Chapter 02 {Final Energy Financial Management}.Doc

8/14/2019 Chapter 02 {Final Energy Financial Management}.Doc

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Chapter 2Financial Statements

2.1 Introduction

The basis for financial planning, analysis and decision making is the financialinformation. Financial information is needed to predict, compare and evaluate thefirms earning ability. It is also required to aid in economic decision-making-investment and financial decision making. The financial information of anenterprise is contained in the financial statements.

A firm communicates financial information to the users through financialstatements and reports. Financial statements contain summarized information of the firms financial affairs, organized systematically. They are the means to presentsthe firms financial situations to the users. Preparation of the financial statements is

the responsibility of the top management. As these statements are used by investorsand financial analysts to examine the firms performance in order to makeinvestment decisions, they should be prepared very carefully contain as muchinformation as possible.

Managers, shareholders, creditors and others interested groups seeks answers to thefollowing questions about firms:

1. What is the financial position of the firm at a given point of time?2. How has the firm performed financially over a given period of time?3. What have been the sources and uses of cash over a given period of time?

To answer the above questions, the accountant prepares two statements, these twobasis financial statements prepared for the purpose of external reporting to owners,investors and creditors.

1. Balance sheet or Statement of Financial Position2. Profit and Loss Accounts or Income Statement

The balance sheet shows the financial positions (or conditions) of the firm at a givenpoint of time. It provides a snapshot and may be regarded as a static picture.

The profit and loss account reflects the performance of the firm over a period of time.

In addition to the above two statements, a cash flow statement is also preparedwhich shows the inflows and outflows of cash from operating, investing andfinancing activities and it shows displays the sources and used of cash during theperiod.


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such as industrial relations, investments, financing, reorganization,appointment of auditors and directors etc.

3. Auditors Report: Auditors report to shareholders verifies whether thebalance sheet and profit and loss account provide a true and fair view of thestate of a companys affairs. Auditors should obtain all necessary

information and explanation and ensure that proper books of accounts asrequired by law have been prepared by the company. They bring out anydeviation or distortion to the notice of the shareholders.

4. Accounting polices: Companies adopt different accounting policies forpreparing their balance sheet and profit and loss account. Annual reportsincorporate major accounting policies as well as changes made in currentyear.

5. Balance Sheet: Balance sheet shows the financial condition of a business at agiven point of time.

6. Profit and Loss Account: Profit and loss account presents the summary of revenue, expenses and net income (or net loss) of a firm.

2.3 Need for Analysis of Financial Statements

The users of the financial statements like shareholders, employees, customers,general public and lenders want to know different things from the financialstatements. Employees are interested in profitability of the business so that they canget bonus, shareholders are interested in growth so that the value of their sharesgoes up. Lenders are interested in knowing the capability of the company to payback the principle amount of loan along with interest. Customers are interested inthe product pricing and quality. As it is, the financial statements do not provide thereadymade answer or all these questions. They need to be analyzed properlykeeping this objective in view.

The analysis of the financial statements, therefore, is aimed at ascertaining financialweaknesses and strength of the company in terms of its activity, liquidity, solvencyand profitability.

2.4 Significance of Financial analysis

1. Investors: Both potential future investors and existing investors are

interested in the analysis of the financial statements. The present investorswant to decide whether they should hold the securities of the company orthey should sell them. On the other hand investors want to know whetherthey should invest in the shares of the company or not.

2. Creditor: They want to know the liquidity position of the company. Theirconcern is whether the company will be able to pay them or not. They try tofocus on liquidity ratio.


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3. Lenders: The long term lenders want to know whether the company isearning enough profits to able to pay interest to them regularly and also theprinciple amount will be paid them as and when due. They are alsointerested to know as to know as to how the money, lent by them, has beenused by the company. It is good if the company invests the long term funds in

Fixed Assets and Working Capital.4. Management: The management always wants to ensure that the financialstability is maintained. From time to the management wants to judge itsshort and long term solvency, and efficiency in utilization of availableresources. It wants to know the return on investment or profit margin on thesales. This information helps the management in decision making andplanning.

For any analysis we need (i) Subject matter and (ii) Tools to work on the subjectmatter. Financial statement i.e. Balance Sheet and Income Statement are the subject

matter or raw material for conducting an analysis. The financial statements have tobe analyzed in order to reach some conclusion. These statements merely containabsolute figure pertaining to assets, liabilities, revenues earned and expensesincurred. As it is, they do not reveal anything about earning capacity, the extant towhich the resources have been utilized and liquidity and solvency position. In orderto make an opinion on these issues, the Balance Sheet and Profit and Loss Accounthave to be analyzed systematically and conclusion have to be drawn to take properdecisions.

2.5 Management Discussion and Analysis of Performance

This part of document is describes the concepts on which the Board relied inrecommending standards for Management's Discussion and Analysis (MD&A) to beincluded in general purpose federal financial reports (GPFFR). ConceptsStatements are not authoritative in the sense that they do not establish standards orprinciples. Preparers may find them useful, but these concepts are not "prescribedguidelines" for required supplementary information as discussed in of theCodification of Statements on Auditing Standards published by the AmericanInstitute of Certified Public Accountants. No standards or prescribed guidelines forMD&A are presented in this statement of concepts.

MD&A is an important vehicle for (1) communicating managers' insights about thereporting entity, (2) increasing the understandability and usefulness of the GPFFR,and (3) providing accessible information about the entity and its operations, servicelevels, successes, challenges, and future. Some federal agencies also refer to MD&Aas the "overview." The basic concept that underlies the standards for MD&A is:


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Each general purpose federal financial report (GPFFR) should include a sectiondevoted to management's discussion and analysis (MD&A). It should address thereporting entity's performance measures, financial statements, systems andcontrols, compliance with laws and regulations, and actions taken or planned toaddress problems. The discussion and analysis of these subjects may be based partlyon information contained in reports other than the GPFFR. MD&A also shouldaddress significant events, conditions, trends and contingencies that may affectfuture operations. A separate document titled Standards for Management's

Discussion and Analysis presents the standards for MD&A. The standards forMD&A say that MD&A should address:

-- the entity's mission and organizational structure;

-- the entity's performance goals and results;

-- the entity's financial statements;-- the entity's systems, controls, and legal compliance; and

-- the possible future effects on the entity of existing, currently-known demands,risks, uncertainties, events, conditions and trends.

The term general purpose federal financial report, abbreviated "GPFFR," is used as a generic term to refer to the report that contains the entity's financial statements that are prepared pursuant to federal accounting principles.

2.6 SIGNIFICANT ACCOUNTING POLICIES (with example of EdithCowan University)

The following accounting policies have been adopted in the preparation of thefinancial statements. These policies have been consistently applied to all the yearspresented, unless otherwise stated.

General statement

The financial statements constitute a general purpose financial report which hasbeen prepared in accordance with Australian Accounting Standards, Statements of Accounting Concepts and other authoritative pronouncements of the AustralianAccounting Standards Board, and Urgent Issues Group (UIG) Consensus Views asapplied by the Treasurer's Instructions. Several of these are modified by theTreasurer's Instructions to vary the application, disclosure, format and wording.The Financial Administration and Audit Act 1985 and the Treasurer's Instructions


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are legislative provisions governing the preparation of financial statements and takeprecedence over Australian Accounting Standards, Statements of AccountingConcepts and other authoritative pronouncements of the Australian AccountingStandards Board, and UIG Consensus Views. The modifications are intended tofulfil the requirements of general application to the public sector, together with the

need for greater disclosure and also to satisfy accountability requirements.If any such modification has a material or significant financial effect upon thereported results, details of that modification and where practicable, the resultingfinancial effect, are disclosed in individual notes to these financial statements.

Reporting Entity

The reporting entity is Edith Cowan University and its controlled entity; ECUResources for Learning Ltd.

Control is taken to exist where: the entity is accountable to the University;

the University has a residual financial interest in the net assets of the entity; and

the University has the power to govern the financial and operating policies of anentity so as to obtain benefits from its activities.

Basis of Preparation

The financial report has been prepared in accordance with applicable AustralianAccounting Standards which includes Australian equivalents to InternationalFinancial Reporting

Standards, Urgent Issues Group Interpretations and other authoritativepronouncements of the Australian Accounting Standards Board.

The Balance Sheet and Income Statement have been prepared on an accrual basisand are in accordance with historical cost convention, modified by the revaluationof land and buildings which have been measured at fair value.

The accounting policies applied in the preparation of the financial statements havebeen consistently applied throughout all periods presented except that AASB 132and AASB 139 have been applied from 1 January 2005, with the option provided byAASB 1 paragraph 36A.


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Assets and liabilities are recognised in the Balance Sheet when, and only when, it isprobable that future economic benefits will flow and the amounts of the assets orliabilities can be reliably measured.

Contingent liabilities and contingent assets are not recognised in the Balance Sheet,

but are discussed in the relevant Notes to the Financial Statements. They may arisefrom uncertainty as to the existence of a liability or asset, or represent an existingliability or asset in respect of which settlement is not probable or the amount cannotbe reliably measured. Where settlement becomes probable, a liability or asset isrecognised.

The consolidated financial report is presented in Australian dollars and all amountsare rounded to the nearest thousand dollars ($000).

The judgements that have been made in the process of applying accounting policiesthat have the most significant effect on the amounts recognised in the financial

report are included at note 4.The key assumptions made concerning the future, and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing amaterial adjustment to the carrying amounts of assets and liabilities within the nextfinancial year, are included at note 5.

Basis of Accounting

The consolidated financial statements have been prepared on the accrual basis of accounting using the historical cost convention, except for certain assets and

liabilities which, as noted are measured at fair value.(a) Principles of consolidation

Subsidiary The consolidated financial statements incorporate the financial statements of EdithCowan University (the parent entity) and entities controlled by the University (itssubsidiary) made up to 31 December each year. Control is achieved where theUniversity has the power to govern the financial and operating policies of aninvestee entity so as to obtain benefits from its activities. A list of controlled entitiesappears in note 27. Consistent accounting policies have been employed in the

preparation and presentation of the consolidated financial statements.The consolidated financial statements include the information and results of eachcontrolled entity from the date on which the University obtains control and untilsuch time as the University ceases to control such entities.

Inter-company transactions, balances and unrealised gains on transactions betweenthe University and controlled entities are eliminated in full on consolidation.


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Unrealised losses are also eliminated unless the transaction provides evidence of animpairment of the asset transferred.

Accounting policies of the subsidiary have been changed on consolidation wherenecessary to ensure consistency with the accounting policies adopted by the

University.(b) Grants and other Contributions

Government Grants

Grant contributions from the Commonwealth Government and Western AustraliaState Government for financial assistance for operational purposes are recognisedas revenue when the University obtains control over the asset comprising thecontributions. When the University does not have control of the contribution or doesnot have the right to receive the contribution or has not fulfilled grant conditions,

the grant contribution is treated as deferred income.Grant contributions from the Commonwealth Government and Western AustraliaState Government for financial assistance for the acquisition of non-current assetsare recognised as revenue when the University obtains control over the assetcomprising the contributions. When the University does not have control of thecontribution or does not have the right to receive the contribution or has notfulfilled grant conditions, the grant contribution is treated as deferred income.

Sponsored Research

Research funds provide the opportunity for graduate and undergraduate studentsto work with the faculty in research as part of their educational experience.Research grant contributions from various sources of sponsored research, includingcorporations, foundations, Commonwealth, State and local governments andresearch institutes are recognised as revenue when the University obtains controlover the asset comprising the contributions. When the University does not havecontrol of the contribution or does not have the right to receive the contribution orhas not fulfilled grant conditions, the grant contribution is treated as deferredincome.

Donations

Donations, gifts and other non-reciprocal contributions are recognised as revenuewhen the University obtains control over the assets comprising the contributions.Control is normally obtained upon their receipt.

Endowment and Bequest Contributions

The University receives restricted funds from donors who wish to fund specificprograms or initiatives in the University. Endowments and bequests are invested to


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create a source of income which is used for scholarships, research, prizes and speciallecture programs. Endowment contributions are recognised as revenue when theUniversity obtains control over the assets comprising the contributions. Control isnormally obtained upon their receipt.

(c) Revenue RecognitionRevenue is measured at the fair value of the consideration received or receivableand represents amounts receivable for goods and services provided in the normalcourse of business, net of discounts and Goods and Services Taxes (GST). Revenueis recognised as follows:

Sale of Goods

Revenue from sales of goods and disposal of other assets is recognised when goodsare delivered and title has passed.

Fees and Charges

Revenue from fees and charges is recognised in the accounting period in which theservices are rendered, by reference to completion of the specific transaction assessedon the basis of the actual service provided as a proportion of the total services to beprovided.

Revenue from students studying at the English language centre (ELICOS), isrecognised on a cash basis. This is because students who have been offered anELICOS course are issued with an invoice; payment of the invoice is a condition of

acceptance. Interest Income

Interest income is accrued on a time-proportion basis, by reference to the principaloutstanding and at the effective interest rate applicable.

Parking and Library Fines

Revenue from parking and library fines is recognised on a cash basis, as the purposeof the fine is to act as a deterrent not strictly for raising revenue. Non-payment of

these fines are not actively pursued. Royalty, Trademark and Licenses Income

Royalties, trademark and licenses income is recognized on an accrual basis inaccordance with the substance of the relevant agreements.


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GainsGains may be realized or unrealized. Realized gains are determined on a net basis asthe difference between the sale proceeds received or receivable and the carryingamount of the non-current asset. Unrealized gains are determined on a net basis asthe difference between the fair value and the carrying amount of an asset.

The policies adopted for the recognition of significant categories of gains are asfollows:

Realized gains on disposal of non-current assets

Gains arising on the disposal or retirement of a non-current asset are recognizedwhen control of the asset and the significant risks and rewards of ownership havepassed to the buyer. Net gains are included in revenue for the period in which theyarise.

Unrealised gains associated with investment property at fair value

Gains arising from changes in the fair value of an investment property are includedin revenue for the period in which they arise.

(d) Expense Recognition

Expenses are recognized when incurred and are reported in the year to which theyrelate.

The policies adopted for the recognition of significant categories of expenses are as

follows: Depreciation, amortization and impairment losses

Depreciation of non-financial physical assets (excluding inventories) is provided ona straight-line basis at rates based on the expected useful lives of those assets. Theexpected useful lives for each class of depreciable asset are provided underproperty, plant and equipment.

Amortization is provided on leasehold improvements, intangible assets and on assetsheld under finance leases and is calculated on a straight-line basis, generally over

the expected useful lives on the same basis as owned assets.Impairment losses are recognized as an expense when an assets carrying amountexceeds its recoverable amount (unless it is related to a re-valued assets where thevalue changes are recognized directly in equity).

Superannuation expense


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The University receives Commonwealth Government superannuationsupplementary funding for employer contributions of the Pension Scheme and GoldState Superannuation (GSS). These contributions where paid to state-administeredGESB during the year. The University also receives Commonwealth Governmentgeneral operating funding for employer contributions of the various UniSuper

superannuation plans.The University includes the following elements in calculating a superannuationexpense:

(a) Defined benefit plan change in the unfunded employers liability in respect of current employees who are members of the Pension Scheme and currentemployees who accrued a benefit on transfer from that Scheme to the GoldState Superannuation Scheme; and

(b) Defined benefit plan emerging cost in respect of current employees who aremembers of the Pension Scheme and current employees who accrued a benefiton transfer from that Scheme to the Gold State Superannuation Scheme; and

(c) Defined contribution plan employer contributions paid to the Gold StateSuperannuation Scheme and all of the Unisuper superannuation plans.

A revenue Superannuation deferred government contributions equivalent to (b)is recognised under Revenue in the Income Statement as emerging costsuperannuation for which they are fully recouped by the Commonwealth

superannuation supplementary grant.

(d) Property, Plant and Equipment

Land and buildings held for use in the production or supply of goods or services, forinvestment, and for administrative purposes, are stated in the Balance Sheet at theirrevalued amounts, being the fair value at the date of revaluation, determined frommarket-based evidence by appraisal undertaken by independent professionalvaluers, less any subsequent accumulated depreciation and subsequent accumulatedrecoverable amount write-down. Revaluations are performed with sufficientregularity such that the carrying amount does not differ materially from that which

would be determined using fair values at the reporting date.

Any revaluation increase arising on the revaluation of such land and buildings iscredited to the asset revaluation reserve, except to the extent that it reverses arevaluation decrease for the same asset class previously recognized as an expense, inwhich case the increase is credited to the Income Statement to the extent of thedecrease previously charged on a asset class basis. A decrease in carrying amountarising on the revaluation of such land and buildings is charged as an expense to the


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extent that it exceeds the balance, if any, held in the asset revaluation reserverelating to a previous revaluation of that asset class.

Depreciation on revalued assets is charged to the Income Statement. On thesubsequent sale or retirement of a revalued asset, the attributable revaluation

surplus remaining in the asset revaluation reserve is transferred directly to theIncome Statement.

Properties in the course of construction for production, rental or administrativepurposes, or for purposes not yet determined, are carried at cost, less anyrecognized recoverable amount write down. Cost includes professional fees and, forqualifying assets, borrowing costs are capitalized. Depreciation of these assets, onthe same basis as other property assets, commences when the assets are ready fortheir intended use. Fixtures and computer equipment are stated at cost lessaccumulated depreciation and any recognized recoverable amount write-down.Purchases of fixtures and computer equipment which individually cost less than

$5,000 are expensed in the Income Statement in the year of acquisition.Depreciation is charged so as to write off the cost or valuation of assets, other thanland and properties under construction, over their useful lives, using the straight-line method.

Expected useful lives for each class of depreciable asset are:

Asset Category Life

Land Not depreciated

Buildings 50 years

Computing equipment 4 years

Other equipment &furniture

6 years

Motor vehicles 6 years

Leased Motor vehicles 6 years

Art Works Not depreciated

Library CollectionsDepreciated at 100% in the fourthyear after acquisition


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Assets held under finance leases are depreciated over their expected useful lives onthe same basis as owned assets or, where shorter, over the term of the relevant lease.

Library Collections are stated at cost of the last three years acquisition of librarybooks. In each year, that years cost of acquisition is added to the carrying value

and the earliest years cost of acquisition within the carrying value is written off.Works of art are classified as heritage assets. These artifacts are protected andpreserved for public exhibition, education, research and the furtherance of publicservice. They are neither disposed of for financial gain nor encumbered in anymanner. Accordingly, such collections are capitalized, irrespective of value and arenot depreciated as it is anticipated that they have indefinite useful lives. Theirservice potential has not, in any material sense, been consumed during the reportingperiod.

Investment Property

Investment property comprises land and buildings which are held to earn rentalsand/or capital appreciation Initial recognition and measurement Investmentproperty assets are initially recognized at cost.

Subsequent measurement after recognition after recognition, the University uses therevaluation model for measurement of investment land and buildings. Land andbuildings are carried at fair value and no depreciation isprovided in respect of freehold land and building.

The fair value of land has been determined on a continuing basis, determined from

market-based evidence.Revaluations are performed with sufficient regularity such that the carryingamount does not differ materially from that which would be determined using fairvalues at the reporting date. The last revaluation of investment land and buildingswas conducted in December 2004 by an independent professional valuer.

The gain arising from changes in the fair value of the investment property areincluded in the income statement for the period in which they arise.

(e) Leases

Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All other leases areclassified as operating leases.

Assets held under finance leases are recognized as assets of the University at theirfair value or, if lower, at the present value of the minimum lease payments, eachdetermined at the inception of the lease. The corresponding liability to the lessor is


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included in the Balance Sheet as a finance lease obligation. Lease payments areapportioned between finance charges and reduction of the lease obligation so as toachieve a constant rate of interest on the remaining balance of the liability. Financecharges are charged directly against income, unless they are directly attributable toqualifying assets, in which case they are capitalized.

Rentals payable under operating leases are charged to expense on a straight-linebasis over the term of the relevant lease.

(f) Impairment

The University is required to assess property, plant and equipment and intangibleassets for any indication of impairment at each reporting date. Where there is anindication of impairment, the recoverable amount must be estimated. As theUniversity is a not-for-profit entity, unless an asset has been identified as surplusasset, AASB 136 prescribes the recoverable amount is the higher of an assets fair

value less selling costs and depreciated replacement cost. Consequently, the risk of impairment is generally limited to circumstances where an assets depreciation ismaterially understated or where the replacement cost is falling.

The University reviews each relevant class of assets annually to verify that theaccumulated depreciation/amortization reflects the level of consumption orexpiration of assets future economic benefits and to evaluate any impairment riskfrom falling replacement costs.

For assets identified as surplus assets, the recoverable amount is the higher of fairvalue less selling costs and the present value of future cash flows expected to be

derived from the asset.(g) Cash

For the purposes of the Cash flow Statement, cash includes cash assets andrestricted cash assets. These include short-term deposits that are readily convertibleto cash on hand and are subject to insignificant risk of changes in value.

(h) Restricted Cash

Endowment and bequest funds are classified as restricted cash assets. Endowment

and bequest funds have been received from benefactors who, by the terms of theirconveying instruments, have stipulated that the use of funds is limited in futureyears to the purposes designated by the benefactors.

(i) Inventories

Inventories are valued at the lower of cost and net realizable value. Cost comprisesdirect materials and where applicable, import duties, transport and handling costs


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that have been incurred to bring the inventories to their present location andcondition. Cost is calculated using the weighted average method. Net realizablevalue represents the estimated selling price less all estimated costs of completion andcosts to be incurred in marketing, selling and distribution.

(j) ReceivablesAccounts receivable include amounts due from students for tuition fees, housing andother enrolment related services and reimbursements due from sponsors of externally funded research. Accounts receivables are recognised at the amountsreceivable as they are due for settlement no more than 30 days from the date of recognition. Accounts receivables do not carry any interest and are stated at theirnominal value as reduced by appropriate allowances for estimated irrecoverableamounts.

(k) Intangibles

The Universitys intangibles comprise externally acquired software for internal useand have been customised by ECU. These assets are carried at cost. Software isamortised on a straight-line basis over its anticipated useful life. The useful life of the Universitys currently amortised software is 5 years.

(l) Other financial assets

Investments are recorded at their fair value. In the case of Investments thatrepresent shares held in publicly listed companies the fair value is measured atbalance date as the last sale price quoted on the Australian Stock Exchange.

(m) Payables

Payables, including accruals not yet billed, are recognized when the Universitybecomes obliged to make future payments as a result of a purchase of assets orservices. Accounts payable are not interest bearing and are stated at their nominalvalue.

(n) Interest bearing liabilities

Interest-bearing loans and overdrafts are recorded as the proceeds received, net of

direct issued costs. Finance charges, including premiums payable on settlement orredemption and direct issue costs, are accounted for on an accrual basis using theeffective interest method and are added to the carrying amount of the instrument tothe extent that they are not settled in the period in which they arise.

(o) Employee Benefits

Annual Leave


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The liability for annual leave that will fall due within 12 months after the end of thereporting date is recognized in the provision for employee benefits and is measuredat the undiscounted amounts expected to be paid. The liability for annual leave thatwill fall due more than 12 months after the end of the reporting date is recognised inthe provision for employee benefits and is measured at the present value of amounts

expected to be paid in the future in respect of services provided by employees up tothe reporting date. Consideration is given, when assessing expected futurepayments, to expected future wage and salary levels including superannuation on-costs. Expected future payments are discounted using market yields at the reportingdate on national government bonds with terms to maturity that match, as closely aspossible, the estimated future cash flows.

Long Service Leave

The liability for long service leave that will fall due within 12 months after the endof the reporting date is recognized in the provision for employee benefits and is

measured at the undiscounted amounts expected to be paid. The liability for longservice leave that will fall due more than 12 months after the end of the reportingdate is recognized in the provision for employee benefits and is measured at thepresent value of amounts expected to be paid in the future in respect of servicesprovided by employees up to the reporting date. Consideration is given, whenassessing expected future payments, to expected future wage and salary levelsincluding superannuation on-costs. Expected future payments are discounted usingmarket yields at the reporting date on national government bonds with terms tomaturity that match, as closely as possible, the estimated future cash flows.

Leave benefits are calculated at remuneration rates expected to be paid when

liabilities are settled. A liability for long service leave is recognized after anemployee has completed four years of service. An actuarial assessment of longservice leave undertaken in-house in 2005 and determined that the liabilitymeasured using the short-hand method was not materially different from theliability measured using the present value of expected future payments. Allunconditional long service leave is classified as a current liability.

Provisions Other

Employee On-Costs

Employee on-costs, including workers compensation insurance and payroll tax, arenot employee benefits and are recognized as liabilities and expenses when theemployee benefits to which they relate has occurred. Employee on-costs are notincluded as part of the Universitys Employee benefits expense and the relatedliability is included in Employee on-costs provision.

Other Compensated Absences


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Employees accrue and accumulate sick leave and study leave in accordance withUniversity policies. It is the policy of the University to recognise the cost of sick leaveand study leave when paid. Employees who leave University employment are notentitled to be paid for accrued sick leave or study leave. Therefore, no liability isshown in the financial statements.

Superannuation The University contributes to the GESB Pension Scheme, GESB Gold StateSuperannuation Scheme and various UniSuper superannuation schemes on behalf of its employees. The contributions made to these schemes by the University, andemerging costs from unfunded schemes, are expensed in the Income Statement.Refer to Note 26 for details relating to the individual schemes.

GESB Scheme Information

Pension Scheme members receive pension benefits on retirement, death or

invalidity. The Fund Share of the pension benefit, which is based on the memberscontributions plus investment earnings, may be commuted to a lump sum benefit.The State Share of the pension benefit, which is employer financed, cannot becommuted to a lump sum benefit.

Some former Pension Scheme members have transferred to the Gold State Scheme.In respect of their transferred benefit the members receive a lump sum benefit atretirement, death or invalidity which is related to their salary during theiremployment and indexed during any deferral period after leaving public sectoremployment.

(p) Foreign currency translation and HedgesTransactions in currencies other than Australian dollars are recorded at the rates of exchange prevailing on the dates of the transactions. At each reporting date,monetary assets and liabilities that are denominated in foreign currencies areretranslated at the rates prevailing on the reporting date. Nonmonetary assets andliabilities carried at fair value that are denominated in foreign currencies aretranslated at the rates prevailing at the date when the fair value was determined.Gains and losses arising on retranslation are included in the Income Statement forthe period.

In order to hedge its exposure to certain foreign exchange risks, the Universityenters into forward contracts and options.

(q) Joint ventures

Joint Venture Operations


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The University participates in a number of joint venture operations. The Universityuses its own property, plant and equipment and incurs its own expenses andliabilities. The joint venture agreements provide that ventures will fund the costs of the joint venture in specific proportions and the revenue generated from the activityis pooled and distributed based on the level of contribution by each venturer.

Joint Venture Entities

The University has no material interest in joint venture entities and does not includeany amounts in the financial statements for its interest in joint venture entities.

(r) Desegregation Information

The University has determined reportable segment information on the basis of business segments and geographical segments.

A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are different fromthose of other business segments. A geographic segment is engaged in providingservices within a particular economic environment that are subject to risks andreturns that are different from those of segments operating in other economicenvironments.

The University and its subsidiary have two reportable business segments consistingof higher education and technical and further education (TAFE). The highereducation segment is an aggregation of operations that deliver progressiveuniversity degree programs for the modern workplace and focus on the service

professions. The TAFE segment primarily delivers nationally accredited flexibletraining solutions designed to meet the varied needs of businesses and individualsactivities.

Geographically, these activities are conducted and operated predominantly inAustralia. Off-shore activities are analyzed as a separate geographical segment.

Segment revenues, expenses, assets and liabilities are allocated to business andgeographic segments on the basis of direct attribution and reasonable estimates of usage. Income tax has not been included in assets and liabilities.

(s) Special reservesThe special reserve represents restricted funds, whose use is limited in future yearsto the purposes designated by the benefactors, donors or sponsors such as researchfinancial assistance, scholarships and capital equipment replacement.

No funds are currently held in special reserves at the reporting date.


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(t) Taxation

The controlled entity, E.C.U. Resources for Learning Ltd. (ECURL) trading asSteps Professional Development, is subject to income tax in Australia under theIncome Tax Assessment Act 1997. Authority has been granted to ECURL to adopt a

calendar tax year.The overseas branches are subject to income tax relating to income and expenditureitems attributable to permanent establishments in the UK and the US. The taxationexpense represents the sum of tax currently payable and is measured at 31December each year.

Taxable profit differs from net profit as reported in the Income Statement becauseit excludes items of income or expense that are taxable or deductible in other yearsand it further excludes items that are never taxable or deductible. The liability forcurrent tax is calculated using tax rates that have been enacted by the reporting

date.(u) Deferred Tax

The University adopts an income statement liability method to account for expectedincome tax consequences inherent in the financial statements. The provision fordeferred income tax liability and the deferred tax assets includes the tax effect (atcurrent tax rates) of differences between income and expense items recognised indifferent accounting periods for book and tax purposes. The benefit arising fromestimated carry-forward tax losses, has also been recorded as a deferred tax assetonly where realization of the asset is considered to be virtually certain. The carrying

amount of deferred tax assets is reviewed at each reporting date and reduced to theextent that it is no longer virtually certain that sufficient taxable profits will beavailable to allow all or part of the asset to be recovered.

(v) Comparative figures

Comparative figures have been restated on the AIFRS basis except for financialinstruments information which has been prepared under the previous AGAAPAccounting Standard AAS 33 as permitted by AASB 1.36A. The transition toAIFRS for data prepared under AASB 132 and AASB 139 will be 1 January 2005.

(w) RoundingAmounts in the financial statements have been rounded to the nearest thousanddollars.


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2.7 Generally Accepted Accounting Principles GAAP

Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rulesaccountants follow in recording and summarizing transactions, and in the

preparation of financial statements.

Financial accounting information must be assembled and reported objectively.Third-parties who must rely on such information have a right to be assured that thedata are free from bias and inconsistency, whether deliberate or not. For thisreason, financial accounting relies on certain standards or guides that are called"General Accepted Accounting Principles" (GAAP).

Principles also derive from tradition, such as the concept of matching. In any reportof financial statements (audit, compilation, review, etc.), the preparer/auditor/ Certified Public Accountant must indicate to the reader whether or not the

information contained within the statements complies with GAAP.

Basic objective

Financial reporting should provide information that is:

Useful to present to potential investors and creditors and other users inmaking rational investment, credit, and other financial decisions.

Helpful to present to potential investors and creditors and other users inassessing the amounts, timing, and uncertainty of prospective cash receipts.

About economic resources, the claims to those resources, and the changes in

them.

Fundamental qualities

To be useful and helpful to users, financial statements must be:

Relevant: relevant information makes a difference in a decision. It also helpsusers make predictions about past, present and future events (it haspredictive value). Relevant information helps users confirm or correct priorexpectations (it has feedback value). It must also be available on time, that isbefore decisions are made.

Reliable: reliable information is verifiable (when independent auditors usingthe same methods get similar results), neutral (free from bias), anddemonstrate representational faithfulness (what really happened or existed).

Comparable: information must be measured and reported in a similarmanner for different enterprises (allows financial statements to be comparedbetween different companies).

Consistent: the same accounting methods should be applied from period toperiod and all changes in methods should be well explained and justified.


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Basic concepts

To achieve basic objectives and implement fundamental qualities GAAP has fourbasic assumptions, four basic principles, and four basic constraints.

Assumptions Economic Entity Assumption assumes that the business is separate from its

owners or other businesses. Revenues and expenses should be kept separatefrom personal expenses. This applies even for partnerships and soleproprietorships. as corporates they are considered separate legal entities

Going Concern Assumption assumes that the business will be in operationfor a long time. This validates the methods of asset capitalization,depreciation, and amortization. Only when liquidation is certain is thisassumption not applicable.

Monetary Unit Assumption assumes a stable currency is going to be the unit

of record. The FASB accepts the nominal value of the US Dollar as themonetary unit of record unadjusted for inflation. Periodic Reporting Assumption assumes that the business operations can be

recorded and separated into different periods (most common periods aremonths, quarters and years). This is required for comparison betweenpresent and past performance.

Principles

The historical cost principle requires companies to account and report basedon acquisition costs rather than fair market value for most assets and

liabilities. This principle provides information that is reliable (removingopportunity to provide subjective and potentially biased market values), butnot very relevant. Thus there is a trend to use fair values. Most debts andsecurities are now reported at market values.

The revenue recognition principle requires companies to record whenrevenue is (1) realized or realizable and (2) earned, not when cash is received.This way of accounting is called accrual basis accounting.

The matching principle. Expenses have to be matched with revenues as longas it is reasonable to do so. Expenses are recognized not when the work isperformed, or when a product is produced, but when the work or theproduct actually makes its contribution to revenue. Only if no connection

with revenue can be established, cost can be charged as expenses to thecurrent period (e.g. office salaries and other administrative expenses). Thisprinciple allows greater evaluation of actual profitability and performance(shows how much was spent to earn revenue). Depreciation and Cost of Goods Sold are good examples of application of this principle.

The full disclosure principle. Amount and kinds of information disclosedshould be decided based on trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be


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enough to make a judgment while keeping costs reasonable. Information ispresented in the main body of financial statements, in the notes or assupplementary information.

Constraints

Cost-benefit relationship states that the benefit of providing the financialinformation should also be weighed against the cost of providing it.

Materiality states that the significance of an item should be considered whenit is reported. An item is considered significant when it would affect thedecision of a reasonable individual.

Industry practices states that accounting procedures should follow industrypractices.

Conservatism states that when choosing between two solutions, the one thatwill be least likely to overstate assets and income should be picked.

Principle of regularityRegularity can be defined as conformity to enforced rules and laws.

Principle of sincerity

According to this principle, the accounting unit should reflect in good faith thereality of the company's financial status.

Principle of the permanence of methods

This principle aims at allowing the coherence and comparison of the financialinformation published by the company.

Principle of non-compensation

One should show the full details of the financial information and not seek tocompensate a debt with an asset, revenue with an expense, etc.

Principle of prudence

This principle aims at showing the reality "as is: one should not try to make things

look prettier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable .

Principle of continuity

When stating financial information, one should assume that the business will not beinterrupted. This principle is mitigating the previous one about prudence: assets do


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not have to be accounted at their disposable value, but it is accepted that they are attheir historical value.

Principle of periodicity

Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the givenrevenue should be split to the entire time-span and not counted for entirely on thedate of the transaction.

The common set of accounting principles, standards and procedures that companiesuse to compile their financial statements. GAAP are a combination of authoritativestandards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

GAAP are imposed on companies so that investors have a minimum level of

consistency in the financial statements they use when analyzing companies forinvestment purposes. GAAP cover such things as revenue recognition, balance sheetitem classification and outstanding share measurements. Companies are expected tofollow GAAP rules when reporting their financial data via financial statements. If afinancial statement is not prepared using GAAP principles, be very wary!

That said, keep in mind that GAAP is only a set of standards. There is plenty of room within GAAP for unscrupulous accountants to distort figures. So, even when acompany uses GAAP, you still need to scrutinize its financial statements.

2.8 EXPLANATORY NOTES ON ACCOUNT CLASSIFICATIONS

OPERATING EXPENSES

Consolidated Revenue Fund operating expenses are presented in the Estimates andthe Supplement to the Estimates on the basis of a group account classification system.Each group account represents a broad category of expenses and is comprised of several specific components termed standard objects of expense. These specificcomponents are presented in the Supplement to the Estimates , and are thenaggregated into the group account totals shown in the Estimates . This group accountclassification system is described below.

SALARIES AND BENEFITS

Base Salaries includes the cost of the base salaries, overtime pay and lump sumpayments for all permanent and temporary direct employees of the government.

Supplementary Salary Costs includes the cost of extra pay for certain types of work such as shift differentials, premiums and allowances.


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Employee Benefits includes the cost of employer contributions to employeebenefit plans and pensions. Other benefits paid by the employer such as relocationand transfer expenses are also included.

Legislative Salaries and Indemnities includes the cost of the annual M.L.A.

indemnity and supplementary salaries as authorized under Section 4 of the Legislative Assembly Allowances and Pension Act . Salaries for the Executive Counciland Officers of the Legislature are also included.

OPERATING COSTS

Boards, Commissions and Courts Fees and Expenses includes fees paid toboard and commission members, juries and witnesses, and related travel and out-of-pocket expenses.

Public Servant Travel includes travel expenses of government employees and

officials on government business including prescribed allowances. Professional Services includes fees and expenses for professional servicesrendered directly to government for: the provision of goods and services in thedelivery of government programs; the provision of goods or services that arerequired by statute or legislation and are billed directly to the government; and theprovision of goods or services that will assist in the development of policy and/orprograms or improve/change the delivery of programs, such as managementconsulting services.

Information Systems Operating includes all contract fees and costs related to

data, voice, image and text processing operations and services such as data andword processing, data communications charges, supplies, repairs, maintenance andshort-term rentals of information processing equipment.

Office and Business Expenses includes supplies and services required for theoperation of offices.

Advertising and Publications includes costs associated with non-statutoryadvertising and general publications.

Statutory Advertising and Publications includes costs associated with special

notices and publications required by statute and regulations.Utilities, Materials, and Supplies includes the cost of services such as the supply of water and electricity, materials and supplies required for normal operation of government services and food for institutions.

Operating Equipment and Vehicles includes the costs associated with the repairand maintenance of government vehicles, and operating machinery and equipment.


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Non-Capital Roads and Bridges includes highway costs recovered from the BCTransportation Financing Authority, costs for minor enhancements to capitalizedinfrastructure, as well as non-highway road costs.

Amortization includes the amortization of the cost of capital assets and prepaid

capital advances over their useful lives. Building Occupancy Charges includes payments to the British ColumbiaBuildings Corporation or the private sector, for the rental and maintenance of buildings and office accommodation, including tenant improvements that do notmeet the criteria for capitalization.

GOVERNMENT TRANSFERS

Transfers Grants includes discretionary grants to individuals, businesses, non-profit associations and others, where there are no contractual requirements.

Transfers Entitlements/Agreements includes payments and reimbursementsunder contract, formula driven agreement, shared cost or other agreement, statuteor regulation, to individuals for defined benefits; or to individuals, public bodiesand organizations for the provision of goods and/or services to the public.

OTHER EXPENSES

Transfers Between Votes and Special Accounts includes transfers (payments)between a vote and a Special Account.

Interest on the Public Debt includes only interest payments on the directprovincial debt borrowed for government purposes.

Other Expenses includes expenses such as financing costs and valuationallowances and other expenses which cannot be reasonably allocated to anotherstandard object of expense.

INTERNAL RECOVERIES

Recoveries Between Votes and Special Accounts includes recoveries between a voteand a Special Account.

Recoveries Within the Consolidated Revenue Fund includes recoveries for the useof equipment or the provision of goods and services between ministries of theprovincial government.

Recoveries External to the Consolidated Revenue Fund includes costs and amountsrecovered from government corporations, other governments, and non-government


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organizations; the offset for commissions paid for the collection of governmentrevenues and accounts; and the write-off of uncollectible revenue related accounts.

CAPITAL EXPENDITURES

Consolidated Revenue Fund capital expenditures are presented on the basis of thecategory of asset acquired. The categorization of assets is described below.

Land includes the purchased or acquired value for parks and other recreationland and land directly associated with capitalized infrastructure (buildings, ferriesand bridges); but does not include land held for resale.

Land Improvement includes the capital cost of improvements to dams and watermanagement systems and recreation areas.

Buildings includes the purchase, construction or major improvement of buildings

owned by the Consolidated Revenue Fund.Specialized Equipment includes the purchase or capital lease cost of heavyequipment such as tractors, trailers and ambulances, as well as telecommunicationsrelay towers and switching equipment.

Office Furniture and Equipment includes the cost or capital lease cost of officefurniture and equipment.

Vehicles includes the purchase or capital lease cost of passenger, light truck andutility vehicles.

Information Systems includes the purchase or capital lease cost of mainframe andother systems hardware, software and related equipment.

Tenant Improvements includes the cost or capital lease cost of improvements toleased space.

Roads includes the capital costs for construction or major improvements of roads, highways and bridges.

Other includes capital expenditures which cannot be reasonably allocated to

another standard object of expense.


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2.9 Subject matter

1. Balance Sheet

The balance sheet is a significant financial of a firm. In fact, it is called a

fundamental accounting report. Other terms to describe this financial statement arestatement of financial positions or position statement. As the name suggestions, thebalance sheet provides information about the financial standing or position of a firmat a particular point of time, say as on March 31, 2006 (i.e. Balance sheet of L&TLimited as on March 31, 2006). The financial position of a firm as disclosed by thebalance sheet refers to its recourses and obligations and the interest of its owners inthe business. In operation terms, the balance sheet contains information in respectsof assets, liabilities, and owners equity.

The balance sheet shows the financial condition of a given point of time. As per the

Company Act, the balance sheet of a company shall be in either the Account Form(Horizontal Form) or the Report Form (Vertical Form). The Report Form (VerticalForm is most commonly used by companies, but it is more convenient to explain thecontents of the balance in the Account Form (Horizontal Form).

Before discussing various account categories found on the balance sheet, we mustknow about some basic concepts underlying financial accounting.

Basic concepts underlying financial accounting

The framework of financial accounting is based on several concepts which havereceived widespread, through not universal, acceptance by accountants. Theimportant concepts have been briefly described below.

1. Entity Concept For purposes of accounting, the business firm is regardedas a separate entity. Accounts are maintained for the entity as distinct fromthe persons who are connected with it. The accountant records transactionsas they affect this entity and regards owners, creditors, suppliers, employees,customers and the government as parties transacting with this entity.

2. Money Measurement Concept Accounting is concerned with only those

facts are expressible in monetary terms. The yardstick provides a means bywhich heterogeneous elements, such as land, Plant and equipment,inventories, securities and goodwill may be expressed may be expressed in acommon denominator.

3. Stable Monetary Unit Concept An implicit assumption in accounting, as itis practiced, is that the monetary unit remains stable and values recorded atthe time that events occur are not changed. Put differently, in the purchasingpower of money are not considered. This principle has been challenged and


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forceful arguments have been advanced for making adjustment for pricelevel changes. Despite the great plausibility of these arguments, the practiceof accounting is still based on the stable monetary unit assumption.

4. Going Concern Concept Accounting is normally based on the premise thatthe business entity will remain a going concern for an indefinitely long

period.5. Cost Concept Assets acquired by a business are generally recorded at theircost and this is used for all subsequent accounting purposes. For example,depreciation is charged on the basis of the original cost. It is evidence thatthis concept is related to the stable monetary unit concept.

6. Conservatism Concept This concept modifies the cost concept in the case of current assets. It is usually stated as follows: Anticipate no profit butprovide for all possible losses. In accordance with this concept, currentassets are generally valued at cost or market value, whichever is lower.

7. Dual Aspect Concept Regarded as the most distinctive and fundamentalconcept of accounting, the dual aspect concept provides the basis for

accounting mechanics.Assets are resources owned by a firm. I) Fixed Assets and II) Current Assets

Liabilities are the claims of various parties against the assets owned by a firm. I)Owners Equity represents the claims of the owners. II) Outside liabilities, on theother hand, reflect the claims of the creditors of the firm.

Since the resources owned by the firm are equal to its liabilities the basicaccounting identity is:

ASSETS = LIABILITIES

Now according to the dual aspect concept, each event has two aspects. Theseare such that the accounting identity is always preserved.

8. Accounting Period Concept In order to know the results of businessoperations and financial position of the firm periodically, time is dividendinto segments referred to as accounting period. Income is measured for theseperiods and the financial position is assessed at the end of an accountingperiod.

9. Accrual Concept Income is measured by changes in the owners equityarising from the operations of the business. An increase in owners equityarising from the business operations is called revenue and a decrease anexpenses. When revenues exceed expenses, the difference is known as income,when expenses exceed revenues the difference is called loss.

10. Realization Concept According to the realization concept, revenue isdeemed to be earned only when it is realized. When is revenue realized? It isnormally deemed realized when goods are shipping or delivered to thecustomers, and not when a sales order is received or a contract signed orgoods manufactured.


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11. Matching Once revenues for an accounting period are recognized, expensesincurred in generating these revenues are matched them. This ensures thatsales and cost of goods sold in the income statements refer to the sameproducts. Note that expenses are matched to revenues and not vice versa.

Liabilities

Liabilities defined very broadly represent what the business entity owes others. TheCompanies Act classified them as follows:

Share Capital Reserves and Surplus Secured Loans Unsecured Loans Current Liabilities and Provisions

1. Share Capital: This is divided into two types: equity capital and preferencecapital.

The first represents the contribution of equity shareholders who are theoretical theowner to the firm. Equity capital, being risk capital, carries no fixed rate of dividend. Preference capital represents the contribution of preference shareholdersand the dividend rate on it is fixed.

2. Reserves and Surplus: Reserves and surplus are profits which have been retainedin the firm. There are two types of reserves: revenue and capital reserves. Revenuereserves represent accumulated retained earning from the profits of normalbusiness operations. These are held in various forms: general reserve, investmentallowance reserve, capital redemption reserves, dividend equalization reserve, andso on. Capital reserves arise out of gains which are not related to normal businessoperations. Examples of such gains are the premium on issue of shares or gain onrevaluation of assets.

Surplus is the balance in the profit and loss account which has not beenappropriated to any particular reserve account. Note that reserves and surplusalong with equity capital represents owners equity.

3. Secured Loans: These denote borrowing of the firm against which specificcollateral have been provided. The important components of secured loans are:debentures, loans from financial institutions, and loans from commercial banks.

4. Unsecured Loans: These are the borrowings of the firm against which no specificsecurity has been provided. The major components of unsecured loans are: fixed


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deposit, loans and advances from promoters, inter-corporate borrowings, andunsecured loans from banks.

5. Current Liabilities and Provisions: Current liabilities and provisions, as per theclassification under the Companies Act, consist of the amounts due to the suppliers

of goods and services bought on credit, advance payments received, accruedexpenses, unclaimed dividend, provisions for taxes, dividends, gratuity, pension, etc.

Currents liabilities for managerial purposes (as distinct from their definition in theCompanies Act) are obligation which are expected to mature in the next twelvemonths. So defined, they include the following:

(i). Loans which are payable within one year from the date of balance sheet,

(ii). Account payable (creditors) on account of goods and services purchasedon credit for which payment has to be made within one year,

(iii). Provisions for taxation,

(iv). Accrual for wages, salaries, rentals, interest and other expenses

(v). Advance payments received for goods and services to be suppliers in thefuture.

Assets

Broadly speaking, asserts represents resources which are of some value to the firm.

They have been acquired at a specific monetary cost by the firm for the conduct of its operations. Assets are classified as follows under the companies Act:

Fixed assets Investments Current assets, loans and advances Miscellaneous expenditures and losses

1. Fixed Assets: These assets have two characterizes: they are acquired for use overrelatively long periods for carrying on the operations of the firm and they areordinarily not meant for resale. Examples of fixed assets are land, buildings, plant,machinery, patents, and copy rights.

2. Investment: These are financial securities owned by the firm. Some investmentrepresents long-term commitment of funds. (Usually these are the equity shares of other firms held for income and control purposes). Other investments are short-term in nature and may rightly be classified under current assets for managerialpurpose. (Under requirement of the Companies Act, however, short-term holding of


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While a single step profit and loss account aggregates all revenues and expanses, amulti-step profit and loss account provides disaggregated. Further, instead of showing only the final profit measures, viz. the profit after tax figure, it presentsprofit measurers as intermediate stages as well. The highlights in the P/L accountare given below.

Net sales Cost of goods sold Gross Profit Operating expenses Operating Profit Non-Operating Surplus/deficit Profit before interest and tax Interest Profit before tax

Tax Profit after tax

Revenues

One group of items listed on the P/L account is revenue. It is defined as the incomethat accrues to the firm by the sale of goods/services/assets or by the supply of thefirms resources to others. Alternatively, revenues mean the value that a firmreceives from its customers. The value/income can arise from other sources:

1. sale of products/goods/services and2. supply of firms resources to othersSales income:- The sales revenues equals net sales, that is, gross sales less (i) returnand allowance, and (ii) sales discount. Gross sales are the total invoice price of thegoods sold/services rendered plus the cash sales during the year. Sales returnrepresents the sale value of goods that were returned by the customers. Salesdiscount is the amount of cash discount taken by customers for prompt payment.

Use of Economic Resources Outside:- the second sources of revenue is obtained byinvesting a firms resources outside, and earning interest, rent, dividend, royalty,commission, fee, and so on.

Expenses

The cost of earning revenue is called expenses. An important item of expansesappearing in the P/L account is the cost of goods sold. Include in this expanse arematerial cost, labour cost and other manufacturing expanses such as fuel andpower, repair, and maintenance, consumable stores, insurance of goods, and so on.


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The general administrative expanses include salary, managerial remuneration, rent,rate and taxes, staff welfare expanses, and so on. Other items are self-explanatory.

Net Income/Profit

The difference between revenues and expanses is net profit. The profit and lossaccount may also show the appropriate of the net profits between dividends paid tothe shareholders and retained earning/amount transferred to reserves and surplus.This last item is transferred to the balance sheet in the owners equity. Thus, it is alink, in a way, between the profit and loss account and the balance sheet.

To conclude the two financial statements, namely, the balance sheet and profit andloss account of a business firm contain useful information. The balance sheet showsthe sources from funds currently used to operate the business have been obtained,that is, liabilities and owners equity, and the type of property rights in which these

funds are currently locked up, that is, assets. The profit and loss account representsthe score-board of the performance of the firm in term of the profitability of itsoperations.

Net sales are obtained as follows:

Sales-Sales inwards-Excise duty

Sales are the sum of the invoice price of goods sold and services rendered during theperiod. Sales inwards represent the invoice value of goods returned by thecustomers. Excise duty refers to the amount paid to the government.

1. Cost of goods: - is the sum of costs incurred for manufacturing the goods soldduring the accounting period. It consists of direct material cost, labour cost,and factory overheads. It should be distinguished from the cost of production. The latter represents the cost of goods produced in theaccounting year, not the cost of goods sold during the same period.

2. Gross profit: - is the difference between net sales and cost of cost of goodssold. Most companies show this amount as a separate item. Some companies,however, show all the expanses at one place without making gross profit aseparate item.

3. Operating expanses: - consists of general administrative expanses, selling anddistribution expenses, and depreciation. (Many accountants includedepreciation under cost of goods sold as a manufacturing overhead ratherthan under operating expanses. This treatment is also quite reasonable).

4. Operating profit: - is difference between gross profit and operating expanses.As a measure of profit it reflects operating performance and is not affectedby non-operating gains/losses, financial leverage, and tax factor.

5. Non-operating surplus: - represents gains arising from sources other thannormal operations of the business. Its major components are income from


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investment and gain from disposal of assets. Likewise, non-operating deficitlosses from activities unrelated to the normal operations of the firm.

6. Profit before interest and taxes (PBIT): - is the sum of operating profit andnon-operating surplus deficit. Referred to also as Earning before interest andtaxes (EBIT), this represents a measure of profit which is not influenced by

financial leverage and the tax factor. Hence, it is preeminently suitable forinter-firm comparison.7. Interest: - is the expanses incurred for borrowed funds, such as term loans

debentures, public deposits, and working capital advances.8. Profit before tax (PBT): - is obtained by deducting interest from profit before

interest and taxes.9. Tax: - represents the income tax payable on the taxable profit of the year.10. Profit after tax (PAT): - is the difference between the profit before tax and

tax for the year.11. Dividends: - represents the amount earmarked for distribution to

shareholders.

12. Retaining earnings: - are the difference between profit after tax anddividends.Structure of the Profit and Loss accounts of Horizon Limited for the Year Endingon March 31, 2001

(Rs in Million)

Items 2001Net sales 701Cost of goods sold 552

Stocks 421Wages and salaries 68Other manufacturing expanses 63

Gross profit 149Operating expanses 60

Depression 30General administration 12Selling 14

Operating profit 89Non- operating surplus/deficit -Profit before interest and tax (PBIT) 89Interest 21Profit before tax (PBT) 68Tax 34Profit after tax 34Dividends 28Retained earnings 6Per share data(in rupees)

Earning per share 2.27Dividend per share 1.87


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Market per share 21.00Book value per share 17.46

3. Cash flow statement

A cash flow statement is a financial report that shows incoming and outgoing moneyduring a particular period (often monthly or quarterly). The statement shows howchanges in balance sheet and income accounts affected cash and cash equivalentsand breaks the analysis down according to operating, investing, and financingactivities. As an analytical tool the statement of cash flows is useful in determiningthe short-term viability of a company, particularly its ability to pay bills.

People and groups interested in cash flow statements include:

Accounting personnel, who need to know whether the organization will be

able to cover payroll and other immediate expenses Potential lenders/creditors, who want a clear picture of a company's ability

to repay Potential investors who need to judge whether the company is financially

sound Potential employees or contractors who need to know whether the company

will be able to afford compensation

The cash flow statement may be prepared on the basis of actual or estimated data.In the later case, it is termed as Projected Cash Flow Statement, which issynonymous with the term Cash Budget.

The cash flow statement is a statement depicting change in cash position from oneperiod to another. The cash flow statement explains the reasons for inflows oroutflows of cash, as the case may be. It also helps management in making plans forthe immediate future. A Projected Cash Flow Statement or the Cash Budget will behelp the management in ascertaining how much cash will be available to meetobligations to trade creditors, to pay bank loans and to pay dividend to theshareholders. A proper planning of the cash recourses will enable the managementto have cash available whenever needed and put it to some profitable or productiveuse in case there is surplus cash available.

The change in the cash position from one period to another is computed by takinginto account Sources and Applications of cash.

The Structure of the CFS


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The cash flow statement is distinct from the income statement and balance sheetbecause it does not include the amount of future incoming and outgoing cash thathas been recorded on credit. Therefore, cash is not the same as net income, which,on the income statement and balance sheet, includes cash sales and sales made oncredit.

Cash flow is determined by looking at three components by which cash enters andleaves a company: core operations, investing and financing,

Operations Measuring the cash inflows and outflows caused by core business operations, theoperations component of cash flow reflects how much cash is generated from acompany's products or services. Generally, changes made in cash, accountsreceivable, depreciation, inventory and accounts payable are reflected in cash fromoperations.

Cash flow is calculated by making certain adjustments to net income by adding orsubtracting differences in revenue, expenses and credit transactions (appearing onthe balance sheet and income statement) resulting from transactions that occurfrom one period to the next. These adjustments are made because non-cash itemsare calculated into net income (income statement) and total assets and liabilities(balance sheet). So, because not all transactions involve actual cash items, manyitems have to be reevaluated when calculating cash flow from operations.

For example, depreciation is not really a cash expense; it is an amount that is

deducted from the total value of an asset that has previously been accounted for.That is why it is added back into net sales for calculating cash flow. The only timeincome from an asset is accounted for in CFS calculations is when the asset is sold.

Changes in accounts receivable on the balance sheet from one accounting period tothe next must also be reflected in cash flow. If accounts receivable decrease, thisimplies that more cash has entered the company from customers paying off theircredit accounts - the amount by which AR has decreased is then added to net sales.If accounts receivable increase from one accounting period to the next, the amountof the increase must be deducted from net sales because, although the amountsrepresented in AR are revenue, they are not cash.

An increase in inventory, on the other hand, signals that a company has spent moremoney to purchase more raw materials. If the inventory was paid with cash, theincrease in the value of inventory is deducted from net sales. A decrease in inventorywould be added to net sales. If inventory was purchased on credit, an increase in


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accounts payable would occur on the balance sheet, and the amount of the increasefrom one year to the other would be deducted from net sales.

The same logic holds true for taxes payable, salaries payable and prepaid insurance.If something has been paid off, then the difference in the value owed from one year

to the next has to be subtracted from net income. If there is an amount that is stillowed, then any differences will have to be added to net earnings.

Investing Changes in equipment, assets or investments relate to cash from investing. Usuallycash changes from investing are a "cash out" item, because cash is used to buy newequipment, buildings or short-term assets such as marketable securities. However,when a company divests of an asset, the transaction is considered "cash in" forcalculating cash from investing.

Financing Changes in debt, loans or dividends are accounted for in cash from financing.Changes in cash from financing are "cash in" when capital is raised, and they're"cash out" when dividends are paid. Thus, if a company issues a bond to the public,the company receives cash financing. However, when interest is paid tobondholders, the company is reducing its cash.

Analyzing an Example of a CFS


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From this CFS, we can see that the cash flow for FY 2003 was $1,492,000. The bulkof the positive cash flow stems from cash earned from operations, which is a goodsign for investors. It means that core operations are generating business and thatthere is enough money to buy new inventory. The purchasing of new equipmentshows that the company has cash to invest in inventory for growth. Finally, theamount of cash available to the company should ease investors' minds regarding thenotes payable, as cash is plentiful to cover that future loan expense.

Of course, not all cash flow statements look this healthy, exhibiting a positive cashflow. But a negative cash flow should not automatically raise a red flag withoutsome further analysis. Sometimes, a negative cash flow is a result of a company'sdecision to expand its business at a certain point in time, which in fact would be agood thing for the future. This is why analyzing changes in cash flow from oneperiod to the next gives the investor a better idea of how the company is performing,and whether or not a company may be on the brink of bankruptcy or success.

Balance Sheet as at 31st March, 2006

As At31st March, 2006

(Rs. in Crores)

As At31st March, 2005

(Rs. in Crores)

I. SOURCES OF FUNDS

1. Shareholders' Funds

a)Capital 375.52 248.22

b)Share Capital Suspense - 1.21

c)Reserves & Surplus 8685.96 9061.48 7646.18 7895.61

2. Loan Funds

a)Secured Loans 33.67 88.69


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b)Unsecured Loans 86.06 119.73 156.67 245.36

3. Deferred Tax - Net 324.76 376.09

Total 9505.97 8517.06

II. APPLICATION OF FUNDS

1.Fixed Assets

a)Gross Block 6227.17 5746.27

b)Less: Depreciation 2065.44 1795.51

c)Net Block 4161.73 3950.76

d)Capital Work-in-Progress 243.40 4405.13 186.15 4136.91

2.Investments 3517.01 3874.68

3.Current Assets, Loans and Advances

a)Inventories 2636.29 2002.99

b)Sundry Debtors 547.96 527.76

c)Cash and Bank Balances 855.82 55.66

d)Other Current Assets 146.80 142.52

e)Loans and Advances 975.03 810.36

5161.90 3539.29

Less :

4.Current Liabilities and Provisions

a)Liabilities 2189.03 1925.64


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b)Provisions 1389.04 1108.18

3578.07 3033.82

Net Current Assets 1583.83 505.47

Total 9505.97 8517.06

Profit & Loss Account for the year ended 31st March, 2006

For the yearended

31st March,

For the yearended

31st March,

IA. GROSS INCOME 16510.51 13585.39

IB. NET INCOME

Gross Sales 16224.43 13349.58

Less: Excise Duties and Taxes on Sales of Productsand Services.

6433.90 5710.13

Net Sales [after considering provision for Taxes of Rs. Nil (2005 - 214.75 Crores); also seeSchedule 19(i)]

9790.53 7639.45


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Other Income 286.08 235.81

10076.61 7875.26

II. OTHER EXPENDITURE

Raw Materials etc. 3983.23 2769.55

Manufacturing, Selling etc. Expenses 2491.85 2119.77

Depreciation 332.34 312.87

6807.42 5202.19

III. PROFIT

Profit before Taxation and Exceptional items 3269.19 2673.07

Provision for Taxation 988.82 836.00

Profit after Taxation before Exceptional items 2280.37 1837.07

Exceptional items (net of tax) (45.02) 354.33

Profit after Taxation 2235.65 2191.40

Profit brought forward 611.41 387.84

2846.76 2579.24

Release from Hotel Foreign Exchange EarningsReserve

- 15.14


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Available for appropriation 2846.76 2594.38

IV. APPROPRIATIONS

General Reserve 1150.00 1100.00

Proposed Dividend 995.12 773.25

Income Tax on Proposed Dividend [Including Rs.0.02 Crore (2005 - Rs. 1.27 Crores) for earlier years]

139.58 109.72

Profit Carried Forward 562.06 611.41

2846.76 2594.38

Earnings Per Share (Face Value Rs. 1.00 each)

On Profit after Taxation before Exceptional items

Basic Rs. 6.08 Rs. 4.91

Diluted Rs. 6.05 Rs. 4.91

On Profit after Taxation

Basic Rs. 5.96 Rs. 5.85

Diluted Rs. 5.93 Rs. 5.85

Cash Flow Statement for the year ended 31st March, 2006(Figures for the previous year have been rearranged to conform with the revised presentation)


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For the year ended31st March, 2006

(Rs. in Crores)

For the year ended 31st March, 2005

(Rs. in Crores)

A. NET PROFIT BEFORE TAX ANDEXCEPTIONAL ITEMS

3269.19

2673.07

ADJUSTMENTS FOR :

Depreciation 332.34 312.87

Interest etc. (Net) 2.83 5.91

Income from Long Term Investments (8.69) (27.04)

Income from Current Investments (155.47) (119.72)

Fixed Assets - Loss on Sale/Write off - Net 19.63 1.89

(Profit)/Loss on Sale of Current Investments - Net (3.43) 0.34

Excess of Cost over Fair Value of CurrentInvestments

12.76 -

Unrealised Loss on Exchange -Net 0.01 0.04

Write off of Long Term Investment - 0.05

Liability no longer required written back (7.38) 192.60 (15.39) 158.95

OPERATING PROFIT BEFORE WORKINGCAPITAL CHANGES

3461.79

2832.02

ADJUSTMENTS FOR :

Trade and Other Receivables (160.51) (109.07)


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Inventories (633.30) (506.09)

Trade Payables 328.79 (465.02

) 418.11 (197.05)

CASH GENERATED FROM OPERATIONS 2996.7

7 2634.97

Income Tax Paid (999.22

) (783.77)

Cash Flow before Exceptional items 1997.5

5 1851.20

Exceptional items paid/received [see Schedule

19(i)]

(67.87) -

NET CASH FROM OPERATING ACTIVITIES 1929.6

8 1851.20

B. CASH FLOW FROM INVESTING ACTIVITIES :

Purchase of Fixed Assets (709.19) (517.20)

Sale of Fixed Assets 5.89 21.51

Purchase of Business (see Note 2 below) (38.83) (38.83)

Purchase of Current Investments (32734.10

) (24462.88

)

Sale/Redemption of Current Investments 33215.54 23446.79

Purchase of Long Term Investments - (3.01)

Sale of Long Term Investments - 0.05

Income from Long Term Investments Received 8.37 27.04

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