FINANCIAL STATEMENT

ANALYSIS AND REPORTING

POST GRADUATE DIPLOMA IN MANAGEMENT
MCC BOYD TANDON SCHOOL OF BUSINESS

TEAM MEMBERS:

 Mrinalini D DM24037
 Naren Balaji V DM24039
 Naveen Chandar M DM24041
 Nelson Prabhu DM24043
 Noah J DM24045
 Poornakala DM24047
 TOPICS

1. Accounting principles…………………………………………………………1
2. Conservatism principle………………………………………………………..3
3. Contingency principle…………………………………………………………3
4. Indian Accounting Standards with International Financial
Reporting Standards………………………………………………………….3
5. Stages in accounting
process………………………………………………….4
6. Notes to accounts……………………………………………………………...6
7. Financial statements…………………………………………………………..6
8. Current and non – current
liabilities………………………………………….9
9. Balance sheet items……………………………………………………………9
10. Pre – tax profit, Cash operating profit, EBIT, Profit after
tax……………..10
1. ACCOUNTING PRINCIPLES

a. Accounting Period
The accounting period concept is the principle that all
business accounting transactions should be separated into
equal time intervals, or accounting periods. Such a time
period is meant to make it possible for the preparation and
presentation of financial statements to investors, as well as to
facilitate performance comparisons between the business and
other time periods. A business is able to calculate its profit
and loss for a given period by creating financial statements
within that time frame. Differences in the accounting period
will lead to inconsistent outcomes, making it challenging to
assess the company’s financial standing at that point.

EXAMPLE: Every year, a company closes its books and records

its
transactions from January 1 to December 31. The accounting
period in this case is one year, from January 1 to December
31. But not every business must adhere to this for a full year.

b. Separate Entity
A business is a separate legal entity from its owners,
according to the separate entity principle, also referred to as
the separate legal entity principle. This implies that personal
and business transactions ought to be kept apart.

EXAMPLE:
Business expenses
When a business owner purchases a laptop for work and one
for personal use, the expense of the business laptop should be
the only one reported in the financial statements of the
company.
Multiple company divisions
Every business division of a company, such as a chain of
restaurants and hotels, should have its own accounts. This is
helpful in the organization's understanding of each business
line's true worth.

c. Money Measurement
The money measurement concept, also known as the
monetary unit principle, is an accounting principle that states
all events and transactions should be documented in terms of
money and that the value of currency is constant. The
following idea may have an impact on accounting book entries
and financial statements:
Financial Statements
 Financial statements may contain errors if inflation is not
taken into account. For instance, even though land was
purchased for $500,000 ten years ago and has since
increased in value to $2,000,000 due to inflation, the land
may still appear to be worth $500,000 on the company's
financial records.
Accounting Books
Accounting books cannot maintain track of events or
transactions that can't be valued in monetary terms, such as
employee skill levels or customer service standards. For
instance, if a company increases customer service in an
attempt to increase sales, the increased costs may be
documented but the sales activities may not.

d. Substance over form

A transaction should be recorded according to its economic
substance rather than just its legal form, according to the
accounting principle of substance over form. This is due to the
fact that as business transactions get more complex over
time, their legal form and economic content may differ.

EXAMPLE: Using a bank lease, a small adventure company

purchases a fleet of vans. Until the last instalment is paid at
the end of the fifth year, the company will not be
acknowledged as the legal owner. But depending on the
fundamental economics of the deal, the lessee might have to
declare the asset as their own.

e. Historical Cost
According to accounting's historical cost principle, an asset's
cost must always be recorded at its original, historic cost,
without taking market fluctuations into account. As a result, a
company may be valued lower than the true value of its
assets.

EXAMPLE: Even though a building's value has increased to

$375,000 today, the historical cost principle would still require
the asset to be recorded on the balance sheet at $60,000 if it
was purchased by a company for that amount in 1975.

f. Dual Aspect:
Every transaction must have a dual effect and be recorded in
two places, according to the dual aspect principle, also
referred to as the double-entry system.
 EXAMPLE: Yuvraj raises Rs. 10,000,00 in capital to launch his
company.
The company has a cash asset of Rs. 10,000,00 and a capital
liability of Rs. 10,000,00 to Yuvraj.

2. ‘Gains are recorded if reasonably certain, whereas losses are

recorded even if reasonably probable’ Explain the statement and
identify the accounting principles involved.

This statement denotes the conservatism principle.

CONSERVATISM PRINCIPLE
The accounting principle known as the Conservatism Principle states
that gains should only be disclosed when they are certain and that
all possible losses, even those that are unlikely to happen, should
be reported as soon as they are identified.

EXAMPLE:
Valuing of inventory
Inventory at Larry Airlines is written down because it is valued at
less than its cost or market value.
Recognising revenue
Revenue is not recognised by Portis Ltd. until the return period has
passed.

3. As per consistency principle, accounting policies once chosen

cannot be changed. Do you agree?

Yes, I agree to the statement i.e., accounting policies once chosen

cannot be changed but if the company has valid reason, then it can
change its policies.

CONSISTENCY PRINCIPLE
According to the principle of consistency, an accounting policy or
method that a company adopts must be followed consistently going
forward. This implies that over time, similar events and transactions
will receive the same accounting treatment.

EXAMPLE: If the company use the cash basis of accounting this

should be applied to its cash flow statement, balance sheet, and
income statement.
4. What is the rationale of convergence of Indian Accounting Standards
with International Financial Reporting Standards.

India officially decided in 2007 to converge with IFRS. The ICAI and
IASB (International Accounting Standard Board) then decided to
work together, collaborate and develop quality and comparable
accounting standards instead of fully adopting the IFRS standards
completely.
The convergence of Indian Accounting Standards (Ind AS) with
International Financial Reporting Standards (IFRS) is intended to
improve the comparability and reliability of financial statements for
Indian companies. The goal is to establish a single set of accounting
standards that can be used internationally, which would benefit a
variety of stakeholders.

BENEFITS
 Cost savings
Companies can avoid keeping separate accounting books, which
can save money and time for finance departments.
 Easier auditing
IFRS are principle-based standards that outline broad rules and
regulations for financial reporting, which can make planning and
executing audits easier.
 Better understanding of business reporting
Globalization has made it possible to accept the world as one
economy, and a single set of accounting standards can help
improve the consistency of accounting policies and understanding
of business reporting.

5. Describe various stages in accounting process.

a. Identify the transactions

Identifying the business transaction is the initial step in the
process of accounting. The business entity has to identify
financial and monetary transactions. Therefore, only those
transactions that are monetary are recorded.

b. Recording of the transactions in journal

 After identifying the transactions, the second step of the
accounting process is to create the Journal entry for
every accounting transaction. The point of recording
transactions is based on the policy followed by the entity for
accounting, i.e. accrual basis or cash basis of accounting. In
the accrual basis of accounting, the revenues and expenses
are recorded in the entity’s books in the period when they are
earned and incurred, respectively, regardless of the actual
cash receipt and payment. However, in the case of cash
accounting, the transactions are recorded only when the
actual cash is received/paid. In a dual entry system, every
transaction affects at least two accounts, i.e., one account is
debited, and another account is credited. For example, if the
purchases are made in cash, the purchases account will be
debited (purchases increase), and the cash account is
credited (cash decreases).

c. Posting in the ledger

After recording the transaction in the Journal, the individual
accounts are then posted in the general ledger. It helps the
owner/accountant know each account’s balance individually.
For example, all the debits and credits of the bank account
are transferred to the ledger account, which helps to know the
increase and decrease in bank balance during a period.
Finally, we can determine the ending bank balance from it.

d. Unadjusted Trial Balance

The company’s trial balance is prepared to check whether the
debits are equal to the credits or not. The trial balance’s main
purpose is to identify any errors made during the above
process. The trial balance reflects all the accounts balances at
the given time. After the preparation of the trial balance, it is
checked that the total of all credits is equal to the total of all
debts, and if the total is not the same, then an error is to be
identified and corrected. There can be other reasons for the
error, but firstly, an accountant tries to locate the error by
preparing the trial balance. Also, trial balance helps to know
the balances of all accounts in a summarized form.
e. Adjusting Journal entries
When the accrual basis of accounting is followed, some of the
entries are to be made at the end of the accounting year,
such as entries of expenses that may have been incurred but
are not booked in the Journal and entries of some income that
may be earned by the business but are not yet recorded in
the books. For example, the interest amount on a fixed
deposit is earned each year, but it is accumulated in the fixed
deposit amount. This interest income is to be recorded in the
books of accounts yearly because the interest is earned
yearly, no matter the amount will be received together after
the maturity of the fixed deposit.

f. Adjusted trial balance

After all the adjusting entries are made, again, a trial balance
is to be prepared before preparing the financial statements to
check that all the credits are equal to the debits after the
adjustment entries are made.

g. Preparation of financial statements

After all the above steps are completed, the financial
statements of the company are prepared to know the actual
financial position, the profitability position, and the cash flow
position of the business. The statements that are prepared for
knowing the above positions are a statement of profit and loss
for knowing the profitability position, the balance sheet for
getting the financial position, and the cash flow statement to
know the changes in cash flows from the three activities of
the business (operating, investing and financing activities).

h. Closing entries
Finally, the accounting cycle ends with this step. These entries
transfer the temporary account balances to a permanent
account. The temporary accounts are the accounts whose
balances end in a single accounting year, such as sales,
purchases, expenses, etc. These balances are first transferred
to the income statement and then to the permanent account,
i.e., the profit/loss is transferred to the retained
earnings account. It should be cleared that only temporary
 accounts are closed, not the permanent ones (accounts that
are balance sheet accounts such as fixed assets, debtors,
inventory, etc.) After closing entries are made, the trial
balance is again prepared to check that the debit equals the
credit, and the accounting cycle starts again with the
beginning of another accounting year.

6. What are notes to accounts? For a better understanding of financial

statements, it is important to go through the notes to accounts do
you agree.

 Notes to the accounts are the additional information and

explanations that accompany the financial statements they
are outside financial statements as footnotes.
 Provide more details and clarity about the items, amounts,
and transactions reported in the balance sheet, income
statements, statement of changes in equity and cash flow
statements.
 Yes, it is important to go through the notes to accounts for a
better understanding of financial statements.

7. Identify the financial statements which include the following

information

a. Shares issued during the year

• Statement of Changes in Equity: This document describes
how a company's equity changed over the course of the
accounting period, taking into account any newly issued
shares.
• Notes to the Financial Statements: These notes frequently
include further information regarding share issuances,
including the number of shares issued, the price at which they
were issued, and the rationale (e.g., capital raising, stock
option exercised) for the issuance.

b. Other incomes earned in the year

• The income statement, also known as the profit and loss
statement, gives an overview of the company's receipts and
outlays for a given time frame.
 • Usually, other revenue is reported in a section labelled
"Other Income" or "Non-Operating Income." These may
consist of dividend payments, interest income, proceeds from
the sale of assets, and other sporadic sources of revenue.
• Financial Statement Notes: Frequently offering a thorough
explanation of the different parts of other incomes, the notes
clarify the types and amounts of each component.

c. Trade receivables at the end of the year

• Trade receivables are included in current assets on the
balance sheet (Statement of Financial Position). These are
sums that customers owe the business for purchases they
made on credit.
• Comments on the Accounts Payable: Additional information
on trade receivables, including the aging of receivables, the
allowance for questionable accounts, and any noteworthy
adjustments made throughout the year, is provided in the
notes

d. Depreciation on assets charged during the year

• Income Statement (Profit and Loss Statement): Usually
included in operating expenses is the depreciation charge. For
the accounting period, it displays how the cost of tangible
assets is distributed over their useful lives.
In the cash flow statement, depreciation is included in the
operating activities section's net income as a non-cash item.
• Financial Statement Notes: These notes include
comprehensive information regarding the rates,
methodologies, and breakdown of depreciation expense by
asset type. The beginning and ending balances of the
cumulative depreciation may also be reconciled.

e. Dividend received during the year

•Dividends received are usually reported under "Other
Income" or "Investment Income" in the income statement
(profit and loss statement).
• Cash Flow Statement: Depending on the type of investment,
 dividend payments are typically listed under "Cash Flows from
Operating Activities" or occasionally under "Cash Flows from
Investing Activities."
•Additional information regarding the sources and quantities
of dividends received, as well as any noteworthy investments
that contributed to the dividend income, may be found in the
notes to the financial statements.

f. Loan outstanding
•The outstanding loans are recorded as liabilities on the
balance sheet (Statement of Financial Position). If they are
payable within a year, they are listed under current liabilities;
if they are payable after more than a year, they are listed
under non-current liabilities. Both short-term and long-term
borrowings are included.
• Notes to the Financial Statements: The notes include
comprehensive details on the loans, including terms, interest
rates, dates of maturity, collateral, covenants, and any
adjustments made to the outstanding balances during the
year. A timeline of upcoming repayment responsibilities could
also be shown.

g. Interest Expenses during the year

•Income Statement (Profit and Loss Statement): Under
operating expenses or financial expenses, interest costs are
usually shown as a separate line item. This illustrates how
much borrowing money costs throughout an accounting
period.
• Cash Flow Statement: Interest expenses are typically shown
as actual cash paid for interest during the period in the "Cash
Flows from Operating Activities" section.
• Notes to the Financial Statements: The notes include further
information on interest expenses, such as the effective
interest rates, the breakdown of interest expenses by type of
borrowing, and any capitalized interest. They might also
contain justifications for notable variations in interest costs
from prior times.
8. Distinguish between pre-tax profit, cash operating profit, EBIT, and
profit after tax.

CURRENT LIABILITIES NON – CURRENT LIABILITIES

Current liabilities are nothing Non-current liabilities are
but we have to pay the amount nothing but we have to pay
within the year or within the beyond one year of beyond the
business year. company’s operating cycle.
Ex: Account payable, short-term Ex: Long- term loans, Bonds
taxes payable, Interest payable. payable, Deferred tax liabilities.

9. How will you classify the following items in the balance sheet of a
company.

a. Goodwill
• Non-Current Asset (Intangible Asset)
• An intangible asset known as goodwill is created when a
firm pays more than the fair market value of its net
identifiable assets to purchase another company.

b. Trade Payables
• Current Liability
• Trade payables, which are often due within a year, are sums
that a business owes its suppliers for products or services that
were acquired on credit.

c. Provision for Doubtful Debts

• Asset
• The amount of accounts receivable that is anticipated to be
uncollectible is estimated in this provision. In order to reflect
the net realizable value, it is deducted from the total amount
of accounts receivable.

d. Securities Premium Account

• Equity
• The amount received by a business above the par value of
its shares at the time of issuance is represented by the
securities premium account, which is a component of
shareholders' equity.

e. Current Investment
• Current Asset
 • Current investments are investments that are expected to
be liquidated or converted into cash within one year of the
business.

f. Investment Property
• Non-Current Asset
• Investment property is real estate held to earn rentals or for
capital appreciation, rather than for use in the company's
operations or for sale in the ordinary course of business.

g. Contingent Liabilities
• Disclosed in the Notes to Accounts.
• They are not recognized in the balance sheet but are
disclosed in the notes to the financial statements.

10. Distinguish between pre-tax profit, cash operating profit, EBIT,

and profit after tax.

Pre-tax profit is the amount of money made by a business before

taxes are subtracted. It is determined by deducting all interest and
other expenditures, as well as operating expenses, from total
revenue before income tax is deducted.
Formula: Revenue - (Cost of Goods Sold + Operating
Expenses + Interest Expenses + Other Expenses)

Cash operating profit, often referred to as “cash operating

income” measures profit from core operational activities and it
excludes non cash involved items and its cost.
Formula: Net Income + Non-Cash Expenses (e.g.,
Depreciation, Amortization) – Changes in Working Capital

Earnings Before Interest and Taxes is referred to as EBIT. It

evaluates a business's profitability based only on its core activities,
excluding income tax and interest costs. By emphasizing revenue
and operational expenses, it essentially represents the company's
operating performance.
Formula: Revenue - (Cost of Goods Sold + Operating
Expenses)

Profit after tax referred to evaluation profitability of the company

from its core operational activity after the payment of tax. After tax
deduction amount of money is available to company which is known
as Profit after tax
 Formula: Revenue - (All Expenses including Cost of Goods
Sold, Operating Expenses, Interest Expenses, and Taxes)

REFERENCES:

Websites

1. https://en.wikipedia.org/wiki/
Convergence_of_accounting_standards
2. https://www.toppr.com/guides/principles-and-practice-of-
accounting/indian-accounting-standards/ifrs-and-
convergence-with-as/
3. https://corporatefinanceinstitute.com/resources/
accounting/accounting-conservatism/#:~:text=Examples
%20of%20Accounting%20Conservatism&text=For
%20example%2C%20a%20company%20that,expects%20to
%20lose%20a%20lawsuit.
4. https://www.investopedia.com/ask/answers/050815/what-
are-most-important-steps-accounting-cycle.asp

Book

1. Financial and Management Accounting - An introduction - Pauline

Weetman -Fifth edition published by Pearson.