Accounting Notes

MARGINAL COSTING - It is a costing technique where only variable cost or direct cost will be charged to the cost unit produced. Marginal costing also shows the effect on profit of changes in volume/type of output by differentiating between fixed and variable costs. Salient Points: 1. Marginal costing involves ascertaining marginal costs. Since marginal costs are direct cost, this costing technique is also known as direct costing; 2. In marginal costing, fixed costs are never charged to production. They are treated as period charge and is written off to the profit and loss account in the period incurred; 3. Once marginal cost is ascertained contribution can be computed. Contribution is the excess of revenue over marginal costs. 4. The marginal cost statement is the basic document/format to capture the marginal costs. Features: 1. It is a method of recording costs and reporting profits; 2. All operating costs are differentiated into fixed and variable costs; 3. Variable cost charged to product and treated as a product cost whilst, 4. Fixed cost treated as period cost and written off to the profit and loss account Advantages: 1. It is simple to understand re: variable versus fixed cost concept; 2. A useful short term survival costing technique particularly in very competitive environment or recessions where orders are accepted as long as it covers the marginal cost of the business and the excess over the marginal cost contributes toward fixed costs so that losses are kept to a minimum; 3. Its shows the relationship between cost, price and volume; 4. Under or over absorption do not arise in marginal costing; 5. Stock valuations are not distorted with present years fixed costs; 6. Its provide better information hence is a useful managerial decision making tool; Disadvantages: 1. Marginal cost has its limitation since it makes use of historical data while decisions by management relates to future events; 2. It ignores fixed costs to products as if they are not important to production; 3. Stock valuation under this type of costing is not accepted by the Inland Revenue as it’s ignore the fixed cost element; 4. It fails to recognize that in the long run, fixed costs may become variable COST-VOLUME-PROFIT ANALYSIS - is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions. Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analyses. Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are: The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant. Assumptions: 1. Constant sales price; 2. Constant variable cost per unit; 3. Constant total fixed cost; 4. Constant sales mix; 5. Units sold equal units produced Models: Basis Graph: The assumptions of the CVP model yield the following linear equations for total costs and total revenue (sales): Total Costs = Fixed Costs + Unit Variable Cost x Number of Units Total Revenue = Sales Price x Number of Units These are linear because of the assumptions of constant costs and prices, and there is no distinction between Units Produced and Units Sold, as these are assumed to be equal. Note that when such a chart is drawn, the linear CVP model is assumed, often implicitly. Break Down: Costs and Sales can be broken down, which provide further insight into operations. One can decompose Total Costs as Fixed Costs plus Variable Costs: TC = TFC + V x X. Following a matching principle of matching a portion of sales against variable costs, one can decompose Sales as Contribution plus Variable Costs, where contribution is "what's left after deducting variable costs". One can think of contribution as "the marginal contribution of a unit to the profit", or "contribution towards offsetting fixed costs". BALANCE SHEET: In financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a company's financial condition. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. A company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth of the company and according to the accounting equation, net worth must equal assets minus liabilities. Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Characteristics: 1. Balance Sheet is a statement. 2. Prepared on a specified date. 3. It is a statement of assets and liabilities. 4. Knowledge of nature of assets and liabilities. 5. Knowledge of financial position 6. Asses and liabilities tally each other. Objects: Balance sheet is a vital part of final account. It has to be compulsorily prepared as per legal provision. Objects of the Balance Sheet have been summarised as under: Main Objects: The mail object of Balance sheet is to assess the financial position of the firm. It is the list of assets and liabilities of the firm on a specific date. The short term and long term financial position of the firm can be obtained from the analysis of the Balance Sheet. Subsidiary Objects: 1. Knowledge of proprietary ratio. 2. Protection against possible losses. 3. Calculation of financial ratios. 4. Calculation of working capital. 5. Ascertaining funds from operation 6. Knowledge regarding sources and application of funds.

INVENTORY VALUATION: An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions. Objectives: Determination of Income, Determination of financial position INVENTORY SYSTEMS: The two most widely used inventory accounting systems are the periodic and the perpetual. Perpetual: The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times. It maintains a separate account in the subsidiary ledger for each good in stock, and the account is updated each time a quantity is added or taken out. Periodic: In the periodic inventory system, sales are recorded as they occur but the inventory is not updated. A physical inventory must be taken at the end of the year to determine the cost of goods sold. Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year. Methods: Specific Identification is a method of finding out ending inventory cost. It requires a very detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year end inventory. When this information is found, the amount of goods are multiplied by their purchase cost at their purchase date, to get a number for the ending inventory cost. On theory, this method is the best method, since it relates the ending inventory goods directly to the specific price they were brought. However, this method allows management to easily manipulate ending inventory cost, since they can choose to report that the cheaper goods were sold first, hence increasing ending inventory cost and lowering Cost of Goods Sold. This will increase the income. Alternatively, management can choose to report lower income, to reduce the taxes they needed to pay. FIFO: FIFO accounting is a common method for recording the value of inventory. It is appropriate where there are many different batches of similar products. The method presumes that the next item to be shipped will be the oldest of that type in the warehouse. In practice, this usually reflects the underlying commercial substance of the transaction, since many companies rotate their inventory (especially of perishable goods). This is still not in contrast to LIFO because FIFO and LIFO are cost flow assumptions not product flow assumptions. In an economy of rising prices (during inflation), it is common for beginning companies to use FIFO for reporting the value of merchandise to bolster their balance sheet. As the older and cheaper goods are sold, the newer and more expensive goods remain as assets on the company's books. Having the higher valued inventory and the lower cost of goods sold on the company's financial statements may increase the chances of getting a loan. However, as it prospers the company may switch to LIFO to reduce the amount of taxes it pays to the government. LIFO: LIFO is an acronym for "last in, first out." (Sometimes the term FILO ("first in, last out") is used synonymously.) In LIFO accounting, a historical method of recording the value of inventory, a firm records the last units purchased as the first units sold. LIFO accounting is in contrast to the method FIFO accounting covered below. Since prices generally rise over time because of inflation, this method records the sale of the most expensive inventory first and thereby decreases profit and reduces taxes. However, this method rarely reflects the physical flow of indistinguishable items. LIFO valuation is permitted in the belief that an ongoing business does not realize an economic profit solely from inflation. When prices are increasing, they must replace inventory currently being sold with higher priced goods. LIFO better matches current cost against current revenue. It also defers paying taxes on phantom income arising solely from inflation. LIFO is attractive to business in that it delays a major detrimental effect of inflation, namely higher taxes. However, in a very long run, both methods converge. “Last in first out” (LIFO) is not acceptable in the IFRS. Weighted Average: Under the weighted average approach, both inventory and the cost of goods sold are based upon the average cost of all units currently in stock at the time of reporting. When inventory turns over rapidly this approach will more closely resemble FIFO than LIFO. P&L ACCOUNT: Income statement, also called profit and loss statement (P&L) and Statement of Operations, is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. Purpose & Importance: 1. Knowledge of net profit or net loss. 2. Ascertaining ratio between net profit and sales. 3. Calculation of expenses ratio to sales. 4. Comparison of actual performance with desired performance. 5. Maintaining provision and reserves 6. Determining future line of action. Explanation: Salaries, Rent, Interest, Commission, Trade expenses, Carriage and Freight outward, Printing and stationary, Advertisement, Samples, Discount, Insurance premium, Loss on gain on sale of assets, any other loss.

BRS: The cash Book and Pass Book are prepared separately. The Businessman prepares the Cash Book and the Pass Book is prepared by the Bank (here by cash book we mean three column cash Book). But as both the books are related to one person and same transactions are recorded in both the books so the balance of both the books should match i.e. the balance as per Pass Book should match to balance at bank as per cash book. But many a times these two balances do not agree then, it becomes necessary to reconcile them by preparing a statement which is called Bank Reconciliation Statement. A BANK RECONCILIATION STATEMENT may be defined as a statement showing the items of differences between the cash Brook balance and the pass book balance, prepared on any day for reconciling the two balances. Causes of Difference: A transaction relating to bank has to be recorded in both the books i.e. Cash Book and Pass Book but sometimes it happens that a bank transaction is recorded only in one book and not recorded simultaneously in other book this causes difference in the two balances Difference may raise: Cheques drawn but not yet presented to the bank., Cheques received but not yet deposited in the bank., Interest credited and not recorded in the organization's books., Bank charges debited but not recorded in the organization's books. Importance: 1. The reconciliation process helps in bringing out the errors committed either in cash Book or Pass Book. 2. Bank reconciliation statement may also show any undue delay in the clearance of cheques. 3. Sometimes the cashier may have the tendency of cheating like he may made entries in the Cash Book only but never deposit the cash into bank. These types of frauds by the entrepreneur’s staff or bank staff may be detected only through bank reconciliation statement. So this way bank reconciliation statement acts as a control technique too. DEPRECIATION: In accounting, depreciation is a term used to describe any method of attributing the historical or purchase cost of an asset across its useful life, roughly corresponding to normal wear and tear. It is of most use when dealing with assets of a short, fixed service life, and which is an example of applying the matching principle per generally accepted accounting principles. Depreciation in accounting is often mistakenly seen as a basis for recognizing impairment of an asset, but unexpected changes in value, where seen as significant enough to account for, are handled through write-downs or similar techniques which adjust the book value of the asset to reflect its current value. Therefore, it is important to recognize that depreciation, when used as a technical accounting term, is the allocation of the historical cost of an asset across time periods when the asset is employed to generate revenues. Features: Depreciation is loss in the value of assets, Loss should be gradual and constant, Depreciation is the exhaustion of the effective life of business, Depreciation is the normal feature, Maintenance of assets is not depreciation, It is the allocation of cost of assets to the period of its life, It is continuing decrease in the value of assets. Specific Words: Obsolescence is the state of being which occurs when a person, object, or service is no longer wanted even though it may still be in good working order. Obsolescence frequently occurs because a replacement has become available that is superior in one or more aspects. Depletion is an accounting concept used most often in mining, timber, petroleum, or other similar industries. The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Depletion is similar to depreciation in that, it is a cost recovery system for accounting and tax reporting. For tax purposes, there are two types of depletion; cost depletion and percentage depletion. Amortization or amortisation is the process of increasing, or accounting for, an amount over a period of time. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death. Amortization is also used in the context of zoning regulations and describes the time in which a property owner has to relocate when the property's use constitutes a preexisting nonconforming use under zoning regulations. Fluctuation: In economics, conjuncture (fluctuation) is a critical combination of events. -- Boom is a time of high business activity, prosperity, peak of business cycle, "bull" market, and/or strong expansion. Depression is a time of acutely low business activity, "bear" market, slumping prices and demand, recession, bust. Causes of depreciation: 1. By constant use. 2. By expiry of time, 3. By obsolescence, 4. By depletion 5. Permanent fall in price, 6. By accidents. Importance: 1. For determination of net profit or loss, 2. For showing assets at fair and true value in the balance sheet. 3. Provision of funds for replacement of assets, 4. Ascertaining accurate cost of production, 5. Distribution of dividend out of profit only. 6. Avoiding over payment of income tax. Factors affecting: 1. Total cost of assets, 2. Estimated useful life of assets 3. Estimated scrap value, 4. Chances of obsolescence, 5. Addition to assets., 6. Legal provision

METHODS OF DEPRECIATIONS Straight-line depreciation: Straight-line depreciation is the simplest and mostoften-used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portion of original cost in equal increments over that period. The salvage value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero or even negative. Salvage value is also known as scrap value or residual value. For example, a vehicle that depreciates over 5 years, is purchased at a cost of Rs. 17,000, and will have a salvage value of Rs. 2000, will depreciate at Rs. 3,000 per year: (Rs. 17,000 - Rs. 2,000)/ 5 years = Rs. 3,000 annual straightline depreciation expense. In other words, it is the depreciable cost of the asset divided by the number of years of its useful life. Declining-Balance Method: Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years are called accelerated depreciation methods. This may be a more realistic reflection of an asset's actual expected benefit from the use of the asset: many assets are most useful when they are new. One popular accelerated method is the declining-balance method. Under this method the Book Value is multiplied by a fixed rate. Annual Depreciation = Depreciation Rate * Book Value at Beginning of Year The most common rate used is double the straight-line rate. For this reason, this technique is referred to as the double-declining-balance method. To illustrate, suppose a business has an asset with Rs. 1,000 Original Cost,Rs. 100 Salvage Value, and 5 years useful life. First, calculate straight-line depreciation rate. Since the asset has 5 years useful life, the straight-line depreciation rate equals (100% / 5) 20% per year. With double-declining-balance method, as the name suggests, double that rate, or 40% depreciation rate is used. Activity depreciation: Activity depreciation methods are not based on time, but on a level of activity. This could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, its life is estimated in terms of this level of activity. Assume the vehicle above is estimated to go 50,000 miles in its lifetime. The per-mile depreciation rate is calculated as: (Rs. 17,000 cost - Rs. 2,000 salvage) / 50,000 miles = Rs. 0.30 per mile. Each year, the depreciation expense is then calculated by multiplying the rate by the actual activity level. Sum-of-Years' Digits Method: Sum-of-Years' Digits is a depreciation method that results in a more accelerated write-off than straight line, but less than decliningbalance method. Under this method annual depreciation is determined by multiplying the Depreciable Cost by a schedule of fractions. -- Depreciable Cost = Original Cost - Salvage Value -- Book Value = Original Cost - Accumulated Depreciation Units-of-Production Depreciation Method: Under the Units-of-Production method, useful life of the asset is expressed in terms of the total number of units expected to be produced. Annual depreciation is computed in three steps. First, a Depreciable Cost is computed. -- Depreciable Cost = Original Cost Salvage Value. Second, Depreciation per Unit is computed. Depreciation charge per unit is computed by dividing Depreciable Cost by Total Units, expected to be produced during the useful life of the asset. -- Depreciation per Unit = Depreciable Cost / Total Units of production. Third, annual depreciation, or Depreciation Expense, by another name, is computed. from the Original Cost. -- Book Value = Original Cost - Accumulated Depreciation Units of time depreciation: Units of Time Depreciation is similar to units of production, and is used for depreciation equipment used in mine or natural resource exploration, or cases where the amount the asset is used is not linear year to year. A simple example can be given for construction companies, where some equipment is used only for some specific purpose. Depending on the number of projects, the equipment will be used and depreciation charged accordingly. Composite Depreciation Method: The composite method is applied to a collection of assets that are not similar, and have different service lives. For example, computers and printers are not similar, but both are part of the office equipment. Depreciation on all assets is determined by using the straight-linedepreciation method. FINANCIAL STATEMENTS: Financial statements (or financial reports) are formal records of the financial activities of a business, person, or other entity. In British English, including United Kingdom company law, financial statements are often referred to as accounts, although the term financial statements is also used, particularly by accountants. Financial statements provide an overview of a business or person's financial condition in both short and long term. All the relevant financial information of a business enterprise, presented in a structured manner and in a form easy to understand, are called the financial statements. There are four basic financial statements: Balance sheet: also referred to as statement of financial position or condition, reports on a company's assets, liabilities, and net equity as of a given point in time. Income statement: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. Profit & Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. Statement of retained earnings: explains the changes in a company's retained earnings over the reporting period. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities. LIMITATIONS: 1. As the historical costs and money measurement concepts govern the preparation of the balance sheet and income statements, hence these financial statements are essentially statements reflecting historical facts. It ignore inflationary trend and does not reflect the true current worth of the enterprise, 2. Certain important qualitative elements are omitted from the financial statements because they are incapable of being measured in monetary terms like the quality and reputation of the management team, employee and other, 3. There are still items in the assets side of the balance sheet which has no real value and are merely deferred charges to future incomes like preliminary / preincorporation expenses and other.

STOCKS: A share of stock is the smallest unit of ownership in a company. If you own a share of a company’s stock, you are a part owner of the company. You have the right to vote on members of the board of directors and other important matters before the company. If the company distributes profits to shareholders, you will likely receive a proportionate share. One of the unique features of stock ownership is the notion of limited liability. If the company loses a lawsuit and must pay a huge judgment, the worse that can happen is your stock becomes worthless. The creditors can’t come after your personal assets. That’s not necessarily true in private-held companies. When you hear or read about “stocks” being up or down, it always refers to common stock. There are two types of stock: 1. Common stock - Common stock represents the majority of stock held by the public. It has voting rights, along with the right to share in dividends 2. Preferred stock - Despite its name, preferred stock has fewer rights than common stock, except in one important area – dividends. Companies that issue preferred stocks usually pay consistent dividends and preferred stock has first call on dividends over common stock. Investors buy preferred stock for its current income from dividends, so look for companies that make big profits to use preferred stock to return some of those profits via dividends. Other Types: Authorized Shares – These shares represent the total number of shares of stock authorized when the company was created. Only a vote by the shareholders can increase this number of shares. However, just because a company authorized a certain number of shares doesn’t mean it must issue all of them to the public. Most companies retain shares for use later called unissued stock or shares. Unissued Shares – Shares a company retains in its treasury and not issued to the public or to employees are unissued shares. Restricted Shares – Restricted shares refer to company stock used for employee incentive and compensation plans. Restricted stockowners need permission of the SEC to sell. There is a waiting period after a company first goes public where insiders’ restricted stock is frozen. When insiders want to sell their stock, they must file a form with the SEC declaring their intention. Even insiders of established companies must file with the SEC before selling their restricted stock. Float Shares – Float refers to the number of shares actually available for trade on the open market. You and I can buy these shares. Outstanding Shares – Outstanding shares includes all the shares issued by the company, which would be the restricted shares plus the float. Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. They have a track record of paying regular dividends, and are valued by investors seeking relative safety and stability. The name comes from the blue-colored chips in the game of poker, which are typically the most valuable. Penny stocks are low-priced, speculative and risky securities which are traded over-the-counter (OTC); i.e. outside of one of the major exchanges. Income stocks offer a higher dividend in relation to their market price. They are especially attractive to investors who are looking for current income that will gradually grow over the years as a way to offset inflation. Growth stocks are securities which appreciate in value and yield a high return. Their profits are typically re-invested to expand the business. Investors gain because the stock prices increase as the business grows, thus increasing the value of the investment. Value stocks are securities which investors consider to be undervalued. They feel that the stock is being traded below market value, and they believe in the long-term growth of the issuing company. PROCEDURE OF ISSUE STOCKS: 1. Determine the number of shares of stock you will issue each owner. Laws in the various states generally specify a minimum number of shares that should be issued. If you exceed that amount, you may pay higher fees to the state. 2. Know that each share is worth a proportionate amount of the company's total net worth. 3. Decide what class of shares you will offer preferred or common. In elections, holders of common stock generally have one vote for each share they hold. They have a right, upon dissolution of the company, to a proportionate share of the assets. Preferred shareholders take certain preferences over common shareholders. 4. Hire a printer to print the stock certificates. 5. Issue certificates to the shareholders. 6. Establish a shareholder agreement, also known as a buyout agreement, dealing with issues relating to stock ownership. The agreement will cover the death or departure of shareholders, protection of proprietary information, transfer or sale of stock, and the method by which a shareholder or group of shareholders can buy out other shareholders. 7. Ensure that shareholders' spouses sign the agreement if the shareholders live in states in which community-property laws govern joint ownership of property. 8. Consider selling shares to a venture-capital firm as a means by which to raise additional capital to buy equipment, hire employees, conduct research and develop, or intensify your marketing efforts.

DEBENTURES: A debenture is defined as a certificate of agreement of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures. In finance, a debenture is a long-term debt instrument used by governments and large companies to obtain funds. It is defined as "any form of borrowing that commits a firm to pay interest and repay capital. In practice, these are applied to long term loans that are secured on a firm's assets. ". Where securities are offered, loan stocks or bonds are termed 'debentures' in the UK or 'mortgage bonds' in the US. The advantage of debentures to the issuer is they leave specific assets burden free, and thereby leave them open for subsequent financing. Debentures are generally freely transferable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit. Types There are two types of debentures: 1. Convertible Debentures, which can be converted into equity shares of the issuing company after a predetermined period of time. In finance, a convertible note (or, if it has a maturity of greater than 10 years, a "convertible debenture") is a type of bond that can be converted into shares of stock in the issuing company or cash of equal value, at some preannounced ratio. It is a hybrid security with debt- and equity-like features. Although it typically has a low coupon rate, the holder is compensated with the ability to convert the bond to common stock at an agreed upon price and thereby participate in further growth in the company's equity value. From the issuer's perspective, the key benefit of raising money by selling convertible bonds is a reduced cash interest payment. However, in exchange for the benefit of reduced interest payments, the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares. Non-Convertible Debentures, which cannot be converted into equity shares of the liable company. They usually carry higher interest rates than the convertible ones. Provisions regulating issue of Debentures: The power to issue debentures can be exercised on behalf of the company at a meeting of the Board of Directors {Section 292(1)(b) of the Companies Act}. A public company may, however, require the approval of shareholders to borrow money in excess of the aggregate of its paid up capital and free reserves.{Section 293 (1) (d)}. Consent of the shareholders would also be required for selling, leasing or disposing of the whole or substantially the whole of the undertaking of the company under section 293 (1) (a) Debentures have been defined under Section 2 (12) of the Act to include debenture stocks, bonds and any other securities of the company whether constituting a charge on the company's assets or not. The attributes of a debenture are: a. A movable property., b. Issued by the company in the form of a certificate of indebtedness., c. It generally specifies the date of redemption, repayment of principal and interest on specified dates. d. May or may not create a charge on the assets of the company. CASH FLOW STATEMENT: In financial accounting, a cash flow statement or statement of cash flows is a financial statement that shows how changes in balance sheet and income accounts affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements. Preparation Methods: Direct method: The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities. Indirect method: The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts for all cashbased transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions. Rules: The following rules are used to make adjustments for changes in current assets and liabilities, operating items not providing or using cash and nonoperating items. 1. Decrease in noncash current assets are added to net income 2. Increase in noncash current asset are subtracted from net income 3. Increase in current liabilities are added to net income 4. Decrease in current liabilities are subtracted from net income 5. Expenses with no cash outflows are added back to net income 6. Revenues with no cash inflows are subtracted from net income (depreciation expense is the only operating item that has no effect on cash flows in the period) 7. Nonoperating losses are added back to net income 8. Nonoperating gains are subtracted from net income.

RATIO ANALYSIS: In finance, a financial ratio or accounting ratio is a ratio of two selected numerical values taken from an enterprise's financial statements. There are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios. Ratios may be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%. FINANCIAL RATIO: Financial ratios are calculated from one or more pieces of information from a company's financial statements. For example, the "gross margin" is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms. In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company's situation and the trends that are developing. Types: Meaning, Objective and Method of Calculation: -

a.

DEBT-EQUITY RATIO: Debt equity ratio shows the relationship between long-term debts and shareholders funds. It is also known as ExternalInternal equity ratio. -- Debt Equity Ratio = Debt/Equity Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc. Equity (Shareholders Funds) = Share Capital (Equity + Preference) + Reserves and Surplus Fictitious Assets Objective and Significance: This ratio is a measure of owners stock in the business. Proprietors are always keen to have more funds from borrowings because: (i) Their stake in the business is reduced and subsequently their risk too (ii) Interest on loans or borrowings is a deductible expenditure while computing taxable profits. Dividend on shares is not so allowed by Income Tax Authorities. The normally acceptable debt-equity ratio is 2:1.

b.

DEBT TO TOTAL FUNDS RATIO: This ratio gives same indication as the debt-equity ratio as this is a variation of debt-equity ratio. This ratio is also known as solvency ratio. This is a ratio between long-term debt and total long-term funds. Debt to Total Funds Ratio = Debt/Total Funds Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc. Total Funds = Equity + Debt = Capital Employed Equity (Shareholders Funds) = Share Capital (Equity + Preference) + Reserves and Surplus Fictitious Assets Objective and Significance: - Debt to Total Funds Ratios shows the proportion of long-term funds, which have been raised by way of loans. This ratio measures the long-term financial position and soundness of long-term financial policies. In India debt to total funds ratio of 2:3 or 0.67 is considered satisfactory. A higher proportion is not considered good and treated an indicator of risky long-term financial position of the business. It indicates that the business depends too much upon outsiders loans.

c.

FIXED ASSETS RATIO: Fixed Assets Ratio establishes the relationship of Fixed Assets to Long-term Funds. Fixed Assets Ratio = Long-term Funds/Net Fixed Assets Where Long-term Funds = Share Capital (Equity + Preference) + Reserves and Surplus + Long- term Loans Fictitious Assets Net Fixed Assets means Fixed Assets at cost less depreciation. It will also include trade investments. Objective and Significance: This ratio indicates as to what extent fixed assets are financed out of long-term funds. It is well established that fixed assets should be financed only out of long-term funds. This ratio workout the proportion of investment of funds from the point of view of long-term financial soundness. This ratio should be equal to 1. If the ratio is less than 1, it means the firm has adopted the impudent policy of using short-term funds for acquiring fixed assets. On the other hand, a very high ratio would indicate that long-term funds are being used for short-term purposes, i.e. for financing working capital.

d.

PROPRIETARY RATIO: Proprietary Ratio establishes the relationship between proprietors funds and total tangible assets. This ratio is also termed as Net Worth to Total Assets or Equity-Assets Ratio. Proprietary Ratio = Proprietors Funds/Total Assets Where Proprietors Funds = Shareholders Funds = Share Capital (Equity + Preference) + Reserves and Surplus Fictitious Assets Total Assets include only Fixed Assets and Current Assets. Any intangible assets without any market value and fictitious assets are not included. Objective and Significance: This ratio indicates the general financial position of the business concern. This ratio has a particular importance for the creditors who can ascertain the proportion of shareholders funds in the total assets of the business. Higher the ratio, greater the satisfaction for creditors of all types.

e.

INTEREST COVERAGE RATIO: Interest Coverage Ratio is a ratio between net profit before interest and tax and interest on long-term loans. This ratio is also termed as Debt Service Ratio. Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on Long-term Loans Objective and Significance: This ratio expresses the satisfaction to the lenders of the concern whether the business will be able to earn sufficient profits to pay interest on long-term loans. This ratio indicates that how many times the profit covers the interest. It measures the margin of safety for the lenders. The higher the number, more secure the lender is in respect of periodical interest.

MANAGEMENT ACCOUNTING: According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its Resource (economics)resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology). Aims: Formulating strategy|strategies, Planning and constructing business activities, Helps in making decision, Optimal use of Resource (economics), Supporting financial reports preparation, Safeguarding asset Role: Consistent with other roles in today's corporation, management accountants have a dual reporting relationship. As a strategic partner and provider of decision based financial and operational information, management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation's finance organization. The activities management accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team. Examples of tasks where accountability may be more meaningful to the business management team vs. the corporate finance department are the development of new product costing, operations research, business driver metrics, sales management scorecarding, and client profitability analysis. Conversely, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation. Scope: (i) Financial accounting – Management accounting is mainly concerned with the rearrangement of the information provided by financial accounting, hence management (ii) Cost accounting – Standard costing, marginal costing, opportunity cost analysis, differential costing and other cost techniques play a useful role in operation and control of the business undertaking. (iii) Revaluation accounting – This is concerned with ensuring that capital is maintained intact in real terms and profit is calculated with this fact in mind. (iv) Inventory control – It includes control over inventory from the time it is acquired till its final disposal. (v) Statistical methods – Graphs, Charts, Pictorial presentation, Index numbers and other statistical methods make the information more impressive and intelligible. (vi) Budgetary control – This includes framing of budgets comparison of actual performance with the budgeted performance, computation of variances, finding of their causes etc. Limitations: 1. It is based on the information that is derived from financial and cost accounting and management accounting depends upon the accuracy of that information and hence it is dependent on it. 2. Since management accounting requires knowledge of subjects like economics, statistics, technology etc… and hence management accountant needs to have full information on all these subjects which is very difficult in practice and hence in this age of specialization it is very difficult to have such type of person who can handle management accountancy with expertise. 3. It is subjective because of lack of certain rules and hence it is more dependent on the person who is handling the management accounting rather than on anything else. 4. It is very costly and hence few organizations can adopt it which limits its use Utility: Planning, Controlling, Coordinating, Organizing, Motivating, Communicating. COST SHEET: All the elements, cost of a product, job or a process, can be put in the form of a statement which is technically called as a Cost Sheet or a Cost Statement. According to CIMA, London cost sheet is a document which provides for the assembly of the estimated detailed cost in respect of a cost centre or a cost unit. It analysis and classified in a tabular form the expenses on different items for a particular period. Additional columns may also be provided to show the cost per unit pertaining to each item of expenditure and the total per unit cost. Variations of stock are also recorded and proper adjustments made to arrive at the correct figures of raw material consumed and the cost of goods sold. Types: Historical: Such a cost sheet is prepared periodically after the costs have been incurred. The period may be a year, half-year, a quarter or a month. Actual costs are complied and presented through such a cost statement. Estimated: Such a cost sheet is prepared before the actual commencement of production. The estimating process is repeated at regular intervals. Estimated cost sheets may be prepared on a yearly, half-yearly, quarterly or monthly basis. Importance: Ascertaining of cost, Controlling costs, Fixation of selling price, Submitting of tenders.

COST In accounting, costs are the monetary value of expenditures for supplies, services, labour, products, equipment and other items purchased for use by a business or other accounting entity. It is the amount denoted on invoices as the price and recorded in bookkeeping records as an expense or asset cost basis. Opportunity cost, also referred to as economic cost is the value of the best alternative that was not chosen in order to pursue the current endeavour—i.e., what could have been accomplished with the resources expended in the undertaking. It represents opportunities forgone. Elements: 1. Material: The substance from which the product is made in known ad material. It may be in raw, semi-manufactured or a manufactured state. It can be direct as well as indirect. (a) Direct Material: All material becomes an integral part of the finished product and which can be conveniently assigned to specific physical units is termed as “Direct Material”. Following are some examples of direct material: (i) All material or components specifically purchased, produced or requisitioned from stores. (ii) Primary packing material (iii) Purchased or partly produced components. (b) Indirect material: All material which is used for purpose ancillary to the business and which cannot be conveniently assigned to specific physical units is termed as “Indirect Material”. Consumable stores, oil and waste, printing and stationary material etc are a few examples. Indirect material may be used in the factory, the office or the selling and distribution divisions. 2. Labour: For conversion of materials into finished goods, human effort is needed, such human effort is called labour. Labour can be direct as well as indirect. (a) Direct: Labour which takes an active and direct part in the production of a particular commodity is called direct labour. Direct labour costs are, therefore, specifically and conveniently traceable to specific products. (b) Indirect: Labour employed for the purpose of carrying out tasks incidental to goods, or services provided, is indirect labour. Such labour does not alter the construction, composition or condition of the product. 3. Expenses: Any other cost besides material and labour is termed as expense. Expenses may be direct or indirect. (a) Direct: These are expenses which can be directly, conveniently and wholly allocated to specific cost centres or cost units. These are also called Chargeable Expenses. (b) Indirect: These are expenses which cannot be directly, conveniently and wholly allocated to cost centres or cost units. CLASSIFICATION: Fixed Cost: In management accounting, fixed costs are defined as expenses that do not change in proportion to the activity of a business, within the relevant period or scale of production. For example, a retailer must pay rent and utility bills irrespective of sales. Along with variable costs, fixed costs make up one of the two components of total cost. In the most simple production function, total cost is equal to fixed costs plus variable costs. Variable Cost: Variable costs are expenses that change in proportion to the activity of a business. In other words, variable cost is the sum of marginal costs. It can also be considered normal costs. Along with fixed costs, variable costs make up the two components of total cost. Direct Costs, however, are costs that can be associated with a particular cost object. Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs. Semi-Variable Cost: Semi variable cost is an expense which contains both a fixed cost component and a variable cost component. The fixed cost element shall be a part of the cost that needs to be paid irrespective of the level of activity achieved by the entity. On the other hand the variable component of the cost is payable proportionate to the level of activity. It shows similarities to telephone bills. One must pay line rental and on top of that a price that depends on how heavy one is using the service. So it changes with output. Another example is satellite television. A price for the box must be paid monthly and to get additional movies, more money has to be given. Product Cost: Cost which become part of the cost of the product rather than an expense of the period in which they are incurred are called as ‘Product Costs’. They are included in inventory values. In financial statements such costs are treated as assets until the goods they are assigned to are sold. They become an expense at that time. These costs may be fixed as well as variables, e.g., cost of raw materials and direct wages, depreciation on plan and equipment, etc. Period Cost: Cost which are not associated with production are called ‘Period Cost’. They are treated as an expense of the period in which they are incurred. They may also be fixed as well as variable. Such costs include general administration costs, salesman salaries and commission, depreciation on office facilities, etc. They are charged against the revenue of the relevant period. Direct Cost: Direct Costs, however, are costs that can be associated with a particular cost object. Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs. Variable costs are sometimes called unit-level costs as they vary with the number of units produced. Indirect Cost: which are not directly chargeable to production. Sunk Cost: The sunk cost is distinct from the economic loss. For example, when a car is purchased, it can subsequently be resold; however, it will probably not be resold for the original purchase price. The economic loss is the difference (including transaction costs). The sum originally paid should not affect any rational future decision-making about the car, regardless of the resale value: if the owner can derive more value from selling the car than not selling it, it should be sold, regardless of the price paid. In this sense, the sunk cost is not a precise quantity, but an economic term for a sum paid, in the past, which should no longer be relevant; it may be used inconsistently in quantitative terms as the original cost or the expected economic loss. It may also be used as shorthand for an error in analysis due to the sunk cost fallacy, non-rational decision-making or, most simply, as irrelevant data.

Methods: the various methods of costing available are as below: • Job Costing - This is done, as the name suggests, on job works which may differ from case to case basis. By giving different job numbers and debiting the costs on the jobs, cost of each job work can be ascertained. • Batch Costing - This is similar to job costing but pertains to batches. • Contract or Terminal Costing - This is done for large contracts. Such businesses need not maintain costs separately as financial accounting will indicate the costs and expenses. In such contracting firms, the cost sheets are maintained for individual contracts. In the absence of expense budgets, inefficiencies are often hidden in such cost sheets. • Single or Output Costing - This is done when the end product is single like a colliery or a power station. Cost sheets are maintained. • Process Costing - This is useful when a product passes through various processes, yielding different by products of commercial value. This is useful in industries like refineries. • Operation Costing - This is followed by mechanical engineering industries which make products or parts. Each manufacturing operation cost is taken into account. There is no difference between this and process costing. • Operating Costing - This method is followed when the company does not have a specific product as output like the service industries. • Departmental Costing - When an end product is ultimately manufactured by different departments this method can be useful. • Multiple Costing - This is useful when a product is manufactured in an assembly line like an automobile. It is important to choose the most appropriate method of costing for your business or industry. Most businesses do not like to engage cost accountants and leave it to financial accountants to take care of this job. It is not recommended. There are many free lance cost accountants available and they can be engaged on need basis.