Financial Accounting

Cover
Contents
1. Business Organization and Accounting
	Risk Appetite and Structure of Business Firms
	Types of Business Entity
	Limited Liability Company—Most Talked About form of Business Organization
	Capital of a Firm—The Backbone
	Sources of Capital for a Company
	Non-Conventional Sources of Finance
	Publicly Traded Company and Fund-Raising Mechanism
	Corporate Democracy—Separation of Ownership and Management
	Return on Equity Shares
	Valuation of Firm
	Corporate Financial Reporting
	Structure and Components of Financial Statements
	Internal vs External Control in the Working of a Company
	Financial Statement Framework—Story of a Fisherman
	Key Terms
	Final Recap
	Review Questions
	Answers
2. Financial Accounting—Framework
	Art and Science of Managing Monetary Transactions
	Accrual System of Accounting
	Concept of Accounting Year and Accruals
	Accounting Concepts and Conventions—An Overview
	Computerized Accounting System
	Accounting Equation—Fundamental Accounting Identity
	Double-Entry System of Accounting
	Debit–Credit Rules—Rules for Maintaining Books of Accounts
	Posting to General Ledger Accounts
	Preparation of Trial Balance
	Elements of Financial Statements—Assets, Liabilities, Income and Expenses
	Financial Statements—Final Accounts
	Accounting Policy and Accounting Standards Concerning Financial Statements
	Capital Maintenance
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
3. Classifi cation of Assets and Liabilities
	Classifi cation of Assets and Liabilities
	Assets
	Classifi cation of Assets Under India GAAP
	Current Liabilities
	Non-Current Liabilities
	Accruals, Provision and Contingent Liabilities
	Classifi cation of Liabilities—Indian GAAP
	Measurement Principles
	Valuation Practice for Assets and Liabilities
	Capital Expenditure, Revenue Expenditure and Fictitious Assets
	Analysis of Monetary Transaction
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
4. The Accounting Cycle
	Books of Accounts
	Accounting Cycle
	General Principles of Accounting
	Segmentation of Journal—Subsidiary Books
	Bank Reconciliation Statement
	General Ledger
	Posting Rules
	Trial Balance—Mathematical Accuracy of Books of Accounts
	Closing Entries—Closing Ledger Accounts
	Opening Entries
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
5. Completion of Accounting Cycle
	Introduction
	Rectifi cation of Errors
	Accrual System and Adjustments
	Disposal of Assets
	Tax Expenses on Taxable Income vs on Accounting Income
	Closing Entries—Closing Ledger Accounts
	Preparation of Manufacturing Account, Trading Account and Profi t and Loss Account
	Preparation of Balance Sheet
	Opening Entries
	Comprehensive Income
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
6. Final Accounts of a Limited Liability Company
	Introduction
	Revenue Recognition—General Principles
	Measurement of Revenue
	Sale of Goods
	Consideration in the Form of Cash
	Collectibility of Revenue
	Service Revenue
	Franchise Fees
	Construction Contracts and Revenue Recognition
	Accounting for Government Grants—Accounting Standard (AS-12)
	Repayment/Refund of Grant
	Revenue Recognition and Indian Gaap
	Accounting for Employee Benefi ts—Accounting Standard (AS-15)
	Accounting for Borrowing Costs—Accounting Standard (AS-16)
	Recognition of Borrowing Cost and Indian GAAP
	Preparation of Company Final Accounts—Final Accounts of Limited Liability Company
	Final Accounts
	Divisible Profi ts
	Dividend—Procedure of Dividend Payment
	Interest Out of Capital—Interest on Capital
	Provisions vs Reserves—Revenue Reserves and Capital Reserves
	Corporate Dividend Tax
	Capitalization of Profi ts and Reserves—Issue of Bonus Shares
	Managerial Remuneration
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case 1
	Case 2
7. Financial Statement Analysis—Ratio Analysis
	Accounting Policies
	Features of Accounting Policies and Quality of Earning
	Earning Management
	Black Holes—Red Flags
	Assessing the Liquidity of the Firm—Liquidity Ratios
	Assessing Solvency—Solvency/Leverage Ratios
	Assessing Operating Management Effi ciency—Sales-Based Profi tability Ratio
	Measuring Overall Performance in Relation to Investment— Investment-Based Profi tability Ratios
	Indicator of Overall Financial Performance
	Capital Market-Related Ratio
	Assessing the Effi ciency in Using Resources—Turnover Ratio
	Stakeholders and Inferences from Calculated Ratios
	Common Size Statement—Intra-Firm Comparison
	Comparative Analysis Using Ratio
	Trend Analysis—Vertical Financial Performance Evaluation
	Precaution while Using Financial Ratios—Limitation of Ratio Analysis
	Distress Analysis—Discriminant Analysis
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case 1
	Case 2
8. Fund Flow Analysis
	Introduction
	Defi nition
	Conceptual Background
	Sources and Application of Funds
	Comprehensive Items—Whether These Lead to Flow of Funds or Not
	Mechanism for Preparing Fund Flow Statement
	Stakeholders and Fund Flow Statement
	Modus Operandi to Carry Out Interpretation from Fund Flow Statement
	Fund Flow Analysis of L&T Ltd.—A Case
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
9. Cash Flow Statement: Preparation and Analysis
	Cash Flow Statement
	Estimation of Cash Flow from Operating Activities
	Estimation of Cash Flow from Investing Activities
	Estimation of Cash Flow from Financing Activities
	Final Reporting of Cash Flow Statement
	Stakeholders and Cash Flow Statement
	Modus Operandi to Carry Out Interpretation from Cash Flow Statement
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
10. Inventory—Accounting and Reporting Issues
	Inventory
	Physical Verifi cation of Inventory
	Methods for the Cost Measurement of Inventory
	Inventory Valuation System
	Valuing Inventory From Accounting Perspective—Accounting Standard (AS-2)
	Inventory and Reporting in Final Accounts
	Misreporting for Inventory and Effect on Profi ts
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
11. Accounting for Capital Expenditure— Fixed Assets and Other Assets under Indian Accounting Standards
	Captial Expenditure—Different Types of Assets
	Property, Plant and Equipment—Features and Recognition
	Initial Recognition of Property, Plant and Equipment—Fixed Assets
	Discount, Rebate, Damages and Penalty Claimed
	Subsequent Expenditure on Property, Plant and Equipment—Fixed Assets
	Subsequent Measuremet of Property, Plant and Equipment—Fixed Assets
	Property Plant and Equipment—Fixed Assets and Indian GAAP
	Depreciation on Property, Plant and Equipment—Fixed Assets
	Depreciation on Property Plant and Equipment—Fixed Assets and Indian GAAP
	Retirement of Property, Plant and Equipment—Fixed Asset
	Disclosure—Property, Plant and Equipment (Fixed Assets)
	Intangible Assets—Meaning, Features and Identifi cation
	Intangible asset—Recognition and Initial Measurement
	Internally Generated Intangible Asset
	Intangible Asset—Subsequent Expenditure
	Intangible Asset—Subsequent Measurement (Measurement After Initial Recognition)
	Amortization
	Derecognition of Intangible Assets—Retirement and Disposal
	Intangible Assets—Disclosure And Indian GAAP
	Impairment of Assets—Concept, Measurement and Recognition
	Indicators of Impairment
	Cash-Generating Units (CGU) and Impairment Loss
	Calculation of Present Value
	Reversal of an Impairment Loss
	Current Assets
	Investments
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
12. Accounting for Liabilities and Accounting Standards
	What are Liabilities?
	Initial Recognition and Measurement of Financial Liabilities
	Subsequent Measurement of Financial Liabilities
	Derecognition of Financial Liabilities
	Provisions—Introduction, Initial Recognition and Measurement
	Provisions—Subsequent Measurement and Use
	Special Issues About Provisions
	Restructuring
	Disclosure
	Contingent Liability
	Post-Retirement Employee Benefi ts—Measurement of Liability—Accounting Standard AS-15
	Recognition and Measurement of Liability—Post-Retirement Employee Benefi ts
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
13. Financial Engineering, Including Foreign Exchange Transaction and Accounting Issues
	Introduction
	Financial Instruments—Finanical Assets, Financial Liabilities and Equity: As- 30, As-31 And IAS-32
	Derivative Financial Instruments
	Financial Instruments—Presentation
	Recognition and Measurement of Financial Instruments—IAS-39
	Financial Instruments—Disclosure—Indian GAAP (AS-32) and IAS-32
	Derecognition of Financal Instruments—AS-30 and IAS-39
	Continuing Involvement in Transferred Asset and Accounting Effect
	Accounting For Non-Cash Collateral in A Transfer of Financial Asset
	Derecognition of Financial Liabilities—AS-30 and IAS-39
	Reclassifi cation of Financial Asset and Financial Liability
	Gains and Losses From Financial Instruments
	Impairment and Uncollectibility of Financial Assets
	Accouting for Futures Contracts/Transactions
	Accounting for Option Contracts
	Securitization
	Accounting for Hedging
	Accounting for Option Contracts, Futures Contracts and Hedging—Indian GAAP
	Financial Instruments and Foreign Exchange Rates
	Changes in Foreign Exchange Rates
	Recognition of Exchange Differences
	Forward Exchange Contracts
	Use of a Presentation Currecny Other Than The Functional Currency
	Consolidation of A Foreign Operation
	Tax Effects of Exchange Differences
	Forward Exchange Disclosure—Foreign Currency Transaction
	Effect of Changes in Foreign Exchange Rates—Indian GAAP vs IAS
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
14. Accounts of Limited Liability Companies: Shares and Debentures
	Introduction
	Capital of a Company
	Layers of Capital
	Accounting for the Issue of Shares
	Forfeiture and Reissue of Shares
	Presentation of Items in the Balance Sheet
	Alteration of Share Capital—Share Split and Consolidation
	Buy Back of Securities
	Bonus Shares
	Rights Issue
	Issue of Preference Shares
	Redemption of Preference Shares
	Issue of Debentures
	Redemption of Debenture
	Redemption by Creating Debenture Sinking Fund—Debentrure Redemption Reserve Fund
	SEBI Guidelines Regarding Issue of Debentures
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
15. Accounting for Merger, Amalgamation and Acquisitions
	Introduction
	Accounting for Business Combination
	Identifi cation of Acquirer
	Fundamental Accounting Principles
	Reverse Acquisition
	Demerger or Spin-off
	Accounting for Business Combination—Amalgamation and Indian GAAP (AS-14)
	Purchase Consideration
	Methods of Accounting for Amalgamation
	Treatment of Balance of Profi t and Loss Account on Amalgamation
	Treatment of Reserves
	Slump Sale Under Indian Income Tax Act
	Amalgamation and Demerger Under the Income Tax Act, 1961
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
16. Consolidated Financial Statement
	Consolidated Financial Statements
	Insignifi cant Infl uence vs Signifi cant Infl uence
	Signifi cant Infl uence vs Control
	Accounting For Investment in Associates
	Accounting for Joint Venture
	Consolidated Financial Statements
	Consolidation Procedure
	Disclosure in Consolidated Financial Statements
	Consolidated Financial Statements—Indian GAAP
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
17. Accounting Standards and IFRS
	International Accounting Standards
	Accounting Standard Setting in India
	International Financial Reporting Standards (IFRS)
	IFRS Implementation—Convergence between GAAP and IFRS
	Indian GAAP vs IFRS
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
18. Accounting for Leases
	Introduction
	Classifi cation of Lease
	Lease-Related Terms—IAS-17
	Finance Lease in the Financial Statements of Lessee
	Operating Lease in the Financial Statements of Lessee
	Finance Lease in the Financial Statements of Lessor
	Operating Lease in the Financial Statements of Lessor
	Accounting of Lease for Manufacturer or Dealer–Lessor
	Sale and Leaseback Transactions
	Comparison of IAS-17 and AS-19
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
19. Reporting Financial Performance and Corporate Governance
	Introduction
	Diclosure in Corporate Financial Reports—Annual Report
	Disclosure Quality
	Segment Reporting
	Identifying Reportable Segments
	Related Party Disclosure
	Discontinuing Operations
	Earning Per Share (EPS)
	Global Reporting Initiatives
	Corporate Responsibility—Corporate Social Responsibility
	Key Terms
	Final Recap
	Review Questions
	Answers
	Case
Appendix I: Window Dressing—Creative Accounting and Forensic Accounting
Appendix II: Case Studies
Appendix III: Recent Changes in Regulations ( Amended schedule VI to companies Act 1956 and Ind-AS)
Model Question Paper-I
Model Question Paper-II
Index