Bhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) Chapter 1: Introduction to FSA [10 Marks] Optional Theory [No Compulsory theory] 1, What do you mean by financial statement analysis? Why such analysis is required? Mention five parties who are interested in such analysis. [2021 H] [BHALOTIA] [9883034569/9330960172) Financial statement analysis ‘The term ‘financial analysis’, also known as analysis and interpretation of financial statements’, refers to the process of determining financial strengths and Weaknesses of the firm by establishing strategic relationship between the items of the balance sheet, profit ane loss account and other operative data, Acconling w Metcalf and Tigard, “ Analyzing financial statements is a process of evaluating the relationship between component parts of a financial statement 10 obtain a better understanding of a firm’s position and performance.” [BHALOTIA) In the words of Myers, “Financial statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single sct-of statements and a study of the trend of these factors as shown in a series of statements, In other words Financial Statement Analysis (FSA) is the diagnostic and investigative study of Financial Statements in order to take logical business decisions. Financial Statement Analysis takes the raw Financial information from the financial statements and tums it into usable information that can be used to make decisions. The three types of analysis ane horizontal analysis, vertical anallysis, and ratio analysis, Each one of these tools gives decision makers a little more insight into how well the company is performing, [SHALOTIA] tives/Need/I is: The primary objective of finanei information contained i financial statement with a view to judge the profitability and financial soundness of the firm, and to mike forecast about future prospects of the Firm. The purpose of analysis depends upon the person interested in such analysis and his object. [BHALOTIA] However, the following purposes or objectives of financial statements ansilysis may be stated to bring cout the significance of such analysis: (®) Toassess the eaming capacity oF profitability of the firm. (ii) To.assess the operational efficiency and managerial effectiveness. (iii) To assess the short term as well as long term solvency position of the firm. (iv) To identify the reasons for change in profitability and financial position of the firm. (v) To make inter-firm comparison. (vi) To make forecasts abit future prospects of the firth. ‘To assess the progress of the firm over a period of time. To help in decision making and conte To guide or determine the dividend action. ‘To provide important information for granting credit - 1—Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) ial Anal of F: “The following parties are interested in the analysis of financial statements: [BHALOTIA] 1. Creditors: Creditors are concemed with the company’s ability 1 pay interest and principal when due and are concerned with the comypatty’s cash flow ability 2, Shareholders: Shareholders provide company with the much needed capital and ate interested to know ‘company’s ability to pay dividend, and growth of dividends and maximize shareholders wealth. Prospective Investors: Financial statement analysis is used by the prospective investors to evaluate the attractiveness of the investmeat in the business. 4. Management: Management uses financial statement analysis to analysis the efficiency of operations and make important business decisions. For example. whether or not to continue or discontinue part of its business, (0 make or buy certain material, or to acquite or rent/lease certain equipment 5. Regulatory Authorities: For publicly traded companies, financial statements are analysed wo ensure compliance to various rules and regulations. | 2. Discuss the Nature and Component of Financial Statement. _| Meaning & components of Financial Statements ‘Financial statements are basically reports that depict financial and accounting information relating to businesses. A company’s management uses it (o communicate with external stakeholders. These include shareholders, tax authorities, regulatory bodies, investors, creditors, etc. [BHALOTIA] ‘These statements basically include the following reparts 1. Balance sheet 2, Profit and Loss statement 3. Statement of cash flow 4, Income sheet Nature of Financial Statements “nancial statements are prepared! using facts relating to events, which are recorded chronologically “Thus, we have to first record all these facts in monetary terms. Then, we have to process them using all applicable rules and procedures. Finally, we can ow use all this data to generate financial statements, Based on this understanding, the nature of financial statements depends on the following poi 1. Recorded facts: We need to first record facts in monetary form te create the statements, For this, we need to account for figures of accounts like fixed assets, cash, trade receivables, ete 2. Accounting conventions: Accounting Standards prescribe certain conventions applicable in the process of accounting. We have to apply these conventions while preparing these statements. For example, the Valuation of inventory at cost price or market price, depending on whichever is lower, ': Apart from conventions. even postulates play a big role in the preparation wf these statements, are basically presumptions that we must make in accounting. For example, the ing concern Postlate presumes & business will exist for a long time. Hence, we have to treat assets on a historical cost basis, [BHALOTIA) 4. Personal judgments: Even personal o statements. Thus, we have to rely on ons and judgments play a big role in the preparation of these - 2 -Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) There are certain differences between the traditional and modern approaches to financial statement analysis ‘The major differences between these two are discussed below: [BHALOTIA] Basis of comparison ‘Traditional Approach of FSA Modem Approach of FSA Scape The analysis is based on only |The modern approach 16 financial [BHALOTIA] information from published financial | statement analysis is not confined to only statement. It is essentially an analysis of | information from conventional financial financial data, statements. It also considers various nomn- financial information, Collection of Data ‘This analysis mainly collects data from | This analysis niot only collects data from [BHALOTIA] income statement and tuilance sheet, | income statement and thilance sheet but also frown other financial statement such as cash flow and find flow. Foots[BHALOTIA] ‘Tochniques of Analysis AS the analysis is restricted 10 only financial data extracted from historical recomds it is backward looking Prediction of future of the firm cannot bbe made with the help of the traditional | approach. _ ‘Techniques like ratio analysis, common ‘The main thrust of the modern approsch to financial statement analysis is on future. It processes all types of formation relevant for making pre- diction about the future of the firm. Thus, ‘tis forward looking. _ The analysis resorts to sophisticuied ‘graph, aod diagram is not practiced ia this approach. [BHALOTIA} [BHALOTIA] sizing of financial statements, trend | statistical and mathematical approach. analysis ete. are generally applied for | [BHALOTIA] analysis. No advanced statistical or mathematical tool is generally used in the analysis. Testing of Decision | Decision rales are made in a normative | Decision rules are frashed after empirical Rukes[BHALOTIA] | way. No market testing is done 10 the | verification, [BHALOTIA] principles developed. [BHALOTIA] Relation with other | The analysis is generally done in] The modem approach attempts 10 Branches of Knowledge | isolation of other branches of know | integrate financial statement analysis with [BHALOTIA} ledge. [BHALOTIA] ‘other branches of knowledge specially with economics and advanced finance theories. [RHALOTIA} Time Horinan ‘The analysis emphasizes on profitability | The modem approach emphasises on (BHALOTIA] and financial position of the firm from | profitability and financial position of the short-term point of view firm both from short-term and long-term point of view. [BHALOTIA] Pictorial An Pictorial analysis with the help of chart, | Pictorial analysis with the help of chart, graph, and diagram is practiced in this approvch, [BHALOTIA) - 3—-Admission Going on for Regular/Crash Course for B.com, Call for details[ Bhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) 4. Briefly discuss five techniques of Financial Statement Analysis. There are five commonplace approvches 10 financial statement analysis; horizontal analysis, vertical analysis, ratio analysis, tend analysis and cost-volume profit analysis, Bach technique allows the building of a more detailed and nuanced financial profile, [BHALOTIA| |ORIZON (SIS Horizontal analysis compares historical data (such as ratios and line items) and is usually depicted as a percentage growth over the same line item in the base year. This allows financiers to easily spot trends and ‘growth pattems and forecast future projections. This type of analysis also lends insight inte the operational results of an organisation and whether itis operating efficiently and profitably, and makes it easier to cornpare ‘growth rates amongst sector competitors. [BHALOTIA] Examples: ‘© Comparative Income Statement © Comparative Balance Sheet 2. VERTICAL ANALYS! Vertical analysis is the proportional analysis of a financial statement, where each tine item on a financial ‘Statement is listed as a percentage of another item. For exumple, every line item onan income statement is stated ax a percentage of gross sakes, while every line item on a balance sheet is stated as a percettage of total assets, This gives analysts an understanding of overall performance in terms of revenue and expenses, Examples: ‘© Common size Income Statement ‘+ Common size Balance Sheet 3. TREND ANALYSIS “Trend analysis uses historical data (such as price thovements nel trade volume) to forecast the Tong-term dlrection of market sentimedt, It is based! én the idea that what has transpired ie the past will occur again in the fiature, Which helps business to better predict and prepare for ipward irends and reversals within particular market segments. Trend analysis is a useful technique as maving with trends (and not against them) will result in profit for an investor. [BHALOTIA] 4. RATIO ANALYSIS Ratio analysis allows for meaningful comparison between the different elements of a financial statement and is used {0 reveal a general upward or downward trend. it’s a quick method 1o obtain an averview of a company’s Financia! heals, but also more granular relationships between data, such as debt andl equity or price versus eamings, in addition to liability areas such as staff tumover. Once ratio has been calculated, it ean be compared against the previous period, which is crucial fr setting performance targets. [BHALOTIA] &. COST VOLUME PROFIT ANALYSIS This analysis technique helps businesses better understand the relationship between sales, costs, and business ‘profit, It examines the fixed cost and variable cost and establishes the relationship between sales. ancl variable cost (0 help business lenders better plan and project profit. (BHALOTIA] - 4—Admission Going on for Regular/Crash Course for B.com. Call for details |3034569): FRFSA CLASS DAILY (8 AM) Points of differences ‘Comparative Statement 1. Definition [BHALOTIA} Comparative financial statement is a kind of document that presents the financial performance of the organisations side by side with the previous year performances, in carder to compare the growth of business over a period of time Common size financial statement is a way of presenting financial information of a business by expressing the components of financial statements as percentages. [BHALOTIA] . Type of analysis Comparative Statements are also known as horizontal analysis. as lancial statements are compared side hy side Common size siatemenis are also known as vertical analysis as data is analysed vertically. [BHALOTIA} . Types af ‘comparison made Comparative statements make use of both absolute figures and percentag Common size statements use only percentage form [BHALOTIA] Purpose [BHALOTIA} Comparative statements are used for comparing —_financial performance for internal purposes ‘and for inter-firm comparison ‘Common size statements are prepared for the reference of stakeholder (BHALOTIA] Objectives Tis main objective is to indicate the trend of operating result. It also shows the trend of the financial position of a business over the period of study Its objective is to reveal the internal composition of Capital structure, Assets ete. 6. Suitable for I is not suitable for comparison oF firms of different sizes. It is suitable for both inter-firm and intra-firm Comparisons. 111s suitable for inter-firm comparison, UBHALOTIA] 7. Useful for tis useful for Segment-wise andlysis, Ic is not useful for segment-wise analysis. - 5 -Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) ‘AS per Ind AS | of the ICAI, certain fundamental accoun presentation of financial statements. They are usually not stated in the financial statements specifically because their acceptance and use are assumed, Disclosure is necessary only if they are not followed. Certain assumptions are employed when preparing financial statements, They are rarely disclosed because they are assumed to be adhered to. Disclosure is required only when they aren't followed. They are generally accepted as the most fundamental accounting assumptions, {BHALOTIA] jons underlie the preparation and ‘The following have generally been accepted as funda Going Concern: #1 Fundamental Accounting Assumption One of the fundamental accounting assumption is preparation of financial statements on “Going Concern’ basis, Lc. the enterprise is expected to be 0 it’s operations for the foreseeable future. In other words, itis assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. [BHALOTIA] pental accounting assumptions: stency: #2 Fi ntal Accounting Assumption Consistency assumption refers to the underlying fact that the same accounting guidelines are adhered to while preparing financial statements from one period 10 the next, There are no frequent changes to be expected. It is assumed that accounting policies are consisteat from one period to another. [BHALOTIA| Accrual: #3 Fundamental Accounting Assumption Revenues and costs are accrued, that is, recognised as they are earned or inenrred (and not as money is received of paid) and recorded in the financial statements of the periods to which they relate. (The tions affecting the process of matching costs with revenues under the accrual assumption are in this standard. [BHALOTIA} consider not dealt wit - 6 Admission Going on for Regular/Crash Course for B.com, Call for details |Bhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) 2.What are the components of financial statements as per Ind-AS 1? [2022 Pass] [BHALOTIA] [9883034569] “As por Ind-A oO (a) a balance sheet as at the end of the period ; (b) a statement of profit and loss for the period! {c) statement of changes in equity for the period; 5 (d) a statement of cash flows for the period; s, (€) notes, comprising a summary of significant accounting policies and other explanatory information: STA complete set of financial statements comprises: [HHALOTIA] (1) comparative information in respe t of the preceding perio the beginning of the preceding period when an entity applies an accounting ely or makes a retrospective restatement of items in its financial statements, or (g) a balance sh policy retrospe when it ree (h) An entity shall present a single statement of profit and loss, with profit or loss and other ‘comprehensive income presented in two sections. The sections shall be presented together, with the profit or loss section presented first followed directly by the other comprehensive income section. [BHALOTIA] lassifies items in its financial statements As per Ind-AS. 1, the general features of financial statement are as follows: [BHALOTIA} (@) Financial statements shall present a true and fair view of the financial position, financial performance and cash flows of an entity. Presentation of true and fair view 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 Ind ASs, with additional disclosure, when necessary, is presumed to result in financial statements that present a true and fair view. [BHALOTIA] (b) An entity whose financial statements comply with Ind ASs shall make an explicit and unreserved statement of such compliance in the notes. (©) Am entity shall not describe financial statements as complying with Ind ASs unless they comply with all the requirements of Ind ASS. (d) An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatc (c) In the extremely rare circumstances in which management concludes that compliance with a requirement in an Ind AS 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 if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure. [BHALOTIA] [= 7 Admission Going on for Regular/Crash Course for B.com. Call for details |Bhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) 4,What are the objectives of ind AS-1? [BHALOTIA] Oblective This Standard prescribes the basis for presentation of general purpose fina: comparability (a) both with financial statements of previous periods and (b) with the financial statements of other entities. (c) It sets out overall requirements for the presentation of financial statements, guidelines for their structure ane! niinimum requirements for their content. [BHALOTIA] statements to ensure 5. What are the purposes/objectives of Financial Statement as per Ind AS-1? [BHALOTIA] [9883034569] The objective of Financial statements is to provide information about the nancial position, financial performance and cash flows of an entity that is useful wo 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 () cash flows. ‘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, [BHALOTIA] 6. Specify three purposes of conceptual framework for preparation and presentation of financial statements of a company. [2022 Hons] [BHALOTIA] [9883034569] ‘The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for extemal users. The purpase of the Framework is to: [BHALOTIA] (a) assist preparers of financial statements in applying Accounting Standards and in dealing with topics that have yet to form the subject of an Accounting Standard; (b) assist the Accounting Standards Board in the development of future Accounting Standards and in its review of existing Accounting Standards: (C) assist the Accounting Standards Board in promoting harmonisation of reguilations, accounting standards and procedures nélating to the preparation and presentation of financial statements by providing. a basis for reducing the number of alternative accounting treatments permitted by Accounting Standards; (d) assist auditors in forming an opinion as to whether financial statements conform with Accounting Standards; (e) assist users of financial statements in imterpreting the information contained in financi prepared in conformity with Accounting Standards; and (8) provide those who are interested in the work of the Accounting Standards Board with information about its approach to the formulation of Accounting Standards statements - 8 Admission Going on for Regular/Crash Course for B.com, Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) [ 7. The users of financial statements [BHALOTIA] ‘The users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, govemments and their agencies and the public. Thay use financial statements in order {0 satisfy some of their information needs. These needs include the following: [BH ALOTIA] {a) Investors, The providers of risk capital are concemed with the risk inherent in, and rem provided by, their investments. They need information to help them determine whether they should buy, hold or sell “They are also interested in information which enables them to assess the ability of the enterprise to pay dividends tb) Employees. Employees and their representative groups are interested in information about the stubitity and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities. te Lenders. Lenders ure interested in information which enables them to determine whether their loans, and the interest attaching to them, will be paid when due (G) Suppliers and other trade creditors. Suppliers and other creditors are interested in information which cnables them to determine whether amounts owing to them will be paid when due. te) ‘Customers. Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise (0 Governments and their agencies. Governments and their agencies are interested in the allocation of resources and, thenefore, the activities of enterprises. &. What are the objectives of Financial Statement? [RKB] The Objective of Financial Statements {a) The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. tb) Financial statements prepared for this purpose meet the common needs of most users. However, financial statements do not provide all the information that users may need to make economic decisions since (a) they largely portray the financial effects of past events, and (b) do not necessarily provide non-financtul information. Financial statements also. show the resulis of the stewardship of management, or the accountability of management for the resources entrusted (0 it. Those users who wish t0 assess the stewardship or accountubility of management do so in onder that they may make economic decisio may include, for example, whether to hold or sell their investment in the enterprise or whether to reappoint or replace the management. [BHALOTIA] ese decisions -9~—Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) Qualitative chameteristics are the attributes that make the information provided in Financial statements useful to users. The four principal qualitative characteristics are unclerstandability, relevance, reliability and comparabiti Understandability. ‘An essential quality of the information provided in financial statements is that it must be readily understandable by users, For this purpose, itis assumed that users have a reasonable knowledge of business and economic activities and accounting and study’ the information with reasonable diligence, Information about complex matters that should be included in the financial statements because of its relevance 10 the economic decision-making needs of users should not be excluded merely om the ground that it may be too difficult for certain users 10 understand. [BHA LOTIA} Relevance ‘To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations. [BH ALOTIA} Reliability To be useful, information must also be reliable. Information has the quality of reliability when it is free from Inaterial error and bias and can be depended! upon by users to represent faithfully that which it either purports #» ‘represent or could reasonably be expected to represent. | BHALOTIA] Comparability Users must be able to compare the financial statements of an enterprise through time in order to identify trends im its financial position, performance and cash flows. Users must also be able to compare the financial statements of different enterprises in order to evaluate their relative financial position, performance and cash flows. Hence, the measurement and display of the financial effects of like: transactions and other events must be carried out in a consistent way throughout an enterprise and over time for that enterprise and in a consistent way for different enterprises. [BHALOTIA] - 10 Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) IND AS- 16 10. the objectives of Ind AS-16. [2021 6" Sem Pass] [BHALOTIA] The objective of Ind AS-16 is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discem information about an enlity’s investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses wo be recognised in relation to them. [BHALOTIA] 4. Mention any 5 items which are to be capitalised while purchasing Plant and Machinery as per Ind AS-16. [21 6 Sem Pass] [BHALOTIA] [9883034569] ‘The cost of an item of property. plant and equipment comprises: {BHALOTIA] (a) its purchase price, including import duties and non-refundable purchase taves, after deducting trade discounts and rebates. (b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. [BHALOTIA] Examples of directly attributable costs are: i. costs of employce benefits arising diectly from the construction or acquisition of the item of property, plant and equipment: fi, costs of site preparation: iii, initial detivery and handling costs; iv. installation and assembly costs; ¥. costs of testing whether the asset is functioning properly vi. professional fees. (c) the initial estimate of the costs of dismantling and removing the item and restoring the site: on which it is located {BHALOTIA] + 11 -Admission Going on for Regular/Crash Course for B.com. Call for details |Bhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) 12. Mention some items which are not cost of property, plant and equipment as per Ind AS-16, Examples of costs that are not costs of an item of property, plant and equipment are: [BHALOTIA] (a) Cost of opening a new facility (b) Administration and general overhead (©) Cost of launching a new product or service (including costs of advertising and promotional activities); (d) Expenses on opening a new business facility or expenses related to an inaugural function (e) Cost of relocating — shifting factory consequent to statutory order (B) Initial Losses when the asset operates at lower capacity (g) Costs of incidental operations not necessary to bring the asset to its required condition and location. [BHALOTIA] 13. State the assets to which Ind AS 16: Property, Plant and Equipment does not apply. [2021 6th Sem Hons] This Standard does not apply to: [BHALOTIA] (a) property, plant and equipment classified as held for sale in accordance with Ind AS 105, Non- ‘current Assets Held for Sale and Discontinued Operations. (b) biological assets related to agricultural activity other than bearer plants, This Standard applies to bearer plants but it does not apply to the produce on bearer plants. (©) the recognition and measurement of exploration and evaluation assets, (a) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b)-(d). [BHALOTIA] 14. What are the conditions need to be satisfied in order to recognise the cost of an item of property, plant and equipment as an asset? [2021 Sem Hons] ‘The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. [BHALOTIA] = 12 ~Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) [ 15. Define the following terms as per Indian AS 16? [BHALOTIA] Depreciation Depreciation is systematic allocation of depreciable asset over a useful life of asset. [BHALOTIA] Meaning of Plant, Property and ment (PPE) Property, plant and equipment are tangible items that (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. [BHALOTIA] Depreciable amount [2021 Hons! Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. [BHALOTIA] 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. [BHALOTIA] wrrving amount {203 Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. [BHALOTIA] jons] Cost Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other [Z Indian Accounting Standards. [BHALOTIA] I Recoverable amount Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. Residual value The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end ofits useful life. [BHALOTIA] Useful life iseful life is: (a) the period over which an asset is expected to be available for use by an entity: or (b) the number of production or similar units expected to be obtained from the asset by an entity - 13-Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) IND AS- 33 16. Objectives of Ind AS-33 [BHALOTIA] [9883034569] The objective of Ind AS-33 Standard is to prescribe principles for the determination and presentation of earnings per share, so as to improve performance comparisons between different entiti reporting period and between different reporting periods for the same entity. Even though earnings per share data have limitations because of the different accounting policies that may be used for determining consistently determined denominator enhances financial reporting. The focus of this Standard is on the denominator of the earnings per share calculation. [BHALOTIA] 47. Basic EPS [BHALOTIA] [9883034569] in the same ‘earnin, EPS can be calculated with the given formula: Basic EPS = (Net income ~ Preferred dividend) Outstanding common shares if a company eamed a net profit of % 50 crore and the total outstanding shares were 1 crore, *S would be % 50 per share. [BHALOTIA] For exampl then the 18. Diluted EPS [BHALOTIA] [9883034569] such as any financial instrument that c include the following: 1.Stock result in more shares in the future, Potential ordinary shares tions and warrants, 2.Convertible bonds; 3. Convertible preferred shares rnd + debt interest) / All convertible securities is necessary to identify all potential shares, 419. Basic EPS vs diluted EPS [BHALOTIA] [9883034569] Basic EPS Diluted EPS Basic Earnings of The Company Per Equity Share Revenues of the Company Per Convertible Share Significant to Investors as It Does Not Helps To Evaluate the Profitability of a Company More Significant to Investors Helps To Assess Profitability with Convertible Securities Common Share Included In The Calculation ‘Common Shares, Stock Options, Preferred Shares, Warrants, Debt all Included in The Calculation Easy To Use [BHALOTIA] ‘Comparatively More Complex [BHALOTIA] - 14 Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) Chapter 3: Accounting Ratios Ratio Analysis: [Optional Theory] 4. What are Accounting Ratios? [BHALOTIA] [9883034569] ‘Recounting ratios are an important ool for analysing financial Satements. It is a comparison of tWo Or more financial data that is used to analyse a company’s financial statements, These depict a connection between twa ot ‘more accounting numbers obtained from financial statements. It is a useful tool for shareholders, creditors, and other stakeholders to- understand a company’s profitabitity. strength, and financial health. This is also known as financial ratios, which are used to track corporate performance and make key business choices. [BHALOTIA] 2. Objectives/Importance/Advantages of Ratio Analysis. [RKB] Following are the objectives of ratio analysis: [BHALOTIA] (a) Highlights the area of concern ~ When accounting ratios are compared with the ideal ratios prevailing in the industry, it brings to light the area which requires the immediate attention of the management. (b) Facilitates comparison —With the help of ratio analysis, comparisons of intra and intercompany performances become easier. (¢) Evaluation of efficiency ~ They provide a detailed overview of the liquidity, solvency, and profitability Position of the business which in its entirety belps in evaluating the efficiency of the business. (d) Forecasting and planning -One of the primary objectives of ratio analysis is that they help in ‘comparing the trend in the financials over the past years which aids the management in preparing future budgets and forecasts. [BHALOTIA] (¢) Transparency to stakeholders ~ Ratio analysis helps the various stakeholders in measuring the operative ‘efficiency of the company, thereby ensuring complete transparency. () Better decision making ~ Analysis of various accounting ratios helps the management in taking better andl improved decisions. [BHALOTIA] (g) Simplicity — It converts complex financial figures interpret them into simpler data that is easily understandable by a layman, (h) Budgeting. While preparing budgets of different functions, past ratios can be used as guide for harmonisation among them. For example, with the help of last year’s material consumption to sales ratio, ‘current year's purchase budget can be prepared with respect to forecasted sales. (i) Indication of long term solvency position. Ratio analysi solvency position i.e, long term debt paying capacity of a firm. So long term creditors, security analysts, and existing and prospective owners of a firm can take their investment decisions rationally and judiciously based on ratios measuring Hong term solvency of the firm, () Measurement of efficiency in utilisation of assets. The technique of ratio analysis throws light on the degree of managerial efficiency in utilisation of various assets. otherwise would require a professional to also helpful in assessing” the long term - 15 ~Admission Going on for Regular/Crash Course for B.com. Call for detailshalotia Classes 034569): FRFSA CLASS DAILY (8 AM) (k) Indication of liquidity position. With the help of ratio analysis, conclusion can be drawn regarding liquidity position ie, short term debt paying ability of the firm. This ability is reflected in the various liquidity ratios. Creditors, Bankers and other suppliers of short term loan are particulary interested in the liquidity ratios. (Signal of corporate sickness. Proper ratio analysis can give signal of corporate sickness in_ advance. Accordingly, measures can be taken timely to prevent the occurrence of such eventuality, (im) Formulation of governmental plans and policies. The goverment takes various plans and policies based on industrial performance of the country. Ratios are generally used as indicators of performance of ustries, [BHALOTIA] | 3-What are the limitations of ratios Analysis. [BHALOTIA] | Limitations of Ratio Analysis : |BHALOTIA. Ratio analysis is a widely used technique for assessing the operating performance and financial position of affirm, But it has got some inherent problems which must not be lost sight of before undertaking such analysis, Some of these problems oF limitations are as follows (a) Dependence on correct data: The efficacy of ratio analysis depends upon the sanctity of accounting data. accounting data are fabricated, the ratio analysis will only give misleading conclusion, (b) follow uniform accounting principles. (©) Ignores changes — Accounting ratios ignore the concept of price level changes which lead to incorrect analysis of financial statements. Price changes are common in the inflationary economy and not taking this into account would not provide reliable results. [BHALOTIA] (@) gnores Qualitative aspects — One of the major limitations of ratio analysis is that it only takes into account Financial figures, ie. quantitative aspect affects the performance of the company. (©) Difficult in. Comparisons — Ratio analyses are popular for conducting inter and intra company comparisons. However, it does not address the issue of variation in accounting policies and procedures followed by different companies in the industry. The differences in policies could render the comparisons completely - It is not concemed with the non ~ monetary information which also it becomes difficult to compare results arrived by following different policies. (®) Unavailability of Standard Definitions - Companies tend to conduct ratio analysis with a view that the results can be compared with the ideal ratios of the industry and any deviations could then be resolved. But the problem area still remains is that there are no universally accepted levels of ideal ratios against which the performance of a company should be measured. [BHALOTIA] (g) Docs not offer a solution — Accounting ratios help the management in identifying the problem areas but the limitation of ratio analysis is that it does not offer a solution to the problem. This is one of the primary limitations of ratio analysis. (h) Historical Information —Ratio analysis is based on historical information provided by the financial statements. The current and future market conditions are not considered while decision making which would not yield better results, [BHALOTIA] - 16 —Admission Going on for Regular/Crash Course for B.com. Call for details[__ Bhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) | 4 Liquidity Ratios (Short term solvency Ratio) [BHALOTIA] iy Wo pay its shor-term debt A liquidity ratio is a type of financial ratio used to determine @ company's abi obligations. [BHALOTIA] (A) Current Ratio: 11 shows the relationship between current assets and current liabilities. It is also known as the working capital ratio, The ideal current ratio is 2:1. ‘The term current assets mean the assets is within 12 months & the term current liabilities which are easily convertible into cash of cash equivale means the liabilities which are payable within a period of 12 months. [BHALOTIA] Current Ratio =- (in months or days) (8) Debtors turnover ratio (Trade receivables turnover Ratio): The ability of a business to collect money from its clients is determined by the accounts receivable tumaver ratio. Credit Sales Debtors Turnover Ratio Trade Receivables = Debtors + Bills Receivables If Credit sales not given separately, assume all sales are credit sales. OF ng Trade receivables + Closing trade recevables Average Trade receivables 3 opening Trade Receivables is not given: Average Trade Receivables = closing Trade Receivables 12 0r3t s Turnover Ratio Debtors velocity (average debt collection period) = velocity (average n period) = = 21 —Admission Going on for Regular/Crash Course for B.com, Calll for detaBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) (C) Creditors turnover ratio (Trade payables turnover Ratio): The accounts payable tumover ratio measures the time period aver which a company is allowed to hold trade payables before being obligated to pay suppliers. [BHALOTIA] Credit Purchases Creditors Tumnover Ratio = pasties Trade Payables = Creditors + Bills Payables If Credit Purchases not given separately, assume all sales are credit purchases. Opening Trade Payables + Closing trade Payables Average Trade Payables = If Opening Trade payables is nat given: Average Trade payables = closing Trade payables 12 0r3 fors Turnover Rat Creditors velocity (average creditors payment period) = (D) Fixed Asset Turnover Ratio: The fixed asset turnover ratio measures the fixed asset investment needed to maintain a given amount of sales [BHALOTIA] Sales Fixed Assests Turnover Ratio = - aa (E) Capital Turnover Ratio Sales Kwerage Capital Employed Capital Turnover Ratio = (F) Assets Turnover Ratio Sales Assets Tumover Ratio = 7-5 Assets (Excluding Preliminary Expenses) (G) Working Capital Turnover Ratio Sales Working Capital Turnover Ratio =~ _—__ a Working Capital Working Capital Or Net Working Capital = Current Assets ~ Current Liabilities = 22 Admission Going on for Regular/Crash Course for B.com, Call for details{_ Bhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) Chapter 4: Fund Flow Analysis [Optional Theory]: 4. What do you mean by fund flow statement? What are the advantages & limitations of fund flow statement? [BHALOTIA] IND FLOW S| ‘A fund flow statement isa statement prepared to company between two balance sheets. It portrays the inflow and outflow of funds ie, sources of applications of funds for a particular period, [BHALOTIA] ADVANTAGES OF FUND FLOW STATEME! Funds flow statement presents the following advantages: (a) Eund Generating Capacity: With the help of eash flows from operating activities, a Funds Flow ‘Statement helps to understand the fund generating capacity of the firm which, ultimately, provides ‘valuable information to the management for taking future courses of action. (b) Changes in Working Cupital Position: A Funds Flow Statement presents either the increase in Working Capital or Decrease in Working Capital with the help of ‘A Statement of Exchanges in Working Capital”"—which helps us to know from which sources the additional Capital has been procured, o the application of such funds. {BHALOTIA] (©) Projected Funds Flow Statement: A firm can prepare its expected inflows and outflows of eash for future with the help of a Projected Funds Flow Statement. [BHALOTIA] (d) Highlights the Causes of Changes: A Funds Flow statement highlights the significant causes of changes in Working Capital position between two accounting periods revealing the effect for the same on the Tiquidity and solvency position of a firm. tion of Credit-Worthiness: Credit C © 1g Agencies, after careful analysis of a Funds Flow firm—which helps them (0 understand the liquidity Si position. (BHALOTIA] itworthiness 0 evaluate the © LIMITATIONS OF F1 (a) A funds flow statement cannot present a continuous change of financial activities including the changes of working capital {b) Since itis based on financial statement (i.e. Income Statement and Balance Sheet, itis not a original statement. [BHALOTIA] (©) A projected Funds Flow Statement does not always present very accurate estimates about the financial position since it is a historic one. (4) this (©) Cash Flow Staten a substitute of financial statements, i.e. Income Statement and Balance S mt n cash position, is more important or more informative than the changes in working capital which is presented by a Funds Flow Statement, (BHALOTIA] - 23 -Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) 2. Discuss the different meaning of the term ‘fund’? Which concept of fund is mostly used in preparing the fund flow statement? [BHALOTIA] [9883034569] [9330960172] Different meaning of the term “fund” ‘The term ‘fund’ has different ch are common to the notations or meanings. The concepts of fund wi accounting world are discussed below: [BHALOTIA] 1 ‘Fund’ in general sense: ‘Fund’ is considered literarily as equivalent to cash available. It consists of cash in hand and demand deposits with banks [Term deposits are not readily available]. Cash is required to acquire assets and to pay off liabilities. In a broader sense, assets which are readily convertible into cash [like Debtors, marketable short — term securities etc,] are included within “Fund”, [BHALOTIA] Some others prefer to consider ‘net monetary assets’ as fund. The latter represents the excess of short — term monetary assets over quick liabilities [which are readily payable]. ‘Fund’ under working Capital concept: Working Capital is the excess of current assets ‘over current liabilities. Fund Flows are concerned with material transactions which cause changes in the Working capital. The sources of the applications of working capital and their net impact on the net working capital of the concerned period are analysed. [BHALOTIA] Fund as Short Term Monetary Assets: According to this concept ‘Fund’ is equivalent to the total of cash all assets which are readily convertible into cash. As such, short ~ term marketable securities or quickly realisable debtors are included within Fund, [BHALOTIA] Eund as Net Monetary Assets: Net Monetary assets = short-term monetary assets (-) readily payable short ~ term debts. A particular group / school of accountants think that “Fund” does ‘not imply short — term monetary assets. Rather it implies short — term net monetary assets. ‘Eund” under modern concept: “All financial resources” that have been used in the concer are considered as Fund. Under the working capital concept if any asset is acquired by issue of shares and there is no outflow of cash, the Fund Flow Statement does not reveal that, But under the modern concept the two aspects of the transaction, namely (a) acquisition of assets and (b) issue of shares are recorded side by side. It is a broader view of all financial transactions. Under this concept fund includes all resources used in the business including human resources. So, the form in which the asset is used does not matter. All aspects of financing and investing activities are shown in the Fund Flow Statement. As a result such a statement carries all information. It is not believed to be a very clear concept. As assets acquired by issue of shares or debentures are treated at par with assets acquired by payment of cash, the analysis made became vague and unreliable in most cases. [BHALOTIA] - 24 Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) Chapter 5: Cash flow Statement [OPTIONAL THEORY: 1. What do you mean by cash flow statement? What are its objectives & characteristics? [BHALOTIA] [9883034569] | Cash Flow Statement: ‘A cash flow statement (CFS) is a financial statement that shows the inflows and also outflows of cash and cash equivalents of a company. Cash flow Statement also shows the cash inflows & outflows from operating, ities. [BHALOTIA] In other words, The cash flow statement (CFS), is a financial statement that summarizes the movement of cash investing, and financial ind cash equivalents (CCE) that me in and go out of a company. The CFS measures how well a company manages its cash position, meaning how well the company snerates cash to pay its debt obligations and fund t its operating expenses. As one of the three main financial statements, the CFS complements the balance shi nent. [BHALOTIA] ind the income st Objectives of cash flow statement The primary objective of cash flow statement is to supply the necessary information relatin ceash to the users financial statement. It also highlights the f fe oF prospective cash positions ie, cash or cash ied with the help of this statement. [BHALOTIA] equivalent, The inflows and outflows of cash can be represe the main objectives of cash flow statement are: (a) Measurement of Cash: Inflows of cash and outflows of cash can be measured an lly which arise from operating activities, investing activities and financial activ (b) Generating inflow of Cash: Timing and certain of rating the inflow of cash can be known which directly helps the m. (©) Classifieat financial activities which help a firm to analyse and interpret its various inflows and outflows of cash, (a) Prediction of futu wanagement to lake various Financing deci agement to take financing decisions in future. n of activities: All the activities are classi d into operating activities, investing activities and A cash flow statement, no doubt, forecasts the future cash flows which helps the jons since synchronisation of cash is possible. and solvency position: Both the inflows and outflows of cash and cash equivalent can (e) Assessing liquui be known, and as such, liquidity and solvency position of a firm ca also be maintained as timing and certainty of cash generation is known i.e. it helps to assess the ability of a firm to generate cash. (f) Evaluation of future cash flows: Whether the cash flow from operating activities are quite sufficient in idendshiaxes. future to meet the various payments e.g. payment of expense/debtvdi (@) Supply necessary information to the users: A casi flow statement supplies various information relating to inflows and outflows of cash to the users of accounting information. [BHALOTIA] - 25 Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes (9883034569): FRFSA CLASS DAILY (8 AM) 2. What are the advantages & limitations of cash flow statement? [BHALOTIA] [9883034569] Advantages of cash flow statement/BHALOTIA] ‘A cash flow statement is of great importance to Financial Management as it is an essential tool of financial analysis for short-term planning. The basic advantages of a cash flow statement are as follows: 1. As a cash flow statement is based on cash basis of accounting, it helps in the evaluation of the cash Position of an organisation. 2. It provides information about all the activities of an organisation classified as operating, investing, and financing activities. 3. A cash flow statement prepared according to AS-3 (Revised) is more useful and suitable for an organisation than a fund flow statement statement that can represent a better picture of the firms position 4. A-cash flow statement also helps in planning the repayment of loans. replacement of fixed assets, and other related long-term planning of cash. Besides, itis also significant for capital budgeting decisions. Sometimes a firm is in a poor cash position in spite of having substantial profits. A cash flow statement helps in determining the reason behind the same by throwing light on different uses of cash generated by the firm. 6. Ifa firm wants to analyse its short-term financial position, cash flow analysis is more useful instead of a fund flow analysis. It is because, in a short period, cash is more relevant for the firm than the working capital to forecast its ability to meet its immediate obligations. [BHALOTIA] i is because there is no standard format for a fund flow Limitations of cash flow analysis 1, Not Suitable for Judging the Liquidity: [BHALOTIA] ‘The liquidity of an organisation does not only depend on the cash alone; hence, a cash flow statement does not represent a true picture of an organisation's liquid 2. Possibility of Window Dressing: Window Dressing means showing a false and better picture of an organisation by manipulating its statements, ‘The possibility of window dressing of cash in cash flow statement is much higher. 3. Ignores Non-cash Transactions: All the non-cash transactions like issue of bonus shares, purchase of fixed assets by issue of debentures or shares, etc., are ignored under a cash flow statement. Therefore, a firm's true position cannot be judged by a cash flow statement. 4. Ignores the Accrual Concept of Accounting: ‘As a cash flow statement is prepared on a cash basis, it ignores one of the basic concepts of accounting; i... the acerval concept 5. No Substitute for an Income Statement: Just like Income Statement, a cash flow statement does mot take both cash and non-cash transactions into account, it is not a substitute for an income statement. 6. Historical in Nature: ‘The information revealed by a cash flow statement is historical in nature, as, itis prepared with the help of two comparative balance sheets of the past years. = 26 —Admission Going on for Regular/Crash Course for B.com. Call for detailsBhalotia Classes 83034569): FRFSA CLASS DAILY (8 AM) 3. Distinguish between fund flow statement & cash flow statement [BHALOTIA] [9883034569] [9330960172] [RKB] “The fund flow statement is the earlier version of the cash How statement. The ‘comprehensive and details the multiple cash flows of a company, rather than just focusing on working capital ih flow Statement is more “The cash flow statement is best used to understand the liquidity position of a firm whereas the fund flow statement is best suited for long-term financial planning, which is why itis an important oo! for investors. The fund flow statement is able o identify the sources of cash and their uses, and the cash flow statement starts with looking atthe current level of cash and how it leads tothe elosing balance of ash, [BH ALOTIA] ‘The Cash Flow Statement shows the changes in the cash position (Inflows and outflows) of a ‘analytical reconciliation statement that explains the reasons for the differences between the opening ‘cash balances over a period. On the other hand, the Fund Flow Statement is a statement that shows the ups and downs of the financial position or the changes in working capital of the entity between the two financial years. ‘While a cash flow statement is concemed with the flow of actual or notional cash, a fund flow statement deals ‘with cash as well as all the other items that constitute working capital. In this way, Cash Flow Analysis help in determining the cash-generating efficiency of the entity. Conversely, Fund Flow Analysis helps in ascertaining the firm's efficiency in utilizing the working capital, [BHALOTLA] BASIS FOR COMPARISON Meaning ‘Cash Flow Statement isthe F summarized statement of cash receipts | 4 and cash payments of the firm between | fina (CASH FLOW STATEMENT] FUND FLOW STATEME! T jow Statement Is a financial too), ned to analyse the changes in al position of the firm, comparing two fin ial periods. two financial years Basis of Accounting Cash Basis of Accounting ‘Aceruall Basis of Accounting [Discloses Taflows and Outflows of Cash ‘Sources and applications of funds [Tool for ‘Short term financial analysis Long term financial analysis Dbjective To explain the cash movement amidst_| ‘To explain the causes of changes in the two points of time, balance sheet items, Le, asset and liabilities between two financial year. pening Balance ‘Opening balance is present No opening balance Difference in Sides Indicates the closing balance of cash Indicates the increase or decrease in working capital Part of Financial Statement Yes No. - 27 -Admission Going on for Regul: sh Course for B.com. Call for details