Corporate Financial Reporting & Analysis

Session 1: MBA 2023

Introduction and Accounting Equation

Prof. Arpita Ghosh

Indian Institute of Management Calcutta
 Introduction to the Course
• Introduction and Accounting Equation: Users and Principal Uses,
Classification of Business Transactions, Qualitative characteristics, Basic
concepts and assumptions and Accounting Equation Sessions
1 to 5
• Accounting Mechanics: Rules of Debits and Credits, Journalizing, Ledger
Posting, Adjustment & Closing Entries and Preparation of Trial balance

• Preparing and Understanding of Income Statement

Sessions 6 to 10
• Preparing and Understanding of Balance sheet
• Using some tools for Analyzing the Financial statements Sessions 11 to 13a
– Common-Size, Trend, Ratio analysis
• Preparing, Understanding and Analyzing Cash flow statements Sessions 13a to 16

Sessions
• Accounting for Property, Plant & Equipment (PPE), Inventory
17 to 20
BOOKS
• Till FSA: “Financial Accounting – Tools for Business Decision Making “by Kimmel, Weygandt & Kieso, International
Student Version, Wiley Publications, Seventh Edition [KWK]
• From CFS: “Corporate Financial Reporting and Analysis”, A. K. Bhattacharyya, PHI, Second Edition [AKB] 2
 The Do’s, the Don’ts, & the Grading
• The Do’s
– Go through the problems specified in the course outline and try to solve
them before you come to the class
– Prepare for the case before coming to the class based on case-questions (will
be provided to you)
– Form study-groups : For learning together and for Project submission
• By next weekend, send me the details of the groups in an excel sheet
(Name, Section, Reg number, email-id, group number)
– Student Tutors: Mohammad Safiuddin (C), Ankit Dinesh Shah (E), Ruchika Chandak (PWD)
– TTA: Section C & E - Hopefully we will get soon
– Contact me when in doubt or have any query :
– Office Hours (by appointment) – Tuesdays and Thursdays : 12:00 to 2:00 pm
My Email id: [email protected]
• The Don’ts
– Don’t be late for the class, Don’t postpone your work
– Don’t violate academic integrity – Heavy Penalties
• Grading: Two Graded Quizzes (20%), Mid-Term (30%), Project (20%), End-Term (30%)
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 Learning Goals - Session 1
• Why should you learn Financial Accounting ?
• What is Accounting ?
• Users and Principal uses of accounting information
• Classification of Business Transactions
• Basic Accounting Equation, Event Vs Transaction
– Effect of transactions on accounting equation
• Elements of Financial Statements : Assets, Liabilities, Owners’
Equity, Dividends, Retained Earnings, Revenues, Expenses
• Financial Statements and Interrelationships
• Richie Advisors Pvt Ltd Case Questions

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 Why should you learn Financial Accounting ?
Accounting is the Language of Business
– Company uses the language to speak about its financial performance,
position and cash flows
– Analysts, investors and other users understand the language and rely
on the information to make their decisions

A manager needs to understand the business language so that

– He can understand information communicated
• Example: Sales Target
– He can use the language to communicate what he intends to do
• Example: Increase in ROI in southern markets
– He can understand the implications of his actions and the way his
actions are going to be evaluated
• Example: Performance bonus

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 Language of Business
Indian information technology (IT) firms are looking at pre-COVID-19 -pandemic margins
as growth in their profit margins, which was boosted following the pandemic, seems to
come to an end. There has been a re-emergence of operating costs in the IT industry with
employees back in offices and business travel resuming. The combined EBITDA margin of
TCS and Infosys Limited (Infy) was the lowest in Jan-Mar 2022 in comparison to the last
many quarters….. as operating expenses grew at a faster pace than revenue…
Source : Business Standard, 18 Apr 2022;Pg 2.

Sriharsha Majety, the Chief Executive Officer of Swiggy, said the company's food delivery
business turned profitable during Jan-Mar 2023, after considering corporate costs …
Majety's statement comes within days of two US investors slashing their valuation of the
company. Source : Business Standard, 19 May 2023 ;Pg 2.

Aditya Birla Fashion and Retail Limited (ABFRL) has reported a consolidated net
loss of Rs187 crore for Jan-Mar 2023 as against a net profit of Rs43.59 crore in
Jan-Mar 2022.
Source : Business Standard , 23 May 2023;Pg 3.

CRISIL has upgraded the ratings on the bank loan facilities of Rs5,166 crore of Tata
Teleservices (Maharashtra) Limited (TTML) to CRISIL AA-/CRISIL A1+ from CRISIL A/CRISIL
A1. The agency has cited strong support from Tata Sons to Tata Teleservices Limited and
TTML for the upgrade. Source : Financial Express, 23 Nov 2017;Pg 10. 6
 What is Accounting
An information system that measures, processes, and communicates financial
information about an economic entity to help users make decisions

Financial
Statements
• Balance
Sheet For
Data
Business Accounting • Income Users/
Measure, Process, Statement Decision Makers
Activities:
& communicate • Cash Flow
(Transactions) Statement
• Retained
Earnings
Statement

Decisions/Actions
Accounting is a link between Business activities & Decision makers
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 Business Activities
Financing Activities – Includes obtaining funds to begin operations and continue
operating
• Borrowings : Party to whom amounts are owed are Creditors /Lenders -
Amounts owed/ obligations of business are called Liabilities
• Issuing shares: Amounts paid by stockholders to buy shares gives rise to
Common Stock - Payments to stockholders are called Dividends

Investing Activities – Spending funds in productive ways : Purchase of resources a

company needs to operate
• Buying Land, Buildings, Equipment, Furniture etc. – Resources owned by a
business are called Assets

Operating Activities - Once a business has the assets it needs, it can begin its
operations. Includes
• Selling goods and services to customers - Amounts earned from sale of
products are called Revenues
• Employing & paying managers and workers, buying & producing goods and
services, paying taxes - These are Expenses 8
 Users: Who uses accounting information ?
Accounting is a link between Business activities & Decision makers

Decision Makers/ Users

INSIDERS OUTSIDERS

Management Those with Direct Financial Interest

• Human Resources
• Investors
• Marketing
• Creditors/Lenders
• Operations Those with Indirect Financial Interest
• Production • Tax Authorities
• Finance • Regulatory Agencies
• Labour Unions
• Customers
• Economic Planners
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 Accounting is complex
An information system that measures, processes, and communicates financial
information about an economic entity to help users make decisions
Management
GAAP: Choice
Concepts, Financial
Standards Statements
• Balance Users/
Business Sheet For
Data
Accounting Decision Makers
Activities: • Income
(Transactions) Measure, Process, Statement Internal Users
Operating & communicate • Cash Flow External Users
Investing Statement
Financing •Statement of
Auditors, Board, Retained
Companies Law, Earnings
Market Regulator Analysts, CRA , Media

Decisions/Actions
Accounting is a link between Business activities & Decision makers
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 Event Vs Transaction
What does accounting measure ? Business transactions

A Business Transaction: An economic event that affects the financial position

of a business
– It can be an exchange of value (like Purchase, Sale, Payment,
Collection, Loan)
– It can be an event that have the same effect as an exchange of value
(non-exchange transaction like Loss from fire, flood, theft, Physical
wear and tear on equipment, Accumulation of interest)

Every transaction affects the BASIC ACCOUNTING EQUATION

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 Financial Position: Basic Accounting Equation
Economic Resources (OWNED) = Equities (OWED)

Economic Resources = Creditors’ Equities + Stockholders’ (or Owners’) Equity

Assets = Liabilities + Owners’ Equity

Assets = Liabilities + Common stock + Retained Earnings

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 Whether Transaction ?
Are the following events recorded in the accounting records as transactions?

Event Criterion Record/

don’t Record
1 GM purchases an office building Is the Record
financial
2 GAP announces a new marketing strategy Don’t Record
position
3 Wipro receives a new contract (assets, Don’t Record
4 Customer buys a product liabilities, or Record
stockholders’
5 Infosys pays wages to its workers Record
equity) of the
6 Kundu travels discusses a guided trip with a company Don’t Record
potential customer changed?
7 Cost of Supplies used by ABC Ltd Record

• All transactions are events.

• But all economic events are not transactions.
• Only Transactions are recorded.
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 Whether Transaction ?
Are the following events recorded in the accounting records as transactions?

Event Criterion Record/

don’t Record
1 GM purchases an office building Is the Record
financial
2 GAP announces a new marketing strategy Don’t Record
position
3 Wipro receives a new contract (assets, Don’t Record
4 Customer buys a product liabilities, or Record
stockholders’
5 Infosys pays wages to its workers Record
equity) of the
6 Kundu travels discusses a guided trip with a company Don’t Record
potential customer changed?
7 Cost of Supplies used by ABC Ltd Record

• All transactions are events.

• But all economic events are not transactions.
• Only Transactions are recorded.
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 Financial Position: Basic Accounting Equation
Economic Resources (OWNED) = Equities (OWED)

Economic Resources = Creditors’ Equities + Stockholders’ (or Owners’) Equity

Assets = Liabilities + Owners’ Equity

If an asset increases, there must be a corresponding 

• decrease in other asset, increase in a liability, or increase in Owners’ Equity
• Every transaction has dual-effect (double-sided) on Basic Accounting Equation
i.e. it affects at least two items in the accounting equation
• The accounting equation must always balance : the two sides of the equation
must always be equal
• It is important to identify the specific effects of every transaction on the
accounting equation. The process is called Transaction Analysis.
– This is the first step of accounting cycle
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 Exercise on THE ACCOUNTING EQUATION
Exercise 1
A = L + SE
$125,000 = $75,000 + SE
SE = $50,000
Exercise 2
The liabilities of AC Ltd equal one third of total assets, and stockholders’
equity is $90,000. What is the amount of liabilities ?
Assets = 1/3 Assets + $90,000
2/3 Assets = $90,000
Assets = $135,000
Liabilities = 1/3 × $135,000 = $45,000
Exercise 3
At the beginning of the year, LC’s assets were $6,20,000, and its stockholders’
equity was $300,000. During the year, assets increased $90,000 and liabilities
decreased $45,000. What is stockholders’ equity at the end of the year ?
Beginning: $620,000 = Liabilities + $300,000
Liabilities = $320,000
$620,000 = $320,000 + $300,000
Change: + 90,000 – 45,000
End: $710,000 = $275,000 + Stockholders' Equity
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End: Stockholders' Equity = $435,000
 Accounting is complex
An information system that measures, processes, and communicates financial
information about an economic entity to help users make decisions
Management
GAAP: Choice
Concepts, Financial
Standards Statements
• Balance Users/
Business Sheet For
Data
Accounting Decision Makers
Activities: • Income
(Transactions) Measure, Process, Statement Internal Users
Operating & communicate • Cash Flow External Users
Investing Statement
Financing •Statement of
Auditors, Board, Retained
Companies Law, Earnings
Market Regulator Analysts, CRA , Media

Decisions/Actions
Accounting is a link between Business activities & Decision makers
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Communicating with Users • Summarizes revenues
earned & expenses
Income Statement incurred over an
Weiss Consultancy, Inc. accounting period
Income Statement
For the Month Ended December 31, 2014 • Shows if the entity has
earned profits
Revenues Date reflects revenues
Commissions and expenses incurred $14,000 • Net income if
earned over a period of time Revenues > Expenses,
Expenses o.w. Net Loss
Equipment rental $2,800
• Flow Report
expense
Wages expense 1,600 • Use : Past net income
Utilities expense 1,200 provides information
Total expenses 5,600 for predicting future
Income before income $8,400 net income –
taxes
investors, lenders
Income taxes expense 1,200
Net income $7,200
Net income figure used to prepare
statement of retained earnings 18
Communicating with Users

Statement of Retained Earnings

Weiss Consultancy, Inc.
Shows
Statement of Retained Earnings changes in
For the Month Ended December 31, 2014 retained
earnings over
Retained earnings, December 1, 2014 $0 an accounting
Net income for the month 7,200 period
Subtotal $7,200
Less dividends 2,400
Retained earnings, December 31, 2014 $4,800

Net income figure comes

Ending balance of retained
from income statement
earnings is needed in
preparing the balance sheet

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Communicating with Users
Date reflects
Balance Sheet account balances as
Weiss Consultancy, Inc. of a certain date
Balance Sheet
 Reports assets and 31-Dec-2014
claims to assets at a
specific point in time. Assets Liabilities
Cash $61,200 Accounts payable $2,400
 Status or stock
Accounts receivable 4,000
report Supplies 2,000 Stockholders’ Equity
 Use: Evaluate
Land 40,000
Building 100,000 Common stock $200,000
reliance on debt vs.
Retained earnings 4,800
equity in funding its
Total stockholders’ equity 204,800
assets, Cash

Total assets $207,200 Total liabilities and $207,200

stockholders’ equity

Ending balance of Retained Earnings comes

from statement of retained earnings

Assets = Liabilities + Stockholders’ Equity. 20

 Communicating with Users

Statement of Cash Flows

Weiss Consultancy, Inc. Begins with a net
 Where did cash Statement of Cash Flows income figure
come from For the Month Ended December 31, 2012
from income
during the statement
Cash flows from operating activities
period?
Net income $ 7,200
Adjustments to reconcile net income to net
 How was cash cash flows from operating activities
used during the Increase in accounts receivable ($4,000)
period? Increase in supplies (2.000)
Increase in accounts payable 2,400 (3,600)
 What was the Net cash flows from operating activities $ 3,600
Cash flows from investing activities
change in the Purchase of land ($40,000)
cash balance Purchase of building (100,000)
during the Net cash flows from investing activities (140,000)
Cash Flows from financing activities
period?
Investments by stockholders $200,000
Dividends (2,400)
 Cash effect of
Net cash flows from financing activities 197,600
Operating, Net increase (decrease) in cash $61,200
Financing and Cash at beginning of month 0
Cash at end of month Cash at end of month should be $61,200
Investing
the same as Cash account
balance on balance sheet
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 Inter-relationships

3.

1.

2.

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Interrelationships

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 Case Questions: Week 1 - On Richie Advisors Private Ltd.

 Identify the business transactions which took place during the month of February and
March 2020.
 Analyze each of the business transactions during the month of February and March
2020 to explain the impact of transactions on items of Basic Accounting Equation,
namely Assets, Liabilities and Shareholder’s Equity
 Name the accounts which might be involved and classify them as A, L or SE
 Show how each of the transactions affect the accounting equation
 Check whether Accounting Equation is in balance after every transaction and after all
the transactions at the end of each month.
 Compare the accounting equation at the beginning and at the end of the two months
period.
 Segregate the transactions involving Revenues and Expenses.
 Calculate: total revenues – total expenses.
 Prepare single-step Income Statements for the month ended 28th February 2020 and
31st March 2020.
 Prepare Statement of Retained Earnings for the month ended 31st March 2020.
 Prepare Balance Sheets at the end of February and March 2020.

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Thank You