COURSE TITLE: FINANCIAL STATEMENTS ANALYSIS COURSE CODE (FIN621) PROFESSOR: NAIMAT ULLAH ABID

COURSE OBJECTIVE Enabling the participants of the course:- To not merely read but to read through the Financial Statements generated by a business enterprise at the end of its accounting period; To not merely read but to read through the Financial Statements generated by a business enterprise at the end of its accounting period; To be familiar with techniques and skills of interpretation and analysis of financial statements and thereby. To be familiar with techniques and skills of interpretation and analysis of financial statements and thereby. To derive sufficient, relevant and appropriate information from these to be able to make informed and intelligent business decisions. To derive sufficient, relevant and appropriate information from these to be able to make informed and intelligent business decisions.

COURSE CONTENTS Accounting principles and Accounting cycle. Accounting principles and Accounting cycle. Preparation of Financial Statements. Preparation of Financial Statements. Notes to Financial Statements, Audit Report, Annual Report. Notes to Financial Statements, Audit Report, Annual Report. Quality of Financial Reports. Quality of Financial Reports. Types of Business and Business Organizations. Types of Business and Business Organizations. Analysis Techniques. Analysis Techniques. Practical Illustration of Analysis Techniques. Practical Illustration of Analysis Techniques.

MAIN OBJECTIVE To derive sufficient, relevant and appropriate information from these to be able to make informed and intelligent business decisions. To derive sufficient, relevant and appropriate information from these to be able to make informed and intelligent business decisions.

RECOMMENDED BOOKS: i)“Accounting: The basis for Business Decisions” by Meigs & Meigs (9th Edition). ii)”Understanding Financial Statements” by Lyn M. Frazer and Aileen Ormiston (Seventh Edition).

WHAT IS ACCOUNTING? Accounting shows the results of business operations for an Accounting period. Accounting shows the results of business operations for an Accounting period. It is the language of business enterprise to show its Financial results. It is the language of business enterprise to show its Financial results. Accounting measures the records and communicates the results of the activities of business. Accounting measures the records and communicates the results of the activities of business.

ONE OF THE MAIN OBJECTIVE Provide decision-makers with sufficient, relevant information to make prudent business decisions Provide decision-makers with sufficient, relevant information to make prudent business decisions Information provided through accounting reports called financial statements: “Financial reporting” Information provided through accounting reports called financial statements: “Financial reporting”

Financial Statements generated by a business i) Income statement: shows operational results of business during/over the accounting period. ii) Statement of owners’ equity: shows changes in Owners capital account. iii) Balance sheet: Depicts Financial position at a specific date; iv) Statement of cash flows: Show cash inflows (receipts) and cash outflows (payments) over/during the accounting period. It is prepared from balance sheet. v) Notes to the Financial Statements are integral part of Financial Statements.

Accounting Period Accounting period is the period of time covered by an Income Statement. Accounting period is the period of time covered by an Income Statement. Usually one year; calendar year (Jan to Dec) or financial year (July to June). Usually one year; calendar year (Jan to Dec) or financial year (July to June). Accounting year synchronize with Financial year. Accounting year synchronize with Financial year. Financial Statements prepared at the end of accounting period. Financial Statements are the end product of accounting process/cycle. Financial Statements prepared at the end of accounting period. Financial Statements are the end product of accounting process/cycle.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) GAAP consist of Ground rules & Principles for preparing Financial statements. GAAP consist of Ground rules & Principles for preparing Financial statements. Embody accounting concepts, measurement techniques and standards of presentation of Financial statements. Embody accounting concepts, measurement techniques and standards of presentation of Financial statements. It Compares between various enterprises and of the same enterprise over many years. It Compares between various enterprises and of the same enterprise over many years. The usage of accounting principles provide reliable Financial data of a business organization.. The usage of accounting principles provide reliable Financial data of a business organization..

GAAP Entity principle: specific business entity separate from personal affairs of the owner's. Entity principle: specific business entity separate from personal affairs of the owner's. Cost principle: valuation and recording of assets at cost. Cost principle: valuation and recording of assets at cost. Going-concern assumption: connected with cost principle, assets acquired for use and not for resale. Going-concern assumption: connected with cost principle, assets acquired for use and not for resale. Objectivity principle: definite, factual basis for assets valuation; measuring transactions objectively. Objectivity principle: definite, factual basis for assets valuation; measuring transactions objectively. Stable currency principle Stable currency principle Adequate disclosure concept: Financial Statements must provide all facts necessary for proper interpretation of statements; Adequate disclosure concept: Financial Statements must provide all facts necessary for proper interpretation of statements; Subsequent events, lawsuits against the business, assets pledged as securities/collaterals, contingent liabilities etc; reflected in Notes. Subsequent events, lawsuits against the business, assets pledged as securities/collaterals, contingent liabilities etc; reflected in Notes.

Accounting Equation A SSETS = LIABILITIES + OWNER’S EQUITY Balance Sheet based on Accounting Equation; a detailed statement of the Equation. Balance Sheet based on Accounting Equation; a detailed statement of the Equation. Utilization of Funds ↔ Source of Funds Utilization of Funds ↔ Source of Funds (what it) OWNS = (what it) OWES (what it) OWNS = (what it) OWES Assets ↔ claimants of Assets. Assets ↔ claimants of Assets. Balance sheet shows Financial position on a specific date. Balance sheet shows Financial position on a specific date. Three main Elements of Balance Sheet: Three main Elements of Balance Sheet: a) Assets b) Liabilities c) Owner’s Equity Sub Elements Of assets are cash, Land, Building etc. Sub Elements Of assets are cash, Land, Building etc. Elements of Income Statement: Revenues & Expenses they affects Owner’s equity. Elements of Income Statement: Revenues & Expenses they affects Owner’s equity.

DUAL ASPECTS OF TRANSACTIONS: Each financial transaction affects two or more elements or sub-elements of the Accounting Equation. Each financial transaction affects two or more elements or sub-elements of the Accounting Equation. Each financial transactions affects Balance Sheet i.e. financial position of the business. Each financial transactions affects Balance Sheet i.e. financial position of the business.

KHIZR PROPERTY DEALER Financial Position as on 30 th July,2006 July 1,2006.Deposit in business by owner Rs. 180,000. The cash account will appear at Rs. 180,000 and Owner’s equity at Rs. 180,000 in balance sheet. Assets (Rs)Owner’s equity (Rs) i)Cash 180,000Khizr, Capital 180,000

July3,2006 Purchased of land for cash for Rs.141,000. Land will appear as assets in the balance sheet Rs. 39,000. Cash will be decreased from Rs. 180,000 to Rs. 39,00 due to purchased of land on cash. Net result in Accounting equation will be as follows: ii)Cash 39,000 Land 141,000 Total Assets 180,000 Khizr, Capital 180,000 Total owner’s equity 180,000

July 5, 2006 Purchase of building partly on cash (Rs.15,000) and partly on credit (Rs.21,000) iii)Cash 24,000 Land 141,000 Building 36,000 Total Assets 201,000 Liabilities & Owners Equity Accounts Payables 21,000 Owner’s equity 180,000 Total 201,000 Accounts Payable & Notes Payable Notes payables are in form of written statements and carry certain rate of interest while Accounts payables are not in written form and carry no interest.

July 10, 2006 Sale of part of land on credit for Rs.11,000 The value of land will decreased by Rs. 11,000 and account receivables will appear in balance sheet at Rs. 11,000. iv)Cash 24,000 Accounts Rec. 11,000 Land 130,000 Building 36,000 Total 201,000 Accounts Payable 21,000 Owner’s equity 180,000 _______ 201,000

July 14, 2006 Purchase of Office Equipment for Rs.5400 on credit. Again Equipment account will appear in balance sheet at Rs. 5,400 and liability of Rs. 5,400 will increase. v)Cash 24,000 A/Cs Receivable 11,000 Land 130,000 Building 36,000 Office equipment 5,400 Total 206,400 A/Cs Payable 26,400 Owner’s equity 180,000 ______ 206,400

July 20, 2006 Partial collection of Accounts Rs.1500 The account receivables will reduced to Rs. 9,500 and cash will increase to Rs. 25,500. vi)Cash 25,500 A/C Receivable 9,500 Land 130,000 Building 36,000 Office Equipment 5,400 Total 206,400 A/Cs Payable 26,400 Owner’s equity 180,000 ______ 206,400

July 31, 2006 Payment of liability (A/C Payable) Rs.3,000. The cash account will reduced to Rs. 22,500 and Liability will also reduced by Rs. 3,000. vii)Cash 22,500 A/Cs Receivable 9,500 Land 130,000 Building 36,000 Office equipment 5,400 (Total) Assets 203,400 A/C Payable 23,400 Owner’s equity 180,000 Liabilities + O equity 203,400