Professional Documents
Culture Documents
Financial Accounting
Financial Accounting
Standards
Session I
Business Organization & Accounting
Dr Rashmi Soni
Rashmi Soni
• Doctor of Philosophy (Finance2008)
• Fellow Member of Cost and Management Accountants( India rank holder 1998)
• Post Graduate in Commerce/ Management
• 20+ years’ experience of imparting Finance & Management courses to
MBA/PGDM/MMS/PGPX in India and Abroad
• Conducted 20+ MDPs across industries in the areas related to Finance and
Strategic Mgmt.
• 29+ research paper publications across ABDC listed International and National
Journals. Also 2 books for MMS course of Univ. of Mumbai
• Research Guide- University of Mumbai (Four completed and some working)
Rashmi Soni
• Faculty and Examiner of Institutes of Chartered Accountants of India and The
Finance
• FDP Scholar from Aston University, Birmingham (UK), IIM Bangalore, IIM Kolkata
Now Future
Economic Entity Going-Concern Principle
The business is accounted for Reflects assumption that the
separately from other business business will continue operating
entities, including its owner instead of being closed or sold
Revenue Recognition
1. Recognize revenue when it is
Historical Cost
earned.
Accounting information is based
2. Proceeds need not be in cash.
on actual cost.
3. Measure revenue by cash
received plus cash value of
items received.
Full Disclosure
Matching
Report enough information for
Expenses are matched against
users to make knowledgeable
revenues, and recorded in the
decisions about the company
same period in which the related
revenues are earned
Accounting Constraints
Conservatism
Income and assets be reported at
their lowest reasonable amounts (i.e.
minimizing the assets and
understating the income) Materiality
Accountants are required to
accurately account for significant
items and transactions
Accounting Equation
• The relationship among three elements of the
balance sheet can be expressed through an
equation, known as fundamental accounting
equation:
Assets (A) = Liabilities (L) + Equity (E)
• The unique feature of the above equation is
that all transactions will affect the equation in
such a way that the equality will always be
maintained.
• This happens due to double entry rule.
Accounting Equation
Liabilities &
Assets Equity
Types of Accounting
Money
Liabilities Assets
Direct or indirect financing by What we own. Some of these
others. We have received would remain with us for long
value from others but we have time and some others would be
not yet compensated them for processed & sold off
the same. Assets can be physical or
monetary.
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Financial Statements
Understanding & Analysis
Financial Statements and Financial Reporting
• President’s letter
Financial
• Balance Sheet
Information • Prospectuses,
• Income Statement • SEC Reporting
Accounting?
• Statement of Cash • News releases
Flows
• Forecasts
1. Identifies • Statement of Owners’
2. Measures or Stockholders’ Equity • Environmental
Reports
3. Communicates • Note Disclosures
• Etc.
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Statement of Profit and Loss
• Inflow of economic benefit
Revenue
Profit/
• Less
Loss
Expenses
Returned Earned / Excess Expenditure
TOP Line
BOTTOM line
Statement of Profit and Loss
Particulars Amount
Revenue xxxx
Expenses xxxx
Profit xxxx
Revenue
Revenue from operations and Other income
• Indicator of financial
• EBITDA is ‘earnings before performance
interest, tax, depreciation • Represents performance of
and amortization’. different taxes, financial and
capital investment
• Tool to determine whether
company can service its debt
• Useful for evaluating
companies with different
capital structure, tax rates and
depreciation and amortization
policies
Balance Sheet
Balance Sheet
• Owners fund
Equity
Assets
±
Liabilities
Utilization of the fund
• Borrowed fund
Hence, Equities + Liabilities always match the assets
Balance Sheet
Equity and Liabilities Amount
Equity xxxx
Liabilities xxxx
Total xxxx
Assets Amount
Assets xxxx
Total xxxx
Assets- Something valuable that an entity owns,
benefits from or has use of, in generating income
• Equity • Liabilities
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Cash Flow Statement
Information on cash flows
• Cash flow statement of an entity informs us about how the
enterprise generates cash and how the generated cash is
utilized it also tells us about timing and certainty
• Cash flow statement can be prepared regardless of the
nature on the entity and nature of transactions incurred as
in the case of a financial enterprise
• Principle cash generating activities of enterprises differs but
all the entities require a decent cash flow from its operating
activities
– They need cash to conduct their operations, to pay their
obligations and to provide returns to their investors
Process of By establishing
identifying relationship
financial between items
Financial
strength and of balance
Analysis
weaknesses of sheet and
a company statement of
profit and loss
Why Financial Statements Are
Analyzed???
Why Financial Statements Are
Analyzed???
Company’s
Credit
Worthiness
Evaluate its
Financial
Soundness
Business Analysis
Equity investors
Creditors
Managers
External Auditors
Directors
Regulators
Lawyers
Financial Analysis Framework
Who uses Financial Statement Analysis?
• Almost Everyone in the Business World
– Bankers – analyze loans and cash flow
– Portfolio Managers – projections of stock prices
– Marketing Managers – market penetration and
impacts to profitability
– Human Resources – compensation analysis
– Senior Management – corporate strategy
– Sales Managers – commission rates on sales
– Internal Financial Analysts – profitability analysis
– Customer Service Managers – efficiency ratios
Data may be compared with the
following:
• The firm's own data from prior years
• Data from another firm in the same industry
• Data from another firm in which the analyst
may invest
• Industry averages
• Benchmarks or targets
Types of financial analysis
• Cross sectional techniques
– At a point of time
Between
• Different companies or different items of financial
statements
• Time series techniques
– Over a period of time
Methods of
Financial Statement Analysis
• Horizontal Analysis
• Vertical Analysis
• Trend Percentages
• Ratio Analysis
Horizontal Analysis
Solvency ratio
Debt to assets ratio Total debt / total assets portion of total assets
finance by debt
Debt to capital ratio Total debt / Total debt + Portion of debt in
total shareholders equity company
Debt to equity ratio Total debt / Total How much debt and
shareholders equity equity company has
Interest coverage ratios EBIT / Interest Interest payment capacity
Analyzing Activity / Turnover /
Efficiency
Activity is a more sophisticated
analysis of a firm's liquidity,
evaluating the speed with which
certain accounts are converted into
sales or cash; also measures a firm's
efficiency
Activity Ratios
Activity Ratio Formula Interpretation
Inventory Turnover Cost of goods sold / Average How many times per period
ratio inventory entire inventory was sold
Days of inventory on Number of days in period / On average how many days of
hand Inventory turnover inventory kept on hand
Receivable Turnover Revenue(credit) / Average How quickly does a company
receivables collect cash
Days of sales Number of days in period / Time between credit sales and
outstanding or Receivable turnover cash collection
Receivable collection
period
Payable Turnover Purchase(Credit) / Average Time company pays to suppliers
Creditors
Average payment Number of days in period/ payable Average number of days to pay
period turnover suppliers
Working capital Revenue / average working capital How efficiently does a company
turnover generate revenue from working
capital
Fixed assets turnover Revenue / average net fixed assets How efficiently does a company
generate revenue from fixed
assets
Analyzing Profitability
Current Inventory
Ratio Turnover
Accounts
Days’ Sales
Receivable
in Inventory
Turnover
Total Asset
Turnover
Current Ratio
Equity
Ratio
Pledged Assets
to Secured
Liabilities
Times
Interest
Earned
Debt Equity Ratio
Debt = Total Debt
Equity Total Equity
Ratio
Profit Basic
Margin Earnings per
Share
Return on Return on
Total Assets Shareholders’
Equity
Profit Margin
Dividend
Yield
Price-Earnings Ratio
Price-Earnings Market Price Per Share
=
Ratio Earnings Per Share
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