FINANCIAL

STATEMENTS
Nature and Purpose

Accounting is a system that provides information on:

- Amount of resources
- How resources were financed
- Results achieved by using resources
For outside as well as inside parties
Purpose of Financial Statements
To provide information about the financial position,
financial performance and cash flows of an entity
To help wide range of users in making economic
decisions
To show the results of managements stewardship of
resources entrusted to it
Business Activities
All companies engage in the following activities:
1. Operating Activities: All revenue producing activities
such as buying, producing, selling goods and services,
paying salaries and taxes
2. Investing Activities: Purchase and sale of long-term
resources such as land, building, machineries
3. Financing Activities: Raising capital from bankers,
lenders and owners. Also includes repayment and
return to creditors and owners
Forms of Business

Sole Proprietorship: One person is the owner.

Responsible for all profits or losses, liable for all its
obligations. Liability is unlimited
Partnership: Two or more owners called partners. They
share profits or losses as per the agreement. Unlimited
liability
Company: An association of persons who contribute
money to the common share capital. A separate legal
entity and limited liability
Objectives of Financial Reporting

FR is intended to provide information for making business

and economic decisions
Information should be comprehensible
FR provides information about economic resources of an
enterprise and the claims against those resources.
FR focuses on earnings
FR helps assess the cash flow situation
Complete set of financial statements
A balance sheet as at the end of the period
A statement of profit and loss for the period
Statement of changes in equity for the period
A statement of cash flows for the period
Notes, comprising a summary of significant accounting
policies and other explanatory information
WHAT IS ACCOUNTING ?

Accounting is the language of business

Accounting is an Information System
a) For Insiders
b) For Outsiders
Accounting provides reports to stakeholders about the
economic activities and condition of a business
Users of Accounting Information
Capital markets: investors both existing and potential
Financial institutions: banks
Govt. institutions: to determine the taxes
Special interest group: creditors, labour unions,
competitors, financial advisors, general public
Insiders: managers, employees,
Going concern
When preparing financial statements, management shall
make an assessment of an entitys ability to continue as a
going concern basis. If material uncertainties exist, which
may cast significant doubt upon the entitys ability to
continue as a going concern, the entity shall disclose
uncertainties.
Accrual basis of accounting
An entity shall prepare financial statements except for
cash flow information, using accrual basis of accounting
Consistency of presentation
An entity shall retain the presentation and classification of
items in the financial statements from one period to the
next unless:
Another presentation or classification would be more
appropriate having regard to the criteria for the selection
and application of accounting policies or
An Ind AS requires a change in presentation
Some Accounting Concepts
Business Entity: Business or entity is separate from the
owners of the entity. Entity is viewed as an economic unit.
Matching Concept: While measuring periodic financial
results, revenue earned during an accounting period is
matched with expenses incurred (to earn the revenue) in the
same accounting period.
Conservatism: Accountant must select the measurement
with the least favorable effect on net income or financial
position
Materiality: Information is material if its misstatement could
influence the decisions of users taken on the basis of
financial statements
Some Accounting Concepts
Money Measurement Concept: Only transactions and
events which are measurable in monetary terms should be
recorded.
Cost Concept: Assets and liabilities should be recorded at
historical cost. The recent trends in accounting show that
policy makers favour fair value accounting in place of
historical cost accounting.
Periodicity Concept: Accounts are prepared for a defined
accounting period. Such period could be a quarter, half
year, a year or, in exceptional circumstances, more than
one year. This concept is essential to measure financial
performance.
Realization Concept - The actual revenue earned during the
accounting period is recorded in the books, irrespective of the fact,
whether the cash is received or not
Elements of the Balance Sheet
Assets --- Assets are the resources controlled
by an enterprise as a result of past events, from
which future economic benefits are expected to
flow to the enterprise.
Liabilities Liabilities are the present
obligations of the enterprise ,arising from past
events, the settlement of which is expected to
result in an outflow of resources embodying
economic benefits.
Equity Equity is the residual interest in the
assets of the enterprise after deducting all its
liabilities.
ACCOUNTING EQUATION

The relationship among asset , liability and equity can

be expressed by the following equation
Assets = Liabilities + Owners Equity
The effect of all business transactions is reflected in this
equation.
Fundamental Accounting Information
Assets Liabilities = Owners Equity
Net Assets = Owners Equity
Every accounting transaction has an equal effect on both
sides of equation.
Current and non-current distinction
An entity shall present assets and liabilities on the basis
of their current and non-current status
An entity shall disclose the amount expected to be
recovered or settled for each asset and liability by way of:
a) No more than twelve months after the reporting period
b) More than twelve months after the reporting period
Current Assets
An entity shall classify an asset as current when:
a) It expects to realise the asset, or intends to sell or
consume it, in its normal operating cycle
b) It holds the asset primarily for the purpose of trading
c) It expects to realise the asset within twelve months
after the reporting period or
d) The asset is cash or a cash equivalent
An entity shall classify all other assets as non-current
Current Liability
An entity shall classify a liability as current when
a) It expects to settle the liability in its normal operating
cycle
b) It holds the liability for the purpose of trading
c) The liability is due to be settled within twelve months
after the reporting period; or
d) It does not have an unconditional right to defer
settlement of the liability for at least twelve months after
the reporting period
An entity shall classify all other liabilities as non-current
Balance Sheet
As a minimum, the BS should include line items that
present the following:
a) Property, plant and equipment
b) Investment property
c) Intangible assets
d) Financial assets
e) Biological assets
f) Inventories
g) Trade and other receivables
h) Cash and cash equivalent
Balance sheet ---- contd.
i) The total of assets classified as held for sale and
disposal
j) Trade and other payables
k) Provisions
l) Financial liabilities
m) Liabilities and assets for current tax
n) Deferred tax liabilities and deferred tax assets
o) Liabilities included in disposal groups classified as held
for sale
p) non-controlling interests, presented within equity
q) Issued capital and reserves attributable to owners
Income Statement
Also called: Profit & Loss statement = P&L statement =
statement of earnings = statement of operations
Technically subordinate to BS.
Shows detail of changes to RE.
Many investors consider IS more important than BS.
Elements of Income Statement
Revenues
Inflows or creation of assets that result from sales of
goods or services.
Expenses
Outflows or consumption of resources to generate
revenues.
Revenues - expenses = income = net income (loss) =
earnings = profit = net earnings (loss).
Statement of Profit and Loss
Revenue x
Other income x
Changes in inventories
Of finished goods and WIP x
Raw materials and
Consumables used x
Employee benefits expense x
Depreciation and Amort exp x
Other expenses x
Total expenses (x)
Profit before tax x
Statement of Changes in Equity
Statement of changes in equity shall include a
reconciliation between the carrying amount at the
beginning and at the end of the period disclosing changes
resulting from
i) Profit or loss
ii) Transactions with owners such as contributions and
distributions
iii) Amount recognised as capital reserve
Statement of Cash Flows
Cash comprises cash on hand and demand deposits
Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amount
of cash and which are subject to an insignificant risk of
changes in value
Cash flows are inflows and outflows of cash and cash
equivalents
Terms Used in Statement of Cash Flows
Operating activities are the principal revenue producing
activities of the entity
Investing activities are the acquisition and disposal of
long-term assets and other investments not included in
cash equivalents
Financing activities are activities that result in changes
in the size and composition of the contributed equity and
borrowings of the entity
Operating activities
Cash receipts from sale of goods and rendering of
services
Cash receipts from royalties, fees, commissions and other
revenue
Cash payment to suppliers for goods and services
Cash payments to and on behalf of employees
Cash receipts and payments of an insurance entity for
premiums and claims, annuities etc.
Cash payments or refunds of income tax
Cash receipts and payments from contracts held for
dealing or trading purposes
Investing activities
Cash payments to acquire property, plant and equipment,
intangibles and other long-term assets
Cash receipts from sales of property, plant and equipment,
intangibles and other long-term assets
Cash payments to acquire equity or debt instruments of other
entities and interests in joint ventures
Cash receipts from sale of equity or debt instruments of other
entities and interests in joint ventures
Cash advances and loans made to other parties
Cash receipts from the repayment of advances and loans
made to other parties
Cash payments for future contracts, forward contracts, option
contracts(Except for trading purpose)
Cash receipts from future contracts, forward contracts, option
contracts(Except for trading purpose)
Financing activities
Cash proceeds from issuing shares or other equity
instruments
Cash payments to owners to acquire or redeem the
entitys shares
Cash proceeds from issuing debentures, loans, notes,
bonds, mortgages and other short-term or long-term
borrowings
Cash repayments of amounts borrowed
Cash payments by a lessee for the reduction of the
outstanding liability relating to a finance lease