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& Analysis

Subject Code C30103

Approach : Concepts & Problem Solving

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Unit - 1

FINANCIAL ACCOUNTING AND ANALYSIS

Course Aim:The aim of accounting is to provide theinformation that is needed for soundeconomic decision making. The main purposeis to provide information about firm’sperformance to external parties such asinvestors, creditors, bankers, researchersand Government Agencies. It has become animportant part of young people’s educationand citizens in various roles in the societiesand businesses of all types.

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Unit I: Introduction to Accounting:Importance, Objectives and Principles, Accounting Concepts and conventions,Accounting Standards (Basics) and The Generally Accepted Accounting Principles(GAAP), Double Entry System–Recording of Business Transactions–Classification of

Accounts–– Accounting cycle.

Unit – II The Accounting Process:

Overview, Books of Original Record; Journal and Subsidiary books,ledger, Trial Balance, Classification of Capital and RevenueExpenses, Final Accounts with adjustments (Simple Problems).

Unit III: Issue & Redemption of Shares and Debentures -Entries for Issue& Redemption of shares& Debentures, Issueof shares &Debentures at Discount and premium- Forfeitureof shares. Depreciation - Depreciation concept– Depreciationof Fixed Assets -Methods of depreciation– Straight LineMethod, Written down Value Method.

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Unit IV: Financial Analysis-I: Analysis and interpretation of financial statements-Horizontal Analysis and Vertical Analysis of CompanyFinancial Statements. Preparation and analysis ofCash Flow Statement and Funds Flow Statement.

Unit V: Financial Analysis-II: Ratio Analysis- Liquidity, Leverage, Solvency andProfitability Ratios – Du Pont Chart -Limitations ofFinancial Statements.

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Unit - 1

COURSE OUTCOMES

Course Aim:• Prepare financial statements in accordance

with GAAP with excel Application.• Analyze general purpose of financial

reports.• Valuation of shares and fixed assets.• Formulate Statements of cash and fund

flows using balance sheet.• Analyze financial statements to identify

problems areas in business.

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What is Accounting?Why Does it Exist?

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1-10Prepared by Dr A Kotishwar, MBA, CMECET

⚫ Bookkeeping is the mechanical and repetitive processof recording financial transactions and keepingfinancial records.

⚫ Bookkeeping is a small part of accounting.⚫ Accounting includes the design of an information

system that meets user’s needs.⚫ Accounting goals are the analysis, interpretation, and

use of information.

Accounting versus bookkeeping

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SYSTEMS OF ACCOUNTING

⚫ Cash System of Accounting⚫ Accrual System of Accounting

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Accounting

A system providing quantitative information,primarily financial in nature, about economic entitiesthat is intended to be useful in making economicdecisions.

Define accounting, identify business goals andactivities, and describe the role of accounting inmaking informed decisions

Although historical in nature, it is useful only if future decisions are impacted by it.

Accounting

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Accounting

The definition given by the American Institute ofCertified Public Accountants (‘AICPA’)

“ the art of recording, classifying andsummarizing in a significant manner and interms of money, transactions and events whichare, in part at least, of a financial character andinterpreting the results thereof ”.

Accounting

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Accounting

⚫ Accounting is an art.⚫ It involves recording, classifying and

summarizing.⚫ It records transactions in terms of money.⚫ It records only those transactions and events

which are of financial character.⚫ It is the art of interpreting the results

Accounting

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Accounting

Today’s accountant focuses on the ultimateneeds of decision makers who use accountinginformation, whether those decision makers areinside or outside the business

Accounting

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Accounting

⚫ Keeping Systematic Records⚫ Protecting and Controlling Business

Properties (no unauthorized use or disposal of any assets

or property belonging to the firm,)⚫ Ascertaining the Financial Position of the

Business⚫ Facilitating Rational Decision Making

Functions of Accounting

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Accounting

⚫ Accounting information is expressed in termsof money:

⚫ Accounting information is based on estimates:⚫ Accounting information may be biased: (fixed or

diminishing )

⚫ Fixed assets are recorded at the original cost:⚫ managerial performance as profits can be

manipulated

Limitations of Accounting

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Accounting as an Information System

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Business Goals, Activities, andPerformance Measures

⚫ A business is an economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners.

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Business Goals

ProfitabilityA business must take in enough money to pay all the costs of doing business, withenough left over as profit for the owners to want to stay in the business.

LiquidityA business must have enough cash available to pay debts when they are due.

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Management

Human Resources

Taxing Authorities

Labor Unions

Regulatory Agencies

Marketing

Finance

Investors

Creditors

Customers

Internal Users

External Users

Who Uses Accounting Data

Users and Uses of Financial Information

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Questions Asked by Internal Users User

1. Can we afford to give our employees a pay raise?

Human Resources

2. What price for our product will maximize net income?

3. Which product line is most profitable?

4. Is cash sufficient to pay dividends to the stockholders?

Marketing

Management

Finance

Users and Uses of Financial Information

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Questions Asked byExternal Users User

1. Is the company earning satisfactory income?

Investors

2. How does Disney compare in size and profitability with Time Warner?

3. Will United Airlines be able to pay its debts as they come due?

Investors

Creditors

Users and Uses of Financial Information

.

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Business Goals and Activities

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All businesses are involved in three types of activity —

◆ financing,

◆ investing,

◆ and operating.

Business Activities

The accounting information system keeps track of the results of each of these business activities.

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Two primary sources of outside funds are:

1. Borrowing money

◆ Amounts owed are called liabilities.

◆ Party to whom amounts are owed are creditors.

◆ Notes payable and bonds payable are different type of liabilities.

2. Issuing shares of stock for cash.

◆ Payments to stockholders are called dividends.

Business Activities

.

Financing Activities

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Investing Activities

Purchase of resources a company needs to

operate.

◆ Computers, delivery trucks, furniture, buildings, etc.

◆ Resources owned by a business are called assets.

Business Activities

.

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Operating Activities

Once a business has the assets it needs,

it can begin its operations.

◆ Revenues - Amounts earned from the sale of products

(sales revenue, service revenue, and interest revenue).

◆ Inventory - Goods available for sale to customers.

◆ Accounts receivable - Right to receive money from a

customer,in the future, as the result of a sale.

Business Activities

.

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Operating Activities

◆ Expenses - cost of assets consumed or services used.

(cost of goods sold, selling, marketing, administrative,

interest, and income taxes expense).

◆ Liabilities arising from expenses include accounts

payable, interest payable, wages payable, sales taxes

payable, and income taxes payable.

◆ Net income – when revenues exceed expenses.

◆ Net loss – when expenses exceed revenues.

Business Activities

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ConceptsThese are Assumptions

ConventionsThese are Trends

The Entity ConceptDual Aspect Concept

.Money Measurement Concept.Going Concern Concept

Periodicity ConceptAccrual Concept

The Matching ConceptCost Concept

Consistency: Disclosure:

Conservatism: Materiality:

Accounting PrinciplesGenerally accepted accounting principles

(GAAP)

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Monetary unit assumption: ⚫ only transaction data expressed in terms of money can be

included in the accounting records

Example: employee satisfaction and percent of international employees are not transactions that should be included in the financial records.

Monetary unit

Customer Satisfaction

Percentage of International Employees

Salaries paid

Should be includedin accounting records

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GOING CONCERN concept

Enterprise will continue in operation long enough to carry out its existing objectives.

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⚫ Revenue recognition principledictates that revenue should berecognized in the accountingperiod in which it is earned.

⚫ When a sale is involved, revenue is recognized at the point of sale.

REVENUE RECOGNITION concept

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Basic Accounting Concepts

⚫ The Entity ConceptA business is an artificial entity distinct from its owners.

⚫ Money Measurement ConceptEach transaction and event must be expressed in monetary

terms.⚫ Going Concern Concept

It means that the entity is going to be continue unless it is liquidated.

⚫ Periodicity ConceptIt helps to measure the performance of business.

⚫ Accrual ConceptIt suggests that incomes and expenses should be recognized

as and when they are earned and incurred.The Matching Concept

It suggests that revenue earned in an accounting year is offset or matched with all the expenses incurred during the same period.

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convention’ denotes custom or tradition or

practice ⚫ Consistency:⚫ Disclosure:⚫ Conservatism: (Examples: Making provisions for bad

debts in respect of doubtful debts.)⚫ Materiality:

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