FRA Class Notes
FRA Class Notes
FRA Class Notes
Agarwalla
Evaluation Criteria
# Heads % weightage
1 Class Participation and attendance 10%
2 Assignments and class preparation submission 30%
3 Quizzes 30%
4 Examination 30%
9. Expenditure | Expense
Expenditure is acquiring an asset. Ex Fruit vendor buys from a wholesaler. The fruits he got is an
asset. Its expenditure for that vendor.
Expense is consuming an asset. Ex Fruit vendor eats fruits then it is an expense.
10. Drawings and dividend are not expenses. Both are distribution of profit. It is deducted from owners
equity.
Not Expenses
a) Drawings
b) Dividends
c) Tax on dividend
11. Financial Income It is interest and dividend income. Its shown separately because its not
operating income
12. Financial expenses Interest paid or to be paid
1. Going Concern Principle Assumption that an entity will remain in business for the foreseeable
future. Conversely, this means that the entity will not be forced to halt operations and liquidate its
assets in the near term at what may be very low fire-sale prices
Hence because of this principle Non-refundable security deposit shall be asset
2. Depreciation = (Cost Estimated Salvage Value) / Estimated life
3. Solving Tendulya Case basis double entry mechanism
Assignment 1
1. Is Depreciation expense (income statement) cumulative or just for the year?
2. Equation stands
End Inventory = Opening Inventory + Brought Inventory Cost of Goods sold
3. What is COGS(Cost of goods sold)/Cost of sales (cost related to production)?
COGS are the direct costs attributable to the production of the goods sold by the company. This
amount includes the cost of the materials used in creating the good along with the direct labor costs
used to produce the good.
- Cost of creating the products that a company sells
- Only costs included in the measure are those that are directly tied to the production of the
products
- Appears on income statement as expense and can be deducted from revenue to get gross
margin
4. How COGS (COGS sold during the period was 30,000) appear in the equation (A=L+NC-D+R-E)?
5. Why inventory is expense?
24th April, 2017, Session 4
1. PQR Limited
a. Items shown in balance sheet such as Accumulated depreciation is only for assets in
business, not for items sold during the year
b. Items shown in P&L such as depreciated expenses is for all assets irrespective of in business
or not
2. How practically the transactions are reported in an organization
Company will create with the aid of computer and systems individual T-accounts and all entries are
recorded in one account.
Two types of account
a) Permanent Account
a. Items of balance sheet such as Assets, liability, owners equity
b. Carry forward the same year on year
b) Temporary Account
a. Items of profit & loss such as revenue & expenses
b. Every year we start and close the account the input of this is taken to balance sheet
c. Revenue and expenses start fresh every year
3. Contra Account
- Negate an account
- Account and its contra account go hand-in-hand
4. Accounts Receivable is a collective account
5. Recording basis Gross or Net
# Gross For Revenue from Operations Net For Revenue from other sources
1 It means that recording the revenue through It means only taking the balance as revenue
other income sources and subtracting
expenses Ex Sold a car for Rs 5 lakh, the depreciated
Ex Sold a car for Rs 5 lakh, profit over value of the car is Rs 4.5 lakh
depreciation expense Rs 0.5 lakh Record a) Profit of Rs 0.5 lakh instead of
Record a) Revenue Rs 5 lakh both sold card and value of car
b) Expenses Rs 4.5 Lakh
3. Expense for each year will be such that desired closing balance of provision is maintained, and is
calculated using the formula
Desired closing balance of provision + actual bad debts during the period actual bad debt
recovered opening balance of provision.
The whole focus is first deriving the closing balance Many regulatory and statutory guidelines and
regulations help in deriving the closing balance.
Understanding from 3 Questions
1. Provision for doubtful debt (post first year) will be inclusive of bad debt (specific account) and
provision of doubtful debt
2. The bad debt expense will be co-related to provision for doubtful debt (post first year).
c) Suppose, both the actual salary and actual bonus come to be (materially) different than what
has been booked at the end of the year. Would you record the differences in the same way for
both the cases in the next accounting years?
Yes, we record both the same in similar fashion
Income TAX
4. All taxes whether paid or not are mentioned as advance tax
5. Tax Paid (named as Advance Tax) in following ways
a. In every quarter (June, Sep, Dec, Mar)
Cash Decreases, advance tax increases
b. Tax deducted at source
Cash decreases, advance tax increases
6. For a company tax is paid 3 times
a. Advance Tax while deriving PBT from PAT
b. Tax deducted at source
c. Tax on Share dividend
Manufacturing Process
Abnormal loss It is considered as an expense and doesnt figure out in COGS- hence it has to be
removed
Conversion Cost a) Labor Costs b) Factory Overheads such as power, fuel, energy c) depreciation of of
machinery and factory building & amortization of patents All costs pertaining to factory and not office.
So administrative cost will not be covered in conversion costs
Share Premium and Bonus shares
7. Share capital 1000; Reserves and surplus 99000 Capital with owners equity is high
The company goes to bank and gets debt of 1 lakh basis the capital and then distribute the reserves
and surplus among share holders
8. If company wants to give bonus shares (ex Mr. X has 10 shares of Company Y, Y wants to give bonus
10 shares) then Share capital will increase by 10 and Reserves & surplus will reduce by 10.
9. Company cannot reduce share capital. This is the most difficult or next to impossible thing to do
given the approval across different or all shareholders and stakeholders
Income Tax
1. Advance Income tax is in asset and provision for tax is in liability
2. Advance Income Tax Tax paid to government in the start of any financial year
3. Provision for Tax Tax anticipated by company in the end of year. This may vary from advance
income tax, as this is more realistic given the extra time to judge the same
4. Keep assets and liabilities/owners equity different while closing income tax of any given year
3 entries to explain
Asset Advance tax (-200); Cash +200 Net Advance tax 2300
Liability Provision for tax (+100); expense +100 Net provision for tax 2300
When both are same cut off with following transaction cash+200; expense +100
Once these adjustments are made these 2 amounts will be netted out and wont appear in Balance
Sheet. The extra allocation will only show up in expense side as an increase or decrease.
8. Liquidity is not just you realize cash but also have a known the exact amount
9. Indirect method is only for operational activities. Financial and investment is totally direct
2. Excise duty is paid in advance. Any company keeps advance account with excise duty
CFO Cash flow from operations CFI Cash flow from investing CFF Cash flow from financing
CFO
# Direct Indirect
1 Normal Net income is adjusted for all noncash revenues and expenses, one of which is depreciation.
process No Depreciation is never a source of cash, but it is deducted to compute net income, so it must
change be added back
2 Most of the statements are indirect method. Reason for this is that if the direct method is
used, a reconciliation of income to cash flows from operations is also required, so most
companies simply use the reconciliation as their summary of cash flow from operations
Construction Contracts
1. Determining stage of completion
a) Cost of method
Percentage completed = Cost Incurred / Total Estimated project cost; where
Total Estimated project cost = Cost incurred + Cost to incur
b) Physical progress method gives completion of physical proportion of the contract work
c) When the outcome of a construction contract cannot be reliably estimated
Revenue = Contract costs (i.e. no profit)
Expected future loss -> to be recognized immediatedly
2. P&L post determining stage of completion
a) Cumulative revenue = % completed * Fixed contract costs
b) Cumulative cost = % completed * Total estimated project cost
c) Revenue of the year = Cumulative revenue till this year cumulative revenue till last year
d) Expense of the year = Cumulative expense till this year Cumulative expense till last year
e) Gross profit = Revenue of the year Expense of the year
f) Provision for future losses = Expected future loss Op. balance of provisions
Expected future loss = (Fixed contract cost Cumulative revenue) Cost to complete (as stated)
In expected future loss, we take only cost to complete as mentioned in the note
Individual Assignment 3
1. Investing, financing, operating
Ratios
1. Interest Coverage Ratio
Going concern Check Are you repaying the interest/installments from profits or new loans?
= PBIT / Interest or PBIT / (Interest + Installments due in next month)
2.
Turnover ratio : Top mein sales Margin/ Ratio bottom mein sales
Sales / (____) (____) / Sales
# Different parameters
1 Net Income
2 Capital expenditures (PPE, depreciable assets)
3 Capital expenditures (PPE, depreciable assets) + Dividends
Trends
#
1 Net Income
2 Cash flow from (continuing) operations
3 Capital expenditures
4 Dividends
5 Net borrowing (proceeds less payments of short and long-term debt)
6 Working capital accounts
7. Was cash flow from operations greater than or less than net income
8. Cash flow from operations > Capital expenditures (PPE)
Capital Expenditure = PPE, Investment in depreciable assets, Purchase of PPE
9. Cash flow from o
# Amortization Capitalization
1 It is an expense; similar to depreciation expense Capitalization is asset
2 Amortization is the value for one year and is not
carried forward as it is part of P&L statement