Financial accounting
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Financial Accounting . Rucha Trivedi [email protected] Types of Accounting. Financial Managerial Tax Non Profit. What is Financial Accounting?. A method to communicate financial information to interested external parties. It is used for both Prediction and Control

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Financial Accounting

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Financial accounting

Financial Accounting

Rucha Trivedi

[email protected]

Types of accounting

Types of Accounting

  • Financial

  • Managerial

  • Tax

  • Non Profit

What is financial accounting

What is Financial Accounting?

  • A method to communicate financial information to interested external parties.

  • It is used for both Prediction and Control

  • User Includes

    • Capital Provider ( Both Debt and Equity)

    • Regulator

    • Customers

    • Suppliers

    • Employees

Financial statement

Financial Statement

  • The accounting equation

  • Income Statement ( P&L Account)

  • Balance Sheet

  • Statement of Cash Flows

  • Statement of Owners Equity ( retained earning)

Income statement profit loss account for the year ended

Income Statement PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED _ _ _ _ _ _ _ _

Balance sheet

Balance Sheet

  • Mirrors the Accounting Equation

    Assets = Liabilities + Equity

  • Assets are listed in order of liquidity

    Current and non-current

  • Equity consists of Contributed Capital and

    Retained Earnings

  • Liabilities are listed in order of maturity

    • Current Liabilities come due in less than a year.

    • Noncurrent liabilities come due after a year.

    • Companies desire more current assets than current liabilities – this difference is called net working capital

Balance sheet as on

Balance Sheet as on _ _ _ _ _ _

Balance sheet as on1

Balance Sheet as on _ _ _ _ _ _

Exercise 1 prepare p l and b s of pantaloons

Exercise : 1 - Prepare P&L and B/S of Pantaloons

  • Income from the sale of Apparel is Rs. 5000, Income from the sale of Accessories is 10% of Apparel. Income form cosmeticsis Rs. 10.

  • Cost of Goods sold is Rs. 3000

  • Salary to staff is 1/5th of the income of the Apparel. Maintenance exp is 10% of the salary to staff.

  • Power is Rs. 8 and other Misc. exp is 50% of Power.

  • Building worth Rs. 1500 and Furniture and Fixtures Rs. 1000. Provide 10% depreciation on both the assets.

  • Investments worth Rs. 600, Debtors Rs. 500, Loans and Advances Rs. 350 and other current Assets Rs. 250.

  • Cash and Bank balance Rs. 118

  • Creditors Rs. 200, Bills Payable Rs. 75 and Interest Payable Rs. 25.

  • Equity share capital of the company is Rs. 500

  • Term Loan is double the amount of equity share capital.

  • Working capital and unsecured loan is 20% and 10% of the term loan resp.

  • Provide Tax @ 35% of the Profit

Cash flow statement

Cash Flow Statement

  • Users Includes:

  • Executives want to know if the cash generated by the company will be sufficient to fund their expansion strategy

  • Stockholders want to know if the firm is generating enough cash to pay dividends

  • Suppliers want to know if their customers will be able to pay if offered credit

  • Investors want to evaluate future growth potential

  • Employees are interested in the overall viability of their employer as indicated by its ability to fund its operations

Statement of cash flows

Statement of Cash Flows

  • Statement of cash flows (SCF) reports cash inflows and outflows

  • Cash flows are reported based on the three business activities of a company:

    • Operating activities: transactions related to the operations of the business.

    • Investing activities: acquisitions and divestitures of long-term assets

    • Financing activities: issuances and payments toward equity, borrowings, and long-term liabilities.

Cash and cash equivalents

Cash and Cash Equivalents

  • Cash Equivalents

    • Held for meeting short term commitments

    • It is readily convertible into known amounts of cash

    • It has a very insignificant risk

    • Short maturity (say 3 months maximum)

  • Sum of these three types of cash flow reflect net increase or decrease of cash and cash equivalents.

Operating activities

Operating Activities

  • These are principal revenue producing activities of the enterprise.

  • Examples:

    • Cash receipts from sale of goods / rendering services;

    • Cash receipts from royalties, fees, commissions and other revenue;

    • Cash payments to suppliers of goods and service;

    • Cash payments to and on behalf of employees.

Investment activities

Investment Activities

  • The activities of acquisition and disposal of long term assets and other investments not included in cash equivalent are investing activities.

  • It includes making and collecting loans, acquiring and disposal of debt and equity instruments, property and fixed assets etc.

  • Examples of cash flows arising from investing activities are as follows:

    • Cash payments to acquire fixed assets

    • Cash receipts from disposal of fixed assets

    • Cash payments to acquire shares, warrants or debt instruments of other enterprises and interest in joint ventures

    • Cash receipt from disposal of above investments

Financing activities

Financing Activities

  • Those activities that result in changes in size and composition of owners capital and borrowing of the organization.

  • It includes receipts from issuing shares, debentures, bonds, borrowing and payment of borrowed amount, loan etc.

    • Sale of share

    • Buy back of shares

    • Redemption of preference shares

    • Issue / redemption of debentures

    • Long term loan / payment thereof

    • Dividend / interest paid



  • Received from investment – it is in investment activities

  • Received from short term investment classified, as cash equivalents should be considered as cash inflows from operating activities.

  • Received on trade advances and operating receivables should be in operating activities

  • On loans / debts are in financing activities

  • On working capital loan and any other loan taken to finance operating activities are in operating activities

Interest Received

Interest Paid



  • For financial enterprises – in operating activities

  • For other than financial enterprises – in investing activities

  • Always classified as financing activities

Dividend Received

Dividend Paid

Direct method for cash flow

Direct Method for Cash flow

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