Financial Management and Accounting Methods
Financial Management and Accounting Methods
Financial Management and Accounting Methods
ACCOUNTING METHODS
1. ACCOUNTING PROCESS
WHAT IS ACCOUNTING?
2.
TYPES OF ACCOUNTING
1.
TYPES OF ACCOUNTING..
2.
ACCOUNTING FUNDAMENTALS
1.
ACCOUNTING EQUATION:
ALL ACCOUNTING IS BASED ON THE FUNDAMENTAL ACCOUNTING
EQUATION, WHICH IS:
ASSETS = LIABILITIES + OWNERSHIP
..... (i)
ASSETS
ACCOUNTING FUNDAMENTALS.
2.
.. (ii)
PROFIT
Example:
2. FINANCIAL STATEMENTS
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FINANCIAL STATEMENTS
INTRODUCTION:
BALANCE SHEET
INCOME STATEMENT
STATEMENT OF OWNERS EQUITY
STATEMENT OF CASH FLOWS
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FINANCIAL STATEMENTS.
1.
BALANCE SHEET:
FINANCIAL STATEMENTS
BALANCE SHEET..
LIABILITY & SHAREHOLDERS EQUITY:
THESE ARE LISTED IN THE ORDER ACCORDING TO THE NEARNESS
WITH WHICH THEY ARE LIKELY TO BE PAID
(i)
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BALANCE SHEET
as on 30 June, 2010
( in Thousands Rs.)
ASSETS
Cash
Account receivable
Inventories
Prepaid expenses
Accum. tax payments
Current Assets
Fixed Assets at Cost
Less Depreciation
Net Fixed Assets
178
678
1329
21
35
2241
1596
857
739
3250
LIABILITIES&
SHAREHOLDERS EQUITY
Bank Loans & Notes Payables
448
Account Payable
148
Accrued Taxes
36
Other accrued liabilities
191
Current Liabilities
823
Long Term Debts
Share Holders Equity:
Stocks
Paid-in-Capital
Retained earnings
Total Shareholders Equity
631
421
361
1014
1796
3250
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FINANCIAL STATEMENTS
2.
INCOME STATEMENT:
i.e.
Revenue
(Net sales)
Expenses
=
(Cost of Goods sold)
Profit
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Rs 3992
Rs 2680
Rs 1312
Rs 912
Rs 400
Rs 85
Rs 315
Rs 114
Rs 201
Rs 143
Rs. 58
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1.
INCOME
NET SALES: STATEMENT.
Amount received or receivable from customers
2.
3.
GROSS PROFIT:
4.
5.
6.
7.
8.
9.
10.
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FINANCIAL STATEMENTS
3.
Investment by Owner
Net Income
Total
Rs.
20,000
30,000
2,400
32,400
52,400
- 600
51,800
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FINANCIAL STATEMENTS
4.
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50,000
7,200
20,000
8,000
6,000
7,000
1,000
1,000
800
7,200
6,000
1,000
800
4,400
50,000
7,200
May
(Rs.)
15,000
200
1,400
______
_____
7,800
10,000
12,200
8,000
1,000
800
7,800
10,000
1,000
800
200
10,000
12,000
1,000
800
400
_____
12,200
June
(Rs.)
400
________
15,400
1,000
800
1,600
_______
15,400
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FINANCIAL RATIOS
We use financial ratios because this way we get a comparison that is
useful than the raw numbers by themselves.
EXAMPLE:
A firm has a net profit of $ 1 Million.
This looks very profitable?
But if the firm had invested $ 100 Million total assets.
Dividing net profit by total assets, we get: 1/100 = 0.01,
which is the firms return on total assets.
The 0.01 figure means that each dollar of asset invested earns a
1 % return.
A savings account provides a better return on investment than this,
with lesser risk.
In this example, the ratio provides quite a useful information.
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Total Debt
Shareholders Equity
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Sales
Fixed Assets
For (b) and (c), shows how effectively the firm is using its assets.
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PROFITABILITY RATIOS:
Relates profit to sales and investment. It is given by any of the
Following:
1. Profitability Ratio = Net Sales - Cost of Goods Sold
Net Sales
2. Profitability Ratio = Net Profit after Taxes
Net Sales
3. Profitability Ratio = Net Profit after Taxes
Total Assets
4. Profitability Ratio =
OR
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2.
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ACCOUNTING FUNDAMENTALS.
COMBINING EQUATIONS (i) AND (ii), WE GET:
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