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Explanation Notes For Indas

The document discusses key accounting ratios that must be disclosed in financial statements as per Indian regulations. It lists 11 mandatory ratios and explains that any changes over 25% from the prior year must be accompanied by an explanation.

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rvsiddharth054
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0% found this document useful (0 votes)
172 views58 pages

Explanation Notes For Indas

The document discusses key accounting ratios that must be disclosed in financial statements as per Indian regulations. It lists 11 mandatory ratios and explains that any changes over 25% from the prior year must be accompanied by an explanation.

Uploaded by

rvsiddharth054
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 19: Earning Per Share

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Chapter 20: Ratio calculation
In order to bring greater transparency in the financial statements, an amendment to Schedule III to the Companies Act,
2013 was introduced by the MCA. Wherein, several new disclosures that are grouped under “Additional Regulatory
Information” (ARI) were mentioned. Disclosure of the following 11 key accounting ratios is one of the disclosures specified
under ARI. It is mandatory to be provided in the Financial Statements:

(a) Current ratio

(b) Debt-equity ratio

(c) Debt service coverage ratio

(d) Return on equity ratio

(e) Inventory turnover ratio

(f) Trade receivables turnover ratio

(g) Trade payables turnover ratio

(h) Net capital turnover ratio

(i) Net profit ratio

(j) Return on capital employed

(k) Return on investment

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Along with the disclosure, an explanation with respect to change in such ratios by more than 25% (whether positive or
negative) in comparison to the preceding year’s ratio, shall also be provided

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1. Historical Information: Financial statements provide historical data, reflecting past performance and financial
position. They do not provide information about future events, which can limit their usefulness for predicting a
company's future performance or market conditions.

2. Qualitative Information: Financial statements primarily focus on quantitative data, such as numbers and figures.
They may not capture important qualitative factors like the quality of management, employee morale, customer
satisfaction, or the impact of new technologies on the business.

3. Estimates and Assumptions: Financial statements often rely on estimates and assumptions, such as depreciation
methods, inventory valuations, and provisions for doubtful accounts. These estimates can vary between companies
and may not always reflect economic reality.

4. Non-Financial Assets: Certain valuable assets, such as intellectual property, brand value, and employee
expertise, are not always represented accurately on financial statements. These intangible assets can be critical to
a company's success but are challenging to quantify and record.

5. Off-Balance Sheet Items: Some financial obligations and assets may not appear on the balance sheet, such as
operating leases or contingent liabilities. This can give an incomplete picture of a company's financial position.

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6. Limited Scope: Financial statements do not include all aspects of a business. For example, they may
not provide a comprehensive view of a company's social or environmental impact, its competitive
positioning, or its research and development efforts.

7. Inflation Effects: Historical cost accounting used in financial statements does not always reflect the
impact of inflation on the values of assets and liabilities. This can distort the true economic value of these
items.

8. Complex Transactions: Financial statements may not fully capture the financial effects of complex
transactions, such as mergers and acquisitions or restructuring activities, which can have significant
implications for a company's financial position.

9. Comparability: Differences in accounting standards and practices across countries can affect the
comparability of financial statements between companies operating in different regions.

10. Potential Manipulation: In some cases, financial statements may be subject to manipulation or
creative accounting practices that can distort the true financial position and performance of a company.

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International Accounting Standard 24 (IAS 24) deals with the disclosure of related party transactions and
relationships in the financial statements of an entity. Related parties can include individuals, entities, or other
parties that have the ability to influence the financial and operating decisions of the reporting entity. Here are
some examples of related party disclosures as required by IAS 24:

1. Key Management Personnel (KMP): Disclose the names of key management personnel (e.g., directors and
executives) and their compensation, including salaries, bonuses, and benefits. This information helps stakeholders
understand the remuneration packages of top executives.

2. Related Party Transactions: Disclose details of significant related party transactions, including the nature of the
transactions, the names of the related parties involved, and the amounts involved. Examples include sales or
purchases of goods or services, loans, guarantees, and leases.

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3. Outstanding Balances: Disclose the amounts outstanding at the end of the reporting period for related
party transactions, including the terms and conditions of these transactions. This information helps assess
the financial exposure of the reporting entity to related parties.

4. Provisions and Contingencies: Disclose any provisions for losses on related party transactions or any
guarantees provided to related parties, along with the nature and amounts of these provisions.

5. Compensation of KMP: Disclose information about compensation of key management personnel,


including salaries, bonuses, stock options, retirement benefits, and any other benefits provided.

6. Equity Interests: If there are significant equity interests held by related parties, disclose the details of these
interests, including the names of the related parties and the extent of their interests.

7. Significant Judgments and Estimates: Disclose any significant judgments and estimates made in
determining whether related party transactions are at arm's length or in estimating the fair value of related
party transactions.

8. Indemnities and Guarantees: Disclose any indemnities or guarantees provided to or received from related
parties, including the nature and maximum amount of potential payments.

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Operating Cash Flow: The operating activities section of the cash flow statement is often considered the
most critical because it reflects a company's ability to generate cash from its core operations. Positive
operating cash flow is generally seen as a sign of a healthy business.

Non-Cash Items: Not all transactions affecting net income result in cash flows. For example,
depreciation and amortization expenses are non-cash items that are added back to net income in the
operating activities section because they don't involve the actual movement of cash.

Investing Activities: This section includes cash flows related to the acquisition and disposal of long-term
assets, such as property, plant, and equipment. Negative cash flows from investing activities may
indicate capital expenditures for growth.

Financing Activities: The financing activities section reflects cash flows related to raising or repaying
capital. Issuing or repurchasing shares, obtaining or repaying loans, and paying dividends are examples
of financing activities.

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