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MURAD ALI, ACA

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Accounting Vs Finance µA Comparison¶
Finance as Agent of Org to Outer World
Finance Hierarchy, Functions in ADSB
Need for Accounting

Forms of a Business Activity

Accounting Terminologies / Concepts

Various Financial Analysis Tools

 


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¢ Accounting & Finance are not one term.

¢ Both are related, dependent, overlapping
terms & used interchangeably.
¢ Need for Accounting arises at very basic
level irrespective of size of Org.
¢ Need for Finance arises at some advance
level and in relatively large organizations
¢ Accounting function has limited use.
¢ Accounting people don¶t necessarily
need knowledge of Finance
 


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¢ Finance people must have command over
Accounting.
¢ In most organizations, both functions are
performed simultaneously.
¢ CONCLUSION
¢ Accounting is mainly concerned with what
happened (facts and results of past)
¢ Finance function can analyze as to what
happened is good/bad, why happened &
what will happen?
  O





 

GOVERNT.
LENDERS

STAKE
SHARE HOLDERS
EMPLOYEES
HOLDERS IN AN
ORG.

CUSTOMERS/ AUDITORS
SUPPLIERS (INTL/EXTL)
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¢ Org is combination of teams working for
common Objective, µMission Statement¶
¢ Mission Statement works as guideline
for setting µCorporate Objectives¶
¢ µCorporate Objectives¶ are elaborated to
establish µOperational Objectives¶
¢ µOperational Objectives¶ used for writing
procedures for each sub unit till bottom.
 
O O


 
 
MISSION
BOD STATEMENT

CORP.
CHIEF EXEC.
OBJECTIVES

PRODN. TECH. MATRL. MARKG. OPERATIONAL

OBJECTIVES
FINANCE/
HR
ADMIN
 ||  
 
¢ MISSION STATEMENT
¢ FFC¶s mission is to sustain its role as the
leader in industrial and agricultural
advancement of Pakistan by setting and
achieving new and higher goals, and taking
initiatives. The Company is committed to
ensuring safe and conducive work
environment, providing high quality
products and allied services to its
customers and profitable returns to its
shareholders.
||  
 
¢ CORPORATE OBJECTIVES
¢ QUALITY POLICY
¢ ENVIRONMENTAL POLICY
¢ SAFETY AND HEALTH POLICY
¢ OPERATIONAL OBJECTIVES
¢ GOOD CORPORATE GOVERNANCE
¢ QUALITY PRODUCT & SERVICES
¢ INCREASE VALUE OF SHAREHOLDERS
¢ HUMAN RESOURCE DEVELOPMENT
¢ DISCOVER & EXPLOIT NEW AVENUES
 


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¢ Financial Accounting and External Financial Reports
(Annual and Quarterly Reports)
¢ Management Accounting and Internal Management
Reporting
¢ Projects Budgeting, Cost Control and Financial Support
¢ Treasury and short term investments
¢ Feasibility analysis and Investment Appraisal
¢ Support for Corporate Governance (Laws, Regulations,
Standards and Audits)
¢ Annual Operating Plan
¢ Insurance
¢ Shareholders Relations
 

 
 
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Mohd Kuhnhi Hamdan Awda, CPA,CITP Mohd MA
Sr. Secretary Vice President, Finance S/H Relations

Mohd Akhtar, ACCA Sasi Kumar N, CIA Fares Al Baloushi

Accounting Supvr Internal Auditor A/Reporting Supvr

Salim Kazi Murad Ali, ACA Sathiapathi,FCA

Lead Fin Anal Cost Controller Lead Fin Anal

Wafiq Baraki Najah Al Z Kelwyn A M. Ashraf Rami N. Time Keepers

Sr. Acctt P/R Anal. Sr.Fin Anal. Sr Fin Clerk Ass. Acctt. 03 Nos.
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¢ Need for Accounting arises whenever

there is a Business Activity.
¢ Business Activity may be for Profit or
for Non-Profit purposes e.g. charity.
¢ All Business Activities are carried out
in the form of ³Transactions´.
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¢ Accounting is the recording, classifying,

summarizing and presenting of these
transactions in such a manner so as to
reflect the results of a Business Activity
for a certain period and the financial
position of the Business Activity at a
certain date.
 


 

TRANSACTION JOURNAL LEDGER

TRIAL
FINANCIAL
BALANCE
STATEMENTS
FINAL
ACCOUNTS
FORMS OF A BUSINESS ACTIVITY

General Partnership
Commandite
Joint Venture

Public Joint Stock Co

Private Joint Stock Co

Limited Liability Co
Commandite Ltd. by Shares
 


!Association of persons united for

some lawful purpose
!Separate legal entity & has rights
& powers
!Members may die or change but
Co. goes on till it is wound up
!Co. can own property & incur liabil.
!Members can contract with the Co.
!A company is an artificial person
!It has a common seal
    O 

ðA form of Business Activity owned and

controlled by one person
ðSimple form of Business Activity conducted
at a relatively small scale
ðNormally run under the name of the owner
ðCan be incorporated as a µSingle Member Co¶
ðNot governed by any commercial law if not
incorporated as a SMC.
 
O | 

ðA form of Business Activity owned and

controlled by two or more persons
ðThese persons enter into an agreement
called Partnership Deed to share the ratio
of investment, P&L and other rights &
responsibilities
ðPartnerships may be formed in shape of
Registered or Unregistered Firms
ðIf no. of persons exceeds twenty, it has
to be incorporated as Co
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COMPANY

PRIVATE PUBLIC NON PROFIT

COMPANY COMPANY ORGANIZATION

LIMITED BY LIMITED BY
GUARANTEE SHARES

UN LISTED
LISTED
    

Restricts the
YES
transfer of shares
Limits the number
YES
of members to fifty

Prohibits invit. to public

NO
to subscribe for shares

YES

PUBLIC PRIVATE
COMPANY COMPANY

Others SMC
     


IDENTIFICATION

The last words of the name of the Co.

shall ALWAYS be ³(Private) Limited´

EXAMPLES

-Feroz Sons (Pvt) Ltd.

-Fuji Film Pakistan (Pvt) Ltd.
-Jaffer Brothers (Pvt) Ltd.
-New Age Cables (Pvt) Ltd.
    

IDENTIFICATION

The last word of the name of the Co.

shall ALWAYS be ³Limited´

EXAMPLES

-Fauji Fertilizer Co. Ltd.

-ICI Pakistan Ltd.
-Fauji Fertilizer Bin Qasim Ltd.
-Habib Bank Ltd.


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Companies/Org meant for welfare of

community or for promotion of Art,
Science, Religion or any other cause

Companies/Org with limited liability

without the addition of the words
³Limited´ or ³(private) Limited´
to its name


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IDENTIFICATION

The name of the Org normally contains

words like ³Trust, Memorial, Welfare etc.

EXAMPLES

-Al-shifa Trust
-Hazrat Bilal Trut
-Shaukat Khanum Memorial Hospital
-Edhi Welfare Trust
   !"
Legal Definition
Co in which the liability of its members
is limited by its MOA to the extent of
unpaid amount of shares held by them.

General Features
-Cos may be Public or Private Ltd
-The last words of the name shall be
µ(Pvt) Ltd¶ or µLtd¶.
   
#"
Legal Definition
Liability of its members is limited by MOA
to such amount as the members may
undertake to contribute to the assets of
Co in the event of its winding up.

General Features

-The last words of the name shall

always be µ(Guarantee) Ltd¶
 #$#%& "

Minimum Maximum
COMPANY Number Number

Private Ltd. SMC 01 01

Private Ltd. Others 02 50

Public Ltd. 03 NIL

Listed Co. 07 NIL

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¢ Business Activity has two basic aims:
¢ Earning of profits &
¢ Increase in net wealth
¢ Accounting System is designed to record:
¢ Profit or Loss for a period (P&L A/C)
¢ Changes in wealth (Balance Sheet)
¢ Changes in Cash & Equivalents (C/Flow)
¢ Changes in Capital & Equity
¢ These components when combined, are
called Financial Statements
 |

    


¢ BALANCE SHEET
¢ Shows financial position of a business
entity by summarizing the assets, liab.
and owner¶s equity at a specific date.
¢ PROFIT & LOSS A/C
¢ Shows the revenue & expense & resultant
profit or loss emanating from operations
carried out during a specific period.
 |

    


¢ CASH FLOW STATEMENT

¢ Shows changes in Cash & Cash
Equivalents during a specific period
¢ STATEMENT OF CHANGES IN EQUITY
¢ Shows changes in Capital & Owner¶s
Equity during a specific period and
closing position at a specific date
 BALANCE SHEET

Capital + Liabilities = Assets

Non Non
Current Current
Current Current

Owner¶s Retained
+ Earnings Tangible
Equity Intangible
  
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¢ ASSETS
¢ Economic resources owned by a
business expected to benefit future
operations of the entity.
¢ Non Current Assets
¢ Assets NOT convertible into cash within
a period of one year.
¢ Current Assets
¢ Assets convertible into cash within a
period of one year.
  
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O
¢ Tangible Assets
¢ Assets which have physical existence
¢ Intangible Assets
¢ Assets not having physical existence
¢ CAPITAL
¢ Amount of initial investment of owners.
¢ LIABILITIES
¢ Economic Obligations of business entity
towards the outsiders
  
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O
¢ Non Current Liabilities
¢ Economic obligations that DO NOT fall
due within the current financial year
¢ Current Liabilities
¢ Economic obligations that fall due within
the current financial year.
¢ OWNER¶S EQUITY
¢ Initial capital + or ± accum. profit/loss
¢ BALANCE SHEET EQUATION
ASSETS = LIABILITIES + CAPITAL
  
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¢ REVENUES
¢ Consideration for sale of goods /
rendering of services during a specific
period
¢ EXPENSES/COSTS
¢ Any expenditure incurred in deriving
revenue for a specific period
¢ DEPRECIATION
¢ Systematic allocation of cost of tangible
asset over its useful life.
  
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¢ AMORTIZATION/IMPAIRMENT
¢ Systematic allocation of cost of
intangible asset over its useful life.
¢ ACCRUALS
¢ To comply with µmatching¶ concept
¢ PROVISIONS
¢ To comply with µprudence¶ concept
 |

ACCOUNT

PERSONAL IMPERSONAL

REAL NOMINAL

INCOMES/ LOSSES/
ASSETS LIABILITIES EXPENSES
REVENUES
 
O|

¢ FINANCIAL ACCOUNTING
¢ Mainly concerned with preparation &
presentation of Fin. Statements for
decision making of external stakeholders
and owners
¢ COST ACCOUNTING
¢ Cost accounting is the process of
tracking, recording and analyzing costs
associated with the products or activities
of an organization
 
O|

MANAGEMENT ACCOUNTING
¢ The process of identification, measurement,
accumulation, analysis, preparation, interpretation
and communication of information used by
management to plan, evaluate and control within an
entity and to assure appropriate use of and
accountability for its resources.
¢ Management accounting also comprises the
preparation of financial reports for non
management groups such as shareholders,
creditors, regulatory agencies and tax authorities"
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¢ CASH BASIS ACCOUNTING
¢ Transactions are recorded only when
cash is received or paid
¢ Against the spirit of Matching Principle
¢ ACCRUAL BASIS ACCOUNTING
¢ Transactions are recorded when the
amount has become due for payment
or receipt.
¢ Follows the Matching Principle
 |

 
¢ PROCESS COSTING
¢ Used in industries with homogeneous products
having continuous/ repetitive processes /
operations
¢ Cost not identifiable for each unit/product
¢ Unit cost is calculated by dividing the total cost
for a specific period by the total # of units
produced
¢ Examples: Oil, fertilizer, textile, food processing
industries etc.
 |

 
¢ JOB ORDER COSTING
¢ Used in industries where direct costs can
be identified with specific units produced
¢ Direct costs such as material and labor
are traced directly into specific jobs while
all indirect costs are allocated on an
appropriate basis eg labor or machine hrs
¢ Widely used by custom manufacturers
such as printing, aircraft /ship
construction & professional services etc.
 

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¢ STANDARD COSTING
¢ MARGINAL COSTING
¢ ABSORPTION COSTING
¢ ACTIVITY BASED COSTING
¢ TARGET COSTING
¢ THROUGHPUT COSTING
 




¢ Before starting a business activity, an

economic unit that has a separate legal
entity from its owner(s) has to be created.
¢ The entity is regarded as a distinct person
and all transactions with owner(s) recorded
as with other persons/organizations.
¢ Usually the first transaction between owner
and entity is that of capital.
 
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EXP FOR REPL. OF
NO EXISTING ASSET YES

BENEFIT TO ACCRUE
NO FOR > 1 YEAR YES

EXP RELATES TO BALANCING, MODERNIZATION &

HEAVY REPAIRS WHICH RESULT IN:
- EXTENSION IN USEFUL LIFE OF PLANT YE
NO
- INCREASE IN CAPACITY S
- SUBST. IMPROV. IN QUALITY/REDUCTION IN COSTS

CAPEX

MEET CAPITALIZ. LIMIT AS

PER CO POLICY

REVENUE NON CAPITALIZED

NO

CAPITALIZE YES
    
  
TYPE OF ASSETS LIMIT A/C CODE
Plant & Machinery 50,000 892
Roads & Buildings 50,000 891
Plant Equipment 30,000 897
Clinical equipment 5,000 894
Vehicles 5,000 893
Electrical & Off. Equip. 3,000 895
Other assets 3,000 896
  O  


 
¢ DOUBLE ENTRY (DUAL ASPECT) CONCEPT
¢ Every transaction affecting one element of an
entity shall have a corresponding effect on at least
one of other elements of the entity.
¢ MATCHING CONCEPT
¢ Only those expenses should be recorded for
which revenue has been recorded for a specific
period and vice versa.
¢ ACCRUAL CONCEPT
¢ Recording of only those revenues earned and only
those expenses incurred during a specific period.
 | 

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¢ Accounting Procedures are
unaffected whether Business Activity
is for Profit or for Non-Profit Purpose
¢ The only change is in the names of
Balance Sheet and Profit & Loss A/C.
¢ The B/S is changed to Statement of
Closing Funds.
¢ The P&L A/C is changed to Income &
Expenditure A/C
    |



 
  ||

  
  

¢ Variance Analysis
¢ Ratio Analysis
¢ Investment Analysis
¢ Break Even Analysis
  

  

¢ Comparison with budget for the

period
¢ Comparison with corresponding
period actual figures
¢ Comparison with industry standards
¢ Comparison with competitors
 | 

¢ Profitability Ratios
¢ Liquidity Ratios
¢ Leverage Ratios
¢ Marketability Ratios
˜O   ˜ O

¢ Historical Ratios
¢ Industry standards
¢ Co own standards
¢ Competitors¶ standards
TECHNIQUES FOR INVESTMENT ANALYSIS

PAY BACK PERIOD (PBP)

NET PRESENT VALUE (NPV)

INTERNAL RATE OF RETURN

OTHER TECHNIQUES
  

¢ ADVANTAGES
¢ Simple to calculate
¢ Easy to understand
¢ Basic screening tool

¢ DISADVANTAGES
¢ No effect for C/F after PBP (Ignores total C/F)
¢ No effect for Present Values
¢ Not a relevant measure (What PBP is Approp)

¢ APPLICABILITY
¢ Appropriate in Capital Rationing Situations

¢ CALCULATION

 
 

¢ ADVANTAGES
¢ Effect for C/F after PBP
¢ Effect for Present Values
¢ Absolute figure, so easy to understand
¢ DISADVANTAGES
¢ Deciding discount factor is subjective
¢ Not a relevant measure (What NPV is Approp)
¢ APPLICABILITY
¢ Appropriate in mutually exclusive projects
¢ CALCULATION


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¢ ADVANTAGES
¢ Effect for C/F after PBP
¢ Effect for Present Values
¢ Relevant measure (in %), so easy to decide
¢ DISADVANTAGES
¢ Not appropriate when cash O/F in>1 period
¢ Deciding the appropriate IRR is subjective
¢ APPLICABILITY
¢ Appropriate in efficient fund utilization situations
¢ CALCULATION
 

 '˜!

Definition

ðBudget refers to an action plan of an

Org. for a specific period, usually 1 year
ðMajor elements for which action plan is
prepared include cash, production,
sales/revenues, expenses, manpower
& business development strategies etc.
 ˜O

 

FINANCIAL ASPECT

Planning

Coordination

Monitoring & Control

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AOP

MASTER CASH
BUDGET BUDGET

SALES PRODUCTION EXPENSE

BUDGET BUDGET BUDGET

OPEX
CAPEX
BUDGET
BUDGET

DIRECT/VARIABLE INDIRECT/ FIXED

EXP BUDGET EXP BUDGET
BASIS FOR BUDGETING
 "#

!No consideration of prior year costs

!Every exp. considered new demand
!Each dirham needs to be justified
!Normally used in capital rationing
situations, cost conscious & newly
established orgs.
(")O"()#

!Budget on average of last few years¶

actual expenditure trend
!Above figures are adjusted for unusual
jobs / expenses
!Only major / unusual jobs need justification
!Normally used in established Orgs with
no scarcity of resources
 | 
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!Under fixed budgeting, budget

once approved is not revised
!Under flexible budgeting, estimates
are flexed for any change in
parameters used at budgeting point
!Comparison is more meaningful
and useful in flexible budgeting
 
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ðFactors that restrict performance of an org.

ðVariable exp budget based on these factors
ðEvery organization has limiting factors
ðUsually it is sales & production capacity
ðIn ADSB, the limiting factor is sales plus
production capacity
a