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Financial Statements
A financial statement is a record of the financial activities of a person or business entity where all related financial information are presented in an orderly manner and can be easily understood.
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Accounting is the art of recording transactions in the best manner possible, so as to enable the reader to arrive at judgments/come to conclusions, and in this regard it is utmost necessary that there are set guidelines. These guidelines are generally called accounting policies. The intricacies of accounting policies permitted Companies to alter their accounting principles for their benefit. This made it impossible to make comparisons. In order to avoid the above and to have a harmonised accounting principle, Standards needed to be set by recognised accounting bodies. This paved the way for Accounting Standards to come into existence.
Accounting Standards in India are issued By the Institute of Chartered Accountanst of India (ICAI). At present there are 30 Accounting Standards issued by ICAI.
Objective of Accounting Standards
Objective of Accounting Standards is to standarize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements.
The institute of Chatered Accountants of India, recognizing the need to harmonize the diversre accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977.
Compliance with Accounting Standards issued by ICAI
Sub Section(3A) to section 211 of Companies Act, 1956 requires that every Profit/Loss Account and Balance Sheet shall comply with the Accounting Standards. 'Accounting Standards' means the standard of accounting recommended by the ICAI and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards(NACAs) constituted under section 210(1) of companies Act, 1956.
Accounting Standards Issued by the Institute of Chatered Accountants of India are as below:
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Disclosure of Accounting Policies: Accounting Policies refer to specific accounting principles and the method of applying those principles adopted by the enterprises in preparation and presentation of the financial statements.
Valuation of Inventories: The objective of this standard is to formulate the method of computation of cost of inventories / stock, determine the value of closing stock / inventory at which the inventory is to be shown in balance sheet till it is not sold and recognized as revenue.
Cash Flow Statements: Cash flow statement is additional information to user of financial statement. This statement exhibits the flow of incoming and outgoing cash. This statement assesses the ability of the enterprise to generate cash and to utilize the cash. This statement is one of the tools for assessing the liquidity and solvency of the enterprise.
Contigencies and Events occurring after the balance sheet date: In preparing financial statement of a particular enterprise, accounting is done by following accrual basis of accounting and prudent accounting policies to calculate the profit or loss for the year and to recognize assets and liabilities in balance sheet. While following the prudent accounting policies, the provision is made for all known liabilities and losses even for those liabilities / events, which are probable. Professional judgment is required to classify the likehood of the future events occurring and, therefore, the question of contingencies and their accounting arises.
Objective of this standard is to prescribe the accounting of contigencies and the events, which take place after the balance sheet date but before approval of balance sheet by Board of Directors. The Accounting Standard deals with Contingencies and Events occurring after the balance sheet date.
Net Profit or Loss for the Period, Prior Period Items and change in Accounting Policies : The objective of this accounting standard is to prescribe the criteria for certain items in the profit and loss account so that comparability of the financial statement can be enhanced. Profit and loss account being a period statement covers the items of the income and expenditure of the particular period. This accounting standard also deals with change in accounting policy, accounting estimates and extraordinary items.
Depreciation Accounting : It is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, passage of time. Depreciation is nothing but distribution of total cost of asset over its useful life.
Construction Contracts : Accounting for long term construction contracts involves question as to when revenue should be recognized and how to measure the revenue in the books of contractor. As the period of construction contract is long, work of construction starts in one year and is completed in another year or after 4-5 years or so. Therefore question arises how the profit or loss of construction contract by contractor should be determined. There may be following two ways to determine profit or loss: On year-to-year basis based on percentage of completion or On cpmpletion of the contract.
Revenue Recognition : The standard explains as to when the revenue should be recognized in profit and loss account and also states the circumstances in which revenue recognition can be postponed. Revenue means gross inflow of cash, receivable or other consideration arising in the course of ordinary activities of an enterprise such as:- The sale of goods, Rendering of Services, and Use of enterprises resources by other yeilding interest, dividend and royalties. In other words, revenue is a charge made to customers / clients for goods supplied and services rendered.
Accounting for Fixed Assets : It is an asset, which is:- Held with intention of being used for the purpose of producing or providing goods and services. Not held for sale in the normal course of business. Expected to be used for more than one accounting period.
The Effects of changes in Foreign Exchange Rates : Effect of Changes in Foreign Exchange Rate shall be applicable in Respect of Accounting Period commencing on or after 01-04-2004 and is mandatory in nature. This accounting Standard applicable to accounting for transaction in Foreign currencies in translating in the Financial Statement Of foreign operation Integral as well as non- integral and also accounting for For forward exchange.Effect of Changes in Foreign Exchange Rate, an enterprises should disclose following aspects:
Accounting for Government Grants : Governement Grants are assistance by the Govt. in the form of cash or kind to an enterprise in return for past or future compliance with certain conditions. Government assistance, which cannot be valued reasonably, is excluded from Govt. grants,. Those transactions with Governement, which cannot be distinguished from the normal trading transactions of the enterprise, are not considered as Government grants.
Accounting for Investments : It is the assets held for earning income by way of dividend, interest and rentals, for capital appreciation or for other benefits.
Accounting for Amalgamation : This accounting standard deals with accounting to be made in books of Transferee company in case of amalgamtion. This accounting standard is not applicable to cases of acquisition of shares when one company acquires / purcahses the share of another company and the acquired company is not dissolved and its separate entity continues to exist. The standard is applicable when acquired company is dissolved and separate entity ceased exist and purchasing company continues with the business of acquired company
Employee Benefits : Accounting Standard has been revised by ICAI and is applicable in respect of accounting periods commencing on or after 1st April 2006. the scope of the accounting standard has been enlarged, to include accounting for short-term employee benefits and termination benefits.
Borrowing Costs : Enterprises are borrowing the funds to acquire, build and install the fixed assets and other assets, these assets take time to make them useable or saleable, therefore the enterprises incur the interest (cost on borrowing) to acquire and build these assets. The objective of the Accounting Standard is to prescribe the treatment of borrowing cost (interest + other cost) in accounting, whether the cost of borrowing should be included in the cost of assets or not.
Segment Reporting : An enterprise needs in multiple products/services and operates in different geographical areas. Multiple products / services and their operations in different geographical areas are exposed to different risks and returns. Information about multiple products / services and their operation in different geographical areas are called segment information. Such information is used to assess the risk and return of multiple products/services and their operation in different geographical areas. Disclosure of such information is called segment reporting.
Related Paty Disclosure : Sometimes business transactions between related parties lose the feature and character of the arms length transactions. Related party relationship affects the volume and decision of business of one enterprise for the benefit of the other enterprise. Hence disclosure of related party transaction is essential for proper understanding of financial performance and financial position of enterprise.
Accounting for leases : Lease is an arrangement by which the lesser gives the right to use an asset for given period of time to the lessee on rent. It involves two parties, a lessor and a lessee and an asset which is to be leased. The lessor who owns the asset agrees to allow the lessee to use it for a specified period of time in return of periodic rent payments.
Earning Per Share :Earning per share (EPS)is a financial ratio that gives the information regarding earning available to each equiy share. It is very important financial ratio for assessing the state of market price of share. This accounting standard gives computational methodology for the determination and presentation of earning per share, which will improve the comparison of EPS. The statement is applicable to the enterprise whose equity shares or potential equity shares are listed in stock exchange.
Consolidated Financial Statements : The objective of this statement is to present financial statements of a parent and its subsidiary (ies) as a single economic entity. In other words the holding company and its subsidiary (ies) are treated as one entity for the preparation of these consolidated financial statements. Consolidated profit/loss account and consolidated balance sheet are prepared for disclosing the total profit/loss of the group and total assets and liabilities of the group. As per this accounting standard, the conslidated balance sheet if prepared should be prepared in the manner prescribed by this statement.
Accounting for Taxes on Income : This accounting standard prescribes the accounting treatment for taxes on income. Traditionally, amount of tax payable is determined on the profit/loss computed as per income tax laws. According to this accounting standard, tax on income is determined on the principle of accrual concept. According to this concept, tax should be accounted in the period in which corresponding revenue and expenses are accounted. In simple words tax shall be accounted on accrual basis; not on liability to pay basis.
Accounting for Investments in Associates in consolidated financial statements : The accounting standard was formulated with the objective to set out the principles and procedures for recognizing the investment in associates in the cosolidated financial statements of the investor, so that the effect of investment in associates on the financial position of the group is indicated.
Discontinuing Operations : The objective of this standard is to establish principles for reporting information about discontinuing operations. This standard covers "discontinuing operations" rather than "discontinued operation". The focus of the disclosure of the Information is about the operations which the enterprise plans to discontinue rather than dsclosing on the operations which are already discontinued. However, the disclosure about discontinued operation is also covered by this standard.
Interim Financial Reporting (IFR) : Interim financial reporting is the reporting for periods of less than a year generally for a period of 3 months. As per clause 41 of listing agreement the companies are required to publish the financial results on a quarterly basis.
Intangible Assets : An Intangible Asset is an Identifiable non-monetary Asset without physical substance held for use in the production or supplying of goods or services for rentals to others or for administrative purpose
Financial Reporting of Interest in joint ventures : Joint Venture is defined as a contractual arrangement whereby two or more parties carry on an economic activity under 'joint control'. Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefit from it. 'Joint control' is the contractually agreed sharing of control over economic activity.
Impairment of Assets : The dictionary meanong of 'impairment of asset' is weakening in value of asset. In other words when the value of asset decreases, it may be called impairment of an asset. As per AS-28 asset is said to be impaired when carrying amount of asset is more than its recoverable amount.
Provisions, Contingent Liabilities And Contingent Assets : Objective of this standard is to prescribe the accounting for Provisions, Contingent Liabilitites, Contingent Assets, Provision for restructuring cost.
Provision: It is a liability, which can be measured only by using a substantial degree of estimation.
Liability: A liability is present obligation of the enterprise arising from past events the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
Financial Instrument: Recognition and Measurement, issued by The Council of the Institute of Chartered Accountants of India, comes into effect in respect of Accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for An initial period of two years. This Accounting Standard will become mandatory in respect of Accounting periods commencing on or after 1-4-2011 for all commercial, industrial and business Entities except to a Small and Medium-sized Entity. The objective of this Standard is to establish principles for recognizing and measuring Financial assets, financial liabilities and some contracts to buy or sell non-financial items. Requirements for presenting information about financial instruments are in Accounting Standard.
Financial Instrument: presentation : The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. The principles in this Standard complement the principles for recognising and measuring financial assets and financial liabilities in Accounting Standard Financial Instruments:
Financial Instruments, Disclosures and Limited revision to accounting standards: The objective of this Standard is to require entities to provide disclosures in their financial statements that enable users to evaluate:
Normative Theory is a theory that prescribes how a process of accounting should be done. This theory is not based on observation and may suggest radical changes to current practices in accounting
Which is correct In the account or On the account?
It can depend on the context.
For example,
# 'there is a balance of xxx on the account', or # 'all those transactions are in the account.' Please submit a full sentence which indicates context so that we are able to offer further comments.
Is debentures in balance sheet?
Yes,debenture in the balance sheet because debentures is liability for the company so it comes debit side in balance sheet in the books of the company.
Dividend declared and paid is shown under cash flows from financing activities in cash flow statment as it is not primary operating activity of business.
Where do common shares go on financial statement?
Common share are part of equity of business that's why shown in equity section of balance sheet.
What is the difference between provisional balance sheet and estimated balance sheet?
Provisional balance sheets are used by companies to prepare for financial audits. An estimated balance sheet is used by companies to show projected growth for investors.
What is The percentage of a firms net income which is transferred into retained earnings?
It depend on many factors like company policy or market situation or how much investment opportunity available to company. Company can retain full net profit or it can distribute full amount of net income to shareholders.
What is advance against depreciation?
The difference between cumulative loan repayment amount and cumilative depreciation is AAD
Power generation companies usually run for 30 years .. if u depreciate it at SLM method it would have around 3.33% anual depreciation but No loan carries such a elongated tenure in general.....
Now the AAD concept come in picture.. The shortfall in LOANrepayment is to depreciation amount is routed thru Sales figure as AAD.. and the same adjusted over the life of teh asset as depreciation..
Got it !
Regards
Malla Reddy
Debt equity ratio = total debt / total equity
debt equity ratio = 1233837 / 2178990 * 100
Debt equity ratio = 56.64%
In a process cost system who is a production cost report prepared for?
In a process cost system, a production cost report is prepared by management for management. The purpose is to determine the efficiency of the production operation and examine cost reducing alternatives. An example of a business that would use a process cost system would be a manufacturer that continuously produces a homogeneous product. For example, a soda bottling company produces the same product day after day. The costs associated with producing that product include the raw materials or ingredients, direct labor and factory overhead. This is contrasted with the cost system used by a printing company. In the latter case, the company would use a job order costing system. The job order costing system would specify the costs associated with producing a particular job order. In the example of a printing company, there would be a set-up charge that would depend on the work involved in preparing the job.
What are the factors affecting owner's equity?
The issuance of stock. The accumulation of profits and/or losses (Retained Earnings). The payment of dividends. The re-purchase of your own stock (Treasury Stock).
QuickBooks does a nice job of formatting the data that has been entered, but it cannot format data that has NOT been entered. For example, GAAP requires businesses to record amounts owed to vendors at year-end as payables. If these amounts have never been entered into QuickBooks, the statements look good to a casual observer but are not GAAP compliant.
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QuickBooks does a fantastic job with financial and managerial reporting. However the matter of data not being entered is a human error that applies to all accounting systems and is not unique to QuickBooks.
It is my understanding that some people consider the ability to edit/correct historical transactions directly (with the appropriate security level), to be the villain in the GAAP debate - even with QuickBooks' always-on audit trail system.
Personally, I love ability to edit directly. In most other accounting systems one has to use a journal entry to make an account classification correction or even to change descriptive text and in in the process one loses a lot of original context.
Most of the time the edit is to fix sloppy data entry or to correct coding. The real GAAP issue in my opinion regardless of the system, is poor training and systems that are more mouse driven, than keyboard driven.
General approach to financial statement analysis?
Generally,there are two approaches to financial statement analysis,one the is the traditional approach where use of ratio analysis is applied and all information for analysis will be gathered from balance sheet and income statement.In recent times trend analysis and common-size statement has been used.The second is the modern approach where both internal and external business environment are taken into consideration.The approach is futuristic as opposed to traditional approach.
The financial statement may be also analyzed horizontally or vertically,across industry,in macro(in aggregate manner) and also in the firm either top down or bottom up.
clicnching statements is the method were the two tops are being related they formed correct spelling then they clich eanh other so that the paragraph will become most understood
If you are only accounting student working in accounting do you call it accountant?
First of all, with language skills like these, you need not be in the accounting profession. An accountant is one who practices accounting as his/her profession. Therefore, I would argue that students involved in higher level accounting education are still considered to be students, rather than accountants.
Do repairs go on the income statement?
Yes, repairs are expensed. Only expenditures that increase the capacity or the economic lifetime of the asset are capitalized (and added to the asset).
What is Bank Guarantee slightly seasoned?
The terms "Seasoned Bank Guarantee" and "Slightly Seasoned Bank Guarantee" are phrases used by scammers to convince people who are not knowledgeable about the banking business to pay to join some internet trading scheme where banking instruments are supposedly traded. The terms Fresh Cut Bank Guarantee, Fresh Cut Bank Notes and MTN are other terms used in this scam. These are not terms used in the legitimate banking industry.
Trading of banking instruments is highly regulated. These regulations state that persons who make the trades of financial instruments must have a license to do so. A novice in finance would not have the knowledge to pass the licensing exam nor would that person have the knowledge to understand the markets for financial instruments.
See:
http:/www.crimes-of-persuasion.com/Crimes/InPerson/MajorPerson/prime_bank.htm
What is the meaning of negative cash balance when projecting balance sheet?
Any negative cash balance represents float. It could represent the total amount of checks outstanding, checks generated and not mailed, or an unreconciled line of credit. Basically, negative cash should be booked as additional accounts payable or an increase in the outstanding borrowing on the line of credit.
What do you do if credits and debits are unequal after running an unadjusted trial balance?
If unequal amounts of debits and credits are found in this step, the reason for the inequality is investigated and corrected before proceeding to the next step.
When a company buys an asset they have to spread the cost of the asset over it's useful economic lifetime, this is done with depreciation.
The accumulated depreciation is the depreciation from previous years and the charge for the year is the amount being depricated that year, which will be charged to the profit and loss.
The assets will shows as a debit balance while depreciation will show as a credit balance in the balance sheet. When charge the depreciation for the year you would credit the balance sheet and debit the profit and loss. So after the asset has come to the end of it's useful economic lifetime the value in the balance sheet will become zero or close to it as the credits of depreciation will cancel out the debit if the asset value.
What does resistant or susceptible mean?
These terms refer to antibiotic sensitivities; antibiotic resistant organisms versus antibiotic susceptible organisms.
What is the purpose of a financial forecast?
The financial forecast or financial plan is often drawn up by clients to present a favourable cash flow situation, and might not be based on the realities of the situation that the business finds itself in. It is an annual projection of income and expenses.
What is the meaning of non recurring cash flow in cashflow statement?
Non-recurring cash flows means cash flows which are of capital expenditure nature or for long term cash flows.
