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Financial Accounting – Review

HUL Q4 misses estimates, profit dips 1% to Rs
1,519 crore, volume shrinks 7%
For FY20, HUL's domestic consumer growth was 2 percent with an underlying
volume growth of 2 percent.
Moneycontrol News @moneycontrolcom

FMCG giant Hindustan Unilever on April 30 reported a profit of Rs 1,519 crore in

the fourth quarter, registering a 1.2 percent decline YoY due to the lockdown in the
second half of March.

The standalone profit in the same period last year was at Rs 1,538 crore.

Revenue for the March quarter dropped 9.4 percent year-on-year to Rs 9,011 crore
due to a decline in volumes.

HUL reported a 7 percent decline in underlying volume growth in the quarter

against 7 percent growth in Q4FY19 and 5 percent growth in Q3FY20.

The numbers missed analysts' expectations. Profit was expected at Rs 1,800 on

revenue of Rs 9,980 crore for the quarter, according to a CNBC-TV18 analysts'
poll.

Operating numbers were also below estimates.

Earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 11

percent year-on-year to Rs 2,065 crore and margin contracted 42 bps YoY to 22.9
percent for the quarter, against CNBC-TV18 estimates of Rs 2,555 crore and 25.6
percent, respectively.
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SBI Q4 profit jumps 4-fold to Rs 3,581 crore, fresh

slippages decline 51%
State Bank of India sold stake in its subsidiary SBI Cards and Payment
Services which lifted profitability.
Moneycontrol News @moneycontrolcom

The Country's largest lender State Bank of India on June 5 reported a standalone
profit of Rs 3,580.81 crore in January-March quarter, a growth of over four-fold
YoY supported by lower provisions and stake sale.

Net profit included Rs 2,731.34 crore on sale of certain portion of investment in

subsidiary SBI Cards and Payment Services during the quarter, the bank said.

Net interest income declined 0.8 percent year-on-year to Rs 22,766 crore in the
quarter ended March 2020 due to moderate loan growth at 6.4 percent YoY.
Domestic net interest margin dipped to 2.94 percent in Q4FY20, down 8 bps YoY
and 65 bps QoQ.

Numbers missed analysts estimates. Profit was estimated at Rs 5,714.8 crore and
net interest income at Rs 25,905.1 crore for the quarter, according to the average of
estimates of analysts polled by CNBC-TV18.

Asset quality has seen improvement in the quarter ended March 2020. Gross non-
performing assets as a percentage of gross advances declined 42 basis points
sequentially to 2.23 percent and net NPAs dropped 79 basis points QoQ to 6.15
percent during the quarter.
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Accounting
Accounting is an information and measurement system that identifies, records and communicates
relevant, reliable, and comparable information about an organizations business activities.

Users of Accounting Information

1.External Information Users—those not directly involved with running the company.
Examples: shareholders (investors), lenders, directors, external auditors, non-executive
employees, labor unions, regulators, voters, legislators, government officials, customers,
suppliers, lawyers, brokers, etc.

a. Financial Accounting—area of accounting aimed at serving external users by

providing them with general-purpose financial statements.

b. General-Purpose Financial Statements—statements that have broad range of

purposes which external users rely on.

2.Internal Information Users—those directly involved in managing and operating an

organization. Examples: research and development managers, purchasing managers,
production managers and marketing managers.

a. Managerial Accounting—area of accounting that serves the decision-making

needs of internal users.

b. Internal Reports—not subject to same rules as external reports. They are

designed with special needs of external users in mind.

Communicating with Users

The three financial statements and their purposes are:

1. Income Statement—describes a company’s revenues and expenses along with the resulting
net income or loss over a period of time. (Net income occurs when revenues exceed
expenses. Net loss occurs when expenses exceed revenues.)

a. Statement of Retained Earnings—explains changes in equity from net income (or

loss) and from owner investment and dividends over a period of time.

2. Balance Sheet—describes a company’s financial position (types and amounts of assets,

liabilities, and equity) at a point in time.

3. Statement of Cash Flows—identifies cash inflows (receipts) and cash outflows (payments)
over a period of time.
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Principles and Assumptions of Accounting—

a. Business entity assumption—a business is accounted for separate from other
business entities and separate from its owner. Necessary for good decisions

b. Going-concern assumption—accounting information reflects the assumption that

the business will continue operating instead of being closed or sold.

c. Monetary unit assumption—transactions and events are expressed in monetary,

or money, units. Generally this is the currency of the country in which it operates
but today some companies express reports in more than one monetary unit.

d. Time period assumption—the life of the company can be divided into time
periods, such as months and years, and that useful reports can be prepared for
those periods.

e. Measurement principle also called the cost principle—financial statements are

based on actual costs (with a potential for subsequent adjustments to market)
incurred in business transactions. Cost is measured on a cash or equal-to-cash basis.

f. Revenue recognition principle—revenue is recognized (recorded) when earned.

Proceeds need not be in cash. Revenue is measured by cash received plus the cash
value of other items received.

g. Expense recognition principle, also called matching principle—prescribes that a

company records expenses incurred to generate revenues it reported.

Expanded Accounting Equation:

Assets = Liabilities + Equity Share Capital + Revenues – Expenses – Dividends

Statement Preparation from Transaction Analysis

1. Income Statement- information about revenues and expenses is conveniently taken from
the equity columns. Total revenues minus total expenses equals net income or loss. Notice
that stockholders’ investments and dividends are not part of income (or loss).

Statement Retained Earnings reports retained earnings changes over reporting

period. Beginning retained earnings, net income, from the income statement is
added (or the net loss is subtracted) and dividends are subtracted to arrive at the
ending retained earnings. Ending retained earnings is carried to the Balance Sheet.

2. Balance Sheet -the ending balance of each asset is listed and the total of this listing equals
total assets. The ending balance of each liability is listed and the total of this listing equals
total liabilities. Equity is separated into common stock and retained earnings (note that
retained earnings is taken from the statement of retained earnings). Equity is added to total
liabilities to get total liabilities and equity. This total must agree with total assets to prove
the accounting equation. Either the account form or the report form may be used to prepare
the balance sheet.
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3. Statement of Cash Flows-the cash column must be carefully analyzed to organize and report
cash flows in categories of operating, investing, and financing. The net change in cash is
determined by combining the net cash flow in each of the three categories. This change is
combined with the beginning cash. The resulting figure should be the ending cash that was
shown on the balance sheet.

Transaction Analysis
each transaction and event always leaves the equation in balance.
(Assets = Liabilities + Equity)
1. Investment by owner:
ASSET = LIABILITIES + EQUITY
+ Cash + Common Stock
reason: investment
Increase on both sides of equation-- keeps equation in balance.

2. Purchase supplies for cash:

ASSET = LIABILITIES + EQUITY
+ Supplies
- Cash
Increase and decrease on one side of the equation keeps the
equation in balance.

3. Purchase equipment for cash:

ASSET = LIABILITIES + EQUITY
+ Equipment
– Cash
Increase and decrease on one side of the equation keeps the
equation in balance.

4. Purchase supplies on credit:

ASSET = LIABILITIES + EQUITY
+ Supplies + Accounts Payable
Increase on both sides of equation keeps equation in balance.

5. Provide services for cash:

ASSET = LIABILITIES + EQUITY
+ Cash + Revenue Earned
Increase on both sides of equation keeps equation in balance.

6. Payment of expense in cash (rent):

ASSET = LIABILITIES + EQUITY
- Cash - (+ Expense)
Decrease on both sides of equation keeps equation in balance.

7. Payment of expense in cash (salaries):

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ASSET = LIABILITIES + EQUITY

- Cash - (+ Expense)
Decrease on both sides of equation keeps equation in balance.

8. Provide services for credit:

ASSET = LIABILITIES + EQUITY
+Acct Rec + Revenue Earned
Increase on both sides of equation keeps equation in balance.

9. Receipt of cash from account receivable:

ASSET = LIABILITIES + EQUITY
+ Cash
- Acct Rec
Increase and decrease on one side of the equation keeps the
equation in balance.

10. Payment of accounts payable:

ASSET = LIABILITIES + EQUITY
- Cash - Accounts Payable

11. Payment of cash dividend:

ASSET = LIABILITIES + EQUITY
- Cash - (+ Dividends)
Decrease on both sides of equation keeps equation in balance.
(Note: since dividends are not expenses they are not used in
computing net income.)

Exercise 1
ABC Company engages in the following activities during Year 1:

1. January 1, Year 1: ABC issues 10,000 shares of stock at Rs.20 par-value.

2. January 20, Year 1: ABC purchases a building for Rs.50,000 and purchases equipment for
Rs.20,000. It pays half the price in cash and the other half through a bank loan.
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3. March 1, Year 1: ABC acquires finished goods for Rs.20,000. ABC pays cash for half of the
merchandise, and the remainder is purchased on account.

4. March 30, Year 1: ABC pays Rs.25,000 in employee salaries.

5. July 1, Year 1: ABC decides to rent additional building space and pays for six months rent,
at Rs.2000 a month, in advance.

6. August 22, Year 1: ABC sells all of the finished goods for Rs.400,000, of which Rs.200,000 is on
account and the remainder is received in cash. ABC expects to collect 95% of its credit sales.

On the sales made on August 22, ABC also offers certain services on the sold merchandise for the
first three months. ABC estimates these services to amount to Rs.5000.

7. October 30, Year 1: ABC collects Rs.100,000 in cash from its accounts receivable, and uses this
money to pay down its accounts payable.

8. November 23, Year1: ABC Company performs services on sold merchandise at cost of Rs.5000 to
date.

9. December 30, Year 1: Depreciation for the year is Rs.2000 on the building and Rs.2400 on the
equipment.

10. December 30, Year 1: ABC pays Rs.250,000 in dividends.

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Exercise 2
Prepare a April 30 balance sheet in proper form for Two Rivers Vending Service, Inc. from
the following alphabetical list of the accounts at April 30:

Accounts receivable $10,000

Accounts payable 18,000
Building 28,000
Cash 10,000
Notes payable 47,000
Office equipment 12,000
Common stock 20,000
Retained earnings ?
Trucks 55,000

TWO RIVERS VENDING SERVICE, Inc.

Balance Sheet
April 30

Assets Liabilities

Equity
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Exercise 3
From the information given below, prepare a November income statement, a November
statement of retained earnings, and a November 30 balance sheet. On November 1 of the
current year, Victoria Garza began Garza Décor, Inc. with an initial investment of $50,000
cash. On November 30, her records showed the following (alphabetically arranged) items and
amounts.

Accounts payable $12,000 Office furnishings $40,000

Accounts receivable 19,000 Dividends 6,000
Cash 21,200 Rent expense 9,600
Fees earned 34,000 Salaries expense 4,200
Notes payable 4,250 Telephone expense 250

GARZA DÉCOR, Inc.

Income Statement
For Month Ended November 30
Revenue:

Expenses:

Net income $19,950

GARZA DÉCOR, Inc.

Statement of Retained Earnings
For Month Ended November 30

Plus:
Net income

Less dividends
Retained earnings, November 30
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GARZA DECOR, Inc.

Balance Sheet
November 30
Assets Liabilities

Equity