E-LESSON-1, 2

IDOL Institute of Distance and Online Learning ENHANCE YOUR QUALIFICATION, ADVANCE YOUR CAREER.

M.B.A 2 All right are reserved with CU-IDOL FINANCIAL REPORTING AND ANALYSIS Course Code: MBA604 Semester: First SLM UNITS : 1&2 E-Lesson : 1 www.cuidol.in Unit-1 & 2 (MBA 604)

UNDERSTANDING 33 FINANCIAL STATEMENT OBJECTIVES INTRODUCTION Student will be able to : In this unit we are going to learn about the To impact understanding of the application of nature of items within financial statement. accounting fundamentals in business organization. To explain the significance of accounting Under this unit you will also understand the information from the perspective of different users purpose for which financial statement are of accounting information. being prepared. To apply accounting principles to record business This unit will also help us understand the transactions culminating into a statement of profit uses of financial statement. and loss, balance sheet and cash flow statement. www.cuidol.in Unit-1 & 2 (MBA 604) INASllTITriUgThEt aOrFeDreISsTeArNveCdE AwNitDh OCNUL-IIDNOE LLEARNING

TOPICS TO BE COVERED 4 > Introduction of financial statement. > Nature of financial statement. > Objectives of financial statement. > Uses of financial statement > Financial year > Form and Content of financial statement. > Users of financial statement www.cuidol.in Unit-1 & 2U(NMIBTA-6104()MBA604) All right are reserved with CU-IDOL

INTRODUCTION 5  Accounting process involves recording, classifying and summarizing of various business transactions.  In the process of summarizing , efforts are made to clarify the profitability and financial position of the entreprise.  Financial statements are the outcome of this process which provide various information’s related to profitability and financial position of the business.  “Financial Statement essentially are interim reports presented annually and reflect a division of the life of an enterprise into more or less arbitrary accounting period more frequently a year” ---- ANTHONY www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

MEANING OF FINANCIAL STATEMENT As per Section2(40) of the Companies Act, 2013, ‘financial stamen ‘ in relation to a Company include the following6: i. A balance sheet at the end of the financial year ii. A statement of the profit and loss for the financial year. iii. Cash flow statement for the financial year. iv. A statement of change in equity, if applicable. v. Explanatory notes www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FEATURES FINANCIAL STATEMENT 7 i. As the financial statements are related to post period of the time hence, these are historical documents ii. They are expressed in monitory terms iii. Financial statement show profitability through statement of Profit and Loss and Financial position through Balance Sheet. BALANCE SHEET i. It shows the financial position of a company at a specific point of time. ii. It shows the financial position as per going concern concept. iii. It establishes a relationship between Equity & Liabilities and assets. It shows that the total of Equity & Liabilities side is always equal to the assets side. www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FEATURES 8 PROFIT AND LOSS i. It is a historical document & it is prepared for the past period. ii. It is prepared for a particular period and not on a particular date. iii. It shows the financial performance of a company (revenues, expenses and profit or loss for the period). www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FINANCIAL STATEMENT- NATURE 9 1) RECORDED FACTS: The term ‘recorded facts’ implies that the data used for preparing financial statements are noted down from accounting records 2) ACCOUNTING CONCEPTS AND CONVENTIONS: Financial statements are prepared by following the accounting concepts and conventions 3) PERSONAL JUDGEMENT: The management applies this method on the basis of their personal judgment www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

OBJECTIVES 10  Provide significant information about the financial activities to the interested parties  Financial forecasting  Evaluating the earning capacity of the firm  Facilitate decisions regarding the changes in the manner of acquisition, utilization, preservation and distribution of the scare resources  Facilitate decisions regarding replacement of fixed assets and expansion of the firm  Safeguard the interest of the shareholders  Help in advising remedial measures  Help in determining rating of the company  Provide necessary data and information for internal reporting www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

USES OF FINANCIAL STATEMENTS  Make decisions about the future of the business 11  Decide whether to lease some equipment in the goods production  Perform financial analysis, a key component in investment decision making in the case of prospective investors  Examine the financial strength of a person or company so as to arrive at a decision as to whether to lend to the company or person  The government uses the financial statements to ascertain the accuracy of taxes paid by the organization  Those who may want to extend credit to the business will use these statements to ascertain the credit worthiness of the company  Financial statements are used by employees of the business to make collective bargaining agreements www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

REVENUE MEANING OF REVENUE 12 Revenue is the income generated from normal business operations and includes discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income. REVENUE-PRODUCING ACTIVITES: i. Acquisition of resources ii. Receipt of customer orders iii. Production iv. Delivery of goods or performance of services v. Collection of cash www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

REVENUE 13 REVENUE RECOGNITION CRITERIA: i. Revenue recognition at the point of sale ii. Revenue recognition in sale of services iii. Revenue recognition in construction work (a) Percentage-completion method (b) Completed contract method iv. Revenue recognition in instalment credit sales v. Revenue recognition using production method vi. Revenue recognition when a firm receives interest, royalties and dividends vii. Money received or amounts paid in advance AMOUNT (MEASUREMENT OF REVENUE RECOGNITION) i. Discount (a) trade discount (b) cash discount ii. Sales returns and allowances iii. Bad debts iv. Revenue measurement in non-cash transactions www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

UNDERSTANDING FINANCIAL STATEMENT 14 FINANCIAL YEAR:  Financial year which shall be a period from 1st April to 31st March every year.  Values that a company should observe while preparing financial statement : i. Shall give a true and fair view of the state of affairs of the company ii. Shall comply with the accounting standards notified under section 133 and iii. Shall be in the prescribed form given in schedule III www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT 15 LEGAL REQUIREMENT UNDER COMAPANIES ACT 2013 1) Section 129 (1) states that the financial statement of a company shall: (i) give true and fair view of affairs of the company (ii) comply with accounting standards notified by the central government, in consultation worth National Financial Reporting Authority and, (ii) be in the form or forms provided in schedule III. 2) The books of accounts must be: (i) prepared on accrual basis [sec. 128 (1)] (ii) follow double entry system of accounting [sec. 128 (1)] (iii) may be maintained in electronic mode [sec. 128 (1)] (iv) maintained in good order for a period of atleast 8 financial year immediately preceding as financial year [sec.128 (5)] (v) open for inspection at the registered office of the company or such other place in India by any director during business hours. 3) Financial statements must be laid down by board of directors of every general meeting of the company [sec. 29 (20)] www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT 16 3) The company must prepare consolidated financial statement in case it has one or more subsidiaries and place before general meeting. [sec.29 (3)] 4) Provisions of the Act applicable to preparation and audit of holding company [sec.29 (4)] 6) The financial statement of a company do not comply with the accounting standards referred to in sec. 19 (1), the company shall disclose in its financial statements, the deviation from the accounting standards, [sec. 129(5)] 7) Central government may exempt any class of companies form complying with any of the requirements of sec. 129 or rules made there under, if it is considered necessary to grant such exemption in the public interest [sec. 29 (6)] 8) The central government may , any notification, constitute a NFRA to provide for matters relating to accounting and auditing standards under the companies Act, 2013 [sec. 132] 9) The central government may prescribe the standards of accounting, as recommended by the Institute of Charted Accounting of India. [sec. 133] www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT 17 NOTES TO ACCOUTNS: SHARE CAPITAL (i) the number and amount of share authorized (ii) the number of shared issued, subscribed and fully paid and subscribed but not fully paid (iii) par value per share. (iv) a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period. (v) the rights, preferences and restrictions attracting to each class of shares including restrictions on the distribution of dividends (vi) shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by or by subsidiaries or associates of the holding company or the ultimate holding company in aggregate; (vii) shares in the company held by each shareholder holding more than 5 per cent. shares specifying the number of shares held. (viii) shares reserved for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts. (ix) calls unpaid (showing aggregate value of calls unpaid by directors and officers) (x) forfeited shares (amount originally paid-up). www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT 18 B. Reserves and Surplus (i) Reserves and Surplus shall be classified as: (a) Capital Reserves (b) Capital Redemption Reserve (c) Securities Premium Reserve (d) Debenture Redemption Reserve (e) Revaluation Reserve (f) Share Options Outstanding Account (g) Other Reserves–(specify the nature and purpose of each reserve and the amount in respect thereof) (h) Surplus i.e., balance in Statement of Profit and Loss disclosing allocations and appropriations such as dividend bonus shares and transfer to/ from reserves, etc. (Additions and deductions since last balance sheet to be shown under each of the specified heads) (ii) A reserve specifically represented by earmarked investments shall be termed as a “fund” (iii) Debit balance of statement of profit and loss shall be shown as a negative figure under the head “Surplus”. Similarly, the balance of “Reserves and Surplus”, after adjusting negative balance of surplus, if any, shall be shown under the head “Reserves and Surplus” even if the resulting figure is in the negative. www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT 19 C. Long-Term Borrowings (i) Long-term borrowings shall be classified as: (a) Bonds/debentures; (b) Term loans: (A) from banks. (B) from other parties. (c) Deferred payment liabilities; (d) Deposits; (e) Loans and advances from related parties; (f) Long term maturities of finance lease obligations; (g) Other loans and advances (specify nature). (ii) Borrowings (iii) Where loans have been guaranteed by directors or others (iv) Bonds/debentures (v) Particulars of any redeemed bonds/debentures which the company has power to reissue shall be disclosed. (vi) Terms of repayment of term loans and other loans shall be stated. (vii) Period and amount of continuing default as on the balance sheet date in www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT 20 D. Other Long-term Liabilities Other Long-term Liabilities shall be classified as: (a) Trade payables (b) Others E. Long-term provisions The amounts shall be classified as: (a) Provision for employee benefits (b) Others (specify nature) F. Short-term borrowings (i) Short-term borrowings shall be classified as: (a) Loans repayable on demand (A) from banks (B) from other parties (b) Loans and advances from related parties (c) Deposits (d) Other loans and advances (specify nature) www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

G. Other current liabilities 21 The amounts shall be classified as: (a) Current maturities of long-term debt (b) Current maturities of finance lease obligations (c) Interest accrued but not due on borrowings (d) Interest accrued and due on borrowings (e) Income received in advance (f) Unpaid dividends (g) Unpaid matured deposits and interest accrued thereon (h) Unpaid matured debentures and interest accrued thereon (i) Other payables (specify nature) H. Short-term provisions The amounts shall be classified as: (a) Provision for employee benefits (b) Others (specify nature) www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT 22 I. Tangible assets (i) Classification shall be given as: (a) Land& building (c) Plant and Equipment (d) Furniture and Fixtures (e) Vehicles (f) Office equipment (g) Others (specify nature) J. Intangible assets (i) Classification shall be given as: (a) Goodwill (b) Brands /trademarks (c) Computer software (d) Mastheads and publishing titles (e) Mining rights (f) Copyrights, and patents and other intellectual property rights, services and operating rights (g) Recipes, formulae, models, designs and prototypes (h) Licences and franchise (i) Others (specify nature) www.cuidol.in Unit-1 & 2 U(MNBIAT6-024)(MBA604) All right are reserved with CU-IDOL

FORM & CONTENT 23 OF FINANCIAL STATEMENT K. Non-current investments L. Long-term loans and advances (i) Non-current investments shall be classified as trade (i) Long-term loans and advances shall be classified as: investments and other investments and further classified (a) Capital Advances; as: (b) Security Deposits; (c) Loans and advances to related parties (a) Investment property; (giving details thereof); (b) Investments in Equity Instruments; (d) Other loans and advances (specify nature). (c) Investments in preference shares; (d) Investments in Government or trust securities; (ii) The above shall also be separately sub-classified as: (e) Investments in debentures or bonds; (a) Secured, considered good; (f) Investments in Mutual Funds; (b) Unsecured, considered good; (g) Investments in partnership firms; (c) Doubtful. (h) Other non-current investments (specify nature). www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT 24 M. Other non-current assets Other non-current assets shall be classified as: (i) Long-term Trade Receivables (including trade receivables on deferred credit terms) (ii) Others (specify nature) (iii) Long term Trade Receivables, shall be sub-classified as: (A) (a) Secured, considered good (B) Unsecured, considered good (C) Doubtful N. Current Investments O. Inventories (i) Inventories shall be classified as: (a) Raw materials (b) Work-in-progress (c) Finished goods (d) Stock-in-trade (in respect of goods acquired for trading) (e) Stores and spares (f) Loose tools (g) Others (specify nature) www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT P. Trade Receivables 25 Trade receivables shall be sub-classified as: (a) Secured, considered good (b) Unsecured, considered good (c) Doubtful Q. Cash and cash equivalents (i) Cash and cash equivalents shall be classified as: (a) Balances with banks (b) Cheques, drafts on hand (c) Cash on hand (d) Others (specify nature) R. Short-term loans and advances (i) Short-term loans and advances shall be classified as: (a) Loans and advances to related parties (giving details thereof (b) Others (specify nature) (ii) The above shall also be sub-classified as: (a) Secured, considered good (b) Unsecured, considered good (c) Doubtful www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FORM & CONTENT OF FINANCIAL STATEMENT 26 S. Other current assets (specify nature) This is an all-inclusive heading, which incorporates current assets that do not fit into any other asset categories T. Contingent liabilities and commitments (to the extent not provided for) (i) Contingent liabilities shall be classified as: (a) Claims against the company not acknowledged as debt (b) Guarantees (c) Other money for which the company is contingently liable (ii) Commitments shall be classified as: (a) Estimated amount of contracts remaining to be executed on capital account and not provided for Uncalled liability on shares and other investments partly paid (b) Other commitments (specify nature) www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

GENERAL INSTRUCTIONS FOR PREPARATION OF 27 STATEMENT OF PROFIT AND LOSS 1. The provisions of this Part shall apply to the income and expenditure account referred to in sub-clause (ii) of clause (40) of section 2 in like manner as they apply to a statement of profit and loss. 2. (A) In respect of a company other than a finance company, revenue from operations shall disclose separately in the notes revenue from— (a) Sale of products; (b) Sale of services; (c) Other operating revenues; Less: (d) Excise duty. (B) In respect of a finance company, revenue from operations shall include revenue from— (a) Interest; and (b) Other financial services. Revenue under each of the above heads shall be disclosed separately by way of notes to accounts to the extent applicable. www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

contd... 28 3. Finance Costs Finance costs shall be classified as: (a) Interest expense (b) Other borrowing costs (c) Applicable net gain/loss on foreign currency transactions and translation . 4. Other income Other income shall be classified as: (a) Interest Income (in case of a company other than a finance company) (b) Dividend Income (c) Net gain/loss on sale of investments (d) Other non-operating income (net of expenses directly attributable to such income) www.cuidol.in Unit-1 & 2U(NMIBTA-6204()MBA604) All right are reserved with CU-IDOL

USERS OF FINANCIAL STATEMENT 29 a) Investors b) Employees c) Lenders d) Suppliers and other trade creditors e) Customers f) Governments and their agencies g) Public www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

SUMMARY 30  Accounting process involves recording, classifying and summarising of various business transactions.  Financial Statements - Its Nature, Objectives and Uses  Form and content of Financial Statement  General Instructions for preparation of Statement of Profit and Loss  General Instruction for preparation of Consolidated Financial Statements  Users of Financial Statement www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

FREQUENTLY ASKED QUESTIONS 31 Q1. What is financial forecasting? Ans. It refers to the processing, estimating or predicting how business will perform in the future. For further detail Refer to SLM Q2. What do you understnad by critical analysis? Ans. It is a careful examination and evaluation of the text, image or other work performance. For further detail Refer to SLM Q3. Explain 'Mutatis Mutandis'. Ans. It is used when comparing two or more cases or situations. For further detail Refer to SLM Q4. What items are included in 'Tangible Assets'? What items are listed under 'Intangible Assets'? Ans. Land, buildings, plant and equipment, furniture and fixtures, vehicles, office equipment. Goodwill, brand trademarks, computer software, mastheads and publishing titles, mining rights, copyrights and patents, recipes, formulae, models, design, prototypes, licenses and franchisee For further detail Refer to SLM www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

MULTIPLE CHOICE QUESTIONS 1. Which among the following are the common tools used by the management to facilitate analysis of 32 financial statement: a) Ratio Analysis b) Fund flow statement c) Cash Flow Statement d) All of the above 2. Which among the following are the uses of financial statements: a) to make decisions about the future of business, b) To decide whether to lease some equipment in whether to stop or continue it goods production c) To perform financial analysis d) All of the above 3. Informationn about the fnancial position of the compnay is provided in: a) Balance Sheet b) Income Statement c) Both (a) & (b) d) none of the above 4. Information about the performance of the compnay is provided in: a) Balance Sheet b) Income Statement c) Both (a) & (b) d) none of the above Ans: 1. (d) 2.(d) 3.(a) 4.(b) www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

REFERENCES 33  “Presentation of Financial Statement”, Standard IAS I, International Accounting Standards Board. Accesses 24 June 2007  “The Framework for the Preparation and Presentation of Financial Statements”. International Accounting Standards Board. Accesses 24 June 2007  Alexander. D., Britton. A. Jorrisen. A., “International financial Reporting and Analysis”. Second Edition, 2005  C. Horngren., “Uses of a Conceptual Framework”, Journal of Accountancy, April 1981, p. 90.  Hampton J. J., “Financial Decision Making”, (Ed 1977), p. 62 www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL

34 THANK YOU For queries Email: [email protected] www.cuidol.in Unit-1 & 2 (MBA 604) All right are reserved with CU-IDOL