Financial Reporting
Day 1
Financial Accounting:
Process of measuring and converting Business Decisions into
Financial Statements using GAAP.
Business Decisions
 Financing Decisions
o Decisions relating to the sources of money
 Investment Decisions
o Decision relating to acquisition of asset
 Operating Decisions
o Decision relating to day to day operations/activities
Financial items
Every Business decision will Financial items.All FI can classified
into five categories
 Assets
 Liabilities
 Equity
 Income
 Expenses
Financial Statements
All the Business will appear/affect the financial statements.
 Balance sheet
 Income statement
 Cash flow statement
 Statement of changes in equity
2
Financial Reporting
This process of converting BD into FS can be explained by using
one of the following frameworks:
 The rules of Debits and Credit
 The frame of Accounting Equation
The process is governed by Generally Accepted Accounting
Principles (GAAP)
 Concepts and conventions
o Business Entity Concept
o Accrual concept
 Accounting Standards
o IFRSVs US GAAP vs IndAS vs AS
 Measurement principles
 Relevant Law
o The companies Act-2013
o The Income Tax Act-1961
o The Banking Regulation Act
o The electricity Act
o Other acts
2
Financial Reporting
Accounting Equation
AE says at any point of time assets of a company will be equal to
the corresponding sources
 Assets = Source
A company cannot have assets without corresponding sources
Sources
 All sources can be classified into two broad categories
o Owners money (equity)
o Outsiders money (Liabilities)
So the accounting equation can be presented as follows
 Assets = Equity + Liabilities
Asset:
 Anything which has the ability to generate future cash flows
Liability
 Obligations of the company
o Contractual
o Statutory
Equity
 Shareholders (owners) money = C +RP
o Capital:Money contributed by the owners
o Retained profit: money generated by the company
o E = C +RP
 Residual claim of the owners
o E = A-L
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2
Financial Reporting
Day 2
BD
FI
FS
The process is governed by Generally Accepted Accounting Principles
(GAAP).
 Concepts and conventions
o Business Entity
o Accrual Concept
Financial Reporting
o Matching Concept
o Accounting period
o Dual aspect
 Accounting Standard
o IndAS
 Relevant Act
Accounting Equation
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



Assets= Sources
Assets = Liabilities + Equity
Change in A = Change in L +Change E
A = E+L
E = A-L (Residual Claim)
Financial Statements
 Balance sheet
o Statement of financial position as on a particular date
 Assets = Equity + Liability
 Income Statement
o Statement of Financial performance during a period
 Profit = Incomes - Expenses
2
Financial Reporting
 Cash flow statement
o Statement of changes in CIH
 CIH = Receipts – Payments
Note: Cash is not equal to profit
 All receipts are not incomes
 All payments are not expenses
 Statement of change in equity
o Change in equity
 Equity = C+ RP
 Change in Capital
 Change in RP
Day 3
Business Decisions and Financial Statements
Focus: Assets
A = L +E
2
Financial Reporting
A = L+( Cap +RP)
A = L +C +(I-E)
Asset
 Anything which has the ability to generate future cash
 VoA = PV of FCF
Assets of consists of the following
 Tangible assets
o PPE
o Stock of goods
 Intangible assets
o Copyrights
o Patents
o Software
2
Financial Reporting
o Knowhow
 Investments
o Shares of other companies
o Bonds/debentures of other companies
 Others
o Expenses paid but not due (Advance or prepaid
exp)
o Incomes due but not received
(Debtors/receivable)
o Right to use (lease)
Classification of assets
 Current & Non current (Statutory)
 Financial assets & others
Assets and Financial Statements
Acquisition of asset may result in one or all of the following
 Reduction of cash
 Creation/increase in liability
 Increase in equity
 Reduction in other assets (other than cash)
2
Financial Reporting
Day 4
Business Decisions and Financial
Business Decsions will involve financial items and all
these financial items will appear on the FS
BD: FD/ID/OD
FI:A/L/E/I/Exp
FS: BS/IS/CFS/SOCE
Focus: Asset, Expenses and Financial Statement
2
2
Financial Reporting
Acqusition of
asset may result
in
Reduction of
cash
Increase in
liability
increase in
equity
reduction in
other assets
(other than cash)
Expense Vs Assets
 Asset : Unexpired benefit
 Expense: Expired benefit during the period
Examples of Expenses
Financial Reporting
 Salary
 Rent
 Tax
 COGS
 Interest
 Depreciation
o Reduction in the value of the PPE
o Dep = Cost/life
 Amortization
o Reduction in the value of intangible asset
o Amort = Cost/life
 Adver
 Commiossion
 Electricity
 Fuel
 R&M
 Fees
 License fee
 Royalty
 Freight
 Dividend (is not an expense)
 sdf
2
2
Financial Reporting
Expense may
result in
Reduction of
cash
Increase in
liability
increase in
equity
reduction in
other assets
(other than cash)
Expense Vs Payment
 All payments are not expenses
 All expenses are not payment
 Example
o Dividend:
 is not an expense
 Distribution of profit among the
shareholders
o Interest:
 expense: charge for using
loan/borrowing
Financial Reporting
Day 5
Focus of the session
Equity and Financial statements
Equity
 Shareholders money
o E = Cap + RP
 RP = PAT - Dividend
 Residual claim of the shareholders
o E = A-L
Change in Equity
 Change in capital
o Increase: Issue of shares
o Decrase: Buy back of shares
 Change in RP
o Current PAT
o Current Loss(negative PAT)
o Distribution of dividend
Dividend
2
Financial Reporting
 Cash Dividend is the distribution of profit among the
shareholders in the form of cash
o Reduction in cash
o Reduction in RP
o So reduction of Equity
 Ds

sdf
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