1. General Purpose Financial
Statements
• Contains historical information
• Comprises –
• Balance Sheet
• Profit & Loss Account
• Cash Flow Statement
• Includes annexure, footnotes, schedules, etc.
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2. Balance Sheet
• A statement of financial position of an Entity as of
f p y
a certain date
• Describes –
• Assets e.g. Cash, Land & Bldg., P&M, etc.
• Liability e.g. Loans, Advances, creditors, etc
e g Loans Advances creditors etc.
• Equity i.e. Initial Investment + Accumulated Earnings
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3. Profit & Loss Account
• A statement of financial performance of an
f p f
entity over a period of time
• Describes –
• Revenues i.e. Sales & other Gains
• Expenses i.e. Direct & Indirect spending
ie
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4. Cash Flow Statement
• A statement of change in financial positions
g f p
at two points in time
• Describes generation & application of cash as
classified under –
• Operating Activities
• Investing Activities
• Financing Activities
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5. Asset
• An asset is a resource controlled by the entity
y y
as a result of past events from which future
economic benefits are expected to flow to the
f p
entity
• Fixed Assets, Investments, Current Assets &
Advances, Miscellaneous Expenditures
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6. Liability
• A liability is a present obligation of the entity
y p g y
arising from past events, the settlement of
which is expected to result in an outflow from
p f
the entity, of resources embodying economic
benefits.
• Secured Loans, Unsecured Loans, Current
Liabilities & Provisions
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7. Owner’s Equity
• Owner’s equity is the residual interest in the
assets of the entity after deducting all its
liabilities
• Sh C it l Reserves & Surplus
Share Capital, R S l
E=A–L
or A = L + E
or A = TL
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8. Check d t di
Ch k understanding
Identify Asset, Liability & Equity
Equipment Depreciation
Retained Earningsg Prepaid Rent
Goodwill Preference Shares
Goods in Stores y
Dividend Payable
Patents Factory
Debtors Freehold Land
Land value appreciation
Perks payable to employee
Suit filed by customernarain@fms.edu
for indemnity
9. Recognition of Assets & Liabilities
• Assets & Liabilities arise from recording of
g
Transactions & Other Events
• Recording of T&OE –
• Exchange with other Entities
• Maintain the Accounting Equation
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10. Illustration
1. Mr. X contributes Rs. 10000 in cash
2.
2 The company borrows Rs. 3000 from bank
Rs
3. Co. purchases equipment for Rs. 5000 in cash
4. Co. gives consultancy services worth Rs. 12000
but customers have paid Rs. 8000 so far
5. Co. pays Rs. 4500 each for salaries, maintenance
6. Co. gives dividend of Rs. 1000
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11. Initial P bl
I iti l Problem
Accounting Equation Approach
ASSETS = LIABILITIES + EQUITY
Cash Equipment Debtors Bank Loan Capital Earnings
1. +10,000 +10,000
2. +3,000
, +3,000
,
3. -5,000 +5,000
4. +8,000 +4,000 +12,000
5.
5 -9,000
9 000 -9,000
9 000
6. -1,000 -1,000
6,000 5,000 4,000 3,000 10,000 +2,000
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12. Class Exercise
1. Mr. Z started business with Rs. 20000 as capital
2. He purchased furniture for cash Rs. 500
p
3. He purchased goods for cash Rs. 1000
4.
4 He purchased goods on credit for Rs. 2000
p rchased Rs
5. He sold goods on credit for Rs. 4000 costing Rs.
2500
6. He paid Rs. 1000 of Rent & Rs. 2000 for
Salaries narain@fms.edu
14. Exercise 1
E i
1.
1 A company issues 50 000 shares of Rs 10 face
50,000 Rs.
value Equity Shares at par value for cash.
2. The
2 Th company acquires L d & B ildi costing
i Land Building i
Rs. 2,25,000 with the payment of Rs. 50,000 in
cash and the b l
h d h balance i settled b raising 8%
is l d by i i
Mortgage for 20 years.
3. Purchases a used JCB for Rs. 13,200 cash.
4. Acquires Raw Material costing Rs. 8,600 on
q g ,
account from Mr. X. narain@fms.edu
15. Exercise 1
5. Returns defective Raw Material purchased
above and costing Rs. 900 to the supplier.
6. Pays the supplier in (4) and (5) the amount due,
less a 2% discount for the prompt payment.
p p p y
7. Obtains a fire insurance policy providing Rs.
5,00,000
5 00 000 coverage beginning next month. It pays
month
the Insurance Premium of Rs. 4,950 for the
current year.
year
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16. Exercise 1
8. Pays Rs. 1,800 for 3 month Rent for the office
space.
9. Purchases a Patent on a machine process for Rs.
90,000 cash .
10. Purchases Office Equipment from Mr. R for
0. u c ases O ce qu p e t o . o
Rs. 2,700 making a down payment of Rs. 250
and agreeing to pay the balance in 30 days.
d g ee g o p y e b ce d ys.
11. The company makes sale of all the goods for
Rs. 16,000
Rs 16 000 out of which only Rs 12 000 could
Rs. 12,000
be Realised from Mr. Y
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17. Solution to Exercise 1
Income Statement
Profit & Loss A/c …..
for the period ending ….
for the year ending …….
y g
Expenses Incomes
Insurance
I 4,950 Sales Revenue
4 950 S l R 16,000
16 000
Rent 1,800 Cash Discount gain 154
Net Goods purchased 7,700
Profit 1,704
16,154 16,154
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18. Solution to Exercise 1
Balance Sheet of …..
as on …….
Liabilities Assets
Creditors - R 2,450 Land & Building 2,25,000
8% M t
Mortgage 1,75,000 Equipments
1 75 000 E i t 15,900
15 900
Equity Shares 5,00,000 Patent 90,000
Profit & Loss A/C 1704 Debtors - Y 4,000
Cash 3,44,254
6,79,154 6,79,154
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19. Solution to Exercise 1
Cash Flow Statement
for th
f the period ending …
i d di
Cash Flow from operations
Receipt from sales 12,000
payment to insurer 4,950
payment to creditors 7,546
payment for rent 1,800
Net cash outflow from operations 2,296
Cash Flow from investments
Land B ildi b
L d & Building bought
h 50,000
50 000
JCB bought 13,200
Patent bought 90,000
Office Equipment bought 250
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Net cash outflow from investments 1,53,450
20. Solution to Exercise 1
Continued …….
Cash Flow from financing
Issue of E it Shares
I f Equity Sh 5,00,000
5 00 000
Net cash inflow from financing 5,00,000
Increase in cash balance 3,44,254
Cash balance at the beginning of the period 0
Cash balance at the end of the period 3,44,254
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