Branches of Accounting

Accounting

Government accounting

Enterprise accounting

Social accounting

Financial accounting

Management accounting

Two aspects of Accounting

accounting

Financial accounting

Accounting analysis

Used for reporting

Used for providing information for planning and control

Audience: Outside world (Govt. bodies, Societies, etc.)

Audience: Internal (Managers and investors)

Financial Accounting

The art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are, in part at least, of a financial character, and interpreting the results thereof
-American Institute of Certified Public Accountants

The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information
-American Accounting Association

Need for Accounting

To know Financial performance (profit or loss incurred during the financial period) Financial position (assets and liabilities as at the end of the financial period)

Principle Financial Statements Balance Sheet Owned and owed statement a snapshot of financial health of a firm It is prepared as at a particular point in time Profit & Loss or Income Statement Quantifying effect of operations in a given period of time Cash Flow Statement Tracking how cash comes-in and goes-out

Balance Sheet

Balance sheet reflects the assets, liabilities, and owners equity at a point in time. In other words, it shows, on a specific day , what the company owned, what it owed, and how much it was worth. Balance sheet is called such because it balances---assets always must equal liabilities plus owners equity

Balance Sheet Equation

Total assets= Total liabilities Total assets= Outside liabilities plus owners equity (Duality concept)

Balance Sheet

Please refer Balance Sheet as at March 31, 2010 of Lanco Infratech Limited

Lanco Infratech Limited

Abridged Balance Sheet as at 31st March 2010

Rs. Millions 2010 SOURCES OF FUNDS Change % 2009

(1) Shareholder's Funds

(a) Capital (i) Equity (b) ESOP Outstanding 2385.47 746.01 8.51 259.59 2198.34 207.46

(c) Reserve and Surplus

(i) Capital Reserve (ii) General Reserve (iii) Surplus in Profit&Loss A/c (iv) securities Premium A/c 42.90 14.58 10717.64 17699.76 31606.36 (2) Loan Funds (a) Secured Loans (b) Unsecured Loans 18893.35 8444.13 27337.48 (3) Deferred Tax Liability (net) 53.86 94.09 128.40 103.53 -69.76 9734.39 3697.04 13431.43 178.13 0.00 0.00 83.09 71.88 69.79 42.90 14.58 5853.82 10298.02 18615.12

Total

58997.70

83.08

32224.68

Lanco Infratech Limited Abridged Balance Sheet as at 31st March 2010

(1) Fixed Assets ( a) Net Block-Original cost-Depreciation (b) Capital Work in Progress (including Capital Adv (2) Investments (a) Investment in subsidary companies (i) Unquoted (b) Others (i) Quoted (Mkt Val Rs,22.26 mio (2009:Rs.4.07 mio (ii) Unquoted (c) Share App Money Pending Allotment (3)Current Assets, Loans and Advances (a) Inventories (b) Sundry Debtors (c) Cash & Bank Balances (d) Other Current Assets (e) Loans & Advances (i) To Subsidiary Companies (ii) To Others Less Current Liabilities and Provisions (a) Liabilities (b) Provisions Net Current Assets

3,988.98 334.36

9.20 49.45

3,652.75 223.72

15,511.53 14.67 17,388.00 1,026.94 38,264.48 5.98 96.77 319.50 -25.79 67.66 15.40 55.60 23.30 23.74 23.31 20,733.22

42.52 260.44 100.12 -12.16 55.40 4219.75 11709.20 876.01 10.78 4501.97 13864.31 35,182.02 27,076.46 503.56 27,580.02 172.73

10,884.01 4.07 8,688.99 1,169.14 24,622.68

4,472.14 23,039.82 3,674.84 8.00

7,547.96 15,999.05 54,741.81 33,385.50 623.09 34,008.59

7,602.00

Total

58,997.70

83.08

32,224.68

Understanding the Liabilities Side of the Balance Sheet of Lanco Infrastructure Limited

Shareholders Funds

Represents total money that the shareholders have in the business. It is broadly shown under two broad heads: (a) Capital : Money shareholders originally put in business. (b) Profits of previous years not taken by them; thus reinvested into the Business Money originally put in by the shareholders. Share Capital is reflected as: (i) Authorised : RoC (Registrar of Companies) permission taken (ii) Issued: shares issued and (iii) Paidup: money per share actually put in Par value per share is also shown here Profits of previous years reinvested into the business It is held in different accounts: (i) General Reserves (ii) Capital Reserve (iii) Surplus in Profit and Loss Account balance (iv) Share Premium account etc

Share Capital

Reserves & Surpluses

Understanding the Liabilities Side of the Balance Sheet of Lanco Infrastructure Limited

Shareholders Funds from an Analysis Perspective: capital + free reserves In working out this number all of the amount shown as Paid-up share capital is taken. In addition, from Reserves and Surpluses, money considered free and belonging to shareholders is taken. Thus, capital and special reserves, being earmarked for special purposes and not being available for shareholders are not considered.

Different Balance Sheets might have accounts of differing nomenclature. The principle in determining Shareholders Funds is: Can shareholders freely access and draw that money out in dividends or on liquidation?
Companies that have accumulated losses will reflect a negative number in the Profit and Loss Account, depleting / reducing shareholders funds.

Understanding the Liabilities Side of the Balance Sheet of Lanco Infrastructure Limited

Represents long term borrowings of the company

Typically these loans are for a period greater than a year. Loans were long term but are to be repaid within the next twelve months are not shown here.
Loan Funds Companys might (or might not) disclose the names of lenders. Some classifications within this grouping are: Secured Unsecured From Financial Institutions / Banks Debentures: together with coupon (interest) offered on them External Commercial Borrowings

Understanding the Assets Side of the Balance Sheet of Lanco Infrastructure Limited

Represents Productive Capacity of the company. These are assets of the company the benefits of which will be realizable to the company over a number of years, usually exceeding at least one year. Fixed Assets Classifications within this grouping tend to be: Land and Building Plant and Equipment Furniture and Fixtures Vehicles Tools and dies etc.

Understanding the Assets Side of the Balance Sheet of Lanco Infratech Limited

Value of fixed assets depletes year on year basis on account of wear and tear from usage. This value, called depreciation, is reduced from the value of the assets shown in the previous years balance sheet to arrive at the closing value of the asset in the current years balance sheet.

In the Fixed Assets Schedule to the Balance Sheet, assets are reflected as follows Gross Block + Additions Sales Depreciation Net Block 100 10 5 45 60 At original purchase price At acquisition price At disposal value

Total accumulated value over the years

Reflected in the Balance Sheet

This is shown for each asset and the net amount is shown in the Balance Sheet itself

Understanding the Assets Side of the Balance Sheet of Lanco Infratech Limited

Working Capital

Represents funds needed to operate the business of the company. It is calculated as follows: Current Assets minus Current Liabilities Short term assets realizable as cash within the next 12 months (a) Inventory of Finished Goods, Semi-finished goods, work in process and raw materials (b) Trade receivables / Sundry debtors (d) Advances (e) Cash and Bank balances(f) Short term investments Short term liabilities which have to be settled within 12 months (a) Trade Receivables / Sundry Creditors (b) Current installment and interest on Long term loans (c) Provisions for payables: taxes, dividends, excise duty etc.

Current Assets

Current Liabilities

Profit and Loss /Income Statement

Income statement shows revenues, expenses, and profit for a period of time, such as a month, quarter, or year. Its also called a profit and loss statement, P&L, Statement of earnings, or Statement of operations.
The bottom line of the income statement is net profit, also known as net income or net earnings

Profit and Loss Statement

Please refer Profit and Loss account for the Year ended March 31, 2010 of Lanco Infratech Limited

Lanco Infratech Limited Abridged Profit and Loss Account for the year ended 31st March 2010
2010 I. INCOME Operting Income Dividend Interest Other Income II. EXPENDITURE Construction and Operating Expenses Opening Contract Work-in-Progress Add:Construction Material Consumed Less:Closing Contract Work-in-Progress 3,615.10 33,826.73 -2,876.93 325 18 -20 849.64 28,744.39 -3,615.10 58,866.99 11.20 278.56 825.39 59,982.14 44 293 178 1631 46 40,825.86 2.85 100.07 47.69 40,976.47 Change (%) 2009

34,564.90

33

25,978.93

Lanco Infratech Limited Abridged Profit and Loss Account for the year ended 31st March 2010
Operating Expenses Salary, wages and other employee benefits Managerial Remuneration 11,868.18 1,896.06 117.19 71 58 3 6,921.99 1,199.55 114.25

Interest and finance charges

Depreciation Auditor's Remuneration Provision for Debts/Claim Other expenses Total III. Profit Before Taxation IV. Provisiona for Taxation V. Profit After Tax Balance of profit carried forward Balance of profit carried to Balance Sheet Earnings per Share (Equity Share of Rs.1 each) Basic Earnings per Share (Rs.) Diluted Earnings per Share (Rs.)

1,979.40
597.71 10.78 11.64 1,735.25 18,216.21 52,781.11 7,201.03 2,337.21 4,863.82 5,853.82 10,717.64 2.17 2.14

43
47 67 86 66 43 79 69 84 83 83 74 73

1,386.12
405.26 6.47 933.56 10,967.20 36,946.13 4,030.34 1,381.66 2,648.68 3,205.14 5,853.82 1.25 1.24

Operating expenses

Operating expenses are the costs that are required to keep the business going day by day. They include salaries, benefits, and insurance, utilities costs, among a host of other items. Operating expenses appear on the income statement

Capital expenses

A capital expenditure is the purchase of an item thats considered a long-term investment, such as computer system and equipment.

Most companies follow the rule that any purchase over a certain rupee amount counts as a capital expenditure, while anything less is an operating expense.

Operating versus Capital expenses

Operating expenses show up on the income statement and thus reduce profit. Capital expenditures show up on the balance sheet; only depreciation of a piece of capital equipment appears on the income statement

Depreciation

Depreciation allows accountants to spread the cost of equipment and other assets over more than one accounting period. Most capital expenditure are depreciated (Land is an example of one that isnt). Accountants attempt to depreciate the items over what they believe will be its useful life

Cash Flow Statement

Statement of cash flows (SCF) reports cash inflows and outflows Cash flows are reported based on the three business activities of a company:
o o o

Operating activities: Transactions related to the operations of the business. Investing activities: Acquisitions and divestitures of longterm assets Fnancing activities: Issuances and payments toward equity, borrowings, and long-term liabilities

Relationship among Basic Financial Statements

Exhibit 1.5 The Relationship Among the Basic Financial Statements Change in Cash

Operating cash flows Investing cash flows Financing cash flows

Statement of cash flows

Cash

Liabilities ____ Income statement Revenues -------------Expenses -------------Net income

Cash

Liabilities ____

Balance Sheet (beginning of period)

--------

Shareholders equity

--------

Other assets

Shareholders equity

Dividends

Other assets

Balance Sheet (end of period)

Change in shareholders equity Statement of shareholders equity

Accounting versus Finance

Treatment of funds Accounting : Measurement of funds (income

and expenses) is based on the accrual principle. Accrual method recognizes revenue at the point of sale, not when collected and expenses when incurred rather than when actually paid

Finance: Treatment of funds is based on cashflows. The revenue is recognized only when received in cash (cash inflows) and expenses are recognized on actual payment (cash outflows)

Accounting versus Finance

Decision Making

Accounting : Principle purpose of accounting

is collection and presentation of financial data. It provides consistently developed and easily interpreted data on past, present and future operations of the firm

Finance: Principle purpose of finance is using

the accounting data for financial planning, controlling and decision making

Finance begins where accounting ends

Accounting versus Finance

Treatment of funds example

Total revenue of Lanco Infrastructure Limited during the last quarter amounted to Rs. 15000 million while the expenditure Rs.12000 million at the end of the quarter , Lanco has yet to collect Rs.6000 million from the customers.
Accounting View (Income Statement) Revenue Financial View (Cash Flow Statement) 15000 Cash Inflow (15000-6000) 9000

Less Expenditure
Net Profit

12000 Less Cash Outflow

3000 Net Cash Outflow

12000
(3000)

Issue: Lanco is making profits but is it liquid ?

Financial Ratio Analysis

Financial Ratios Analysis

The analysis of relationships between two or more line items on the financial statements

Classification of Financial Ratios

Liquidity ratios

Objective
Indicates the ability of a firm to meet its obligations in the short run Based on the relationship between current assets and current liabilities Two liquidity ratios commonly used are Current ratio and

Quick ratio

Current Ratio

Current assets

====================
Current liabilities Measures short-term liquidity, the ability to meet needs for cash as they arise

Quick Ratio

Quick assets ============== Current liabilities

Measures short-term liquidity more rigorously than current ratio by eliminating inventory , usually the least liquid current asset

Liquidity Ratios

Issues What does a current ratio significantly higher or lower than the industry average indicate?

Whether quick ratio is a stringent test of liquidity?

Activity Ratios

Provide the information about managements ability to control expenses and to earn a return on the resources committed to the business

Inventory Turnover Ratios

Cost of goods sold (COGS) ================================ Inventories COGS= (beginning inventories + purchases +production costs-ending inventories) To evaluate the overall efficiency with which inventories are managed

Accounts Receivable Turnover

Net sales ================================ Net accounts receivable Indicates how many times receivables are collected during a year on an average

Accounts Payable Turnover

Cost of goods sold ================================ Accounts payable Measures efficiency of the firm in paying suppliers

Fixed Asset Turnover Ratio

Net sales ================================ Net fixed assets

Measures efficiency of the firm in managing fixed assets

A word of caution when the fixed assets are old and depreciated substantially the ratio may appear more favourable

Leverage Ratios

Measure the degree of protection of suppliers of long-term funds and can also assist in judging a firms ability to raise additional debt and its capacity to pay its liabilities on time

Debt to Equity Ratio

Total debt (liabilities) ==================== Shareholders equity Debt equity ratio reflects the relationship between loan funds and shareholders funds. Usually lower the debtequity ratio the higher the creditors are protected

Interest Coverage Ratio

Operating profit (PBIT-Profit before interest and taxes) ========================================== Interest expense Interest coverage ratio defines the firms ability to pay interest which is a deductible expense. The higher the ratio, the better the ability to pay

Fixed Charge Coverage Ratio

Operating profit+ Lease payments ================================ Interest expense + Lease payments

Measures coverage capability more broadly than times interest earned including operating lease payments as a fixed charge

Profitability Ratios

Measure managements ability to control expenses and to earn a return on the resources committed to the business

Gross Profit Margin Ratio

Gross profit ================================ Net sales Measures profit generated after consideration of cost of products sold

Operating Profit Margin Ratio

Operating profit ================================ Net sales Measures profit generated after consideration of operating expenses

Net Profit Margin Ratio

Net profit ================================ Net sales Measures profit generated after consideration of all expenses and revenues

Return on Total Assets Ratio

Net profit/net earnings ================================ Total assets Measures overall efficiency of firm in managing assets and generating profits

Return on Equity Ratio

Net profit/net earnings ================================ Shareholders equity Measures overall efficiency of firm in managing assets and generating profits

Market Ratios

Indicate how the equity stock is assessed in the capital market. The market value of a share is a combined influence of risk and return, valuation ratios are the most comprehensive measures of performance

Earnings Per Share (EPS)

Net profit/net earnings ================================ Average shares outstanding Shows return to ordinary sharehoders for each share owned

Price to Earnings Ratio

Market price of share

================================ Earnings per share

Expresses multiple that the stock market places on a firms earnings

Price earnings ratio reflects the factors of profitability, growth prospects, shareholder orientation, image and degree of liquidity

Dividend Payout Ratio

Dividends per share ================================ Earnings per share Shows percentage of earnings paid to shareholders

Dividend Yield

Dividends per share ================================ Market price of share Shows the rate earned by shareholders from dividends relative to current price of share