Cash Flow Statement

Defination :

                The Cash Flow Statement is one of the financial statements. It explains that how a company’s cash and cash equivalents have changed during a specific time period .

Methods of Cash flow statement:

There are 2 basic methods to make cash flow statements;

• Direct Method.
• Indirect Method.        

Classification of cash flow statement:

.

• Operating Activities

• Investing Activities

• Financing Activities

                                 Operating Activities

  In Operating Activities

 . Cash effects of transactions that create revenues and expenses
 . Enter into the determination of net income

 Cash Inflows and outflow in operating activity :

  Inflow:

.From sale of goods and services

.from interest and dividend received

  Cash Outflows:

. To supplier for inventory

. To employees for services

. To Govt for taxes

. To lenders for interest

. To others for expenses

                       Investing Activities

Investing Activities includes:

. Purchasing and disposing of investments and productive long lived assets using cash

. Lending money and collecting the loans

  Cash Inflows and outflow in Investing activity :

Cash Inflows:

. From Sale of Property,Plant and Equipment.

. From sale f investments in debt or equity securities of other types

. From collection of principle on loans to other entities

Cash Outflows:

. To purchase Property, Plant and equipment

. To purchase investments in debt or equity securities of other tyes

. To make Loans

                             Financing Activities:

Financing activities includes.

.Obtaining cash from issuing debt and repaying the amounts borrowed

.Obtaining cash from stockholders, repurchasing shares and paying dividends.

 Cash inflow and outflow in Financing Activities

 Cash Inflows:

. From sale of equity securities

. From issuance of debts

Cash Outflows:

. To stockholders as dividends

. To redeem longterm debt or reaquire capital stock

Adjusting Entries

Definition:

             Adjusting entries are journal entries made at the end of financial accounting year to adjust revenues and expenses to that accounting year where they actually occurred.

There are five basic types of adjusting entries:-

Accrued revenues :

                   It is also called accrued assets are revenues already earned but not yet paid or recorded.

 Entry :

                   Accrued Revenue (dr)

                                             Revenue  (cr)

 Unearned revenues:

                 it s also called deferred revenues are revenues received in cash and recorded as liabilities prior to being earned.

     

        Entry :

                           Revenue (dr)

                                                  Unearned Revenue(cr)

Accrued expenses:

                 it also called accrued liabilities are expenses already incurred but not yet paid or recorded.

      

        Entry:

                     Salaries Expense (dr)

                                            Salaries payable(cr)

Prepaid expenses:

           or deferred expenses are expenses paid in cash and recorded as assets prior to being used.

Entry:

                       Insurance expense (dr)

                                            Prepaid insurance(cr)

·        Other adjusting entries include depreciation of fixed assets, allowances for bad debts, and inventory adjustments.

BANK RECONCILIATION STATEMENT

               

A Bank reconciliation is a process that explains the difference between the bank balance shown in an organisation's Bank statement, as supplied by the bank, and the corresponding amount shown in the organisation's accounting records at a particular point in time.

A transaction relating to bank has to be recorded in both the books i.e.  Cash Book and Pass Book but sometimes it happens that a  bank transaction is recorded only in one book and not recorded simultaneously in other book causing difference in the two balances.

We operate a bank account in which we deposit money and withdraw money from time to time. We maintain a record with ourselves of these deposits and withdrawals. One day we get our pass-book (statement

issued by the bank) updated but are surprised to find that the balance shown by the pass book was different from what it should have been as per our records.

Then it is obvious that we will compare the two sets of records and find out items which are recorded in one but not in the other. Similar situation may arise in case of a business concern which operates a bank account. These business concerns maintain record of all of their banking transactions in their bank column of the cash book.

On any particular date the bank balance shown by the bank column cash book and that shown by the pass book should be the same. But if there is difference between the two, the business concern will find out the reasons to reconcile the balance.

Following Points are considered;

(a) Compare transactions that appear on both Cash Book and Bank Statement

(b) Update Cash Book from details of transactions appearing on Bank Statement

(c)  Balance the bank columns of the Cash Book to calculate the revised balance

(d) Enter correct date of the statement

(e) Enter the balance at bank as per the Cash Book

(f) Enter details of unpresented cheques

(g) Enter sub-total on reconciliation statement

(h) Enter details of bank lodgements

(i) Calculate balance as per Bank Statement

ISA2

ISA2 inventories

Objectives:

The objective of this Standard is to prescribe the accounting treatment

for inventories. A primary issue in accounting for inventories is the amount

of cost to be recognized as an asset and carried forward until the related

revenues are recognized. This Standard provides guidance on the

determination of cost and its subsequent recognition as an expense,

including any write-down to net realizable value. It also provides guidance

on the cost formulas that are used to assign costs to inventories.

                                                                                                                                                                   Scope:

The Standard clarifies that some types of inventories are outside its scope while

certain other types of inventories are exempted only from the measurement

requirements in the Standard

Measurement of Inventories ;

It includes:                                                                                                                                                     1.Costs of Purchase.     2. Costs of Conversion.        3. Cost of Inventories.

Techniques for the Measurement of Cost

 Techniques for the measurement of the cost of inventories, such as the standard

cost method or the retail method, may be used for convenience if the results

approximate cost. Standard costs take into account normal levels of materials and

supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and,

if necessary, revised in the light of current conditions.

                                                                                                                                                        Recognition as an Expense                                                       

When inventories are sold, the carrying amount of those inventories shall

be recognised as an expense in the period in which the related revenue is recognised.

Net Realisable Value

The cost of inventories may not be recoverable if those inventories are damaged, if

they have become wholly or partially obsolete, or if their selling prices have

declined. The cost of inventories may also not be recoverable if the estimated costs

of completion or the estimated costs to be incurred to make the sale have

increased. The practice of writing inventories down below cost to net realisable

value is consistent with the view that assets should not be carried in excess of

amounts expected to be realised from their sale or use.

                                                                                                                                                            Disclosure  :

The financial statements shall disclose:                   

(a) the accounting policies adopted

in measuring inventories, including the cost formula used;

(b) the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity;

(c) the carrying amount of inventories carried at fair value less costs to sell;

(d) the amount of inventories recognised as an expense during the period;

(e) the amount of any write-down of inventories recognized;

as an expense in the period;

(f) the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period

IAS16

Objective

The objective of IAS 16 is to prescribe the accounting treatment for property, plant,

and equipment (PP&E) so that users of the financial statements can discern

information about the entity’s investment in its PP&E and any changes in those

investments.

The principal issues associated with accounting for PP&E are (¶1)

• recognition of the assets when they are acquired

• determination of the carrying amounts of these assets in subsequent periods

• determination of depreciation charges and any impairment losses to be recognized

in relation to these assets.  International Accounting Standard 16 (IAS 16), Property, Plant and Equipment• 2

The general principle underlying IAS 16 is that, first, an entity accounts for all costs of

property, plant, and equipment at the time these costs are incurred and, second, it then

allocates the costs over the useful life of the asset. These concepts should already be familiar

to Canadian accountants; what IAS 16 adds to GAAP is the option to use fair value to

determine the carrying value of PP&E subsequent to acquisition.

Cost model:

 After recognition as an asset, an item of property, plant and equipment

shall be carried at its cost less any accumulated depreciation and any accumulated

impairment losses. 

Revaluation model: 

After recognition as an asset, an item of property, plant and

equipment whose fair value can be measured reliably shall be carried at a revalued

amount, being its fair value at the date of the revaluation less any subsequent

accumulated depreciation  and subsequent accumulated impairment losses.

Revaluations shall be made with sufficient regularity to ensure that the carrying

amount does not differ materially from that which would be determined using fair

value at the balance sheet date.

If an asset’s carrying amount is increased as a result of a revaluation, the increase

shall be credited directly to equity under the heading of revaluation surplus. However,

the increase shall be recognised in profit or loss to the extent that it reverses a

revaluation decrease of the same asset previously recognised in profit or loss. If an

asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be

recognised in profit or loss. However, the decrease shall be debited directly to equity

under the heading of revaluation surplus to the extent of any credit balance existing in

the revaluation surplus in respect of that asset. 

Depreciation:

Depreciation is the systematic allocation of the depreciable amount of an asset over its

useful life. Depreciable amount is the cost of an asset, or other amount substituted for

cost, less its residual value.  Each part of an item of property, plant and equipment

with a cost that is significant in relation to the total cost of the item shall be

depreciated separately.  The depreciation charge for each period shall be recognised in

profit or loss unless it is included in the carrying amount of another asset. 

The depreciation method used shall reflect the pattern in which the asset’s future

economic benefits are expected to be consumed by the entity. 

DEBIT CREDIT, BASIC ACCOUNTING EQUATION

DEBIT CREDIT, BASIC ACCOUNTING EQUATION

For this entry, I’ll try to explain the basic accounting equation in relation to debit-credit.

First, I’m going to define the basic definition, which basically state that for a given business entity, the basic accounting equation is:

Assets = Liabilities + Owner’s Equity

And is derived from:

assets = claims on assets

Assets are items that have monetary value and are owned by the business. By definition, Assets are placed on the left side of the Accounting equation. A term has been assigned describing the left side, known as debit.
Claims on Assets define the claims on every item of the Asset. For example, capital is an item that is known to be assigned to the owner, while payables are claims of others against an Asset. By definition, this side is placed at the right side of the Accounting equation known as credit side.

debit = credit

The equation above has the following meanings:

1. The left side is denoted by the term debit.
2. The right side is denoted by the term credit.
3. The two sides of the equation are equal.

assets = debit

In our basic accounting equation, the element known as Asset is assigned to debit. The equation shown above simply means that all assets are placed on the debit side, left side of the basic accounting equation.

claims on assets = credit

On the right side of the basic accounting equation, we find credit. This simply means that all claims on assets are to be placed on the right side of the equation, known as credit side. To illustrate it, we state claims on assets is equal to credit.

Secondly, At this point, the term Claims on Assets will be covered in detail, showing the two parts. The credit side of the equation has two items, namely: Liabilities and Owner’s Equity.
Liabilities are items owed, they are normally items that were borrowed from other businesses that must be covered or paid sometime in the future.

Owner’s Equity are items belonging to the owner of the business. They are items such as money, equipment, etc that are/were added by the owner to the business.
Example:
1) Mark invested money into the business, worth $25,000.

2) Mark added office equipment, by adding his personal laptop computer worth $1,200.