CASH FLOW STATEMENT.
. The cash flow statement is similar to the income statement, except that it dispenses with some of the abstract items found on the income statement (such as depreciation) and focuses on actual cash. Most of the information found on the cash flow statement is contained in either the income statement or the balance sheet, but here it is organized in such a way that it is difficult for companies to use accounting tricks to obscure the facts. The cash flow statement is broken down into three parts:
· Cash Flows from Operating Activities : Here you'll find how much money the company received from its actual business operations. This does not include cash received from other sources, such as investments. To calculate the cash flow from operating activities, the company starts with net income (from the income statement), then adds back in any depreciation expenses, deferred taxes, accounts payable and accounts receivables, and one-time charges .
· Cash Flows from Investing Activities: This section shows how much money the company has received (or lost) from its investing activities. It includes money that the company has made (or lost) by investing its excess cash in different investments (stocks, bonds, etc), money the company has made (or lost) from buying or selling subsidiaries, and all the money the company has spent on its physical property, such as plants and equipment.
· Cash Flow from Financing Activities: This is where the company reports the money that it took in and paid out in order to finance its activities. In other words, it calculates how much money the company spent or received from its stocks and bonds. This includes any dividend payments that the company made to its shareholders, any money that it made by selling new shares of stock to the public, any money it spent buying back shares of its stock from the public, any money it borrowed, and any money it used to repay money it had previously borrowed.
· Operating cash flows information indicates the business' ability to
generate sufficient cash from its continuing operations
· Investing cash flows information indicates how the business plans to
expand
Information about financing cash flows illustrates how the business plans to finance its expansion/reward shareholders
IAS 2 INVENTORIES.
The objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.
Inventories shall be measured at the lower of cost and net realisable value.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula.
Net realizable value is :
Estimated selling price in the ordinary course of business
Less estimated cost of completion
Less estimated cost to sell
: Recording Inventory Movements Periodic v/s Perpetual System
To compute cost of sales in periodic system purchases are recorded in the purchase account. Opening balance of inventory is added to that amount and an inventory count is performed at year end. This inventory count gives an amount of closing inventory. This closing inventory is reduced from accumulated balance of opening inventory and purchases during the year to compute stock in trade. However, in periodic system, accountant does not have any idea about stock in trade so it is difficult, almost impossible to detect stock theft when using periodic system.
In perpetual system accountant updates the balance of closing inventory after every transaction involving inventory. It means after every purchase and sales accountant get to know about the inventory balance. So at year end, accountant will not only have accurate information about stock in trade but he will also be able to detect any theft. Closing balance in the books of account shows the closing inventory that should be there in the godowns of the company. Any difference between these amounts is obviously due to theft.
IAS-16 Property, Plant & Equipment
Objective:
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are:
- the timing of recognition of asset;
- the determination of their carrying amounts; and
- the depreciation charges to be recognized.
Scope
IAS-16 applied to all Property, Plant & Equipment until and unless any other standard requires or permits a different accounting treatment
Recognition:
The cost of an item or Property, Plant & Equipment shall be recognized as an asset if, and only if:
a) it is probable that future economic benefits associated with the item will flow to the entity; and
b) The cost of the item can be measured reliably.
Measurement at Recognition
An item of Property, Plant & Equipment that qualifies for recognition as an asset shall be measured at its cost
Costs that are not Costs of Property, Plant & Equipment:
- Costs of opening new facility;
- Costs of introducing new product or service;
- Costs of conducting business in new location or with new class of customer;
- Administration and other general overhead costs;
- Costs incurred in using or redeploying an item;
- Amounts related to certain incidental operations.
· Cost Model:
After recognition, property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.
Revaluation Model:
After recognition, property, plant and equipment can be measured at a revalued amount, its book value at the date of the revaluation less accumulated depreciation and accumulated impairment losses.
Depreciation
- Systematic allocation of cost to profit or loss over useful life.
- Depreciable amount determined after deducting residual value.
- Reviewed at least at each balance sheet date:
– Residual value.
– Useful life.
– Depreciation method
ADJUSTING ENTRIES.
Adjusting entries are made in your accounting journals at the end of an accounting period. Adjusting entries are made after a trial balance is prepared. The purpose of adjusting entries is to adjust revenues and expenses to the accounting period in which they actually occurred. After adjusting entries are made in the accounting journals, they are posted to the general ledger in the same way as any other accounting journal entry.
.
Types of Adjusting Entries
There are five types of adjusting entries:
1. Accrued revenues
2. Accrued expenses
3. Unearned revenues
4. Prepaid Expenses
5. Depreciation
Accrued Revenues
If you perform a service for a customer in one month, but don't bill the customer until the next month, you would make an adjusting entry showing the revenue in the month you performed the service. You would debit accounts receivable and credit service revenue.
Accrued Expenses
A good example of accrued expenses is wages paid to employees. When a business firm owes wages to employees at the end of an accounting period, they make an adjusting entry by debiting (increasing) wages expense and crediting (decreasing) wages payable.
Unearned Revenues
Unearned revenues refer to payments for goods to be delivered in the future or services to be performed. If you place an order for an item from a company on the Internet in February and that item does not arrive (and you don't pay for it) until March, the company from which you placed the order would record the cost of that item as unearned revenue.
Prepaid Expenses
Prepaid expenses is a very descriptive title. Prepaid expenses are assets that are paid for and gradually get used up during the accounting period. A common example of prepaid expenses is office supplies. A company buys and pays for office supplies. Gradually, during the accounting period, the office supplies are used up. As they are used up, they become an expense. During the month when the office supplies are used, an adjusting entry is made to debit office supply expense and credit prepaid office supplies.
Depreciation
Depreciation is the process of allocating the cost of an asset, such as a building or a piece of equipment, over the serviceable or economic life of the asset. Adjusting entries are a little different for depreciation. Business owners have to take accumulated depreciation into account. Accumulated depreciation is just what it says - the accumulated depreciation of a company's assets over the life of the company.
The accumulated depreciation account on the balance sheet is called a contra-asset account and it is used to record depreciation expense.
No comments:
Post a Comment