FINAL PROJECT

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.

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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.

BANK RECONCILIATION STATEMENT:
                                    A Bank reconciliation is a process that explains the difference between the bank balance shown in an organisation's Bank statement, as supplied by the bank, and the corresponding amount shown in the organisation's accounting records at a particular point in time. 

RECORDING:

                                            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 causing difference in the two balances.

EXAMPLE:

                   We operate a bank account in which we deposit money and withdraw money from time to time. We maintain a record with ourselves of these deposits and withdrawals. One day we get our pass-book (statement issued by the bank) updated but are surprised to find that the balance shown by the pass book was different from what it should have been as per our records.

                                                                              Then it is obvious that we will compare the two sets of records and find out items which are recorded in one but not in the other. Similar situation may arise in case of a business concern which operates a bank account. These business concerns maintain record of all of their banking transactions in their bank column of the cash book.

DIFFERENCES BETWEEN BANK STATEMENT AND 

CASH BOOK BALANCES:

                                                                        On any particular date the bank balance shown by the bank column cash book and that shown by the pass book should be the same. But if there is difference between the two, the business concern will find out the reasons to reconcile the balance.

Following Points are considered;

• Compare transactions that appear on both Cash Book and Bank Statement
• Update Cash Book from details of transactions appearing on Bank Statement
• Balance the bank columns of the Cash Book to calculate the revised balance
• Enter correct date of the statement
• Enter the balance at bank as per the Cash Book
• Enter details of unpresented cheques
• Enter sub-total on reconciliation statement
• Enter details of bank lodgements
• Calculate balance as per Bank Statement

ACCOUNTING CYCLE.

accounting cycle is generally refers to as involving various steps for business transactions and these steps are performed repeatedly.these are also followed for the preparation of financial statements.

STEPS INCLUDED:

• journal entries 
• ledger accounts
• trial balance
• adjusting entries
• adjusted trial balance
• closing entries
• closing trial balance
• financial statements

1.JOURNAL.

       "analysing business transactions and recording them into journal entries form on day to day basis"

basic type of journal is known as general journal.we record business transactions on day to day basis on a double entry system in it.

2.LEDGER ACCOUNTS.

next step involves the posting of journal entries into ledger accounts. every journal entry has a ledger account. it has a debit or credit balance.which is transfered to trial balance.

3.TRIAL BALANCE.

it is defined as "a statement of all the debit and credit items,made to test their accuracy."

 trial balance contains the all debit and credit balances of ledger accounts. it is made under the instruction of IAS. an unadjusted trial balance is made before any adjustment is made in a ledger.

4.ADJUSTING ENTRIES.

  An accounting entry made at the end of accounting period to allocate items between accounting period."

these entries are made at end of accounting period to adjust the ledger accounts.the main purpose is to match the expenses and revenues whichnis required by matching principle of accounting.

5.ADJUSTED TRIAL BALANCE.

after adjusting entries and posting them to ledgers,adjusted trial balance is made.it contains all balances of ledgers after adjusting entries done. 

6.CLOSING ENTRIES.

some accounts are closed in order to make their balances zero at the end of accountind period.these accounts include:

revenues

expenses

income summary

dividend

7.CLOSING TRIAL BALANCE.

it is made after closing entries posted to ledgers. the purpose of it is to assure that the total of debit is equal to total of credit before the new accounting period start.

8.FINANCIAL STATEMENTS.

financial statements presents the picture of financial position and position over period of time.it is the true picture of accountind information. some of them are:

income statement 

balance sheet etc..