as-2 & as-6 report (by vivacity)

8/8/2019 As-2 & as-6 Report (by Vivacity)

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Financial Accounting Report Cash Flow and Analysis of Balance Sheet

ATHARVA INSTITUTE OFMANAGEMENT STUDIES

Financial Accounting Report

On

ACCOUNTING STANDARD - 2

AND

ACCOUNTING STANDARD - 6

By

Vivek Jadhav ()

Kiran Jadhav ()

Ajit Hirekar (13)

Vipul Dhorajiwala ()

Nilesh Isal (15)

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MMS 1 st Year Division A

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Introduction

Accounting Standard-2: Valuation of

InventoriesObjective :

A primary issue in accounting for inventories is the determinationof the value at which inventories are carried in the financialstatements until the related revenues are recognized. ThisStatement deals with the determination of such value, includingthe ascertainment of cost of inventories and any write-downthereof to net realizable value.

Scope:

1. This Standard should be applied in accounting for inventoriesother than:

(a) Work in progress arising under construction contracts,including directly related service contracts(b) Work in progress arising in the ordinary course of

business of service providers;(c) Shares, debentures and other financial instruments heldas sk-in-trade; and(d) Producers' inventories of livestock, agricultural and forestproducts, and mineral oils, ores and gases to the extent thatthey are measured at net realizable value in accordance withwell established practices in those industries.

The inventories referred to in paragraph 1 (d) are measured atnet realizable value at certain stages of production. This occurs,for example, when agricultural crops have been harvested ormineral oils, ores and gases have been extracted and sale isassured under a forward contract or a government guarantee, orwhen a homogenous market exists and there is a negligible risk of failure to sell. These inventories are excluded from the scope of this Standard.

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Definition: The following terms are used in this Statement with the meaningsspecified:

Inventories are assets :(a) Held for sale in the ordinary course of business;(b) In the process of production for such sale; or(c) In the form of materials or supplies to be consumed in theproduction process or in the rendering of services.

Net realizable value is the estimated selling price in the ordinarycourse of business less the estimated costs of completion and theestimated costs necessary to make the sale.

Measurement of InventoriesInventories should be valued at the lower of cost and netrealizable value.

A. Cost of Inventories:

1. Costs of Purchase

The costs of purchase consist of the purchase price includingduties and taxes (other than those subsequently recoverable bythe enterprise from the taxing authorities), freight inwards andother expenditure directly attributable to the acquisition. Tradediscounts, rebates, duty drawbacks and other similar items arededucted in determining the costs of purchase.

2. Costs of Conversion The costs of conversion of inventories include costs directlyrelated to the units of production, such as direct labour. They alsoinclude a systematic allocation of fixed and variable productionoverheads that are incurred in converting materials into finishedgoods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the

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volume of production, such as depreciation and maintenance of factory buildings and the cost of factory management andadministration. Variable production overheads are those indirectcosts of production that vary directly, or nearly directly, with the

volume of production, such as indirect materials and indirectlabour. The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the normalcapacity of the production facilities. Normal capacity is theproduction expected to be achieved on an average over a numberof periods or seasons under normal circumstances, taking intoaccount the loss of capacity resulting from planned maintenance.

The actual level of production may be used if it approximatesnormal capacity. The amount of fixed production overheadsallocated to each unit of production is not increased as aconsequence of low production or idle plant. Unallocatedoverheads are recognized as an expense in the period in whichthey are incurred. In periods of abnormally high production, theamount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measuredabove cost. Variable production overheads are assigned to eachunit of production on the basis of the actual use of the productionfacilities.

A production process may result in more than one product beingproduced simultaneously. This is the case, for example, when joint products are produced or when there is a main product anda by-product. When the costs of conversion of each product arenot separately identifiable, they are allocated between theproducts on a rational and consistent basis. The allocation may bebased, for example, on the relative sales value of each producteither at the stage in the production process when the productsbecome separately identifiable, or at the completion of production. Most by-products as well as scrap or waste materials,by their nature, are immaterial. When this is the case, they areoften measured at net realizable value and this value is deductedfrom the cost of the main product. As a result, the carryingamount of the main product is not materially different from itscost.

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FIFO and LIFO accounting (first in - first out, last in - first out).FIFO regards the first unit that arrived in inventory as the first onesold. LIFO considers the last unit arriving in inventory as the firstone sold. Which method an accountant selects can have asignificant effect on net income and book value and, in turn, ontaxation. Using LIFO accounting for inventory, a companygenerally reports lower net income and lower book value, due tothe effects of inflation. This generally results in lower taxation.Due to LIFO's potential to skew inventory value, UK GAAP and IAShave effectively banned LIFO inventory accounting.

2. Weighted average

Inventory valuation method used where different quantities of goods are purchased at different unit costs. Under this method,weights are assigned to the cost price on the basis of the quantityof each item at each price. It takes Cost of Goods Available forSale and divides it by the total amount of goods from BeginningInventory and Purchases. This gives a Weighted Average Cost perUnit. A physical count is then performed on the ending inventoryto determine the amount of goods left. Finally, this amount ismultiplied by Weighted Average Cost per Unit to give an estimateof ending inventory cost.

3. Standard cost accounting

It uses ratios called efficiencies that compare the labour andmaterials actually used to produce a good with those that thesame goods would have required under "standard" conditions. Aslong as similar actual and standard conditions obtain, few

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problems arise. Unfortunately, standard cost accounting methodsdeveloped about 100 years ago, when labour comprised the mostimportant cost in manufactured goods. Standard methodscontinue to emphasize labor efficiency even though that resource

now constitutes a (very) small part of cost in most cases.Standard cost accounting can hurt managers, workers, and firms in several ways.For example, a policy decision to increase inventory can harm a manufacturingmanager's performance evaluation. Increasing inventory requires increased

production, which means that processes must operate at higher rates. When (not if)something goes wrong, the process takes longer and uses more than the standardlabor time. The manager appears responsible for the excess, even though s/he hasno control over the production requirement or the problem.

In adverse economic times, firms use the same efficiencies to downsize, right size,or otherwise reduce their labor force. Workers laid off under those circumstanceshave even less control over excess inventory and cost efficiencies than their managers.

Many financial and cost accountants have agreed for many years on the desirabilityof replacing standard cost accounting. They have not, however, found a successor.

4. Retail method

It is generally used in retail business, when it is difficult toascertain cost of individual item. It is applicable when items of inventories are rapidly changing items and have similar marginsand for which it is impracticable to use other costing method.

Under this method, the cost of inventory is determined byreducing from the sale of inventories the approximate percentageof gross margin. The percentage used takes into considerationthe inventory that has been marked down o below its originalselling price.

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Determination of net realizable value of inventories

Net realizable value means the estimated selling price in ordinarycourse of business, less estimated cost of completion andestimated cost necessary to make the sale. NRV is estimated onthe basis of the most realizable evidence at the time of valuation.Estimation of net realizable value also takes into account thepurpose for which the inventory is held. Estimation of netrealizable value is made as at each balance sheet date.

Estimation of net realizable value:

- if the finished product in which raw materials and supplies usedis sold at cost or above cost, then the estimated realizable valueof raw materials and supplies is considered more than its cost.

- if finished product in which raw material and supplies used issold below cost, then the estimated realizable value of rawmaterial or supplies is equal to replacement price of raw materialor supplies.ss

Comparison between cost and net realizablevalue

The comparison between cost and NRV should be made item byitem or by group of items. The value between the two, whicheveris lower should be taken for the computation of inventories.

Disclosure in financial statementPage 9


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Following should be disclosed:

Accounting policy adopted in measuring inventories Cost formula used

Classification of inventories like finished goods, WIP, rawmaterial, spare parts and its carrying amount.

Accounting standard-6: Depreciation Accounting

Introduction

This Statement deals with depreciation accounting and applies to

all depreciable assets, except the following items to which specialconsiderations apply:

(i) Forests, plantations and similar regenerative naturalresources;

(ii) Wasting assets including expenditure on theexploration for and extraction of minerals, oils, naturalgas and similar non-regenerative resources;

(iii) Expenditure on research and development;(iv) Goodwill;

(v) Live stock.

This statement also does not apply to land unless it has a limiteduseful life for the enterprise.

Different accounting policies for depreciation are adopted by

different enterprises. Disclosure of accounting policies fordepreciation followed by an enterprise is necessary to appreciatethe view presented in the financial statements of the enterprise.

Definitions

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Depreciation is a measure of the wearing out, consumption orother loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and marketchanges.

Depreciation is allocated so as to charge a fair proportion of thedepreciable amount in each accounting period during theexpected useful life of the asset. Depreciation includesamortization of assets whose useful life is predetermined.

Company profile : TWENTYFIRST CENTURY MANAGEMENTSERVICES LIMITED

TWENTYFIRST CENTURY MANAGEMENT SERVICES LIMITED (TCMS)

was founded by Robert Bullemer in 1986. The CaliforniaCorporation is headquartered in Santa Barbara, California. Thecompany has four major product/service divisions:

Computer systems

Hotel systems

Loan systems

Partnership systems

The PARTNERSHIP SYSTEMS division's primary product, thePARTNERS SYSTEM, is a comprehensive administration system forhedge funds and syndicators of real estate, oil & gas, movie

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production. The HOTEL SYSTEMS division produces acomprehensive property management system for hotels, motelsand resorts. The LOAN SYSTEMS division offers a series of products for loan origination, servicing, portfolio management,

and pipeline tracking. TCMS plans to develop more products for specialized verticalmarket applications. The product development strategy is afocused approach which targets specific vertical markets with afully integrated set of functional applications.

TCMS, after its inception in India in 1995, is listed in the followingstock exchanges:

Madras Stock Exchange Ltd., National Stock Exchange of India Ltd. The Stock Exchange, Mumbai.

BALANCE SHEET OF TCMS:

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Financial Ratios

Current RatioCurrent Ratio = _Current Assets_

Current Liabilities

It is also known as solvency ratio as it indicates solvency positionof the company. It is also known as Working Capital Ratio as itrepresents working capital. It indicates the sources available tomeet current obligations. Hence, it is expected that current ratio

should be higher. The ideal current ratio is 2:1. The current ratio of TCMS is 1.82 for 2009 and 2.05 for 2010. Thisis the ideal ratio and is a good indication for the company.

Quick Ratio

Quick Ratio = _Quick Assets__

Quick LiabilitiesIt is also known as acid test ratio. This ratio indicates theimmediate ability of a company to pay off its current obligations.It indicates the solvency and the financial soundness of thebusiness.

The ideal quick ratio is 1:1.

The quick ratio of TCMS is 1.08 for 2009 and 1.32 for 2010.

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Debt to Assets Ratio

Debt to Assets Ratio = Total AssetsTotal Debts

Where,Debts = Loan Funds + Current Liabilities

Assets = Fixed Assets + Current Assets

This ratio indicates the share of debts in creating the total assetsof the firm.

The Debt to Assets Ratio of TCMS is 0.21 for 2009 and 0.33 for2010.

If the ratio is less than 0.5, it means most of the company's assetsare financed through equity.

Debt Equity Ratio

Debt Equity Ratio = _Debt_ Equity

Where,

Debt = All liabilities including long-term and short-term.

Equity = Net worth + Preference Capital

Higher the ratio, less secure are the creditors. In the times of distress or difficulty, they suffer more than the owners. Contraryto this, lower the ratio, creditors enjoy higher degree of safety.

The Debt Equity Ratio of TCMS is 0.27 for 2009 and 0.5 for 2010.

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Earnings Per Share

Earnings Per Share = Net Profit After Tax - Preference DividendNo of Equity Shares

This ratio expresses the amount of earnings per share after taxesand preference dividend during certain period. As this ratioindicates the overall performance of the organization, such ratiocalculated for the year-to-year proves to be very helpful to theshareholders and the investors to take investment decisions. Italso affects the market prices of the shares.

The Earnings Per Share of TCMS for 2009 is 14.95% and 16.35%for 2010.

This indicates better returns for shareholders.

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