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    Sessions 5

    Uploaded by

    adharsh veera
    The document discusses key accounting concepts like consistency, materiality, inventory, operating cycle, sales, cost of goods sold, and calculating gross margin and operating income. Some key points are: 1. Consistency in accounting methods is important, and any changes must be disclosed to stakeholders. 2. Materiality depends on judgment, and immaterial items can be disregarded if disclosure is provided. 3. Inventory, receivables, and payables are part of the operating cycle which converts cash to inventory, work in progress, finished goods, receivables, and back to cash. 4. Cost of goods sold is calculated by subtracting closing inventory from opening inventory and additions like purchases.

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    Sessions 5

    Uploaded by

    adharsh veera
    19 views12 pages
    The document discusses key accounting concepts like consistency, materiality, inventory, operating cycle, sales, cost of goods sold, and calculating gross margin and operating income. Some key points are: 1. Consistency in accounting methods is important, and any changes must be disclosed to stakeholders. 2. Materiality depends on judgment, and immaterial items can be disregarded if disclosure is provided. 3. Inventory, receivables, and payables are part of the operating cycle which converts cash to inventory, work in progress, finished goods, receivables, and back to cash. 4. Cost of goods sold is calculated by subtracting closing inventory from opening inventory and additions like purchases.

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    The document discusses key accounting concepts like consistency, materiality, inventory, operating cycle, sales, cost of goods sold, and calculating gross margin and operating income. Some key points are: 1. Consistency in accounting methods is important, and any changes must be disclosed to stakeholders. 2. Materiality depends on judgment, and immaterial items can be disregarded if disclosure is provided. 3. Inventory, receivables, and payables are part of the operating cycle which converts cash to inventory, work in progress, finished goods, receivables, and back to cash. 4. Cost of goods sold is calculated by subtracting closing inventory from opening inventory and additions like purchases.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    19 views12 pages

    Sessions 5

    Uploaded by

    adharsh veera
    The document discusses key accounting concepts like consistency, materiality, inventory, operating cycle, sales, cost of goods sold, and calculating gross margin and operating income. Some key points are: 1. Consistency in accounting methods is important, and any changes must be disclosed to stakeholders. 2. Materiality depends on judgment, and immaterial items can be disregarded if disclosure is provided. 3. Inventory, receivables, and payables are part of the operating cycle which converts cash to inventory, work in progress, finished goods, receivables, and back to cash. 4. Cost of goods sold is calculated by subtracting closing inventory from opening inventory and additions like purchases.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 12

    Consistency

    • There are different ways a given event may be recorded.


    • A bad debt may be deducted from revenue or shown as an expense
    • Once an entity decides on one accounting method, it should follow
    the same method consistently for all subsequent events
    • If the entity changes an accounting method, it has to be informed to
    the stakeholders
    • Consistency to be maintained in a category of transaction and not
    across transactions. ( inventories are recorded at lower of cost or
    market value while fixed assets are recorded at purchase cost )
    Materiality

    • Court will not consider trivial matters


    • The decision on what is trivial depends on judgement and common
    sense
    • When it is an estimate, it should be a close estimate
    • Insignificant events may be disregarded, but there should be a full
    disclosure of important information
    • The CFOs and CEOs should certify the materiality
    • Inventory are goods that are meant for eventual conversion into cash
    in the normal course of business.
    • Like Receivables they are part of the operating cycle.
    • Raw materials
    • Work in progress
    • Finished goods
    Operating Cycle
    • Cash to cash
    • Cash to inventory
    • Inventory to work in progress
    • Work in progress to Finished goods
    • Finished goods to sales
    • If sales in cash then finished goods to cash, else finished goods to
    Accounts receivables and then to cash
    • All these assets are collectively called current assets
    Operating Cycle
    (Service Provider)

    Cash

    Debtors/
    Receivables
    30 days

    Operating Cycle= 30 days or 1 month.


    Operating Cycle (Trader)

    Cash

    Operating Cycle
    (Trader)

    Debtors/
    Receivables
    35 days Stock
    25 days

    Operating Cycle= 35+25= 60 days or 2 months


    Operating Cycle
    (Manufacturer)

    Cash

    Debtors/ Raw
    Receivables Materials
    60
    30 days 60 days

    Finished
    Goods Work in
    20 days Progress
    10 days

    Operating Cycle= 60+10+20+30= 120 days or 4 months


    • There can be variations in the WC cycle.
    1. A bus operator with specific route permit is a service provider. He may start his
    day by taking diesel from the nearby petrol bunk on credit, which he will repay
    at the day end after completing that day’s work. He, in other words, starts his
    day not with cash but with creditors. He will not be having any debtors as
    nobody after entering in the bus request for ticket on credit basis for his
    journey.
    2. A Person who runs his vehicle on contract basis will be having debtors as he
    will be receiving payment from his client only at the beginning of the
    succeeding month.
    3. Similarly, a Trader may or may not have receivables depending upon his credit
    policy or the nature of the goods he deals with.
    Sales

    Gross sales
    Less Discount
    sales returns
    Net sales
    Cost of goods sold / Cost of sales

    Inventory / Merchandise
           
    Closing balance of
    inventory
      26520
     
    Purchases (cash or
    36030  
    credit)
      ?
    cost of goods sold?
       
       
       
    opening balance of
    inventory
        29835
    Gross margin

    Net sales
    Less Cost of goods sold/ cost of sales
    Gross Margin
    Operating Income or Profit

    Gross margin
    Less: selling expenses, general, administrative
    Research and development expenses
    Operating profit (Earnings before Depreciation Interest and Tax)
    Less: Depreciation
    Earnings before Interest and tax
    Less : Interest expenses
    Earnings before Tax
    Less : Taxes
    Net profit or Profit after tax

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