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INTRICACIES OF
BALANCE SHEET/
FINANCIAL STATEMENTS
By:
Prof: R.K.GUPTAB.COM (Hons); CAIIB; AIB (London); LL.B(I)
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WHAT IS FINANCIAL STATEMENT ?
Periodical Review of the status of Investmentand progress made by the Management.
They contain facts recorded on the basis of
accounting conventions and exercise of personal judgements.
Integrity & Competence of Accountants, whoprepare them, have a bearing on the ultimate
results furnished by them.
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NEED OF ANALYSIS OF
FINANCIAL STATEMENTS
Parameters taken for the analysis must satisfy thecriteria of good lending.
Safety of depositors¶/ Investors¶ money/funds.
Requirement of Depositors:
± Yield on their deposit/investment ± Safety of funds/investment
± Liquidity of funds i.e. available at any point of time.
PURPOSE though is not requirement of depositors butit boost the depositors¶ confidence in long run. To
maintain the confidence, the regulator in India i.e. RBIissues guidelines to maintain CRR, SLR, Selectivecredit Control, Awareness and advisory guidelines for particular sectors like home loan, retail, SSI, SME or Large Corporate sector.
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Need for Ethics in Accounting
No body except the promoters and/ or say
Executives Officers are involved directly in the
management of the company.
The information must reach to all concerns
present and prospective stake holders so that
they may be aware of the present financial
position of the company solely for the purpose of
continuing or take out their investment to some
other better opportunity.
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NEED FOR ETHICS IN ACCOUNTING-2
Changes in world economy during last 3decades: ± Unification of east and west Germany in 1990
± Transformation of East European ³Iron curtain´
economies into open economies ± Disintegration of USSR
± Formation of World Trade Organization (WTO).
± Lowering the Bamboo curtain and gradual integrationof China¶s economy with the rest of the world
± Formation of west European economic zone by 11countries including Germany and France andacceptance of Euro as their common currency.
±
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NEED FOR ETHICS IN ACCOUNTING-3
± Adoption of New Economic Policy (NEP) of deregulation,privatization and globalization by India in 1991.
± Opening up of almost all the world economies since 1990s.
± Most of the countries have adopted the policy of currencyconvertibility on current account and many of them are now
moving in stages towards capital accounts convertibility ± After opening of economies of various countries, there is greater
movement of international investment by FIIs.
Keeping in view the above developments, the interest of shareholders and other investor stake holders across theborders of the country have become of vital importance.Hence if the accounts are prepared in accordance withthe high standard of ethics, it creates confidence in themind of the investors and the lenders as well.
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High quality accounting standards
High quality accounting standards consists
of a comprehensive set of neutral principle
that require consistent, comparable,relevant and reliable information that is
useful for investors, lenders, creditors and
all others who make capital allocation
decisions
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Main source of financial information
Published accounts of the company which should therefore be notonly transparent but reflect true and fair view of the financial healthof the company also.
This information is submitted in various forms like:
± Balance sheet & Profit & Loss Accounts as on 31st of March of
every year (u/s 210 (1) of Companies Act 1956 and if deviations,then the reasons thereof should be furnished u/s 211(3b)
± Cash flow statement which is mandatory for the listed companiesin India under clause no 32 of Listing agreement (SEBI-cir/08/2000 of 04.02.08) should be prepared in accordance with AS 3 of ICAI (only cash)
± Fund Flow Statement is studied particularly in reference not onlyto know the source and uses of fund but also to see whether short term sources are used to finance long term uses, which istechnically known as diversion of fund (working capital).
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Various forms for submission of
information -2 ± Consolidated financial statements for thelisted companies in case there aresubsidiaries of such listed companies besides
their individual financial statements. ( SEBI²SMRP/POLICY/CIR-44 OF 31.08.2001) Statutory Audit and filing of the statement is
mandatory( Clause 32 of listing agreement)
Board¶s Reports shall include a Directors¶
responsibility statement confirming that theaccounts have been prepared in accordance withthe relevant accounting guidelines ( u/s 217 (2AA)of companies Act
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Various forms for submission of
information -3 ± EPS (earning per share data) in accordance with AS20 of ICAI on or after 01.04.2001. It is mandatory for all listed companies.
± Directors responsibility statement - Material
information on issues covering all functions of thecompany and how the interest of the stake holders isprotected by the company.
± Auditors Reports which confirms for following up of the Indian General Accepted Accounting Principlesand Practices (GAAP)
This does not mean that after audit of accounts themanagement is relieved of its responsibility. The auditorsonly certify on the basis of information supplied hencesafeguarding the assets of the company is the soleresponsibility of the management. (Satyam)
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Meaning of True and Fair view of
Financial Statements
The financial statements are to be preparedstrictly in accordance with:
± Companies Act and other applicable laws of
the land. ± Generally Accepted Accounting Principles
and Practices (GAAP) UK and USA GAAP are more stricter as compare
to Indian standards on GAAP. The Indian companies which wants to raise capital
in foreign countries are to rewrite their accounts inaccordance with the international GAAP
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MAJORWEAKNESS OF FINANCIAL
STATEMENTS
Lack of objectivity.
Being influenced largely by the subjectiveexercise of judgement.
± (SATYAM COMPUTERS, Verification Of Balances And Cash On The Date Of Balance Sheet).
LARGE DEPOSITS on HIGEHR RATE OFINTEREST (Banking Companies),
± BANK DEPOSITS shown in PUBLIC DEPOSITS,
FAKE BALANCE SHEET containing FAKESIGNATURES OF AUDITORS/DIRECTORS.(certificate from auditors should be obtainedand kept on record)
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BALANCE SHEET & TYPES OF
BALANCE SHEETS
WHAT IS BALANCE SHEET
It is a balance of all recorded transactions relating tofinance and should be prepared in accordance withschedule VI of Companies Act 1956.
There is no guidelines for firms other than companies.
The assets and liabilities are shown in accordance withthe permanency of assets and liabilities.
TYPE OF BALANCE SHEETS
± PROJECTED BALANCE SHEET ± ESTIMATED BALANCE SHEET
± PROVISIONAL BALANCE SHEET
± AUDITED BALANCE SHEET.
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Formats of Balance Sheet
The Companies Act provides for two formats of BalanceSheet.
One is the conventional 'T" format, wherein assets andliabilities are grouped in descending order of their
liquidity.
The other is the vertical format, which was introduced in1979 on the basis of International Accounting Standards.
So far as non-corporate entities are concerned, IBA, in
collaboration with Institute of Chartered Accountants of India, evolved formats for Financial Statements whichwere later on approved by RBI.
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CLASSIFICATION OF ASSETS AND
LIABILITIES
Fixed assets and Term Liabilities
Current assets and Current Liabilities
CAPITAL ± AUTHORIZED, ISSUED &PAID UP CAPITAL
± QUASHI CAPITAL-unsecured loans ± PREFERENTIAL CAPITAL (not repayable or to be converted
equity share capital)
RESERVES: ± Capital Reserves/Perpetual Reserves
± Revaluation Reserves of Assets
± Share Premium
± Profit on sale of Assets
± Specific reserves for specific purpose
± Capital subsidy received from Central/State Government.
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CLASSIFICATION OF ASSETS AND
LIABILITIES-2
Revenue Reserves:
± General Reserves
± Reserve for Bad Debts ± Reserve for fall in value of investment
Specific Reserve:
± Debenture Redemption Reserve
± Depreciation Reserves
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TERM LIABILITY
Debentures not payable during the year
Redeemable preference share after 12 years or more
Secured Loan
Unsecured Loans Deposits from public payable after 12 months
Provision for Gratuity.
Share application Money
CURRENT LIABILITY TL & Deposits repayable during the year
Sundry creditors for goods and expenses
Provisions for expenses
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FIXED ASSETS/CURRENT ASSETS
Fixed Assets
Cash and Bank Balances
Investment
Current assets ± Stock, Sundry Debtors, Loans and
Advances
Debtors below 6 months: Govt Debtors
Debtors over 6 months: Govt Debtors Study of Debtors/Creditors List
Bank Staff-involvement,
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FIXED ASSETS/CURRENT ASSETS
Large advances to Directors, partners,Diversion of funds
Allied Concerns. MSVS Agro P Ltd Amroha SBI/OBC
Debtors and Creditors not dealing in goods. Name of Beneficiary of Bank Guarantees in SundryCreditors²Dunroll Industries
Valuation of Stock
Position of Govt Dues i.e. custom, excise, trade tax or
any other tax. Stock obsolete
Verification of Balances with Bank on that day. (SatyamComputers)
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INTANGIBLE ASSETS
Good will
Losses
Patent Trade Mark
Preliminary Expenses incurred not fully
written off
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NOTES TO BALANCE SHEET
Contingent Liability ± Claims against a company not acknowledged as
debt.
± Arrears of fixed cumulative dividend on cumulativepreference shares.
± Uncalled liability on account of partly paid shares inthe investment portfolio
± Pending suit in court of law against the borrower or vice-versa
Change of method of depreciation
Accounting standards applied or not
Corporate Governance ±Disclosures
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DISCLOSURE
Disclosure means a policy for unveiling the
information to one or more
persons/institution/society at large which
may be in the interest of the company/
stakeholders/lenders/creditors/ depositors.
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Indian Accounting Standards
The role of ICAI in framing the accounting standards. ± ³Financial statements also show the results of stewardship of
management, or the accountability of management for theresources entrusted to it. Those users and assessors of thestewardship and accountability of management do so in order that they may make economic decisions. These decisions mayinclude, for example, whether to hold or sell their investment inthe enterprises or whether to reappoint or replace themanagement´
± Chairman/CEO and CFO take the responsibility by signing the
annual accounts of the company every year. Chairman/ CEOand CFO signs the responsibility statements.
Number of reporting accounting standards set up byICAI²(28) known as AS-1 TO AS-28
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DETAILS OF AS 1 to AS 28
AS NO STANDARDS IN RESPECT OF
AS-1 Disclosure of Accounting practices
AS-2 Valuation of inventories
AS-3 Cash flow Statement
AS-4 Contingencies and events occurring after the balance date
AS-5 Net profit or Loss for the period and extraordinary, items and
changes in Accounting Policies
AS-6 Depreciation Accounting
AS-7 Construction Contracts
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DETAILS OF AS 8 to AS 28
AS NO STANDARDS IN RESPECT OF
AS-8 Accounting for research and Development
AS-9 Revenue Recognition
AS-10 Accounting for Fixed Assets
AS-11 Accounting for the effects of changes in foreign exchange rates
AS-12 Accounting for Government Grants
AS-13 Accounting for Investments
AS-14 Accounting for amalgamations
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DETAILS OF AS 15 to AS 28
AS NO STANDARDS IN RESPECT OF
AS-15 Accounting for Retirement Benefits in financial statements of
employees
AS-16 Borrowing Cost
AS-17 Segmental Reporting
AS-18 Related Party Disclosures
AS-19 Leases
AS-20 Earning Per Share
AS-21 Consolidated Financial Statements
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DETAILS OF AS 22 to AS 28
AS NO STANDARDS IN RESPECT OF
AS-22 Accounting for Taxes on Income
AS-23 Accounting for investment in Associates in Consolidated
Financial Statements AS-24 Discontinuing Operations
AS-25 Interim Financial Reporting
AS-26 Intangible Assets
AS-27 Financial Reporting of interest of joint ventures
AS-28 Impairment of Assets
Generally accounting reporting system in India matches with the international
standards of GAAP . Besides the above, ICAI issues several statements and
guidelines, notes and opinion with a view to ensuring uniformity in corporate
accounting and reporting practices
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ACCOUNTING STANDARDS
SCENARIO IN INDIA
After amendment in companies act 1956, amendingsection 210 it is mandatory on the part of the companiesto adhere to the accounting standards set up by theInstitute of Chartered accountants of India which has
been described hereinabove from AS-1 to AS 28 anydeviation to the Indian GAAP, require cogent reasonsand proper clarifications
Indian GAAP is though not as stricter as that of USGAAP but still the accounting standards of Indian GAAP
are in accordance with the International AccountingStandards Board (IASB)
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PROFIT AND LOSS ACCOUNT
Comparison be studied
± Capacity installed & utilized vis-à-vis sales and
purchases (value and quantity)
± Interest amount ± Electricity charges
± Labour expenses
± Other expenses
± Depreciation Charged
± Other income
± Repair of machineries expenses
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LIMITATION OF
BALANCE SHEETS FAIRNESS
± unrealised Income as revenue or realisationof book debts on last day increasing hugecash balance on the day of B/S
± Maximum Receivable and Payables on thelast day by showing huge sales andissuance of cheques but not paid in bankbooks.( Average Sundry Creditors/Debtors be taken into consideration)
± Increasing sales and increasing profits onthe last week/month/day
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REMEDY OF THE LIMITATION
Quality of Management
Management efficiency
Technology
Marketing Growth perspective.
Stock Market perceptions.
RATIOS:
± Current Ratio: 1:1; 1.17:1, 1.33:1 ± Debt Equity Ratio: 2:1,
± Leverage Ratio: 4:1
± DSCR : 1.5:1
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REMEDY OF THE LIMITATION-2
RATING OF BOROWER
± Why rating is down and up critical analysis
be done and recorded
INTERNAL ACCRUALS
± To improve the current ratio or DER or meet
out the working capital margin. Accruals
should be examined keeping in view thecapacity, efficiency and marketing.
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THANK YOUFor your kind attention
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