Beruflich Dokumente
Kultur Dokumente
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Financial reporting provides information about performance, financial position, and
changes in financial position
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Food for thought
Suppose you were working with Satyam in 2008. If you had analyzed the previous 3
years financial statements, would you have discovered that cash was diverted from
the company?
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The objective of an audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.
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Why FSA
Evaluating M&A
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Accounting principles
Accrual concept
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Accounting principles
Consistency rule
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Liquidity Vs Solvency
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Accounting Process
Voucher
(Documentation)
Journal
(Day book)
Ledger
(Classification)
Trial Balance
(Summarizing)
Financial Statements
(Bifurcation)
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Documentation and Recording
Debit the receiver Debit what comes in Debit all expenses and losses
Credit the giver Credit what goes out Credit all incomes and gains
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What’s relevant for whom?
Particulars Amount
Net Sales/Income from Operations 460233.00
Lenders?
Other Operating Income 5800.00 Owners?
Interest 5077.00
Lenders
Net Profit (+) / Loss (-) for the period 211809.00 Owners
Employees
Dividend (%) -
Public-at-large?
Face Value (in Rs.) 1.00
Report format
Balance Sheet
Account format
Income statement
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Balance Sheet
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Typical Assets
Inventories
Receivables
Prepaid expenses
Intangible assets
Investments
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Financial Statements
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Food for thought
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Balance Sheet
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Typical Liabilities
Borrowings
Payables
Provisions
Unearned revenues
Financial liabilities
Accrued liabilities
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Food for thought
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Balance Sheet
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Food for thought
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Points to Ponder
How should firm fund their assets? Why is equity capital important
Corporate strategy
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Special Note- Inventories
What is dating?
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Points to Ponder
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Special note- Intangibles
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Income Statement
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Income Statement
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Income statement
Eh-Bit-Duh?
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Classification using nature of expense method
Revenue
Other income
Employee expenses
Other expenses
Total expenses
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Food for thought
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Revenue Recognition- Goods
Precludes revenue recognition when the product has been shipped but risks
and rewards of ownership have not actually passed to the buyer
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Revenue Recognition- Goods
Preclude firms from recognizing revenue when the customer is unlikely to pay
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Revenue Recognition- Services
Outcome of a transaction involving the rendering of services can be estimated reliably
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From Annual Report: Revenue Recognition
4. Cost and earnings in excess of billings are classified as unbilled revenue while
billing in excess of cost and earnings is classified as unearned revenue.
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Revenue Recognition- Special Cases
Long-term contracts
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Expense Recognition
Period Cost
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Issues In Expense Recognition
Warranty on sales
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Points to Ponder
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Accounting equations
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Why Cash Flow Statement
Provides information about cash receipts and cash payments during an accounting
period
Shows cash flow linkage between ending cash balance and beginning balance
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Cash Flow Statement
Disclosing sources and uses of cash helps statement users evaluate the company’s
liquidity, solvency, and financial flexibility
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Bond Issue
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Accounting for Carbon Credits
Clean Development Mechanism
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Accounting for Leases
Operating Lease
Ownership of leased asset transfers to lessee at end of lease
Financial Lease Lease term is 75 percent or more of useful life of leased asset.
Recent ED
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Deferred Taxes
Temporary Differences
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Corporate Frauds
Asset misappropriation
Corruption
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Financial Statement Fraud
Understating liabilities
Overstating revenue
Overstating assets
Understating expenses
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Red Flags: Overstating Income
Strong revenue growth when peer companies are experiencing weak sales
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Red Flags: Understating expenses
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Cookie Jar Reserves
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Ratio Analysis- Asset Utilization Measurement
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Ratio Analysis
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Ratio Analysis
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Ratio Analysis
Accumulated depreciation
———————————
Total fixed assets
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Ratio Analysis
Investment Turnover
Sales
——————————————————
Equity + Long-term liabilities
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Ratio Analysis
Break-even Point
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Ratio Analysis
Margin of Safety
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Ratio Analysis- Operating Performance Measurement
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Ratio Analysis
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Gross Profit Index: Red Flags
Accounting changes
Business issues
Corporate strategy
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Ratio Analysis- Cash Flow Measurement
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Ratio Analysis
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Ratio Analysis
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Ratio Analysis
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Points to Ponder
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Ratio Analysis- Liquidity Measurement
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Ratio Analysis
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Points to Ponder
How about annualizing sales for the period covered by the existing accounts receivable?
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Ratio Analysis
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Ratio Analysis- Capital Structure and Solvency
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Ratio Analysis
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Ratio Analysis
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