CS Executive Corporate and Management Accounting Notes
Introduction to Financial Accounting
- Accounting is the art of recording, classifying and summarizing transactions and events which are of a financial character in terms of money, and interpreting the results thereof.
- Three main branches of accounting are financial accounting, cost accounting and management accounting.
- Accounting functions are: keeping systematic records; protecting and controlling business properties; ascertaining the operational profit/loss; ascertaining the financial position of the business; and facilitating rational decision-making.
- Accounting is the language of business and is used to communicate financial and other information to different interested parties, like owners, manager, creditors, investors, researchers and government.
- Accounting information should be relevant, reliable, comparable, understandable, timely, neutral, verifiable and complete.
- Accounting can be based on cash or accrual system. In cash system, accounting entries are passed only when cash is received or paid, while in accrual system transactions are recorded on the basis of amounts having become due for payment or receipt.
- Book-keeping is different from accounting. Book-keeping is concerned with the permanent recording or maintaining of all transactions in a systematic manner to show their financial effects on the business.
- Accounting is concerned with the summarizing of the recorded transactions.
- Accounting principles are guidelines to establish standards for sound accounting practices and procedures in reporting the financial status of a business. These principles can be accounting concepts and accounting conventions.
- Accounting concepts are defined as basic assumptions on the basis of which financial statements of a business entity are prepared. While ‘convention’ denotes custom or tradition or practice based on general agreement between the accounting bodies which guide the accountant while preparing the financial statements.
- Some of the important accounting concepts are: business entity concept, money measurement concept, cost concept, going concern concept, dual aspect concept, realization concept, accrual concept, accounting period concept and revenue match concept.
- Accounting conventions are consistency, disclosure, conservatism and materiality.
- Accounting Standards (ASs) are written policy documents issued by expert accounting body or by government or any other regulatory body.
- Two classes of accounts are personal accounts and impersonal accounts. Impersonal accounts can be further classified into real and nominal accounts.
- Accounting Equation represents that sum of resources (assets) is equal to the obligations (capital and liabilities) of the business.
- Accounting cycle includes identifying, recording, classifying and summarizing of the transactions.
- Every transaction is recorded in the journal before being posted into the ledger. It is the book of account in which transactions are recorded in a chronological order.
- Recording in the journal is done following the rules of debit and credit.
- Posting is the process of recording transactions in the ledger based on the entries in the journal.
- The main function of a ledger is to classify or sort out all the items appearing in the journal or other subsidiary books under their appropriate accounts so that at the end of the accounting period summary of each account is easily available.
- Balancing of ledger accounts involves equalization of both sides of the account by putting the difference on the side where the amount is short.
- Various subsidiary books are: purchases book; sales book; purchases returns book; sales returns book; bills receivable book; bills payable book and cash book.
- Petty Cash Book may be maintained under Imprest System of petty cash.
- General journal or journal proper is maintained for recording those transactions for which there are no other appointment subsidiary book.
- Trial balance is prepared after posting the entries in ledger to verify the arithmetical accuracy of entries made in the ledger.
Introduction to Corporate Accounting
- Final accounts of a company consist of balance sheet as at the end of the accounting period, and profit and loss account for that period.
- Section 129 of the Companies Act, 2013 prescribes the form and contents of balance sheet, and profit and loss account of a company.
- Balance sheet of a company shall be prepared according to Schedule III of the Companies Act, 2013.
- The Schedule III sets out minimum requirements for disclosure on the face of the Balance Sheet, and the Statement of Profit and Loss (hereinafter referred to as “Financial Statements”) and Notes.
- Statement of Profit & Loss of a company shall be prepared according to Part II of Schedule III of the Companies Act, 2013.
- Section 129(1) of the Companies Act 2013, states that the financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form provided for different class or classes of companies in Schedule III.
Accounting for Share Capital
- Share represents a singular unit into which the total share capital of a company is divided.
- Share capitalincludes majorly the following two types of shares under the Companies Act, 2013:
- preference shares
- equity shares.
- An equity share is the one which is not a preference share. Equity shares are also known for their riskbearing. Preference shares are the shares that hold preferential rights as to the payment of dividend at a fixed rate; and the return of capital on winding up of the company.
- Shares may be issued for cash or for a consideration other than cash. When a company allots fully paid shares to promoters or to creditors or to any other party for the services rendered by them, it is known as issue of shares for consideration other than cash.
- Shares of a company may be issued at :a. Par- When shares are issued on a price equivalent to its face value.b. Premium- When shares are issued at a price higher than the face value. c. Discount- When shares are issued at a price lower than the face value.
- Restrictions on the usage of the Securities premium money received has been laid u/s 52 (2) of Companies Act 2013
- When the number of shares applied for exceeds the number of shares issued, the shares are said to be oversubscribed. In such a case, some applications may be rejected; some applications are accepted in full; and allotment is made to the remaining applicants on pro-rata basis.
- Forfeiture of shares is considered as the compulsory termination of membership by way of penalty for non-payment of allotment and/or any call money
- The forfeited shares may be reissued at:a. Par b. Premium c. Discount
- In case of reissue of forfeited shares at a premium, the entire amount standing to the credit of Shares Forfeited Account would be treated as net gain and transferred to Capital Reserve Account.
- In case the forfeited shares are reissued at a discount, the amount of discount can, in no case, exceed the amount credited to Shares Forfeited Account.
- As per Section 68, 69, 70 of the Companies Act, 2013, a company may purchase its own shares or other specified securities out of its free reserves and this is known as buy-back.
- A company is under a legal obligation to first offer the subsequent issue of shares to its existing equity shareholders. This right is called rights issue.
- Company may issue fully paid up bonus shares to its members, in any manner out of (i) its freereserves; (ii) the securities premium account; or (iii) the capital redemption reserve account.
- Sweat equity shares refers to equity shares given to the company’s employees/ directors on favourable terms in recognition of their work at a discount or consideration other than cash
- Underwriting is known as a guarantee given by the underwriters to the company that the shares or debentures offered to the public will be subscribed for in full. An underwriting agreement may be:a. Complete Underwriting b. Partial Underwriting. Firm Underwriting
Accounting for Debentures
- Debentures are Part of loan capital and the company is liable to pay interest thereon whether it earns profit or not
- Debentures may be of different kinds depending upon the conditions of their issue- secured , unsecured, bearer, registered, convertible, non- convertible, redeemable, irredeemable, first mortgage, second mortgage.
- Debentures may be issued at par, or at a premium, or at a discount
- Debentures can be issued for cash, consideration other than cash and as collateral security.
- The term ‘Collateral Security may be defined as additional security given for a loan. Where a company obtains a secured loan from a bank or insurance company, it may mortgage some of its assets as a security against the said loan.
- Wherever a company issues debentures it undertakes to pay interest thereon at a fixed percentage. As the debentures acknowledge a debt, the payment of interest on the debt is obligatory on the part of the company issuing them irrespective of the fact whether the company earns profit or not. Thus, interest payable on debentures is a charge against the profits of the company.
- The discount/loss on debentures is in the nature of capital loss and therefore the same must be written off over the life time of debentures.
- When debentures are redeemed out of capital, no debenture redemption reserve is created out of profit of the company.
- Section 71(4) of the companies Act,2013 provides that the debentures shall be redeemed out ofdivisible profits of the company through the creation of Debenture Redemption Reserve.
- A company if authorized by its articles of association, can buy its own debentures in the open market. The debentures so purchased can be used either for immediate cancellation or redemption of debentures or for investment.
- If the purchase price for the debentures includes interest for the expired period, the quotation is said to be “Cum-interest”. If, on the other hand, the purchase price for the debentures excludes the interest for the expired period, the quotation is said to be “Ex-interest”.
Related Aspects of Company Accounts
- When a company has substantial cash resources, it may like to buy its own shares from the market particularly when the prevailing rate of its shares in the market is much lower than the book value or what the company perceives to be its true value.
- As per Section 68, 69, 70 of the Companies Act, 2013 states that a company may purchase its own shares or other specified securities out of its free reserves, and the proceeds of any other shares or other specified securities.
- Buy-back is permissible: (a) from the existing security holders on a proportionate basis through the tender offer; or (b) from the open market.
- Regulation 10(1) of the Securities and Exchange Board of India provides that a company shall, as and by way of security for performance of its obligations on or before the opening of the offer of repurchase, deposit in an escrow account such sum as is specified in 10(2).
- A company, other than a listed company, which is not required to comply with Securities and Exchange Board of India Employee Stock Option Scheme Guidelines shall not offer shares to its employees under a scheme of employees’ stock option (hereinafter referred to as “Employees Stock Option Scheme”)
- ESOP means a scheme under which the company grants option (a right but not an obligation) to an employee to apply for shares of the company at a predetermined price. This right is exercisable by the employee, during the specified period.
- Section 2(37) of the Companies Act, 2013 states that the “employee stock option” means the option given to the whole time director, officers or employees of a company which gives such directors, officers of employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price
- According to Section 43 of the Companies Act, 2013, Equity share capital may be Equity Share Capital with the voting right or Equity Share Capital with differential right as to dividend, voting or otherwise.
- Rule 4 of the Companies (Share Capital and Debentures) Rules 2014 deals with equity shares with differential rights.
- The company shall not convert its existing equity share capital with voting rights into equity sharecapital carrying differential voting rights and vice versa.
- The holders of the equity shares with differential rights shall enjoy all other rights, such as bonus shares, rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued Where a company issues equity shares with differential rights, the Register of Members maintained under section 88 shall contain all the relevant particulars of the shares so issued along with details of the shareholders.
- Underwriting is an undertaking or guarantee given by the underwriters to the company that the shares or debentures offered to the public will be subscribed for in full.
- An underwriting agreement may be: Complete Underwriting, Partial Underwriting and Firm Underwriting.
- Applications bearing the stamp of the respective underwriters are called marked applications and the applications received directly by the company which do not bear any stamp of the underwriters are known as unmarked applications.
- Debentures may be issued at par, or at a premium, or at a discount.
- Debentures may be issued by a company for cash, for consideration other than cash, and as collateral security.
- The issue of debentures to vendors is known as issue of debentures for consideration other than cash.
- The term ‘Collateral Security’ implies additional security given for a loan. When a company takes a loan from bank or insurance company, it may issue its own debentures to the lender as collateral security against the loan in addition to any other security that may be offered such an issue of debentures is known as “Debentures Issued as Collateral Security.
- A company may issue debentures on any specific condition as to its redemption, such as: issued at par and redeemable at par, issued at a discount redeemable at par, issued at a premium redeemable at par, issued at par redeemable at a premium, issued at discount, but redeemable at premium.
- When a company issues debentures it undertakes to pay interest thereon at a fixed percentage. The payment of interest on the debt is obligatory on the part of the company issuing them irrespective of the fact whether the company earns profit or not and the interest payable on debentures is a charge against the profits of the company.
- Discount on issue of debentures is a capital loss to the company and it is required to be shown on the assets side of the Balance Sheet under the heading “Other Current or Non-Current Asset” until it is written off.
- When a company issues debentures at par or at a discount which are redeemable at a premium, the premium payable on redemption of the debentures is treated as capital loss.
- Redemption of debentures refers to the discharge of the liability in respect of the debentures issued by a company. Debentures can be redeemed at any time either at par or at a premium or at a discount.
- Debentures may be redeemed by way of: annual drawings, payment in one lump sum at the expiry of a specified period or at the option of the company at a date within such specified period, purchase of debentures in the open market and conversion into shares.
- Interest on debentures is generally paid half-yearly to the holders on certain specified dates. If the purchase price for the debentures includes interest for the expired period, the quotation is said to be “Cum-interest”, on the other hand, the purchase price for the debentures excludes the interest for the expired period, the quotation is said to be “Ex-interest”.
Financial Statements Interpretation
- Financial Statements represent a formal record of the financial activities of an entity.
- Financial statements are reports prepared and issued by company management to give investors and creditors additional information about their company’s performance and financial standings.
- The four general purpose financial statements include: Income Statement,Balance Sheet, Statement of Stockholders Equity, Statement of Cash flow.
- Financial statements are prepared by transferring the account balances on the adjusted trial balance to a set of financial statement templates.
- Both public and private companies issue at least 4 financial statements to attract new investors and raise funding for expansions.
- Financial sheets that are issued for time periods smaller than one year are called interim statements.
- The annual financial statement form is prepared once a year and cover a 12-month period of financial performance.
- Information to be presented in the profit or loss section or the statement of profit or loss.
- Information to be presented in other comprehensive income section.
- Information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.
- Information to be presented either in the statement of changes in equity or in the notes.
- IAS 7 Cash flow statement sets out requirements for the presentation of the cash flow statement and related disclosures.
- The listed entity shall submit a compliance certificate to the exchange duly signed by both that is by the compliance officer of the listed entity and the authorized representative of the share transfer agent, wherever applicable, within one month of the end of each half of the financial year.
- Depreciation may be defined as the gradual reduction in the value of an asset due to wear and tear as in the case of physical assets like building, machinery, etc., or by mere passing of time as in the case of lease, patent and copyright
- If depreciation is not provided, the value of assets shown in Balance Sheet will not present the true and fair value of assets.
- Two methods to calculate depreciation: straight line method and written down value method.
- Provisions is to be made in respect of a liability which is certain to be incurred, but its accurate amount is not known.
- Reserves are the amount set aside out of profits. It is an appropriation of profits and not a charge on the profits.
- The managerial remuneration shall be payable to a person appointed within the meaning of section 196 of the Companies Act, 2013.
- In accordance with Section 135(5) of the 2013 Act, the Board of each company covered under the CSR requirement needs to ensure that the company spends, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of CSR policy
- The 2013 Act read with the Accounts Rules require several disclosures about performance, risks, etc.
- IAS 24 Related Party Disclosures requires disclosures about transactions and outstanding balances with an entity’s related parties.
- Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements.
- Audit queries are questions asked by an auditor during an investigation. These may be used to gather information to come to a conclusion in the audit.
- Interpreting the financial health of a corporation requires an understanding of its financial statements.
Consolidation of Accounts as per Companies Act, 2013
- Holding company : As per section 2(46) of the Companies Act, 2013 “A company shall be deemed to be the holding company of another, if, but only if, that another is its subsidiary.
- Subsidiary company : As per section 2(87) of the Companies Act, 2013, a company is a subsidiary of another company, if, but only if:
1. The other company controls the composition of its board of directors
2. The other company
(a) Holds more than half in nominal values of its equity shares capital
(b) It is a subsidiary of any company which is that of other company’s subsidiary consolidated P&L A/c and balance sheet mean a single P&L A/c and balance sheet of a holding company and all its subsidiaries (group).
Steps involved in the preparation of consolidated balance sheet and profit & loss A/c (Ref: Main
Various factors to be considered for the preparation of consolidated balance sheet of a holding
company and its subsidiaries.
(i) Holding-minority ratio
(ii) Elimination of investment a/c
(iii) Minority interest
(iv) Cost of control/goodwill
(v) Pre-acquisition profit (capital profit)
(vi) Post-acquisition profit (revenue profit)
(vii) Revaluation of assets and liabilities
(ix) Bonus shares issued by subsidiary company
(x) Dividends from subsidiary company preference shares in subsidiary company
(xi) Preference shares in subsidiary company
(xii) Debentures in subsidiary company
(xiii) Mutual obligations
(xiv) Consignment liabilities
(xv) Unrealized profit in stock
(xvi) Post and pre-acquisition losses abnormal losses
(xvii) Preliminary expenses
- Key Terms:
Holding Company : A company is said to be the holding company of another if that other company is its subsidiary.
Subsidiary Company : A company is said to be a subsidiary of another if that another company controls the composition of its board of directors (holding more than 50% of the nominal value of equity share capital).
Minority Interest : Holding of the general public (other than holding company) in a subsidiary company is termed as “minority interest”.
Cost of Control : The “excess” amount paid (more than face value or book value of shares) by the holding company to acquire ‘controlling interest’ in the subsidiary company.
Consolidated Balance Sheet : The balance sheet prepared by the holding company by incorporating all the assets and liabilities of its subsidiary company long with its own assets and liabilities.
Corporate Financial Reporting
- Financial reporting includes not only financial statements but also other means of communicating information that relate to the information provided by the accounting system.
- The end product of accounting process should be such that it generates:
- information useful in investment and credit decisions,
- information useful in assessing cash flow prospects (amount, timing, and uncertainly), and
- information about enterprise resources, claims to those resources and changes therein.
- The Value-Added Statement (VAS) is a voluntary disclosure and adds little information to thatcontained in the income statement. It calculates total output by adding sales, changes in stock, and other incomes, then subtracting depreciation, interest, taxation, dividends, and the amounts paid to suppliers and employees.
- Economic value-added (EVA) measures the economic rather than accounting profit created by abusiness after the cost of all resources including both debt and equity capital have been taken into account.
- EVA = “Net Operating Profit after Taxes” – (Equity Capital X % Cost of Equity Capital)
- Market value-added (MVA) is the difference between the Company’s market and book value of shares.
- Market Value-Added = Company’s total Market Value – Capital Invested
- Shareholder Value-Added (SVA) represents the economic profits generated by a business above and beyond the minimum return required by all providers of capital.
Cash Flow Statement
- CASH FLOW STATEMENT is in statement of changes in cash position from the beginning and till end of the accounting period.
- Accounting Standard (AS) -3 on Cash Flow Statement issued by ICAI is mandatory, AS-3 requires that cash flow statement should report cash flow during the period classified by operating activities, investing activities and financing activities.
- Cash flow means cash inflow and cash outflow.
- Cash inflow means source of cash, and it increases the total cash available at the disposal of the firm.
- Cash outflow means use of cash which decreases the total cash available at the disposal of the firm.
- Net cash flow is the difference between cash inflow and cash outflow.
- Operating activities are the principal revenue activities of the enterprise. These pertain to cash generated by sales and all the operating expenses and are most often the biggest source of cash flows.
- Investing activities pertain to the acquisitions and disposal of long-term assets, such as plant,machinery, land and building and other investments.
- Financing activities are those that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise.
Accounting Standards (AS)
- Accounting Standards (ASs) are written policy documents issued by expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements.
- The objective of general purpose financial reporting is to provide financial information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.
- Two important characteristics of financial information relates to relevance and reliability
- Convergene of varied Accounting Standards with International Financial Reporting Standards (IFRS) has gained worldwide momentum in recent years to ensure uniformity and transparency in reporting standards.
- India has committed to convergence of its Indian Accounting Standards (Ind AS) with IFRS in a phased manner beginning April 1, 2016.
- A revised roadmap for implementation of Indian Accounting Standards (Ind AS) finalized by the council of the ICAI (Institute of Chartered Accountants of India) and submitted to MCA (Ministry of Corporate Affairs) for its consideration.
- (ICAI): The Institute of Chartered Accountants of India
- (ASB): Accounting Standards Board
- (IAS): International Accounting Standards
- (IFRS): International Financial Reporting Standards
- (IASC): International Accounting Standards Committee
- (IFRIC): International Financial reporting Interpretations Committee
- (IASC):International Accounting Standards Committee
- (SIC): Standard Interpretations Committee
National and International Accounting Authorities
1. The Institute of Company Secretaries of India (ICSI)
2. The Institute of Chartered Accountants of India
3. The Institute of Cost Accountants of India
4. IFRS Foundation/International Accounting StandardsBoard (IASB)
5. International Public Sector Accounting Standards Board(IPSASB)
6. Financial Reporting Council (FRC) (UK)
7. European Financial Reporting Advisory Group (EFRAG)
8. Financial Accounting Standards Board (FASB
9. American Institute of Certified Public Accountants(AICPA)
10. Australian Accounting Standards Board (AASB)
11. The Institute of Chartered Accountants in Australia (ICAA)
12. Financial Reporting & Assurance Standards Canada (FRASC)
13. Canadian Institute of Chartered Accountants (CICA)
14. Accounting Standards Board of Japan (ASBJ)
Adoption, Convergence and Interpretation of International Financial Reporting Standards (IFRS) and Accounting Standards In India
- The objective of general purpose financial reporting is to provide financial information that is useful for existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.
- Two important characteristics of financial information relates to relevance and reliability
- Convergene of varied accounting standards with international financial reporting standards (IFRS) has gained worldwide momentum in recent years to ensure uniformity and transparency in reporting standards.
- India has committed to convergence of its Indian Accounting Standards (Ind AS) with IFRS in a phased manner beginning April 1, 2016.
- A revised roadmap for implementation of Indian Accounting Standards (Ind AS) finalized by the council of the ICAI (Institute of Chartered Accountants of India) and submitted to MCA (Ministry of Corporate Affairs) for its consideration.
Overview of Cost
– Cost is the amount of resource given in exchange for some goods or services.
– The Chartered Institute of Management Accountants, London defines cost as “the amount of expenditure (actual or notional) incurred on or attributable to a specified thing or activity”.
– Cost is the amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or activity.
– Cost accounting is the establishment of budgets, standard costs and actual costs of operations, processes, activities or products, and the analysis of variances, profitability or the social use of funds.
– Cost centre means, a production or service location, function, activity or item of equipment whose costs may be attributed to cost units.
– Cost unit is a unit of product or service in relation to which costs are ascertained.
– Cost accounting increases the overall productivity of an organization and serves as an important tool, in bringing prosperity to the nation.
– The objectives of cost accounting are ascertainment of cost, fixation of selling price, proper recording and presentation of cost data to the management for measuring efficiency and for cost control.
– The Scope of Cost and Management Accounting is very wide and broad because it first ascertains the cost of the product and services rendered, and later on provides this information to the management for financial analysis and interpretation of the business operation.
– There are three Elements of cost: Material, Labour, Expenses which are further divided into direct and indirect cost.
– Direct Material , Direct Labour and Direct Expenses when combined together are known as Prime Cost.
– Indirect Material, Labour and Expenses when combined together are termed as Overheads.
– Overheads are further classified under two heads: Based on Functional Analysis and Behavioural Analysis.
– Based on Functional Analysis Overheads are classified under four categories. Manufacturing OH, Administration OH, Selling & Distribution OH and Research & Development OH.
– Material cost constitutes a major proportion of the total cost of the product. All products are made up of one or many materials.
– The material cost chargeable to a component is the one which is in pre-manufacturing or rough state(i.e., raw material). It includes all scrap removed during manufacturing process.
– Labour is the cost of human endeavour in the product and requires coordinated efforts for its control.
– The management objective of keeping labour cost as low as possible is achieved by balancing productivity with wages.
– Low wages do not necessarily mean low labour cost.
– Expenses may be defined as “the costs of services provided to an undertaking and the notional costs of the use of owned assets”.
– Direct expenses are those expenses which are directly chargeable to a job account.
– Overhead may be defined as the cost of indirect material, indirect labour and such other expenses, including services, as cannot be conveniently charged direct to specific cost centres or cost units.
– Direct costs(materials, labour, etc.) are associated with individual jobs or products.
– Indirect expenses or overheads are not associated with individual jobs or products; they represent the cost of the facilities required for carrying on the operations.
– Cost Sheet is the statement designed to show the output of the particular accounting period along with breakup of costs.
Cost Accounting Records & Cost Audit under Companies Act, 2013
The Companies Act, 2013 empowers the Central Government to make the rules in the area of maintenance of cost records by the companies engaged in the specified industries, manufacturing / providing such goods / services; and for getting such cost records audited, vide Section 148.
– As per Rule 2(e) the Companies (Cost Records and Audit) Rules, 2014, “Cost Records” means books of account relating to utilization of materials, labor and other items of cost as applicable to the production of goods or provision of services under the provisions of Section 148 of the Act.
– It is mandatory to keep the cost records for proper supervision and control.
– The class of companies, including foreign companies defined in clause (42) of Section 2 of the Act, engaged in the production of the goods or providing services, having an overall turnover from all its products and services of Rs. 35 crore or more during the immediately preceding financial year, shall include cost records for such products or services in their books of account.
– Every company specified in item (A) of rule 3 shall get its cost records audited in accordance with these rules if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees fifty crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under rule 3 is rupees twenty five crore or more.
– Every company specified in item (B) of rule 3 shall get its cost records audited in accordance with these rules if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees one hundred crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under rule 3 is rupees thirty five crore or more.
– The cost records referred to in sub-rule (1) shall be maintained on regular basis in such manner as to facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half-yearly or annual basis.
– The cost records shall be maintained in such manner so as to enable the company to exercise, as far as possible, control over the various operations and costs to achieve optimum economies in utilization of resources and these records shall also provide necessary data which is required to be furnished under these rules.
– The category of companies specified in rule 3 and the thresholds limits laid down in rule 4, shall within
one hundred and eighty days of the commencement of every financial year, appoint a cost auditor.
– Form CRA-1 shall be maintained to keep cost records
– Form CRA-2 is the form of intimation of appointment of cost auditor by the company to Central
– Form CRA-3 is the Cost Audit Report.
– Form CRA-4 is for filing Cost Audit Report with the Central Government
Budget, Budgeting and Budgetary Control
A budget is a precise statement of the financial and quantitative implications of the course of action that management has decided to follow in the immediate next period of time.
– Forecasting may be defined as analysis and interpretation of the future conditions in relation to operations of the enterprise. It involves looking ahead and projecting the future course of events.
– Budgeting is the complete process of designing, implementing and operating budgets. The main emphasis in this is short-term budgeting process involving the provision of resources to support plans which are being implemented.
– CIMA, London, defines budgetary control as “the establishment of budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision”.
– The budget manual is a written document or booklet which specifies the objectives of the budgeting organization and procedures.
– Budget Period means the period for which a budget is prepared and employed.
– A budget key factor or principal budget factor is described by the CIMA London terminology as: “a factor which will limit the activities of an undertaking and which is taken into account in preparing budgets”.
– The Master budget is “a summary of the budget schedules in capsule form made for the purpose of presenting, in one report, the highlights of budget forecast”.
– The Chartered Institute of Management Accountants, London defines flexible budget as a budget which by recognising different cost behaviour patterns, is designed to change as volume of output changes. It is a budget prepared in a manner so as to give the budgeted cost for any level of activity. It is a budget which by recognising the difference between fixed, semi-fixed and variable cost is designed to change in relation to the activity attained.
– Zero base budgeting as “a method of budgeting whereby all activities are re-evaluated each time a budget is set. Discrete levels of each activity are valued and a combination chosen to match funds available.”
– Performance budgeting, is looked upon as a budget based on functions, activities and projects and is linked to the budgetary system based on objective classification of expenditure.
– Performance budgeting involves evaluation of the performance of an organization in the context of both specific as well as overall objectives of the organization.
– A budget variance is the difference between the budgeted or baseline amount of expense or revenue, and the actual amount. The budget variance is favourable when the actual revenue is higher than the budget or when the actual expense is less than the budgeted expense.
– Negative variances can be caused by an efficiency problem, utilization problem, or due to unexpected or unavoidable occurrence whereas positive variance can provide insight why you did so well and what processes are working for your business.
Financial statement analysis involves the examination of both the relationship among financial
statement numbers and the trends in those numbers over time.
– Financial Statement analysis is a study of relationship among various financial factors in a business, as disclosed by a single set of statements and study of the trends of these factors as shown in a series of statements.
– Steps involved for financial statement analysis are – Prepare financial Statements, Analyze financial statements, Gather additional information, Make decisions related to Operating, Investing, Financing and Implement decisions and observe results
– Financial statements are prepared on the basis of (i) recorded facts; (ii) accounting conventions; (iii) postulates; (iv) personal judgements, and (v) accounting standards and guidance notes
– According to the objective of the analysis financial statement, analysis can be long-term and shortterm
– Ratio analysis is a process of comparison of one figure against another, which helps to make proper analysis about the strength and weaknesses of the the firm’s operations.
– The functional ratios can be further classified into – profitability ratios, turnover ratios or activity ratios,financial ratios or solvency ratios and market test ratios.
– Liquidity or short term solvency means ability of the business to pay its short term liabilities.
– The debt equity ratio is used to ascertain the soundness of long term financial policies of the business.
– The interest coverage ratio shows how many times interest charges are covered by funds that are
available for payment of interest.
– P/E ratio is the barometer of the market sentiment.
– Turnover ratios are useful to measure how effectively the firms employ its resources.
– Operating cost = Material cost + Labour cost +Factory overheads + office & selling expenses.
Management Reporting (Management Information Systems)
– Reports can be defined as means of communication, usually in the written form, of facts which should be brought to the attention of the various levels of management who can use them to take suitable action for proper control.
– In any organization, there are three distinct level of managements- first line managements, middle management and top management.
– A management reporting system is essentially a mechanism for monitoring the ‘mission’ of an organization in terms of objectives set out in formal plan evolved by the organization.
– Inefficient reporting processes that yield inaccurate and dated information normally cause more harm than good.
– Effective processes uncover material financial misstatements prior to circulating information with investors and other stakeholders, and identify and address problem areas before they elevate tounmanageable levels.
– A good report will help the management in taking the expected action to improve the performance of the concern.
– Reports are classified into three types: contents, Form, Frequency.
– There are three forms of reporting: Descriptive, Tabular & Graphic Presentation.
– Routine reports are rendered at periodic intervals.
– The intervals at which routine reports are to be presented should be fixed for each report.
– Special reports are to be presented after making and investigation of the problem which requires to be investigated.
Decision Making Tools
Valuation, Principles And Framework
– Corporate valuations form the basis of corporate finance activity including capital raising, M&A and also to meet regulatory / accounting requirements or for voluntary purpose
– Business Valuation is the process of determining the “Economic Worth” of a company based on its Business Model under certain assumptions and limiting condition and subject to data available on the valuation date.
– The Indian Capital Market follows a free pricing regime and thus the accurate pricing of an IPO is of immense importance.
– There are broadly three approaches of valuation: Asset approach, Income approach, Market approach
– The adjusted net asset method is commonly used for estimating the value of the business.
– Net asset value is useful for shares valuation in sectors where the company value come from the held assets rather than the stream of profit that was generated by the company business.
– The Income based method of valuations is based on the premise that the current value of any business is a function of the future value that an investor can expect to receive from purchasing all or part of the business.
– If the additional financing uses more than one source, say a combination of debt and preference share capital, then the WACC of new financing is called the Weighted Marginal Cost of Capital (WMCC)
– WMCC can be effectively used in the calculation of NPV by analyzing WMCC in conjunction with the firm’s investment opportunities.
– A market approach is a method of determining the appraisal value of an asset based on the selling price of similar items. The market approach is a business valuation method that can be used to calculate the value of property or as part of the valuation process for a closely held business.
– Indian Accounting Standard (abbreviated as Ind-AS) is the Accounting standard adopted by companies in India and issued under the supervision and control of Accounting Standards Board (ASB), which was constituted as a body in the year 1977.
Valuation of Shares, Business and Intangible Assets
– There are two principal methods of valuation of shares: Net Assets Method and Earning Basis
– Valuation of shares on net asset basis, also called asset backing or intrinsic value or break up value method.
– The earning basis of share valuation is expressed through: Yield method or Dividend yield method or Earning Capacity method
– Yield basis valuation may take the form of valuation based on rate of return and productivity factor
– Intangible asset is defined as a capital asset having no physical existence, its value being dependent on the rights that possession confers upon the owner. Accounting Standard (AS) 26 Intangible Assets issued by the Institute of Chartered Accountants of India deals with meaning and valuation of intangible assets.
– There are three approaches used in valuing intangible assets;cost approach , Market value approach, Economic value approach.
– The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life.
– The amortisation charge for each period should be recognised as an expense unless some Accounting Standard permits or requires it to be included in the carrying amount of another asset.
Indian Accounting Standards (Ind AS) 102
1. Equity-settled share-based payment transactions in which the entity receives goods or services and as consideration for equity instruments of the entity
2. Cash-settled share-based payment transactions in which the entity receives goods or services and incurs a liability based on the price (or value) of the entity’s shares
3. Grant date is defined as “the date on which the Company and employees agree to the terms of an employee share-based payment plan.
4. SBP arrangement is an agreement between the entity (or another group entity or any shareholder of any group entity) and another party that entitles the other party to receive
Method of Valuation
– Valuation of any asset provides its true value or worth.
– Discounted Cash Flow Model calculate the value of an equity share as the total present value of all future expected cash inflows. The present value is calculated by using some appropriate discount rate or required rate of return on equity (Ke). This is the minimum required rate of return from the viewpoint of the prospective investor.
– An asset-based approach is a type of business valuation that focuses on a company’s net asset value (NAV), or the fair-market value of its total assets minus its total liabilities, to determine what it would cost to recreate the business.
– Net asset value is useful for shares valuation in sectors where the company value come from the held assets rather than the stream of profit that was generated by the company business
– The investors will invest the funds in the form of equity share capital of a firm, only if they expect a return from the firm, which will compensate them for surrendering the funds as well as the risk undertaken. The rate of discount at which the expected dividends are discounted to determine their present value is known as cost of equity share capital.
– CAPM shows how risky assets are priced in efficient capital market. It helps in the prediction of expected return on security or portfolio. The expected return determined through CAPM can be used to find out whether a security is earning more or less than expected return. From investment point of view an investor should select securities which provide higher return than the one expected by CAPM.
– As per CAPM there is a linear and positive relationship between expected return and systematic risk measured by β.
– β is an indicator of systematic risk of a security. It measures the sensitivity of a security’s return with respect to market return. It is an index or a number which shows whether a security is less sensitive or more sensitive to market return.
– Under the APT, an asset is mispriced if its current price diverges from the price predicted by the model.
– The APT along with the capital asset pricing model (CAPM) is one of two influential theories on asset pricing.
– Economic value added (EVA) is a financial measure of what economists sometimes refer to as economic profit or economic rent.
– Market value added is the difference between the Company’s market and book value of shares. According to Stern Stewart, if the total market value of a company is more than the amount of capital invested in it, the company has managed to create shareholder value. If the market value is less thancapital invested, the company has destroyed shareholder value.
– Shareholder Value Added (SVA) represents the economic profits generated by a business above and beyond the minimum return required by all providers of capital. The SVA approach is a methodology which recognises that equity holders as well as debt financiers need to be compensated for the bearing of investment risk.
– Book value is the price paid for a particular investment or asset. Fair market value, on the other hand, is the current price at which that same asset can be sold.