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ATHARVA INSTITUTE OF
MANAGEMENT STUDIES
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
Introduction
Accounting Standard-2: Valuation of
Inventories
Objective:
A primary issue in accounting for inventories is the determination
of the value at which inventories are carried in the financial
statements until the related revenues are recognized. This
Statement deals with the determination of such value, including
the ascertainment of cost of inventories and any write-down
thereof to net realizable value.
Scope:
1. This Standard should be applied in accounting for inventories
other than:
(a) Work in progress arising under construction contracts,
including directly related service contracts
(b) Work in progress arising in the ordinary course of
business of service providers;
(c) Shares, debentures and other financial instruments held
as sk-in-trade; and
(d) Producers' inventories of livestock, agricultural and forest
products, and mineral oils, ores and gases to the extent that
they are measured at net realizable value in accordance with
well established practices in those industries.
Definition:
The following terms are used in this Statement with the meanings
specified:
Measurement of Inventories
Inventories should be valued at the lower of cost and net
realizable value.
A. Cost of Inventories:
1. Costs of Purchase
The costs of purchase consist of the purchase price including
duties and taxes (other than those subsequently recoverable by
the enterprise from the taxing authorities), freight inwards and
other expenditure directly attributable to the acquisition. Trade
discounts, rebates, duty drawbacks and other similar items are
deducted in determining the costs of purchase.
2. Costs of Conversion
The costs of conversion of inventories include costs directly
related to the units of production, such as direct labour. They also
include a systematic allocation of fixed and variable production
overheads that are incurred in converting materials into finished
goods. Fixed production overheads are those indirect costs of
production that remain relatively constant regardless of the
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
3. Other Costs
Other costs are included in the cost of inventories only to the
extent that they are incurred in bringing the inventories to their
present location and condition. For example, it may be
appropriate to include overheads other than production
overheads or the costs of designing products for specific
customers in the cost of inventories.
Interest and other borrowing costs are usually considered as not
relating to bringing the inventories to their present location and
condition and are, therefore, usually not included in the cost of
inventories.
Cost formula
I. FIFO (first in first out)
FIFO and LIFO accounting (first in - first out, last in - first out).
FIFO regards the first unit that arrived in inventory as the first one
sold. LIFO considers the last unit arriving in inventory as the first
one sold. Which method an accountant selects can have a
significant effect on net income and book value and, in turn, on
taxation. Using LIFO accounting for inventory, a company
generally reports lower net income and lower book value, due to
the effects of inflation. This generally results in lower taxation.
Due to LIFO's potential to skew inventory value, UK GAAP and IAS
have effectively banned LIFO inventory accounting.
2. Weighted average
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
Standard cost accounting can hurt managers, workers, and firms in several ways.
For example, a policy decision to increase inventory can harm a manufacturing
manager's performance evaluation. Increasing inventory requires increased
production, which means that processes must operate at higher rates. When (not if)
something goes wrong, the process takes longer and uses more than the standard
labor time. The manager appears responsible for the excess, even though s/he has
no control over the production requirement or the problem.
In adverse economic times, firms use the same efficiencies to downsize, right size,
or otherwise reduce their labor force. Workers laid off under those circumstances
have even less control over excess inventory and cost efficiencies than their
managers.
Many financial and cost accountants have agreed for many years on the desirability
of replacing standard cost accounting. They have not, however, found a successor.
4. Retail method
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
(iv) Goodwill;
This statement also does not apply to land unless it has a limited
useful life for the enterprise.
Definitions
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
• Computer systems
• Hotel systems
• Loan systems
• Partnership systems
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
Financial Ratios
Current Ratio
Current Ratio = _Current Assets_
Current Liabilities
The current ratio of TCMS is 1.82 for 2009 and 2.05 for 2010. This
is the ideal ratio and is a good indication for the company.
Quick Ratio
Quick Ratio = _Quick Assets__
Quick Liabilities
The quick ratio of TCMS is 1.08 for 2009 and 1.32 for 2010.
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
This ratio indicates the share of debts in creating the total assets
of the firm.
The Debt to Assets Ratio of TCMS is 0.21 for 2009 and 0.33 for
2010.
If the ratio is less than 0.5, it means most of the company's assets
are financed through equity.
Where,
Higher the ratio, less secure are the creditors. In the times of
distress or difficulty, they suffer more than the owners. Contrary
to this, lower the ratio, creditors enjoy higher degree of safety.
The Debt Equity Ratio of TCMS is 0.27 for 2009 and 0.5 for 2010.
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Financial Accounting Report – Cash Flow and Analysis of Balance Sheet
This ratio expresses the amount of earnings per share after taxes
and preference dividend during certain period. As this ratio
indicates the overall performance of the organization, such ratio
calculated for the year-to-year proves to be very helpful to the
shareholders and the investors to take investment decisions. It
also affects the market prices of the shares.
The Earnings Per Share of TCMS for 2009 is 14.95% and 16.35%
for 2010.
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