Financial Accounting and Analysis

1. Mr. Batra & Mr. Khatri the CFO and accounts manager of Sharda International, having
difference of opinion with regard to IGAAP and IFRS as far as the presentation of financial
statements is concerned. List the main points of differences between IGAAP and IFRS
related to the presentation of financial statements (10

Difference between GAAP and IFRS

Format
IGAAP
Schedule 3 prescribes the minimum requirement for disclosure on the face of the balance sheet
and the statement of profit and loss account. AS3 provides guidance on the line items to be
presented in the statement of cash flows.
IFRS
It specifies the line items to be presented in the statement of profit and or loss accounts and other
income and statement of changes in equity.

Fair presentation
IGAAP
Fair presentation requires compliance with the requirements of the companies Act 2013, and other
regulatory requirement and the application of the qualitative characteristics of Accounting
Standard Framework. Departure from these regulations are prohibited unless permitted by other
regulatory framework
IFRS
Fair presentation requires faithful representation of the effect of the transactions in accordance
with the definitions of and recognition criteria for asset and liabilities income and expense set out
in the Framework. In rare circumstance the management can depart from the compliances.
Reasons for the departure are need to be disclosed.

Statement of change of shareholders Equity

IGAAP
No separate statement is required to disclose changes in shareholders equity. These are disclosed
in separate schedule of share capital and reserves and surplus
IFRS
In IFRS this statement is used to indicate the capital transactions with owners, movement in
accumulated profit and loss and reconciliations of all components of equity.

Presentation of Income Statement

IGGAP
Schedule 3 requires an analysis of expense by nature. Any item of income or expenditure which
exceeds 1% of revenue from operations of 1,00,000 whichever is higher needs to be disclosed.
IFRS
An analysis of expense is presented using a classification based on either the nature of expenses
or their functions whichever provides reliable and relevant information. If presented by a function
specific disclosure by nature are provided in the notes. When items of income or expense are
material their nature and amount are separately disclosed.

Extraordinary Items
IGAAP
Extraordinary items are disclosed separately in statement of profit and loss and are included in
determination of net profit or loss for the period. Items of profit and loss should be distinct from
the ordinary items and the should be determined by nature of event or transaction in relation to
the business ordinary carried out
IFRS
Presentation of any items of income or expense as extraordinary is prohibited.

Correction of Errors
IGAAP
A restatement for correction of the errors is not required. The effect of correction should be
included in the current rent income statement with separate disclosure
IFRS
The comparatives are related and if the error occur before earliest period presented, the opening
balances of assets, liabilities and equity for the earliest previous period are restated.

Capital
IGAAP
AS1 does not require an entity to disclose information that enables users of its financial statement
to evaluate the entitys objectives, policies and processes of managing capital
IFRS
Require disclosure of information about management of capital and compliance with external
imposed capital requirement if any.

Cash flow Statement

IGAAP
It is mandatory for all entities. Cash includes cash equivalents but overdrafts are excluded.
IFRS
Mandatory for listed companies only and companies meeting the turnover requirements. Cash
includes cash equivalents and overdraft.

Reclassification
IGAAP
A disclosure is made in the financial statement that comparative amount have to be reclassified to
conform to the presentation in the current period without additional disclosure for the nature
amount and the reason for reclassification
IFRS
When comparative amount are reclassified, nature, amount and reason for reclassification are
disclosed.

2. The accounting process is a series of activities that begins with a transaction .Discuss the
steps involved in the accounting process, which are necessary to complete the process

Identifying Business Transactions

The accounting process starts with identifying business transactions and events. In an organization many
events occur every day. But not all of them are transactions as they do not involve cash. Only those that
are measurable in cash and which make change in financial position are called as transactions and are
included in the process. These transactions should also pertain to the business entity. For example, a
personal loan made by the owner that does not have anything to do with the business entity and is not
included in the process. Documents such as a receipt, an invoice, bank statement help provide evidence
that a transaction has occurred.
Recording in the Journals
A journal is a book in which transactions are recorded. A Business transactions are recorded using the
double-entry bookkeeping system. They are recorded in journal entries containing at least two accounts.
Journal entry is logging of transactions in accounting journal items. The journal entry consist of several
recordings, each of which is either debit or credit. The total of debit side should be equal to credit side,
else the journal entry is said to be unbalanced. Transactions are recorded as Debit and credit in monetary
terms with date and short descriptions about the cause of the particular event. Special journals are often
used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements.

Posting to the Ledger from Journal

Also known as Books of Final Entry, the ledger is a collection of accounts. These accounts are broken
down by account number and class. When information is posted from the journal to ledger it is transferred
to each account that was affected by transaction. For example, all journal entry debits and credits made to
Cash would be transferred into the Cash account in the ledger. We will be able to calculate the increases
and decreases in cash; thus, the ending balance of Cash can be determined.
Unadjusted Trial Balance
An un-adjusted trial balance is prepared to test the equality of the debits and credits recorded in ledger. It
is a way to find out errors and faults that may have crept in the previous step. When errors are discovered,
correcting entries are made to rectify them or reverse their effect. Un-adjusted trial balance makes the
next step easy and provides the balances of all accounts that may require adjustment in the next stage.
However this is only used for internal use only

Adjusting Entries
Adjusting entries are prepared to insure matching principles and revenue recognition are followed.
Adjustments are done in the following ways:
A. According to accrual concept, payable expense lime payable salary, rent and accrued income like
accrued interest on investment etc. are to be adjusted in the books of accounts for determining
actual income or loss of a particular period.
B. According to income-expense matching concept for determining actual profit expense incurred
for earning income like advance, expense, depreciation expense, uncollectible allowance etc. are
to be adjusted in the book of account.
Adjusting entries are prepared to update the accounts before they are summarized in the financial
statements.

Adjusted Trial Balance

An adjusted trial balance contains all the account titles and balances of the general ledger which is created
after the adjusting entries for an accounting period have been posted to the accounts. The purpose of an
adjusted trial balance is to show the effects of all financial events that have occurred during the
accounting period. It is used to prepare financial statement.

Financial Statements
Financial statement are the output of accounting process. When the accounts are already up-to-date and
equality between the debits and credits have been tested, the financial statements are prepared.
A complete set of financial statements is made up of:

Balance Sheet: tells us its financial flexibility of a company to acquire capital and its ability to
distribute cash in the form of dividends to the company's owners.
Statement of Changes in Owners Equity: A separate Statement of Changes in Stockholders' (or
Owners) Equity is also prepared that reconciles the various components of operating expenses on
the balance sheet for the start of the period with the same items at the end of the period.
Statement of Cash Flows: The cash flow statement tells us sources and uses of cash during the
period, provides information about the company's investing and financing activities during the
period.
Income Statement: The income statement (also known as the profit and loss statement or P&L)
tells us about the earnings and profitability of a business.

Closing Entries
After preparation of financial statements the temporary accounts such as revenue or expense and gain or
loss including balance of income statement are closed by passing closing journal entries these accounts
are closed to a temporary income summary account, from which the balance is transferred to the retained
earnings account (capital). Any dividend or withdrawal accounts also are closed to capital. Closing entries
are made only for temporary accounts. Real or permanent accounts, i.e. balance sheet accounts, are not
closed.
Post-Closing Trial Balance
In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the
equality of debits and credits after closing entries are made. Since temporary accounts are already closed
at this point, the post-closing trial balance contains real accounts only.

3. The Chopra & Company reported the following results-

Net Income
Total Assets
Shareholders equity
Revenues

14830
114450
23045
99850

Apply the Du Pont Analysis.

Indicate the Return on asset and total asset turnover.

DuPont Model
ROE= Profit Maximization*Total Assets*Financial Leverage
This can be further expanded into following
Net Income/ Revenue * Revenue/Total Asset * Total Asset/ Shareholders Equity
14830/99850 * 99850/114450 * 114450/23045
= 0.14*0.87*4.96 = 0.60

Return on Assets
ROA= Net income/Total Assets
=
14830/114450= 0.129

Total Asset Turnover Ratio

Asset Turnover = Sales or Revenues / Total Assets
= 99850/114450 =0.87