Professional Documents
Culture Documents
Executive
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SYLLABUS
UNIT I:
Financial Accounting: Meaning of double entry
accounting, Meaning, nature and importance
Accounting cycle, accounting equation. Journal, Ledger
and Trial Balance .Accounting concepts and
conventions, Financial statements- Profit & Loss
account & Balance sheet. Financial statement AnalysisComparative Analysis, Common size & Trend Analysis
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UNIT II
Financial Statement Analysis - Ratio analysis
Classification of ratios, Advantages & Disadvantages Fund flow statements advantages and disadvantagesMarginal costing Cost Volume Profit analysis Break
Even analysis BEP, P/V ratio, MS
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UNIT III:
Introduction to Financial Management Nature of
Financial management Objectives of financial
management -Financial Decisions- Organization of
Finance function Agency Problem
Working capital Concepts Types Determinants
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UNIT IV
Sources of capital -Cost of Capital Meaning and
Significance Components Cost of Equity, Cost of
Debt, Cost of Preferred capital, Cost of retained
earnings and weighted average cost of capital. Capital
budgeting meaning Different methods Payback, Net
Present Value, Internal rate of return, Profitability
index and average rate of return
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UNIT V
Financial ,Operating and Combined Leverages Meaning
of Capital Structure -Determinants of capital
structure .Dividend decision Dividend policy - Dividend
theories Walter and Gordon modelof dividend
Stability of dividend Share split Buyback of shares.
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REFERENCES
1. I.M.Pandey, Financial Management, Vikas publishing
house Ltd., 9th edition, 2007.
2. Prasanna Chandra, Financial Management Theory and
Practice, Tata McGraw Hill, 7th Edition, 2008.
3. Financial and Management accounting by Reddy and
Moorthy
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BIM
Executive
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UNIT 1
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ACCOUNTING:
Accounting is the process of collecting, recording,
classifying summarizing and interpreting financial data
for the needs of management.
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COST ACCOUNTING
COST SHEET
STANDARD COSTING
VARIANCE ANALYSIS
MANAGEMENT ACCOUNTING
- FINANCIAL STATEMENT ANALYSIS COMPARATIVE, COMMON SIZE, TREND ANALYSIS
CAPITAL BUDGETING
RATIO ANALYSIS
FUND FLOW STATEMENT
MARGINAL COSTING
BREAK EVEN ANALYSIS
P/V RATIO
MARGIN OF SAFETY
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Financial accounting
The main purpose is to ascertain the profit or loss and
to indicate the financial position of the company.
The two important statements prepared in financial
accounting are Profit & loss accounts and Balance
sheet.
Profit & loss accounts to know the profitability of the
company
Balance sheet to know the financial position of the
company on a particular date.
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Functions/advantages/need/importance/purpose/objective
s/uses of financial accounting
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Cost accounting
The process of accounting for cost from the point at
which expenditure is incurred or committed to the
company of its ultimate relationship with cost centres
and cost units.
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Functions/Advantages/need/importance/purpose/objectiv
es/uses of cost accounting
Ascertaining cost
Fixation of selling price
Cost control
Cost reduction
Evaluation of performance
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Management accounting
Management accounting is the presentation of
accounting information in such a way as to assist
management in the creation of policy and in the day to
day operations of the company.
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Functions/Advantages/need/importance/purpose/objectiv
es/uses of Management accounting
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BIM
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Vels University
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BIM
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Vels University
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ACCOUNTING CYCLE
JOURNAL
LEDGER
-RECORDING
-CLASSIFYING
TRIAL BALANCE
-SUMMARISING
FINAL ACCOUNTS
- INTERPRETING
TRADING ACCOUNT
PROFIT & LOSS ACCOUNT
BALANCE SHEET
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FINANCIAL
STATEMENTS
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ACCOUNTING CYCLE
JOURNAL:
Journal is a daily record of business transactions.
It is also called as day book
The process of recording transactions in the journal called
Journalizing
The entries made in journal called journal entries
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ACCOUNTING CYCLE
FORMAT OF JOURNAL
S.No
(Rs.)
Vels University
Date
Particulars
L.F
Debit(Rs.)
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Credit
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ACCOUNTING CYCLE
ADVANTAGES OF JOURNAL:
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ACCOUNTING CYCLE
DISADVANTAGES OR LIMITATIONS OF JOURNAL:
It will be too long if all the transactions are recorded
Difficult to ascertain the balance of each account
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ACCOUNTING CYCLE
LEDGER:
Ledger provides a summary of similar transactions at one
place.
It is a summary statement of complete transactions relating to
an account.
Ledger is considered as main book of accounts
It is considered to be the principal book of accounts which
helps us in attaining the main objective of accounting.
It provides vital information like
Total sales value periodically
Total purchases periodically
Amount due from individual customers
Amount due to individual suppliers
Amount spent on specific items of expenditure etc
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ACCOUNTING CYCLE...
DIFFERENCE BETWEEN JOURNAL AND LEDGER
JOURNAL
LEDGER
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ACCOUNTING CYCLE...
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Journal is the book of prime (first) entry, while Ledger is the book of final entry.
In other words, ledger contains analytical records, while journal contains chronological records.
Narration is required in a journal that is not the case in the ledger.
Transactions are recorded in the sequence of occurrence in the journal, whereas transactions are
classified and recorded in relevant accounts in the ledger.
Data can be classified based on transaction in the ledger, while the basis of classification of data are
accounts in the ledger.
A transaction is firstly recorded in the journal soon after the occurrence of it; it is only then transferred
to the ledger.
Final accounts cannot directly be prepared from journal, but ledgers form the basis for easy
preparation of final accounts.
Accuracy of journal cannot be tested, but accuracy of ledger can be tested to a certain extent using
trial balance.
Journal has two columns for debit and credit, whereas a ledger has two sides of an account one for
debit and the other for credit.
Journals are not balanced at the end of a period, but accounts in the ledger are balanced at the end of
a specific period.
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ACCOUNTING CYCLE..
TRIAL BALANCE:
A statement containing the balances of all ledger accounts, as
at any given date, arranged in the form of debit and credit
columns placed side by side and prepared with the object of
checking the arithmetical accuracy of ledger postings.
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ACCOUNTING CYCLE..
IMPORTANCE OR SIGNIFICANCE OF TRIAL BALNCE:
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ACCOUNTING CYCLE..
LIMITATIONS OF TRIAL BALANCE:
Trial Balance only confirms that the total of all debit balances
match the total of all credit balances.
Trial balance totals may agree in spite of errors. An example
would be an incorrect debit entry being offset by an equal
credit entry.
Likewise, a trial balance gives no proof that certain
transactions have not been recorded at all because in such
case, both debit and credit sides of a transaction would be
omitted causing the trial balance totals to still agree.
Types of accounting errors and their effect on trial balance are
more fully discussed in the section on Suspense Accounts.
If avoucheris completed omitted to be entered in a day book
then it will not affect the total of the trial balance.
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Accounting conventions
Convention of full disclosure
All information should be revealed
Convention of consistency
Rules, practices and concepts should be used
Convention of materiality
Only required and important items in financial items.
Unimportant should ne left out or merged.
Convention of conservatism
Playing safe. To have accounting alternative for transactions.
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BIM
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(Dr)
Credit: (Cr)
Benefit giving aspect
In Ledger, Trial balance and Profit & Loss account, the left
hand side is known as debit side and right side know as credit
side.
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NATURE OF ACCOUNT
PERSONAL ACCOUNT
EG: RAMU A/C, GANESH A/C, BANK A/C, RS & CO A/C ETC
REAL ACCOUNT
TANGIBLE ASSETS
EG: MACHINE, LAND, STOCK ETC
INTANGIBLE ASSETS
EG: GOODWILL, PATENTS ETC
NOMINAL ACCOUNT
EXPENSES
EG: SALARY A/C, RENT A/C
INCOME
EG: INTEREST RECEIVED
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NATURE OF
ACCOUNT
DEBIT (DR)
CREDIT (CR)
PERSONAL
A/C
THE
RECEIVER
THE GIVER
REAL A/C
WHAT
COMES IN
WHAT GOES
OUT
NOMINAL
A/C
EXPENSES
INCOME AND
AND LOSSES GAINS
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FINANCIAL STATEMENTS
PROFIT AND LOSS ACCOUNT
BALANCE SHEET
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Profit & loss account is prepared to ascertain the net profit or net loss of the company in an
accounting period
It is an account into which all gains and losses are collected in order to ascertain the excess of
gains over the losses or vice versa
The left side of the profit and loss account is the debit side (dr) where all the operating and
non operating expenses are mentioned.
The right side of the statement is called as credit side (Cr) where all the operating and non
operating income are mentioned
If income is more than the expenses, then company gets Net profit
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Sales
Interest, dividend received
Rent received
Commission, discount received etc
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Purchases
Wages
Salary, rent
Discount
Tax
Interest
Power
Electricity
Carriage inwards
Carriage outwards
Clearing charges
Packing charges
Dock dues
Coal, gas
Factory light
INCOME
Sales
Commission received
Rent received
Interest received
Dividend received
Discount received
Other income
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Dividend paid
Trade charges
Manufacturing expenses
Stationary
Insurance
Repair
Office expenses
Sundry expenses
Establishment expenses
Commission paid
Advertise expenses
Selling and distribution expenses
Audit expenses
Depreciation
Bad debts
Travelling expenses
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BALANCE SHEET
The balance sheet comprises of list of assets and
liabilities of the company on a given date
It presents the financial position of a concern.
It is called as statement of equality.
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LIABILITIES
CURRENT LIABILITIES
Creditors
Bills payable
Outstanding expenses
Tax payable
Dividend payable
Bank overdraft
LONG TERM LIABILITIES
EQUITY
Equity share capital
Preference share capital
Reserves & Surplus (Retained Earnings)
DEBT
Debentures
Bank loan
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ASSETS
CURRENT ASSETS
Cash in hand
Cash at bank
Debtors
Bills receivable
Stock
Prepaid expenses
Short term investments
FIXED ASSETS
Land & building
Plant & machinery
Furniture
Loose tools
Motor car
Long term investment
Goodwill
Patents & copyrights
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FIXED ASSETS
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FINANCIAL STATEMENT
Financial statements refer to formal and original
statements prepared by a business concern to disclose
its financial information
The two major financial statements are
Profit & loss account
Balance sheet
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Prospective investors use financial statements to perform financial analysis, which is a key component in making investment decisions.
A lending institution will examine the financial health of a person or organization and use the financial statement to decide whether or not to lend
funds.
Philanthropies may use financial statements of a non-profit as a component in determining where to donate funds.
Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid
by a company.
Vendors who extendcreditmay use financial statements to assess the creditworthiness of the business.
Managersrequire Financial Statements to manage the affairs of the company by assessing its financial performance and position and taking
important business decisions.
Shareholdersuse Financial Statements to assess the risk and return of their investment in the company and take investment decisions based on their
analysis.
Customersuse Financial Statements to assess whether a supplier has the resources to ensure the steady supply of goods in the future. This is
especially vital where a customer is dependant on a supplier for a specialized component.
Competitorscompare their performance with rival companies to learn and develop strategies to improve their competitiveness.
General Publicmay be interested in the effects of a company on the economy, environment and the local community.
Governmentsrequire Financial Statements to determine the correctness of tax declared in the tax returns. Government also keeps track of
economic progress through analysis of Financial Statements of businesses from different sectors of the economy.
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Simplicity:Financial statements should be simple so that concerned individuals can easily understand and interpret them properly. For this, the
statements must be simple and clear.
Right time:These must be prepared at the right time. Any delay in their presentation may decrease their usefulness.
Compliance with legal requirements:Financial statements must be prepared in the form and style as required by the Act. They must have subjectmatter as prescribed and must be presented as stated in the Act.
Adherence of accounting principles:The financial statements must be based on the Generally Accepted Accounting Principles (GAAP) so that they
may have universal acceptance.
Disclosure:The financial statements should disclose all the relevant and material facts. It should be transparent so that the users of accounting
information can draw neat conclusions.
Authentic:The information contained in the financial statements should be authentic supported by evidence.
Relevant to the purpose:Financial statements must be relevant to their purposes. Irrelevant and unnecessary informations should not be included
in these statements.
Complete and accurate informations:Financial statements should include the complete and accurate information about the progress of a business
and its future prospects. Informations should be based on facts. False and incomplete information results in wrong interpretation.
Comparability:Financial statements should be comparable. The comparison can be made between present and past as well as between one business
and the other. It increases the utility of the statements. This can be done when similar accounting principles are adopted for their presentation.
Facilitating the analysis:Decisions can be taken only by proper analysis of the financial statements. Thus, financial statements should be prepared
in such a way that it may facilitate the analysis. For this, the various items should be classified and grouped in a proper manner, so that data can be
obtained easily for analysis.
Systematic arrangement:The information contained in the financial statements should be arranged systematically so that they may be comparable.
Audited:The financial statements should have been presented to the uses after being audited by the competent chartered accountants.
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Based on traditions and conventions:Financial statements are prepared and based upon traditions and conventions which allow the usage of personal judgments.
Based on historical data:Financial statements are based on historical data while parties are more interested in knowing the present position and future prospects of
the business enterprise.
Scope of manipulations:Financial statements are sometimes prepared according to the needs of the situation or whims of the management. Management can
manipulate financial statements by under-valuation or over-valuation of inventory, under or over charging of depreciation etc.
Sometimes window dressing is resorted to in order to show better financial position of a concern than its real position. So financial statements are not free from bias.
Influenced by personal judgements:Financial statements are influenced by personal judgements of the account. On many issues more than one methods are
permitted. For example, method of depreciation, valuation of stock, valuation of goodwill etc. all depend upon the personal judgements of the policy-maker of the
enterprise.
Ignore qualitative aspects:Financial statements show only those facts which can be expressed in money terms. Qualitative aspects of the business units are omitted
from the books, because they cannot be expressed in money terms. Thus, cordial employer-employee relations, efficiency of management, firm?s ability to develop
new products, customer satisfaction, etc. have a vital role in the profitability of the firm, but here ignored and omitted because these are qualitative in nature.
Ignore inflationary effects:Changes in price level make data meaningless. Financial statements record transactions at historical costs. No account is taken of the
present value.
Ignore the interest of other parties:Financial statements are prepared with a view to take care of the interest of proprietors only and ignore the interests of all
other interested parties like creditors, investors, workers, stock exchanges, taxation authorities, economists, researchers, politicians, etc.
Financial statements are only interim reports:Financial statements are essentially interim reports. They cannot be final. The actual profit or loss of a business can
be determined only when the business is ultimately closed. The existence of contingent assets and liabilities, deferred revenue expenses make the statement less
accurate and more subjective.
Artificial view:Financial statements do not reveal a real and correct picture of the worth of assets and their loss of value. The reason is that they are shown on
historical cost. Thus, these statements provide artificial view. Market or replacement value and the effect of the changes in the price level are completely ignored.
Incapable:Financial statements are incapable of showing profitability, operational efficiency, financial soundness, etc. of the business.
These limitations of financial statements can be removed by efficient analysis and interpretation of the financial statements.
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BIM
Executive
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School of Management
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TREND ANALYSIS
Trend analysis is the analysis of the trend of the financialratiosof the company over the
years. It is an important tool of horizontal analysis. Under this analysis, ratios of different
items of the financial statements for various periods are calculated and the comparison is
made accordingly. The analysis over the prior years indicates the trend or direction. Trend
analysis is a useful tool to know whether the financial health of a business entity is
improving in the course of time or it is deteriorating.
RATIO ANALYSIS
Ratio analysis is the analysis of the interrelationship between two financial figures. The
most popular way to analyze the financial statements is computing ratios. It is an
important and widely used tool of analysis of financial statements. While developing a
meaningful relationship between the individual items or group of items of balance sheets
and income statements, it highlights the key performance indicators, such as,liquidity,
solvency and profitabilityof a business entity. The tool of ratio analysis performs in a way
that it makes the process of comprehension of financial statements simpler, at the same
time, it reveals a lot about the changes in the financial condition of a business entity.
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