efficiencies. In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and evaluating cost management performance. A standard costing system involves estimating the required costs of a production process.rmation, ird Costing and Budgetary Control Budgetary Control ne . they Budgets are for specific time periods beyond which they have no relevance. New budgets Ae f revision) may be prepared thereafter. sales etc. gures to > Budgetary control can be carried on without standards. It is not dependent on standard costing. technical Budgets are usually the past actual figures adjusted for future changes.) Budgets are expensive) and are set for departments, functions etc.