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Accounting for Managers Programs Offered Post Graduate Programmes (PG) n e i Master of Business Administration Accounting for l Master of Computer Applications Master of Commerce (Financial Management / Financial Technology) Master of Arts (Journalism and Mass Communication) Master of Arts (Economics) Master of Arts (Public Policy and Governance) Managers On y Master of Social Work Master of Arts (English) it Master of Science (Information Technology) (ODL) Master of Science (Environmental Science) (ODL) Diploma Programmes Post Graduate Diploma (Management) r s e Post Graduate Diploma (Logistics) Post Graduate Diploma (Machine Learning and Artificial Intelligence) Post Graduate Diploma (Data Science) i v Undergraduate Programmes (UG) Bachelor of Business Administration Bachelor of Computer Applications Bachelor of Commerce U n y Bachelor of Arts (Journalism and Mass Communication) t Bachelor of Arts (General / Political Science / Economics / i English / Sociology) Bachelor of Social Work Bachelor of Science (Information Technology) (ODL) A m c ) Product code ( AMITY Amity Helpline: (Toll free) 18001023434 For Student Support: +91 - 8826334455 Support Email id: [email protected] | https://amityonline.com (c )A m ity U ni ve rs Accounting for Managers ity O nl in e  e © Amity University Press in All Rights Reserved No parts of this publication may be reproduced, stored in a retrieval system or transmitted nl in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. O SLM & Learning Resources Committee ity Chairman : Prof. Abhinash Kumar Members : Dr. Ranjit Varma Dr. Divya Bansal Dr. Arun Som rs Dr. Maitree ve Dr. Sunil Kumar Dr. Reema Sharma ni Dr. Winnie Sharma Member Secretary : Ms. Rita Naskar U ity m )A (c Published by Amity University Press for exclusive use of Amity Directorate of Distance and Online Education, Amity University, Noida-201313  Contents Page No. e Module - I: Introduction to Financial Accounting 01 in 1.1 Financial Accounting Introduction 1.1.1 Financial Accounting: Essentials nl 1.1.2 Business Accounting Functions 1.1.3 Accounting Categories O 1.1.4 Fundamental Accounting Terms 1.1.5 Overview of Capital Structure 1.1.6 Capital vs. Revenue: Financial Transactions ity 1.1.7 Accounting Principles: Case Study 1 1.1.8 Accounting Principles: Case Study 2 1.1.9 Comparative Analysis: Indian, US, and International Standards 1.1.10 Accounting Cycle 1.2 Recording of Transaction 1.2.1 Accounting Equation: Part 1 rs ve 1.2.2 Accounting Equation: Part 2 1.2.3 Transactions and Rules of Debit/Credit 1.2.4 Journal Entry: Part 1 ni 1.2.5 Journal Entry: Part 2 1.2.6 Ledger Posting with Example U 1.2.7 Subsidiary Books 1.2.8 Trial Balance: Meaning, Benefit and Format 1.2.9 Preparation of Trial Balance ity Module - II: Preparation of Financial Statements 40 2.1 Financial Statements 2.1.1 Financial Statements Essentials m 2.1.2 Key Elements of Financial Statements 2.2 Income Statement )A 2.2.1 ncome Statement: Revenue 2.2.2 Income Statement: Goods Sold 2.2.3 Income Statement: Operating Expenses (c 2.2.4 Income Statement: PAT 2.2.5 Dividends and EPS 2.2.6 Case Study on Income Statement: ITC  2.3 Balance Sheet 2.3.1 Balance Sheet: Liabilities e 2.3.2 Balance Sheet: Assets 2.3.3 Balance Sheet: Working Capital in 2.3.4 Equity Changes 2.3.5 Balance Sheet as per Indian Companies Act 2013 Revised Schedule III - Case Study ITC nl 2.4 Dericiation 2.4.1 Introduction to Depreciation 2.4.2 Straight Line Method in Depreciation O 2.4.3 Annuity and Units of Production Method in Depreciation 2.4.4 Sinking Fund and Depletion Method in Depreciation ity 2.4.5 Change in Rate and Useful Life in Depreciation Module - III: Analysis of Financial Statements 76 3.1 Introduction 3.1.1 Overview of Financial Statement Analysis 3.1.2 Trend Analysis rs ve 3.2 Comparative Analysis 3.2.1 Comparative Balance Sheet: Horizontal Analysis 3.2.2 Comparative Income Statement: Horizontal Analysis ni 3.2.3 Comparative Balance Sheet Vertical Analysis 3.2.4 Comparative Income Statement: Vertical Analysis U 3.2.5 Inter Firm Comparison: Case Study/Numerical 3.3 Ratio Analysis 3.3.1 Ratio Analysis: Profitability Ratios ity 3.3.2 Ratio Analysis: Liquidity Ratios 3.3.3 Ratio Analysis: Solvency Ratio 3.3.4 Ratio Analysis: Turnover Ratios m 3.3.5 Ratio Analysis: Earning Ratios 3.3.6 DuPont Decomposition Analysis )A 3.4 Cash Flow Statement 3.4.1 Cash Flow Statement: Overview and Benefits 3.4.2 Cash Flow from Operations: Direct Method 3.4.3 Cash Flow from Operations: Indirect Method (c 3.4.4 Cash Flow Statement: Numerical 1  3.4.5 Cash Flow Statement: Numerical 2 Module - IV: Introduction to Cost and Management Accounting e 115 4.1 Introduction in 4.1.1 Introduction to Cost and Management Accounting 4.1.2 Overview of Cost Classification nl 4.2 Cost Sheet 4.2.1 Cost Sheet Basics O 4.2.2 Cost Sheet Numerical Example 4.3 Marginal Costing 4.3.1 Marginal Costing Overview ity 4.3.2 CVP Analysis: Fundamentals 4.3.3 Break-Even Analysis in CVP 4.3.4 Margin of Safety in CVP 4.3.5 Decision Making with CVP Analysis 4.4 Inventory 4.4.1 Inventory Valuation Basics rs ve 4.4.2 Inventory Methods: LIFO and Average 4.5 Standard Costing 4.5.1 Introduction of Standard Costing ni 4.5.2 Material Variance Analysis 4.5.3 Labour Variance Analysis U 4.6 Budget 4.6.1 Budgeting Fundamentals 4.6.2 Overview of Budget Types ity 4.6.3 Advanced Budget Types 4.7 Numericals and Case study 4.7.1 CVP Analysis Calculations m 4.7.2 Variance Analysis Calculations 4.7.3 Cash Budget Numericals )A Module - V: Latest Development Trends and Practices 153 5.1 Financial software for Analysis (c 5.1.1 Financial Modelling Overview 5.1.2 Sales and Receivables Budgeting 5.1.3 COGS and Inventory Budgeting  5.1.4 Salaries and Operating Expenses Budget 5.1.5 Cash Budget e 5.1.6 Income Statement 5.1.7 Balance Sheet in 5.1.8 Cash Flow Statement 5.1.9 Financial Ratios nl 5.1.10 CVP Analysis 5.1.11 Use of Prowess in Finance 5.1.12 Human Resource Accounting O 5.1.13 Inflation Accounting 5.1.14 IFRS : Introduction ity 5.1.15 IFRS Framework rs ve ni U ity m )A (c Accounting for Managers 1 Module - I: Introduction to Financial Accounting Notes Learning Objectives e At the end of this module, you will be able to: in Analyse Financial Accounting Essentials and Business Accounting Functions Differentiate Accounting Categories nl Define Fundamental Accounting Terms Evaluate Capital Structure Illustrate the Accounting Cycle employing O Apply Transactions and Rules of Debit/Credit Develop Journal Entries Implement Ledger Posting with Example ity Utilise Subsidiary Books employing Introduction Grocery or medical shop and wondered about how the business keeps track of rs its transactions over time, such as throughout a year. You might have questioned why maintaining such records is necessary, how it benefits the business, and whether it’s a mandatory practice. ve Now, consider the operations of a business organisation. These entities offer a wide range of goods, from simple items like safety pins to complex products like fighter aircraft. Service-oriented businesses provide diverse services such as transportation, hospitality, and software development. To make informed decisions, businesses rely on accounting ni information. This information is also crucial for government agencies, regulatory bodies, analysts, and individuals at various levels and times. U ity m )A Source: https://www.edubridgeindia.com/blog/wp-content/uploads/2023/07/How-does-Financial- (c Accounting-work.jpg Accounting, as one of the oldest and most structured management information systems, has evolved to meet the social and economic needs of society. It involves identifying, measuring, and communicating economic information about an organisation to Amity University Online 2 Accounting for Managers its users, aiding in rational decision-making. The accounting system serves as a means to provide relevant and reliable financial information to all interested parties. Notes Accounting is the science and art of accurately recording in books all business e transactions that involve the transfer of money or its equivalent. It can also be described as the art of systematically recording commercial transactions, enabling a person to determine in the correct outcome of their business activities at the end of a specific period. Additionally, it allows individuals to understand the true state of their business and assets through an examination of their books. nl In today’s social and economic landscape, everyone is required to maintain some form of accounts. In the realm of social and economic activities, individuals and institutions are accountable for their economic activities, wealth, income, and expenditures to various O entities. Various types of transactions take place in business. Without maintaining proper accounts, it is impossible to ascertain the profit or loss of a business or its financial position ity on any given date. This module explores the meaning, scope, and objectives of financial accounting, highlighting its importance and practical applications in daily life. 1.1 Financial Accounting Introduction rs 1.1.1 Financial Accounting: Meaning and Functions Business is an economic activity conducted to earn profits and increase the wealth ve of the owner. Business rules are based on general principles of trade social values and the national or international boundaries legal framework. While these variables the vary for different companies and regions, the basic goal is to add value to the product or service in order to satisfy customer demand. ni Through reporting all transactions related to the development of monetary inflows of sales revenue and monetary outflows of operating expenses, a business accounting system ensures an accountability. The accounting system provides the financial information needed U to assess the efficacy of both current and past activities. The accounting system also provides the data required to file reports that show the status of a business entity’s borrower liabilities, ownership equities and asset capital. ity Accounting serves as the language of business, detailing the transactions that occur within a specific timeframe. It encompasses three key functions: recording, classifying, and summarising. Often referred to as the “language of business,” accounting records all monetary transactions that take place within a defined period. The accounts of a business offer m valuable information to its stakeholders. 1.1.2 Business Accounting Functions )A Accounting has a very broad scope and area of operation. Its use is not limited only to the business world but is distributed throughout all facets of society and all occupations. Nowadays, financial transactions must take place in any social institution or professional practice, whether that is income generating or not. Therefore, the need to record and (c summarise these transactions as they occur emerges and there is a need to figure out the net result of the same after the expiry of a certain fixed period. To keep systematic records - Accounting is performed to keep a systematic record of financial transactions. The primary objective of accounting is to help collect financial Amity University Online Accounting for Managers 3 data and to record it systematically for the derivation of correct and useful results of financial statements. To ascertain profitability - With the help of accounting, the profits and losses incurred Notes e during a specific accounting period can be evaluated. With the help of a Trading and Profit& Loss Account, the profit or loss of a firm can be easily determined. in To ascertain the financial position of the business - A balance sheet or a statement indicates the financial position of an Enterprise as on a particular date. A properly drawn balance sheet gives us an indication of the value of assets, the nature and nl value of a liability, and also the capital position of the firm. Thus, the soundness of any business entity can be easily ascertained. To assist in decision-making - To take decisions for the future, there is a need for O accurate financial statements. One of the main objectives of accounting is to take the right decisions at the right time. Thus, accounting gives the platform to plan for the future with the help of past records. ity To fulfil Law compliance - Business entities like organisations, trusts, and societies are being run and governed according to different legislative acts. Similarly, different taxation laws (direct-indirect tax) are also applicable to every business house. It is requires to keep and maintain various types of accounts and records as prescribed by corresponding laws of the land. Accounting helps in running a business in compliance with the law. 1.1.3 Branches or Types of Accounting rs ve Accounting, as an ancient discipline, is dedicated to documenting diverse transactions. It is indispensable for tracking receipts, payments, income, and expenditures. Accounting can be broadly categorised into three main types: 1. Financial Accounting - Financial accounting is aimed at identifying an accounting year’s ni results in terms of profits or losses and assets and liabilities. To do this it is important that numerous transactions are documented systematically. Financial accounting is characterised as an art and science of systematically classifying, analysing and reporting U business transactions in order to prepare a report at the end of the year to assess the details of the related year. Financial Accounting Involves the Following Terms – ity ™™ Business transactions: A business transaction refers to any action that establishes a legal relationship. Examples include buying and selling goods, hiring an employee and paying their salary, settling various expenses, and acquiring assets. ™™ Classification of transactions: Prior to recording a transaction, proper classification m is essential. Transactions can be classified as either cash or credit transactions. Likewise, income receipts and expenditure payments can be distinguished and segregated accordingly. )A ™™ Recording of transactions: The core of financial accounting lies in the recording of transactions. In accounting terminology, this recording process is referred to as an entry, and there are specific rules governing the recording of various transactions in the books of accounts. (c 2. Cost Accounting - Cost accounting aims to capture an enterprise’s production costs by evaluating input costs for each production phase, along with fixed costs like equipment depreciation. It involves analysing and recording these costs separately before comparing them with anticipated or measurable outcomes. This process helps the enterprise Amity University Online 4 Accounting for Managers evaluate its financial performance. Cost accounting is often used within an Enterprise to facilitate decision-making, and financial management is typically seen by the investor’s Notes external community. Cost accounting can also be useful in budgeting and setting up cost e control systems as a method for management, which can increase the Enterprise’s net profits in the long run. in 3. Management Accounting - Management accounting involves applying professional knowledge and skills to prepare and present accounting information in a manner that aids management in formulating policies, as well as planning and controlling organisational nl operations. Its primary goal is to provide information to the management team at all levels within the organisation for the following purposes: a) Formulating the policies––strategic planning O b) Planning the activities of the organisation––corporate planning c) Controlling the activities of the organisation d) Decision-making––long-term and tactical ity e) Performance appraisals at strategic and operational level - A management accounting/cost statement provides information to allow managers to plan, control and organise the activities of the business. The purpose of a costing/management accounting information system is to: 1. 2. statements. rs Provide information about the cost of the product to be used in financial Provide information for planning, organising and controlling. ve Difference between Management Accounting and Financial Accounting S.no Management Accounting Financial Accounting ni 1 Management Accounting is primarily Financial Accounting is based on the monetary based on the data available from Financial transactions of the enterprise. Accounting. U 2 Reports prepared in Management Reports as per Financial Accounting are meant Accounting are meant for management for the management as well as for shareholders and as per management requirement. and creditors of the concern. ity 3 It provides necessary information to the Its main focus is on recording and classifying management to assist them in the process monetary transactions in the books of accounts of planning, controlling, performance and preparation of financial statements at the evaluation and decision making. end of every accounting period. m 4 Reports may contain both subjective and Reports should always be supported by objective figures. relevant figures and it emphasizes on the objectivity of data. )A 5 Reports are not subject to statutory audit. Reports are always subject to statutory audit. 6 It evaluates the sectional as well as the It ascertains, evaluates and exhibits the entire performance of the business. financial strength of the whole business (c 1.1.4 Fundamental Accounting Terms Accrual Basis: Accrual System means a cost incurred (i.e. accrued) is duly accounted for irrespective of whether it is paid or not during that period. In addition, all transaction are supposed to have dual aspect- debit aspect and a credit aspect. Amity University Online Accounting for Managers 5 Liability: A liability is characterised as the future economic benefit sacrifices that the organisation is obligated to make as a result of past transactions or other past events to other entities. Notes e Double entry system: The double-entry accounting or bookkeeping scheme means that sums must be reported in a minimum of two accounts for any business transaction. The in double-entry system also specifies that the amounts entered as debits must be equal to the amounts entered as credits for all the transactions. nl 1.1.5 Overview of Capital Structure Capital structure is the makeup of a firm’s capitalisation. It represents the mix of different sources of long-term funds such as equity and preference shares, long term O loans, retained earnings etc. In the total capitalisation of an Enterprise. For example, an Enterprise has 1,00,000 equity shares, 1,00,000 preference shares, 50,000 debentures and also 50,000 retained earnings, in this case the capitalisation is of Rs. 3,00,000 as the term capitalisation is used for total long-term funds. The term capital structure is used for ity the mix of capitalisation. In the given example it can be stated that the capital structure of an Enterprise consists of 1,00,000 equity shares, 1,00,000 preference shares, 50,000 debentures and also 50,000 retained earnings. The capital structure is the particular combination of an Enterprise’s debt and equity rs to finance its overall operations and growth. Debt is typically in the form of bond issues or loans, while equity may be in the form of common stock, preferred stock, or retained earnings. Short-term debt, such as provisions for working capital, is also considered part of ve the capital structure. Understanding Capital Structure A reference to the capital structure is mostly to the debt-to-equity (D / E) ratio of an ni Enterprise which provides insight into how risky the borrowing practices of an Enterprise are. A firm that is heavily financed by debt usually has a more aggressive capital structure and thus poses greater risk to investors. However, this risk could be the primary source of U growth for the Enterprise. Debt is one of two main ways in which a business can raise money on capital markets. Companies benefit from debt because of their tax benefits; interest payments made as a result of borrowing funds can be deductible from taxes. Debt also allows a firm or ity business to retain ownership, as opposed to equity. Furthermore, debt is ample and easy to access in periods of low interest rates. Equity allows for part ownership in the Enterprise from outside investors. Equity is costlier than debt, particularly when interest rates are low. Like debt, however, m equity doesn’t need to be repaid. In the case of declining profits, this is a gain to the Enterprise. By contrast, equity represents an owner’s claim on the Enterprise’s future earnings. )A 1.1.6 Capital and Revenue: Expenditures and Receipts The profit and loss account, along with the balance sheet, are collectively known as the final accounts. The profit and loss account shows the financial results of a business, while (c the balance sheet shows its financial position. Accurate calculation of profit or loss requires the correct recognition of revenues and expenses. If expenses or revenues are recognised incorrectly, the business’s results will be inaccurate. Therefore, distinguishing between capital and revenue items is crucial. Amity University Online 6 Accounting for Managers In business, there are numerous types of expenditures. Some of the expenditures generally incurred in all types of businesses include: Notes 1. Purchase of goods e 2. Purchase of fixed assets such as Building, Furniture, Machine, etc. in 3. Carriage inwards 4. Octroi 5. Purchase of Raw Material nl 6. Import duty 7. Coal, gas, water, oil, grease, fuel, heating and lighting 8. Wages paid to workers for installation of machinery O 9. Salaries 10. Rent, rates and taxes ity 11. Stationery and printing 12. Postage and Telegrams 13. Entertainment 14. Repairs and renewals 15. Depreciation on fixed assets 16. Office expenses 17. Bank charges rs ve 18. General expenses 19. Travelling expenses 20. Overhauling of second-hand machinery purchased ni 21. Major repairs affected for reconditioning a machinery/the old assets 22. Increasing the seating capacity of a cinema hall U 23. Constructing an additional room 24. Carriage for bringing a fixed asset to place of business 25. Shifting business to convenient premises ity 26. Advertisement on introducing a new product in market 27. Replacement of hand driven machine by automatic machine 28. Research and development There are two types of expenses and two types of incomes which are classified as: m 1. Revenue expenditure/Revenue receipts 2. Capital expenditure/Capital receipts )A a. Classification of Expenditures Expenditures of a business are classified into following three categories: ™™ Capital expenditure: Expenditure that is incurred in a business to derive benefits over a long period is known as capital expenditure. The benefits of capital (c expenditures are typically realised over multiple accounting years. Examples include expenditure to acquire fixed assets such as plant and machinery, land and buildings, furniture, and carriage paid in connection with the purchase of fixed assets. Amity University Online Accounting for Managers 7 ™™ Revenue expenditure: When expenditure is incurred for a short period (less than one year) and for the regular operation of the business, it is termed as revenue expenditure. The benefits of revenue expenditures are enjoyed by the business Notes e in the current period only. Examples include expenses incurred during the normal course of business such as salaries of staff, rent and taxes, fuel and electricity in used for running machinery, cost of sales, depreciation of fixed assets, and expenditure incurred for the upkeep of an asset. ™™ Deferred revenue expenditure: There are certain revenue expenditures that are nl incurred during one accounting year but are applicable wholly or in part in future periods. Examples include heavy expenditure on advertisement for introducing a new product in the market or exploring new markets for the product. These O expenditures appear to be revenue expenditure, but they are actually deferred revenue expenditure because the benefit from them is likely to be enjoyed over a number of years. When revenue expenditure is incurred for the benefit of two or three years, it is termed as deferred revenue expenditure. Examples include the ity cost of a heavy campaign of advertisement and preliminary expenses. The benefit of such types of expenditure is enjoyed by the enterprise for a number of years. b. Distinction Between Capital and Revenue Expenditure rs 1) An expenditure which increases the earning capacity of a fixed asset is a capital expenditure whereas an expenditure incurred for maintaining a fixed asset is revenue expenditure. 2) Cost of acquisition and installation of a fixed asset is a Capital expenditure ve whereas purchase price of goods bought for resale is revenue expenditure. 3) An expenditure incurred for the acquisition of a source of income is a capital expenditure whereas an expenditure incurred for the purpose of earning of an ni income is revenue expenditure. 4) An expenditure incurred by a person to free himself from a capital liability is a capital expenditure. Whereas an expenditure incurred by a person to free himself U from a revenue liability is a revenue expenditure. 5) An expenditure incurred in obtaining capital by issuing shares is a capital expenditure whereas expenditure incurred for raising loans or issuing debentures is revenue expenditure. ity c. Classification of Receipts Receipts of a business are classified into following categories: a) Capital Receipts: Capital receipts are receipts that do not arise from the normal m course of business. They do not affect the profit or loss of the business and typically either increase liabilities or reduce assets. Examples of capital receipts include the sale of fixed assets, long-term investments, and the issuance of )A share capital, debentures, and loans. It’s important to note that capital receipts are distinct from capital profits or losses. The total amount received from the sale of assets is considered a capital receipt, while the difference between the sale proceeds and the cost of the assets is considered a capital profit or loss. (c b) Revenue Receipts: The receipts which arise out of normal course of a business are known as Revenue Receipts. These are shown on credit side of P/L account. In other words, the receipts which are not capital receipts are revenue receipts as sale of goods. These include income from sale of goods; dividend received from Amity University Online 8 Accounting for Managers shares, rent received form letting out the business property, Interest received from investment. Notes d. Differences between Capital and Revenue Receipts e 1. Sale proceeds of a fixed asset are a capital receipt. Whereas, the sale proceeds of in a trading asset is a revenue receipt. 2. A receipt in substitution of a source of income is a capital receipt. Whereas, a receipt in substitution of income is a revenue receipt. nl 3. Compensation received for loss of business is a capital receipt. Whereas, compensation received for loss of profit is a revenue receipt. 4. Subsides or grants received from the government for any development scheme O is a capital receipt. Whereas, subsidy or grants received from the government for meeting foreign competition is a revenue receipt. 5. Insurance money received for loss of a capital asset is a capital receipt. Whereas, ity insurance money received for the loss of a trading asset is a revenue receipt. 1.1.7 Concepts and Conventions of Accounting with Example: Part 1 Case Study - Profitability and Earnings Persistence Time Period - September 20, 2017 rs Company Name - Molson Coors Brewing Company In this case, Molson Coors Brewing Company emerged from the merger of Adolph ve Coors Company and Molson Inc. in February 2005, a move likely driven by horizontal market extension, as both companies operated in the same industry but targeted different markets (U.S. and Canada). The aim was to enhance value and satisfy shareholders. Molson Coors’ brands cater to diverse consumer preferences in its key markets of Canada, ni the United States, and the United Kingdom. By analysing their financial statements at year-end 2013, which compared the past three years on the income statement and comprehensive income statement and the past U two years on the balance sheet, along with accompanying notes, Molson Coors aimed to assess their expected future profitability and earnings persistence. The notes provided insight into the company’s basis of presentation and significant accounting policies, such ity as revenue recognition, cost of goods sold, special items, and income taxes. The case highlighted the importance of identifying unusual, infrequent, or nonrecurring items, like “Special items, net,” and items within comprehensive income, to gauge a company’s financial health accurately. m This scenario has deepened my understanding of general concepts related to the income statement and specific line items on financial statements, including comprehensive income and special items. It has also emphasised the importance of correctly classifying these items for evaluating a company’s future profitability and earnings sustainability. )A Concepts: A. What are the major classifications on an income statement? The income statement shows the revenues, expenses, and profits, along with the various (c classifications for revenues and expenses. The main classifications include: 1. Operating section: This section includes important amounts such as the gross revenue and cost of goods sold to arrive at the gross margin. It also includes important expenses resulting from operations such as rent, supplies, and utilities. Amity University Online Accounting for Managers 9 2. Non-operating section: This section includes other revenues, gains, expenses, and losses resulting from secondary activities of the company. 3. Income tax section: This section includes the total of federal and state taxes levied Notes e on income. 4. Discontinued operations section: This section includes the material gains and in losses resulting from the disposition of a section of the business. 5. Noncontrolling interest section: This section includes the allocation of income to the noncontrolling shareholders. nl 6. Earnings per share section: This section includes the performance measures over the reporting period. O B. Explain why, under U.S. GAAP, companies are required to provide “classified” income statements. The classified income statement, or multiple-step income statement, provides greater transparency and comparability for a company. It clearly states the gross margin amount ity and allows readers to compare it to previous years and the industry. Furthermore, the statement provides an operational income amount, or profit earned by the primary operating activities, which can be interpreted by the reader. Overall, the classified income statement presents more detail and transparency of a company C. rs In general, why might financially statement users be interested in a measure of persistent income? By understanding that a persistent income exists on the financial statement, users can be ve more certain in the comparability of their financial analyses of a company over previous years. In addition, the users are better able to predict future incomes and expectations for a company. ni D. Define comprehensive income and discuss how it differs from net income. Comprehensive income is a combination of net income/net loss and other comprehensive income, which includes amounts such as unrealised gains/losses on investments and U retirement plans and foreign currency transaction adjustments among other income amounts. Essentially this amount contains all of the revenues, expenses, gains, and losses that changed stockholders’ equity over a period of time. Comprehensive income includes net income and provides a clearer view of the financial reports. ity Process: E. The income statement reports “Sales” and “Net sales.” What is the difference? Why does Molson Coors report these two items separately? m Generally, in most companies, sales are the total of all sales transactions without deductions from the amount, while net sales are sales minus sales returns and allowances and sales discounts. However, in the case of Molson Coors, the sales refer )A to the revenue from beer and other malt beverages before the deduction of excise taxes. Excise taxes are indirect taxes levied on a product that is included in the price of the product. In this case, the government has imposed an excise tax on Molson Coors’ beer shipments. After deducting the total of the excise taxes, net sales remain. By keeping these two amounts separate, users are able to analyse the effects of the taxes on sales (c using a trend analysis. F. Consider income statement item “Special items, net” and Note 1 and 8. i. In general, what types of items does Molson Coors include in this line item? Amity University Online 10 Accounting for Managers The special items line item includes charges incurred or benefits realised that are not believed to be indicative of the core operations. Examples include: infrequent Notes or unusual items, impairment or asset abandonment-related losses, restructuring e charges and other atypical employee-related costs, or fees on termination of significant operating agreements and gains (losses) on disposal of investments. in ii. Explain why the company reports these on a separate line item rather than including them with another expense item. Molson Coors classifies these special items as operating expenses. Do you concur with this classification? nl They are allowed to report the special items as a separate line item because of the FASB’s Accounting Standard Update 2015-01 (Subtopic 225-20). This ASU allows unusual or infrequently 29 occurring items to be reported as a separate component O on the income statement. The Special Items of Molson Coors includes these unusual or infrequently occurring items, as well as, other items caused from unusual events. I concur with their classification as long as the items are not reported year after year. G. Consider the income statement item “Other income (expense), net” and the information ity in Note 6. What is the distinction between “Other income (expense), net” which is classified a non- operating expense, and “Special items, net” which Molson Coors classifies as operating expenses? rs The “Other income (expense), net” line item refers solely to the gains and losses resulting from activities not directly related to their operations of brewing and selling beer. Examples include: gains and losses on foreign exchange and sales of non-operating ve assets. “Other income (expense), net” is classified as a nonoperating expense because it is not directly related to their operations; however, the “Special items, net” is related to their operations, but it is not indicative of their core operations because they include unusual or infrequently occurring items. ni H. Refer to the statement of comprehensive income. i. What is the amount of comprehensive income in 2013? How does this amount U compare to net income in 2013? The comprehensive income attributable to Molson Coors is $760.2 million in 2013. The comprehensive income is $187.7 million greater than the income including non- controlling interests in 2013; net income is $572.5 million in 2013. ity ii. What accounts for the difference between net income and comprehensive income in 2013? How are the items included in Molson Coors’ comprehensive income related? m As described in the aforementioned definitions, comprehensive includes net income and changes to owner equity like gains and losses on derivative instruments and pensions, etc. In Molson Coors’ case, they have reported a foreign currency translation adjustment loss of $207.7 million, an unrealised gain on derivative instruments of )A $35.5 million, and other items normally included under comprehensive income on their Consolidated Statements of Comprehensive Income at year-end of 2013. All of the items included in their comprehensive income reflect the change in the equity; they all affect stockholder’s equity. (c Analysis: J. Consider the information on income taxes, in Note 7. What is Molson Coors’ effective tax rate in 2013? Amity University Online Accounting for Managers 11 - Effective tax rate = Income Tax Expense / Pre-tax income Pre-tax income = $654.5 million Notes Income Tax Expense = $84.0 million e Effective tax rate = $84.0 M / $654.5 M in Effective tax rate = 12.8% 1.1.8 Concepts and Conventions of Accounting with Example: Part 2 nl Case Study - Property, Plant, and Equipment Company Name - Palfinger AG Time Period - November 8, 2017 O Executive Summary In this scenario, Palfinger AG, headquartered in Bergheim, Austria, operates in ity the construction, transport, agriculture and forestry, recycling, and haulage industries. Specialising in hydraulic lifting, loading, and handling solutions, Palfinger is an international manufacturing company. Being a non-U.S. entity, Palfinger follows the International Financial Reporting Standards (IFRS) for its financial reporting. The company has disclosed its 2006 and 2007 financial statements, along with excerpts from the footnotes for 2007, rs providing a comparison of the financial information from these two years. The footnotes mainly focus on property, plant, and equipment, including details on all accumulated depreciation and impairments. ve This case study offers insights into how a manufacturing company like Palfinger reports its property, plant, and equipment in its financial statements and accompanying notes, highlighting the differences between U.S. GAAP and IFRS reporting. The exercises in the case study enhance understanding in calculating net book values using various ni depreciation methods and determining gains and losses on asset disposals. It also sheds light on the impact of depreciation methods on the income statement and how manufacturing companies disclose transactions affecting property, plant, and equipment U in their notes. Overall, this scenario provides a deeper understanding of items affecting property, plant, and equipment (such as depreciation, additions, and disposals) and property, plant, and equipment management in manufacturing companies. ity Concepts: A. Based on the description of Palfinger above, what sort of property and equipment do you think the company has? Obviously as a large manufacturing company, Palfinger AG has buildings, warehouses, m land, and different types of equipment for manufacturing and for their offices. More specifically, their equipment would include some types of assembly lines, lifts, and production machinery. They may also have office equipment, but in comparison with )A the production equipment, it wouldn’t be as material. Most of these would be housed in factories and warehouses. B. The 2007 balance sheet shows property, plant, and equipment of €149,990. What does this number represent? (c The number represents the value of Palfinger’s property, plant, and equipment. This includes the costs of land and buildings, plant and machinery, other plant fixtures, fittings, and equipment, prepayments and assets under construction, and undeveloped land. Amity University Online 12 Accounting for Managers C. What types of equipment does Palfinger report the financial statement notes? Palfinger reports machinery and other plant, fixtures, fittings, and equipment in its notes. Notes These might further be divided into equipment that they own, equipment that they lease, e and equipment bought with government grants. The types are not explicitly stated, but they might include delivery equipment, office equipment, factory equipment, and similar in fixed assets. D. In the notes, Palfinger reports “Prepayments and assets under construction. “What does this sub-account represent? Why does this account have no accumulated depreciation? nl Explain the reclassification of €14,958 in this account during 2007. Under the International Financial Reporting Standards (IFRS), Palfinger reports its O own assets being constructed as “Prepayments and assets under construction.” However, under the U.S. Generally Accepted Accounting Principles (GAAP), this subaccount is called “Self-constructed assets.” This subaccount represents the cost of the aforementioned construction of a company’s own assets. The costs would include ity the materials, direct labor, and possibly overhead assigned to the construction process. There would not be any accumulated depreciation yet because these assets are not yet available for use, or in operations. The reclassification amount represents the assets that were under construction but were finished during the year. These reclassifications are E. rs then dispersed into the other property, plant, and equipment accounts. How does Palfinger depreciate its property and equipment? Does this policy seem reasonable? Explain the trade-offs management makes in choosing a depreciation ve policy. Palfinger depreciates its property and equipment using the straightline depreciation method. Assuming that their asset’s economic usefulness is the same each year and that the maintenance and repairs expense is consistent year-to-year, the straight-line ni depreciation method would be reasonable, especially for its simplicity. Palfinger has estimated the economic useful life of the different types of their assets, satisfying the first assumption. When management must choose a depreciation policy, they must consider U the effects of the expenses on income. Essentially, the trade-off is time-based on when a company should recognise those expenses. F. Palfinger routinely opts to perform major renovations and value-enhancing modifications ity to equipment and buildings rather than buy new assets. How does Palfinger treat these expenditures? What is the alternative accounting treatment? Based on Palfinger’s notes to its financial statements, replacement investments and value-enhancing investments are capitalised and depreciated over either the new or the m original useful life. The alternative accounting treatment that could be used would be to expense them as revenue expenditures (expenses) rather than capital expenditures (assets). The important guideline is to use a consistent application of either the capital or )A expense policy. Process: All figures below are in € thousands. (c A. Use the information in the financial statement notes to analyse the activity in the “Property, plant and equipment” and “Accumulated depreciation and impairment” accounts for 2007. Determine the following amounts: Amity University Online Accounting for Managers 13 i. The purchase of new property, plant and equipment in fiscal 2007. - The purchase of new property, plant and equipment in fiscal 2007. Notes 1. The purchases of new PPE include: e Land and buildings 12,139 in Undeveloped 2,020 Plant and machinery 15,612 Other 10,673 nl Prepayments/Under Construction 21,000 Total 61,444 O ii. Government grants for purchases of new property, plant and equipment in 2007. Explain what these grants are and why they are deducted from the property, plant, and equipment account. ity - Government grants are financial awards that do not have to be repaid, and in this case, they help fund Palfinger’s new property, plant and equipment purchases. According to the International Accounting Standard 20, specifically section IAS 20.24, government grants can be accounted for in one of two ways:   As deferred income rs By deducting the grant from the asset’s carrying amount As stated in Palfinger’s notes, government grants are presented as reductions ve of the acquisition and/or manufacturing costs, representative of the second aforementioned treatment. iii. Depreciation expense for fiscal 2007. ni The depreciation expense for 2007 consists of: Land and buildings 2,826 Plant and machinery 6,869 U Other 2,862 Total 12,557 ity iv. The net book value of property, plant, and equipment that Palfinger disposed of in fiscal 2007. - The net book value of PPE disposals for 2007 consists of: Account Disposal Depreciation NBV m Land and buildings 1,409 1,011 398 Plant and machinery 6,733 6,548 185 )A Other 4,936 4,739 197 Prepayments/ Under Construction 721 0 721 B. The statement of cash flows (not presented) reports Palfinger received proceeds on the sale of property, plant, and equipment amounting to €1,655 in fiscal 2007. Calculate the (c gain or loss that Palfinger incurred on this transaction. Hint: use the net book value you calculated in part G. iv. Explain what this gain or loss represents in economic terms. - The total net book value for Palfinger’s PPE includes: Amity University Online 14 Accounting for Managers Land and buildings 398 Notes Plant and machinery 185 e Other 197 Prepayments/Under Construction 721 in Total 1,501 The total proceeds on the sale of PPE are greater than the total net book value for nl Palfinger’s PPE, meaning Palfinger will report a gain of 154 for fiscal 2007. Economically, the gain represents a sale price greater than the book value of an asset. C. Consider the €10,673 added to “Other plant, fixtures, fittings, and equipment” during O fiscal 2007. Assume that these net assets have an expected useful life of five years and a salvage value of €1,273. Prepare a table showing the depreciation expense and net book value of this equipment over its expected life assuming that Palfinger recorded a full year of depreciation in 2007 and the company uses: ity - Straight-line depreciation Purchase Price – Salvage Value = Depreciable Cost 10,673 – 1,273 = 9,400 Salvage value = €1,273 Rate = 100%/5 yrs = 20% rs Table: Straight-Line Depreciation ve Year Carrying Depreciation Acc. Book value Value expense depreciation (endof year) (end of year) ni 1 10,673 1,880 1,880 8,793 2 8,793 1,880 3,760 6,913 3 6,913 1,880 5,640 5,033 U 4 5,033 1,880 7,520 3,153 5 3,153 1,880 9,400 1,273 Table 5: Double-Declining-Balance Depreciation ity Year Carrying Depreciation Acc. Book value Value expense depreciation (endof year) (40%) (end of year) m 1 10,673 4,269 4,269 6,404 2 6,404 2,562 6,831 3,842 3 3,842 1,537 8,368 2,305 )A 4 2,305 922 9,290 1,383 5 1,383 110 9,400 1,273 D. Assume the equipment from part i. was sold on the first day of fiscal 2008 for €7,500. (c Assume that Palfinger’s accounting policy is to take no depreciation in the year of sale. i. Calculate any gain or loss on this transaction, assume Palfinger used straight-line depreciation. What is the total income statement impact of the equipment for the Amity University Online Accounting for Managers 15 two years that Palfinger owned it? Consider the gain or loss on disposal as well as the total depreciation recorded on the equipment (i.e. the amount from part I. i.) With a net book value at the end of 2007 of €8,793 and a sale price of €7,500, Notes e Palfinger would recognise a loss of €1,293* in 2008. The loss along with the depreciation expense in 2007 of €1,880 would amount to € (3,173) **. This amount in reflects the total income statement impact over the two-year period using straight- line depreciation. * 7,500 – 8,793 = € (1,293) ** (1,293) + (1,880) = € (3,173) The journal entry would appear as follows: nl Cash - 7,500 Loss on sale - 1,293 O Equipment - 8,793 ii. Calculate any gain or loss on this transaction assuming the company used double- declining-balance depreciation. What is the total income statement impact of this ity equipment for the two years that Palfinger owned them? Consider the gain or loss on disposal as well as the total depreciation recorded on the equipment. With a net book value at the end of 2007 of €6,403.80 and a sale price of €7,500, Palfinger would recognise a gain of €1,096.20* in 2008. The gain deducted from rs the depreciation expense in 2007 of €4,269.20 would amount to € (3,173) **. This amount reflects the total income statement impact over the two-year period using double declining-balance depreciation. * 7,500 – 6,403.80 = €1096.20 ** (4,269.20) ve + 1,096.20 = € (3,173.00) The journal entry would appear as follows: Cash - 7,500 ni Gain on sale - 1,096 Equipment - 6,404 iii. Compare the total two-year income statement impact of the equipment under the U two depreciation policies. Comment on the difference. Both of the two-year income statement impacts were the same at the end of the second year. The difference lies in when the depreciation expense and gain/loss ity affect the income statement: first year or second year; as well as, recognising a gain or a loss when disposing of the assets. This concept is important to consider when managers are deciding on which depreciation method to use. m 1.1.9 Indian Accounting Standard, US GAAP and IFRS: Overview Indian Standards for Accounting (Ind AS): )A The Institute of Chartered Accountants of India (ICAI) created the Indian Accounting Standards (Ind AS) as a collection of accounting guidelines to promote consistency and openness in financial reporting throughout the country. To bring Indian accounting processes into compliance with international standards, Ind AS and International Financial Reporting Standards (IFRS) have mostly converged. (c The goal of Ind AS is to improve financial statements’ quality and dependability while increasing their relevance and comparability. It covers a wide range of accounting topics, such as revenue, leases, and the recognition, measurement, presentation, and disclosure of financial instruments. Depending on factors like net value and listing status, certain Amity University Online 16 Accounting for Managers Indian corporations were mandated to use Ind AS as of January 2022, the last time I checked. Notes The US GAAP stands for “Generally Accepted Accounting Principles.” e In the US, accounting is done according to US Generally Accepted Accounting in Principles, or US GAAP. The Financial Accounting Standards Board (FASB) created this extensive set of rules and regulations for financial reporting by both public and private businesses. nl Overview: US GAAP offers a framework for clear and uniform financial reporting, guaranteeing the relevance, dependability, and comparability of financial statements. It addresses a number of subjects, including fair value estimation, corporate mergers, and O revenue recognition. The main basis of US GAAP is rules, with distinct regulations for various transactions and occurrences. Businesses that are listed on US stock exchanges are often obliged to use US GAAP. ity Standards for International Financial Reporting (IFRS) The International Accounting rules Board (IASB) created the International Financial Reporting Standards (IFRS) collection of accounting rules to establish a framework for financial reporting that is consistent across the globe. Companies apply IFRS in a wide range of nations worldwide. rs Overview: The goal of IFRS is to standardise accounting procedures worldwide in order to promote greater transparency and ease cross-border comparisons. The recognition, ve measurement, presentation, and disclosure of financial information are only a few of the topics it covers in relation to financial reporting. Principle-based, IFRS concentrates on the content of transactions as opposed to particular regulations. IFRS have been adopted by many nations, especially in Europe, for financial reporting. ni Key Differences: Organisation: U Ind AS has merged with IFRS to become compliant with international standards. US GAAP follows its own set of guidelines, some of which are more specific and directive than others. ity IFRS is an international set of standards designed to promote uniformity between nations. Principle-Based vs. Rule-Based: m US GAAP is more rule-based, offering particular instructions for various types of transactions. IFRS is a principles-based accounting standard that prioritises general principles over )A specific regulations. Ind AS contains concepts from IFRS but may have special carve-outs to suit Indian situations. Geographic Relevance: (c For some companies in India, Ind AS is applicable. In the US, US GAAP is applied. Amity University Online Accounting for Managers 17 IFRS is implemented by numerous nations internationally, notably in Europe. Regulatory Authorities: Notes e Ind AS is supervised by the Institute of Chartered Accountants of India (ICAI). The Financial Accounting Standards Board (FASB) is in charge of overseeing US in GAAP. The International Accounting Standards Board (IASB) creates and updates IFRS. It is advisable to consult the most recent standards and regulations for the most up-to- nl date information because accounting standards are subject to updates and changes. 1.1.10 Accounting Cycle O When a complete sequence of accounting procedures is carried out repeatedly in the same order during an accounting period, it is referred to as an accounting cycle. ity Phases of the Accounting Cycle Collect and Analyze Cash and every Transactions Take action for investment, credit and rs Posting into ve similar decisions Journals ni Interpretation Posting Transactions to ledger accounts U Prepare financial Prepare statements Trial Balance ity Steps in the Accounting Cycle Recording of Transactions: Transactions are first recorded in subsidiary books as soon as they occur. Journal: The transactions are then recorded in the Journal chronologically. m Ledger: All journal entries are posted into the Ledger chronologically and in a classified manner. )A Trial Balance: After compiling all the ledger account closing balances, a Trial Balance is prepared at the end of the period for the preparation of financial statements. Adjustment Entries: Adjustment entries are recorded and adjusted accordingly before preparing financial statements. (c Adjusted Trial Balance: An adjusted Trial Balance may also be prepared. Closing Entries: All nominal accounts are closed by transferring to the Trading Account and Profit and Loss Account. Amity University Online 18 Accounting for Managers Financial Statements: Financial statements can now be easily prepared, exhibiting the true financial position and operating results. Notes e 1.2 Recording of Transaction in 1.2.1 Accounting Equation: Part 1 The recording of business transactions in books of accounts is based on a fundamental equation called the accounting equation. This equation expresses the equality of assets on nl one side and the claims of outsiders (liabilities) and owners or proprietors on the other side. It states that whatever a business possesses in the form of assets is financed either by the proprietor or by outsiders. O In Mathematical form = Assets = Liabilities + Capital Or A = L + P or P=A–L ity Or L = A – P Where A = Assets, L = Liabilities, P = Capital For example – rs Mr. A has started business by contributing INR2, 00,000 as Capital. It can be said that asset in the form of Cash has been created for the business concern. ve Hence, Cash = Rs. 2,00,000 Capital = Rs. 2,00,000 Mr. A later on purchased furniture for INR.20, 000 and machinery for 60,000. Now the position of the assets is a follows ni Capital = Cash + Machinery + Furniture 2,00,000 1,20,000 20,000 60,000 ( 2,00,000 – 80,000) U From the above business transactions, we find that Capital = Assets or Assets = Capital Increase or decrease in capital will result in the corresponding increase or ity decrease in assets. For example, Mr. A introduces INR50, 000 as additional capital Capital = Cash + Machinery + Furniture m 2,00,000 + 50,000 1,20,000 + 50,000 20,000 60,000 2,50,000 1,70,000 20,000 60,000 )A In general, businesses often borrow money from outsiders to fund their operations, meaning they owe money to outsiders. These assets are financed by funds provided by both proprietors and outsiders. Money borrowed from outsiders is referred to as a liability. Example – XYZ Ltd. is a company incorporated to carry on the business of selling (c juices. XYZ Ltd.’s transactions for the month of January were as follows: Jan. 1 Issued equity shares of 20,00,000 (cash received in full). Jan. 5 Purchased land for 5,75,000. Amity University Online  (Figures are in `) (c Assests Liabilities +Capital Solution - Cash Inventory Land Building Machinery Creditors Bills Payable )A Accounting for Managers Jan. 1 (+) 20,00,000 +20.00.000 Jan. 5 (-) 5,075,000 m +5,75,000 Balance 14,25,000 5,75,000 Jan. 8 (-) 1,40,000 ________ + 4,40,000 = +3,00,000 payable in three monthly instalments. Balance 12,85,000 5,75,000 4,40,000 =3,00,000 20,000,00 ity Purchased further machinery worth 50,000. Jan. 15 (-)2,20,000 _______ +2,20,000 =_______ Balance 10,65,000 5,75,000 4,40,000 2,20,000 =3,00,000 20,00,000 U Jan. 15 Purchased machinery worth 2,20,000. Jan. 20 (-)1,75,000 +5,75,00 +4,00,000 Balance 80,90,000 5,75,000 5,75,000 4,40,000 2,20,000 =3,00,000 4,00,000 20,00,000