1. Financial accounting: Session One
Ashish Pandey

2. Accounting environment
Ministry of corporate affairs
Administers Companies act 1956 (revised companies act 2013)
Supervises three professional bodies
Imp provisions of the act
Book of a/c to be kept
Financial statements
Compliance with accounting standards
RBI
IRDA
SEBI
Income Tax Act, 1961

3. (AS) 2 Valuation of Inventories

4. 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 the production process or in the rendering of services.

5. Measurement of Inventories
Inventories should be valued at the lower of cost and net realisable value.

6. Cost of Inventories The cost of inventories should comprise all
costs of purchase,
costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.

7. Cost formulas
The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs

8. Cost formulas
The cost of inventories, other than those dealt with in previous slide, should be assigned by using the first-in, first-out (FIFO), or weighted average cost formula.

9. Net realisable value
is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

10. 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.

11. Net Realisable value
The cost of inventories may also not be recoverable if
the estimated costs of completion or the estimated costs necessary to make the sale have increased.
The practice of writing down inventories 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.

12. Disclosure The financial statements should disclose:
(a) the accounting policies adopted in measuring inventories, including the cost formula used; and
(b) the total carrying amount of inventories and its classification appropriate to the enterprise.

13. Inventory System
Periodic inventory system
Perpetual inventory system

14. Date
transaction
units
Unit cost
Total cost
Jan 1
Beginning inventory
100 2
200
Mar 27
Purchase 3
300
June 12 4
400
Sept 19 5
500
Nov 30 6
600
total
2000
sold
350 10
3500
Dec 31
Ending inventory

15. Specific identification
Dec 31 inventory constitute of
60 units from march 27 purchase
70 units from june 12 purchase
And 20 units from sept 19 purchase
Calculate value of closing inventory under specific identification, fifo, lifo & wac.
Calculate gross profit for all the four inventory costing methods

16. Effects of FIFO,WAC & LIFO
prices
Ending inventory
Cost of goods sold
Gross profit
Increasing
FIFO>WAC>LIFO
LIFO>WAC>FIFO
Constant
FIFO=WAC=LIFO
Decreasing

17. (AS) 10 Accounting for Fixed Assets

18. Fixed Assets
It is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.
It comprises a significant portion of the total assets of an enterprise, & therefore are imp in the presentation of financial position.

19. Component of cost
The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price.

20. directly attributable costs are
site preparation;
initial delivery and handling costs;
installation cost, such as special foundations for plant; and
professional fees, for example fees of architects and engineers.

22. Non-monetary Consideration
When a fixed asset is acquired in exchange for another asset, its cost is usually determined by reference to the fair market value of the consideration given.
When a fixed asset is acquired in exchange for shares or other securities in the enterprise, it is usually recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident.

23. Further
Subsequent expenditures related to an item of fixed asset should be added to its book value only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance.
Fixed asset should be eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal.

24. Exceptional & extraordinary items

25. Exceptional items Exceptional item arise from ordinary activity;
They are not expected to be recurring;
the nature and amount of such item is relevant to user of financial statement;

26. Illustrations of Exceptional items
 Profit or loss arises on disposal of fixed asset.
Abnormal losses on long term contract.
Amount received in settlement of insurance claims
Write off of expenditure capitalized on intangible assets other than amortisation.

27. Extraordinary items
‘Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly.

28. Illustrations of Extraordinary items
Significant charge in Government fiscal policy;
attachment of property,
loss of property due to earthquake/natural calamity.

29. Exercise
Mamta Fashions Pvt ltd..