Unit 1: Introduction to Accounting (Basics)

1. What is Accounting?

Accounting is the process of recording, summarizing, and interpreting financial

transactions of a business. It helps businesses track income, expenses, and overall
financial health.

1.1 Definition of Accounting

• American Institute of Certified Public Accountants (AICPA):
“Accounting is the art of recording, classifying, and summarizing
transactions in a significant manner and interpreting the results.”
• Robert N. Anthony:
“Accounting is a means of collecting, summarizing, analyzing, and reporting
financial information.”

1.2 Characteristics of Accounting

1. Records financial transactions: Only monetary transactions are
recorded.
2. Classifies and summarizes data: Transactions are categorized
(e.g., sales, purchases).
3. Measures in terms of money: All business events are recorded in
monetary terms.
4. Analyzes and interprets: Helps in decision-making for
management.
5. Communicates results: Reports are shared with stakeholders.

2. Branches of Accounting
1. Financial Accounting – Records and summarizes financial
transactions for external reporting.
2. Cost Accounting – Tracks production costs to improve efficiency.
3. Management Accounting – Provides financial data for business
decision-making.
4. Tax Accounting – Helps in calculating tax liabilities.
5. Forensic Accounting – Investigates fraud and financial crimes.
3. Accounting Process (Steps)
1. Identifying – Recognizing business-related financial
transactions.
2. Measuring – Expressing them in monetary terms.
3. Recording – Entering them in journals.
4. Classifying – Organizing data in ledgers.
5. Summarizing – Preparing trial balances and financial statements.
6. Analyzing & Interpreting – Evaluating financial performance.
7. Communicating – Sharing insights with management and
investors.

4. Objectives of Accounting
• Maintain systematic records.
• Determine profits and losses.
• Assess financial position (Balance Sheet).
• Provide information to investors, management, and creditors.
• Ensure compliance with laws and regulations.

5. Users of Accounting Information

Internal Users
• Owners & Shareholders – Want to know profit & growth.
• Management – Uses data for decision-making.
• Employees & Trade Unions – Assess financial stability for job security.

External Users
• Investors – Analyze company performance before investing.
• Creditors & Lenders – Assess risk before lending money.
• Government & Tax Authorities – Monitor tax compliance.
• Public & Media – Assess financial health for transparency.

6. Advantages of Accounting

Maintains systematic records

 Helps in financial decision-making
Assists in taxation matters
Helps in valuation of business
Aids in legal matters
Replaces memory (prevents forgetting transactions)

7. Limitations of Accounting

Ignores qualitative factors (employee skill, honesty, etc.)

Can be biased (different valuation methods give different results)
Based on estimates (depreciation, bad debts, etc.)
Ignores inflation and market value changes
Risk of manipulation (window dressing)

8. Important Accounting Terms

Term Meaning
Assets Resources owned by a business (cash, property, stock, etc.)
Liabilities Debts owed by a business (loans, creditors, outstanding expenses)
Capital Owner’s investment in the business
Expenses Costs incurred to run a business (salaries, rent, electricity)
Income Money earned from sales or services
Profit Revenue minus expenses
Stock/Inventory Goods available for sale

9. Accounting Concepts

Concept Explanation
Business Entity Business and owner are separate legal entities
Going Concern Business will continue for the foreseeable future
Money Measurement Only monetary transactions are recorded
Accounting Period Financial performance is measured over specific time periods
Cost Concept Assets are recorded at their purchase price
Matching Concept Expenses are recorded in the same period as the revenue they
generate
Accrual Concept Revenue is recorded when earned, not when cash is received

10. Golden Rules of Accounting

Type of Account Rule

Personal Account Debit the receiver, Credit the giver
Real Account Debit what comes in, Credit what goes out
Nominal Account Debit all expenses and losses, Credit all incomes and gains

Quick Revision

Accounting is the process of recording, summarizing, and interpreting business

transactions.
It helps businesses track financial performance and aids in decision-making.
There are three main branches of accounting – Financial, Cost, and Management
Accounting.
Users of accounting information include owners, management, investors, creditors,
and the government.
Accounting concepts ensure standardized financial reporting.
Golden Rules of Accounting help in recording transactions correctly.

Quick Test on Unit 1

Part 1: MCQ 1. What is the primary objective of accounting?

a) To record personal expenses
b) To track business transactions systematically
c) To pay taxes
d) To ensure business growth
2. Which of the following is NOT an asset?
a) Cash
b) Debtors
c) Loan payable
d) Equipment
3. What is the golden rule for Nominal Accounts?
 a) Debit what comes in, Credit what goes out
b) Debit all expenses and losses, Credit all incomes and gains
c) Debit the receiver, Credit the giver
4. The Going Concern Concept assumes:
a) Business will continue indefinitely
b) Business will close soon
c) Business transactions are recorded randomly
5. Which statement is TRUE about liabilities?
a) Liabilities represent company profits
b) Liabilities are business debts
c) Liabilities are considered assets

Part 2: Short Answer Questions

1. Define Accounting and its objectives.
2. What are the main branches of accounting?
3. Explain the difference between Financial and Management
Accounting.
4. What are the three golden rules of accounting?
5. Name three internal and three external users of accounting
information.

Unit 2: Financial Statement Analysis (Basics & Key Concepts)

Now, let’s break down Unit 2: Financial Statement Analysis in an easy and structured
way so that you understand the basics well.

1. What is Financial Statement Analysis?

Financial Statement Analysis is the process of reviewing and analyzing a company’s

financial statements to make better economic decisions. It helps in understanding the
financial health, profitability, and stability of a business.

2. Importance of Financial Statement Analysis

 • Helps in decision-making for investors, creditors, and management.
• Identifies strengths and weaknesses of a business.
• Helps in comparing financial performance over time.
• Assists in budgeting and forecasting future performance.

3. Types of Financial Statements

Financial Statement Purpose

Balance Sheet Shows financial position at a specific point in time.
Profit & Loss Statement (Income Statement) Shows profit or loss over a period.
Cash Flow Statement Shows inflows and outflows of cash.
Statement of Changes in Equity Shows changes in owner’s equity over time.

4. Understanding the Balance Sheet

4.1 What is a Balance Sheet?

A balance sheet is a financial statement that provides a snapshot of a company’s

assets, liabilities, and equity at a specific date.

Formula:
Assets = Liabilities + Owner’s Equity

4.2 Key Components of a Balance Sheet

1. Assets – What the company owns.
• Current Assets – Cash, inventory, accounts receivable.
• Non-Current Assets – Land, buildings, machinery.
2. Liabilities – What the company owes.
• Current Liabilities – Short-term debts, accounts payable.
• Non-Current Liabilities – Long-term loans, debentures.
3. Owner’s Equity – The owner’s investment in the company.

5. Understanding the Profit & Loss Statement (Income Statement)

5.1 What is a Profit & Loss Statement?

It is a financial statement that shows a company’s revenues and expenses over a
specific period to determine profit or loss.

Formula:
Net Profit = Revenue - Expenses

5.2 Key Components of a P&L Statement

1. Revenue (Income) – Money earned from sales or services.
2. Cost of Goods Sold (COGS) – Cost of raw materials and labor used in
production.
3. Gross Profit – Revenue minus COGS.
4. Operating Expenses – Rent, salaries, utilities, marketing costs.
5. Net Profit – Final profit after all expenses and taxes.

6. Understanding the Cash Flow Statement

6.1 What is a Cash Flow Statement?

A cash flow statement shows how cash enters and leaves a business over a period.

6.2 Key Components of a Cash Flow Statement

1. Operating Activities – Cash generated from regular business
operations.
2. Investing Activities – Buying or selling assets (property, machinery,
stocks).
3. Financing Activities – Loans, dividend payments, issuing shares.

7. Techniques of Financial Statement Analysis

Technique Purpose
Comparative Statement Analysis Compares financial data over two or more years.
Common Size Statement Analysis Expresses each item as a percentage of total assets
or revenue.
Ratio Analysis Uses financial ratios to evaluate business performance.
Trend Analysis Identifies patterns over time to predict future performance.

8. Ratio Analysis (Key Ratios for Exam)

8.1 Liquidity Ratios (Measures Short-Term Solvency)

Ratio Formula Ideal Value

Current RatioCurrent Assets / Current Liabilities 2:1
Quick Ratio (Current Assets - Inventory) / Current Liabilities 1:1

8.2 Profitability Ratios (Measures Profitability)

Ratio Formula Purpose

Gross Profit Margin (Gross Profit / Sales) × 100Measures profit after deducting direct
costs.
Net Profit Margin (Net Profit / Sales) × 100 Measures profit after deducting all
expenses.
Return on Equity (ROE) (Net Profit / Shareholder’s Equity) × 100 Measures return to
investors.

8.3 Efficiency Ratios (Measures Asset Utilization)

Ratio Formula Purpose

Inventory Turnover COGS / Average Inventory Measures how fast inventory is sold.
Debtors Turnover Net Credit Sales / Average Receivables Measures how efficiently
credit sales are collected.

Quick Revision of Unit 2

Financial Statement Analysis helps evaluate a company’s financial health.

Balance Sheet shows assets, liabilities, and equity at a specific date.
Profit & Loss Statement shows revenue, expenses, and net profit over a period.
Cash Flow Statement tracks cash inflows and outflows.
Ratio Analysis helps measure financial performance using different formulas.
 Quick Test on Unit 2

Part 1: Multiple Choice Questions (MCQs)

1. Which financial statement shows the financial position at a specific date?
a) Profit & Loss Statement
b) Balance Sheet
c) Cash Flow Statement
2. What is the formula for the Current Ratio?
a) Current Assets / Current Liabilities
b) Quick Assets / Total Liabilities
c) Net Profit / Sales
3. What does the Net Profit Margin Ratio indicate?
a) How much sales revenue remains after expenses
b) How quickly inventory is sold
c) The company’s ability to pay short-term debts
4. Which of the following is a financing activity?
a) Selling inventory
b) Paying employee salaries
c) Issuing company shares
5. The ideal value of the Quick Ratio is:
a) 1:1
b) 2:1
c) 0.5:1

Part 2: Short Answer Questions

1. What are the three main financial statements?
2. Explain the formula and importance of the Current Ratio.
3. What is the difference between Gross Profit and Net Profit?
4. Define Cash Flow Statement and list its three components.
5. What is Trend Analysis, and how does it help businesses?

Unit 3: Corporate Financial Statements

Now, let’s go through Unit 3: Corporate Financial Statements in an easy and structured
manner.

1. What are Corporate Financial Statements?

Corporate Financial Statements are formal records of the financial activities of a

company. These statements provide information about the financial position,
performance, and cash flows of a company.

1.1 Importance of Corporate Financial Statements

• Helps investors make informed decisions.
• Assists management in planning and controlling business operations.
• Required for legal and tax compliance.
• Helps in obtaining loans and credit from banks.

2. Key Components of Corporate Financial Statements

Financial Statement Purpose

Balance Sheet Shows financial position at a specific point in time.
Profit & Loss Statement Shows profit or loss over a period.
Cash Flow Statement Shows cash movements during a period.
Statement of Changes in Equity Shows changes in owner’s equity.
Notes to Accounts Additional information about financial statements.

3. Understanding the Balance Sheet

3.1 Definition & Purpose

A Balance Sheet provides a snapshot of a company’s assets, liabilities, and equity at a

specific date. It follows the Accounting Equation:
Assets = Liabilities + Equity

3.2 Components of a Balance Sheet

1. Assets (What the company owns)
• Current Assets: Cash, Accounts Receivable, Inventory.
• Non-Current Assets: Land, Machinery, Buildings.
 2. Liabilities (What the company owes)
• Current Liabilities: Short-term loans, Creditors, Outstanding
expenses.
• Non-Current Liabilities: Long-term loans, Bonds.
3. Equity (Owner’s investment in the business)
• Share Capital
• Reserves & Surplus

4. Understanding the Profit & Loss Statement (Income Statement)

4.1 Definition & Purpose

A Profit & Loss Statement summarizes a company’s revenues and expenses over a
specific period.

Formula:
Net Profit = Revenue - Expenses

4.2 Components of a P&L Statement

1. Revenue (Income) – Money earned from sales or services.
2. Cost of Goods Sold (COGS) – Cost of raw materials, labor, and
production.
3. Gross Profit – Revenue minus COGS.
4. Operating Expenses – Salaries, rent, marketing expenses.
5. Net Profit – Final profit after all expenses and taxes.

5. Understanding the Cash Flow Statement

5.1 Definition & Purpose

A Cash Flow Statement tracks cash inflows and outflows during a period.

5.2 Components of a Cash Flow Statement

1. Operating Activities – Cash earned from business operations.
2. Investing Activities – Buying/selling assets or investments.
 2. Investing Activities – Buying/selling assets or investments.
3. Financing Activities – Loans, dividends, issuing shares.

6. Statement of Changes in Equity

This statement shows how a company’s equity (owner’s investment) changes over time.

Key Components
• Opening Equity
• New Share Issuances
• Retained Earnings (Profit not distributed as dividends)
• Dividends Paid
• Closing Equity

7. Notes to Accounts
• Explains how financial statements are prepared.
• Discloses accounting policies, assumptions, and risks.
• Provides details on loans, taxes, contingent liabilities, depreciation,
etc.

8. Differences Between Financial Statements

Feature Balance Sheet P&L Statement Cash Flow Statement

Purpose Shows assets & liabilities Shows income & expenses Shows cash movement
Timing Specific date Over a periodOver a period
Main Elements Assets, Liabilities, Equity Revenue, Expenses, Profit/Loss
Operating, Investing, Financing

9. Types of Financial Reporting Formats

1. Vertical Format (Common Format for Public Companies)
• Items arranged in a column format.
• Used in company annual reports.
2. Horizontal Format (Traditional Format)
• Items arranged side by side.
• Less common today.
 Quick Revision of Unit 3

Corporate Financial Statements provide financial data for investors, management,

and lenders.
The Balance Sheet shows a company’s financial position at a specific date.
The Profit & Loss Statement shows income and expenses over a period.
The Cash Flow Statement shows cash movements from operations, investments, and
financing.
The Statement of Changes in Equity tracks changes in shareholder investment.
Notes to Accounts explain accounting policies and financial details.

Quick Test on Unit 3

Part 1: Multiple Choice Questions (MCQs)

1. What is the purpose of a Balance Sheet?
a) Shows profit or loss
b) Shows cash inflows and outflows
c) Shows the financial position at a specific date
2. Which financial statement tracks revenues and expenses?
a) Cash Flow Statement
b) Profit & Loss Statement
c) Balance Sheet
3. What are the three sections of a Cash Flow Statement?
a) Assets, Liabilities, Equity
b) Operating, Investing, Financing
c) Revenue, COGS, Expenses
4. Which section of a Balance Sheet includes Share Capital and Retained
Earnings?
a) Assets
b) Liabilities
c) Equity
5. The Statement of Changes in Equity shows changes in:
a) Assets
b) Liabilities
c) Shareholder investment
Part 2: Short Answer Questions
1. What are Corporate Financial Statements? Name the key types.
2. Explain the difference between a Balance Sheet and a Profit & Loss
Statement.
3. What are the three types of cash flows in a Cash Flow Statement?
4. Why are Notes to Accounts important?
5. What is included in the Statement of Changes in Equity?

Unit 4: Ratio Analysis

Now, let’s go through Unit 4: Ratio Analysis in an easy and structured manner.

1. What is Ratio Analysis?

Ratio Analysis is a financial tool used to evaluate a company’s financial health by

comparing different financial data.

1.1 Importance of Ratio Analysis

• Helps in decision-making for investors, creditors, and management.
• Assists in identifying profitability, liquidity, efficiency, and solvency
of a company.
• Helps in comparing a company’s performance over different periods
or with competitors.

2. Categories of Ratios

Category Purpose
Liquidity Ratios Measures short-term financial health.
Profitability Ratios Measures ability to generate profits.
Efficiency Ratios Measures how efficiently assets are used.
Solvency (Leverage) Ratios Measures long-term financial stability.
Market Ratios Measures stock performance.
3. Liquidity Ratios (Short-Term Financial Health)

Liquidity ratios measure a company’s ability to pay its short-term debts.

Ratio Formula Ideal Value

Current RatioCurrent Assets / Current Liabilities 2:1
Quick Ratio (Current Assets - Inventory) / Current Liabilities 1:1

• Current Ratio: Measures the company’s ability to pay short-term

obligations.
• Quick Ratio: Also called Acid-Test Ratio, it excludes inventory
because it may take time to sell.

4. Profitability Ratios (Earning Capacity of Business)

Profitability ratios measure how well a company generates profits from its operations.

Ratio Formula Purpose

Gross Profit Margin (Gross Profit / Sales) × 100Measures profit after deducting direct
costs.
Net Profit Margin (Net Profit / Sales) × 100 Measures overall profitability after all
expenses.
Return on Equity (ROE) (Net Profit / Shareholder’s Equity) × 100 Measures returns
earned by shareholders.
Return on Assets (ROA) (Net Profit / Total Assets) × 100Measures how efficiently
assets generate profit.

5. Efficiency Ratios (Asset Utilization)

Efficiency ratios measure how effectively a company utilizes its assets.

Ratio Formula Purpose

Inventory Turnover COGS / Average Inventory Measures how fast inventory is sold.
Debtors Turnover Net Credit Sales / Average Receivables Measures how efficiently
credit sales are collected.
Asset Turnover Ratio Net Sales / Total Assets Measures how efficiently assets
generate sales.

• Higher turnover ratios indicate better efficiency.

• A low ratio may indicate slow-moving inventory or poor credit
collection.

6. Solvency (Leverage) Ratios (Long-Term Financial Stability)

Solvency ratios measure a company’s ability to meet long-term obligations.

Ratio Formula Ideal Value

Debt-to-Equity Ratio Total Debt / Shareholder’s Equity < 2:1
Interest Coverage Ratio EBIT / Interest Expense Higher is better

• Debt-to-Equity Ratio: Measures financial leverage; high values

indicate higher debt dependence.
• Interest Coverage Ratio: Measures how easily a company can pay
interest on its debt.

7. Market Ratios (Investor’s Perspective)

Market ratios evaluate a company’s stock valuation and investor attractiveness.

Ratio Formula Purpose

Earnings Per Share (EPS) Net Profit / Total Shares Measures profitability per share.
Price-to-Earnings (P/E) Ratio Market Price per Share / EPS Measures how much
investors are willing to pay for earnings.
Dividend Yield (Dividend per Share / Market Price per Share) × 100 Measures
return from dividends.

8. Interpretation of Ratios

High Ratio Low Ratio

Indicates good performance, efficiency, profitability. May indicate poor financial health
or inefficiency.
Stronger position to pay debts and expand business. Possible liquidity problems or
declining profits.

Example:
• If Current Ratio is 0.8:1, the company may struggle to meet short-
term liabilities.
• If ROE is high, the company is effectively generating profits from
shareholders’ equity.

Quick Revision of Unit 4

Ratio Analysis helps measure financial performance and stability.

Liquidity Ratios measure short-term solvency (Current Ratio, Quick Ratio).
Profitability Ratios measure profit efficiency (Net Profit Margin, ROE).
Efficiency Ratios measure asset utilization (Inventory Turnover, Debtors Turnover).
Solvency Ratios measure long-term financial strength (Debt-to-Equity, Interest
Coverage).
Market Ratios help investors evaluate stock performance (EPS, P/E Ratio).

Quick Test on Unit 4

Part 1: Multiple Choice Questions (MCQs)

1. Which ratio measures a company’s ability to pay short-term debts?
a) Debt-to-Equity Ratio
b) Current Ratio
c) Net Profit Margin
2. What is the ideal Current Ratio?
a) 1:1
b) 2:1
c) 0.5:1
3. What does a high Inventory Turnover Ratio indicate?
a) Slow-moving inventory
b) High efficiency in selling inventory
c) Poor credit collection
 4. Which ratio measures how much profit is generated from each rupee
of sales?
a) Quick Ratio
b) Gross Profit Margin
c) Debt-to-Equity Ratio
5. What is the formula for ROE (Return on Equity)?
a) (Net Profit / Total Assets) × 100
b) (Net Profit / Shareholder’s Equity) × 100
c) (Net Profit / Sales) × 100

Part 2: Short Answer Questions

1. What are the five main categories of financial ratios?
2. Define Current Ratio and its formula.
3. What does the Debt-to-Equity Ratio measure?
4. How does EPS (Earnings Per Share) help investors?
5. Explain the difference between Profitability Ratios and Solvency Ratios.

Unit 5: Cash Flow Statement

Now, let’s go through Unit 5: Cash Flow Statement in an easy and structured way.

1. What is a Cash Flow Statement?

A Cash Flow Statement (CFS) is a financial statement that shows the inflows and
outflows of cash within a company over a period of time. It helps in understanding how a
business generates and uses cash.

1.1 Importance of a Cash Flow Statement

• Helps in assessing a company’s liquidity and solvency.
• Helps investors and creditors understand cash-generating capacity.
• Shows how cash is used for operating, investing, and financing
activities.
• Helps in forecasting future cash needs and making financial
decisions.
2. Components of a Cash Flow Statement

A cash flow statement is divided into three sections:

Section Purpose Examples

Operating Activities Cash from core business operationsCash sales, payments to
suppliers, salaries, taxes
Investing Activities Cash from buying/selling assets Buying land, selling
machinery, investments
Financing Activities Cash from raising capital Loans, issuing shares, paying
dividends

3. Operating Activities (Main Business Activities)

3.1 What are Operating Activities?

Operating activities are the day-to-day business activities that generate revenue and
expenses.

3.2 Cash Inflows from Operating Activities

Cash received from customers (sales revenue)

Interest and dividends received
Other business income

3.3 Cash Outflows from Operating Activities

Payments to suppliers for goods/services

Salaries and wages paid to employees
Rent, utilities, and taxes paid

4. Investing Activities (Buying & Selling Assets)

4.1 What are Investing Activities?

These involve long-term investments and capital expenditures.

4.2 Cash Inflows from Investing Activities

Selling machinery, land, buildings

Selling investments (stocks, bonds)
Interest received from investments

4.3 Cash Outflows from Investing Activities

Purchasing machinery, buildings, land

Buying investments (stocks, bonds)

5. Financing Activities (Raising Capital & Paying Debts)

5.1 What are Financing Activities?

These activities involve raising and repaying capital (loans, shares, dividends, etc.).

5.2 Cash Inflows from Financing Activities

Issuing shares (equity financing)

Borrowing money (loans, debentures)

5.3 Cash Outflows from Financing Activities

Paying dividends to shareholders

Repaying loans or interest payments

6. Methods of Preparing a Cash Flow Statement

There are two methods of preparing a Cash Flow Statement:

Method Explanation
Direct Method Lists actual cash transactions (cash received & paid).
Indirect Method Starts with net profit and adjusts for non-cash expenses
(depreciation, etc.).

Formula for Indirect Method:

Net Cash Flow from Operating Activities = Net Profit + Non-Cash Expenses ±
Adjustments for Working Capital

7. Cash Flow vs. Profit

Basis Cash Flow Profit

Meaning Actual cash inflows & outflows Revenue minus expenses
Includes All cash transactions Includes both cash and non-cash items (depreciation,
credit sales)
Importance Measures liquidity Measures profitability
Example A company may have a profit but no cash if customers delay payments A
company can have cash but no profit if it sells assets

8. Interpretation of Cash Flow Statements

Cash Flow Situation Meaning

Positive Cash Flow from Operations Strong core business activities
Negative Cash Flow from Operations Business is not generating enough cash
Positive Cash Flow from Investing Selling assets or investments
Negative Cash Flow from Investing Investing in business growth
Positive Cash Flow from Financing Raising capital through loans or shares
Negative Cash Flow from Financing Paying off debts or dividends

Quick Revision of Unit 5

A Cash Flow Statement shows cash inflows and outflows over a period.
It consists of Operating, Investing, and Financing Activities.
Operating Activities involve core business transactions.
Investing Activities involve buying/selling assets.
Financing Activities involve loans, shares, and dividends.
 There are two methods of preparing a cash flow statement: Direct & Indirect.
Cash Flow ≠ Profit (Cash flow focuses on actual cash movement).

Quick Test on Unit 5

Part 1: Multiple Choice Questions (MCQs)

1. Which activity is included in Operating Activities?
a) Selling land
b) Paying salaries
c) Taking a bank loan
2. Cash received from selling machinery is classified under which
activity?
a) Operating Activities
b) Investing Activities
c) Financing Activities
3. What is the primary difference between the Direct and Indirect
methods?
a) Direct method starts with net profit
b) Indirect method starts with net profit
c) Both are the same
4. Paying dividends to shareholders is classified under which activity?
a) Operating Activities
b) Investing Activities
c) Financing Activities
5. Which of the following statements is true?
a) Profit and Cash Flow are the same
b) A company can have profit but no cash
c) Investing activities include salary payments

Part 2: Short Answer Questions

1. What are the three sections of a Cash Flow Statement?
2. Define Operating Activities with examples.
3. How do Investing Activities affect cash flow?
4. Explain the difference between Cash Flow and Profit.
5. What are the two methods of preparing a Cash Flow Statement?
 Unit 6: Budgetary Control

Now, let’s go through Unit 6: Budgetary Control in an easy and structured manner.

1. What is Budgetary Control?

Budgetary control is a system of planning, controlling, and monitoring financial

resources within an organization using budgets.

1.1 Importance of Budgetary Control

• Helps in cost control and profit maximization.
• Ensures efficient resource allocation.
• Provides a benchmark for performance evaluation.
• Helps in strategic decision-making.

2. Key Terms in Budgetary Control

Term Definition
Budget A financial plan for income and expenses over a period.
Budgetary Control Process of planning, monitoring, and controlling budgets.
Forecasting Predicting future financial outcomes based on past data.
Variance Analysis Comparing budgeted vs. actual performance.

3. Objectives of Budgetary Control

Planning financial activities in advance.

Coordinating activities across different departments.
Monitoring and controlling expenses.
Improving efficiency and profitability.
Encouraging accountability and responsibility.

4. Types of Budgets
Type of Budget Purpose
Operating Budget Forecasts revenues and expenses for day-to-day operations.
Capital Budget Plans for long-term investments (machinery, infrastructure).
Cash Budget Manages cash inflows and outflows.
Sales Budget Estimates future sales revenue.
Production Budget Plans production levels based on demand.
Flexible Budget Adjusts based on business activity levels.
Zero-Based Budgeting (ZBB) Requires every expense to be justified from scratch.

5. Steps in Budgetary Control

1. Setting Objectives – Define goals for income, expenses, and profits.
2. Preparing Budgets – Develop detailed financial plans for different
departments.
3. Comparing Budget vs. Actual – Analyze financial performance
regularly.
4. Variance Analysis – Identify deviations and their causes.
5. Taking Corrective Actions – Adjust budgets or operations to improve
results.

6. Variance Analysis (Budget vs. Actual Performance)

Variance Analysis helps compare budgeted figures with actual performance.

Type of Variance Formula Interpretation

Sales Variance Actual Sales - Budgeted Sales Positive: More sales than expected.
Cost Variance Budgeted Cost - Actual Cost Negative: Higher costs than expected.
Profit Variance Actual Profit - Budgeted Profit Positive: Higher profit than planned.

Example:
If the budgeted sales were ₹1,00,000 but actual sales were ₹1,20,000, then:
Sales Variance = ₹1,20,000 - ₹1,00,000 = ₹20,000 (Favorable Variance)

7. Advantages of Budgetary Control

Improves financial planning and decision-making.

 Helps in cost reduction and efficiency.
Encourages coordination among departments.
Provides early warnings of financial problems.
Helps in setting and achieving business goals.

8. Limitations of Budgetary Control

Budgets are based on assumptions, which may be inaccurate.

Can be rigid and reduce flexibility.
Employees may focus on meeting budgets rather than innovation.
Time-consuming to prepare and monitor budgets.

Quick Revision of Unit 6

Budgetary Control is a system for planning and managing financial resources.

Different types of budgets include operating, capital, cash, sales, and production
budgets.
Variance Analysis helps compare budgeted vs. actual performance.
The budgeting process includes setting objectives, preparing budgets, and
analyzing performance.
Helps in cost control, efficiency, and strategic planning.
Limitations include rigidity, time consumption, and assumption-based planning.

Quick Test on Unit 6

Part 1: Multiple Choice Questions (MCQs)

1. What is the main objective of Budgetary Control?
a) To increase production
b) To plan and control financial resources
c) To eliminate business competition
2. Which budget focuses on long-term investments?
a) Operating Budget
b) Capital Budget
c) Sales Budget
3. What does Variance Analysis compare?
 a) Budgeted vs. Actual Performance
b) Sales vs. Profit
c) Cash Flow vs. Balance Sheet
4. What is Zero-Based Budgeting (ZBB)?
a) Budgeting with no fixed targets
b) Preparing budgets from scratch without past data
c) Keeping the same budget as last year
5. Which of the following is a disadvantage of budgetary control?
a) Helps in cost reduction
b) Can be rigid and inflexible
c) Improves decision-making

Part 2: Short Answer Questions

1. Define Budgetary Control and its objectives.
2. What are the types of budgets used in a business?
3. Explain Variance Analysis with an example.
4. What are the advantages of budgetary control?
5. Discuss any two limitations of budgetary control.

That completes Unit 6! Let me know if you want to revise any topic, or should
we move to Uni

Unit 7: Inventory Valuation

Now, let’s go through Unit 7: Inventory Valuation in an easy and structured manner.

1. What is Inventory Valuation?

Inventory valuation is the process of assigning a monetary value to a company’s

inventory at the end of an accounting period. It helps in determining cost of goods sold
(COGS) and financial position.

1.1 Importance of Inventory Valuation

• Helps in determining profit or loss.
• Affects the Balance Sheet and Profit & Loss Statement.
 • Ensures accurate taxation and financial reporting.
• Helps in cost control and pricing decisions.

2. Types of Inventory

Type Meaning
Raw Materials Basic materials used for production.
Work-in-Progress (WIP) Semi-finished goods still in production.
Finished Goods Products ready for sale.
Merchandise Inventory Goods bought for resale (retail businesses).

3. Methods of Inventory Valuation

There are different methods to value inventory. The choice of method affects COGS and
profitability.

Method Explanation Impact

First-In, First-Out (FIFO) Oldest inventory is used first Lower COGS in inflation,
Higher Profits
Last-In, First-Out (LIFO) Newest inventory is used first Higher COGS in inflation,
Lower Profits
Weighted Average Cost (WAC) Uses average cost per unit Smooths out price
fluctuations
Specific Identification Tracks actual cost of each item Used for expensive items like
cars, jewelry

4. FIFO vs. LIFO Comparison

Feature FIFO LIFO

Cost of Goods Sold (COGS) Lower in inflation Higher in inflation
Ending Inventory Value Higher in inflationLower in inflation
Profitability Higher in inflationLower in inflation
Tax Impact Higher taxes due to higher profits Lower taxes due to lower profits

5. Choosing the Right Inventory Valuation Method

 • Use FIFO when prices are rising to show higher profits.
• Use LIFO when prices are rising to reduce taxes.
• Use WAC to smooth out price fluctuations.
• Use Specific Identification for high-value items like cars, diamonds.

6. Impact of Inventory Valuation on Financial Statements

Financial Statement Impact of Inventory Valuation

Profit & Loss Statement Affects COGS, Gross Profit, and Net Profit.
Balance Sheet Affects total inventory value and asset valuation.
Taxation Higher inventory value = Higher taxable income.

7. Advantages of Inventory Valuation

Helps in accurate financial reporting.

Affects cost control and pricing strategies.
Essential for tax calculations.
Helps in inventory management decisions.

8. Limitations of Inventory Valuation

Different methods give different profit figures.

LIFO is not allowed under IFRS, only under GAAP.
Can be manipulated to change profits for tax benefits.

Quick Revision of Unit 7

Inventory Valuation assigns value to stock for financial reporting.

Types of inventory include Raw Materials, WIP, Finished Goods.
FIFO, LIFO, Weighted Average Cost (WAC), and Specific Identification are the main
valuation methods.
FIFO results in higher profits, while LIFO results in lower taxes.
Inventory valuation affects COGS, Profit, Balance Sheet, and Taxation.

Quick Test on Unit 7

Part 1: Multiple Choice Questions (MCQs)
1. Which inventory valuation method assumes the oldest inventory is
sold first?
a) FIFO
b) LIFO
c) Weighted Average
2. Which inventory valuation method gives the highest profit during
inflation?
a) FIFO
b) LIFO
c) WAC
3. Which inventory method is not allowed under IFRS?
a) FIFO
b) LIFO
c) WAC
4. Which type of inventory includes goods still in production?
a) Raw Materials
b) Work-in-Progress
c) Finished Goods
5. What is the main impact of choosing LIFO over FIFO?
a) Higher profits
b) Lower profits and lower taxes
c) No impact on financials

Part 2: Short Answer Questions

1. What is Inventory Valuation, and why is it important?
2. Explain the FIFO and LIFO methods with examples.
3. What are the advantages and limitations of Weighted Average Cost
(WAC)?
4. How does inventory valuation affect financial statements?
5. Why would a company choose LIFO over FIFO?

Unit 8: Marginal Costing and Profit Planning

Now, let’s go through Unit 8: Marginal Costing and Profit Planning in an easy and
structured manner.

1. What is Marginal Costing?

Marginal costing is a costing technique where only variable costs are considered for
decision-making, and fixed costs are treated as period costs.

1.1 Importance of Marginal Costing

Helps in short-term decision-making.

Assists in profit planning and cost control.
Useful for break-even analysis and pricing strategies.
Helps in evaluating make-or-buy decisions.

2. Key Concepts in Marginal Costing

Term Definition
Marginal Cost The cost of producing one additional unit.
Variable Costs Costs that change with the level of production (e.g., raw materials,
labor).
Fixed Costs Costs that remain constant regardless of production (e.g., rent, salaries).
Contribution Margin Sales revenue minus variable costs.
Break-even Point (BEP) The sales level at which total revenue equals total costs (no
profit, no loss).

3. Marginal Costing Formula

Contribution per Unit = Selling Price per Unit - Variable Cost per Unit

Total Contribution = Total Sales - Total Variable Costs

Break-even Sales (Units) = Fixed Costs / Contribution per Unit

 Break-even Sales (₹) = Fixed Costs / Contribution Margin Ratio

Profit = Total Contribution - Fixed Costs

4. Break-even Analysis

4.1 What is Break-even Analysis?

Break-even analysis determines the minimum sales level required to cover all costs.

Term Meaning
Break-even Point (BEP) Where total revenue = total cost (no profit, no loss).
Margin of Safety The difference between actual sales and break-even sales.
Profit Volume (PV) Ratio Measures the relationship between contribution and sales.

4.2 Formula for Break-even Analysis

Concept Formula
Break-even Sales (Units) Fixed Costs / Contribution per Unit
Break-even Sales (₹) Fixed Costs / Contribution Margin Ratio
Margin of Safety (%) (Actual Sales - Break-even Sales) / Actual Sales × 100
PV Ratio Contribution / Sales × 100

5. Application of Marginal Costing in Decision-Making

Fixing Selling Price – Helps in setting prices by considering only variable costs.
Make or Buy Decision – Whether to manufacture or outsource a product.
Shutdown Decision – Whether to continue or close operations based on contribution.
Product Mix Decision – Choosing which product is more profitable.
Accepting Special Orders – Evaluating additional orders at lower prices.

6. Advantages of Marginal Costing

Simple and easy to use.

Helps in cost control and decision-making.
 Useful in profit planning and pricing.
Helps in analyzing the impact of changes in costs and volume.

7. Limitations of Marginal Costing

Assumes fixed costs remain constant, which may not be true.

Not suitable for long-term decisions.
Ignores the effect of semi-variable costs.
Not useful for companies with high fixed costs.

Quick Revision of Unit 8

Marginal Costing considers only variable costs for decision-making.

Break-even Analysis determines the sales level where profit = 0.
PV Ratio, Contribution, and Break-even Sales help in profitability analysis.
Helps in pricing, cost control, product mix, and shutdown decisions.
Assumes fixed costs remain constant, which is a limitation.

Quick Test on Unit 8

Part 1: Multiple Choice Questions (MCQs)

1. Marginal Costing considers which type of costs?
a) Fixed Costs
b) Variable Costs
c) Both Fixed and Variable Costs
2. What is the formula for Contribution per Unit?
a) Sales - Fixed Costs
b) Sales - Variable Costs
c) Sales - Total Costs
3. Break-even Sales (Units) is calculated as:
a) Fixed Costs / Contribution per Unit
b) Fixed Costs / Sales
c) Fixed Costs / Variable Costs
4. Which decision is NOT based on Marginal Costing?
a) Make or Buy Decision
 b) Capital Investment Decision
c) Accepting Special Orders
5. What does a higher PV Ratio indicate?
a) Higher profitability
b) Lower profitability
c) Higher fixed costs

Part 2: Short Answer Questions

1. What is Marginal Costing, and why is it important?
2. Explain the Break-even Analysis with an example.
3. What is the formula for Margin of Safety (%)?
4. How does Marginal Costing help in decision-making?
5. List two advantages and two limitations of Marginal Costing.

Unit 9: Standard Costing and Variance Analysis

Now, let’s go through Unit 9: Standard Costing and Variance Analysis in an easy and
structured manner.

1. What is Standard Costing?

Standard Costing is a cost control technique where predetermined (standard) costs are
compared with actual costs, and any differences (variances) are analyzed.

1.1 Importance of Standard Costing

Helps in cost control and performance measurement.

Identifies variances and their causes.
Assists in budgeting and cost estimation.
Encourages efficiency and cost reduction.

2. Key Terms in Standard Costing

Term Definition
Standard Cost Estimated cost set before production.
Actual Cost The real cost incurred in production.
Variance The difference between standard and actual cost.
Variance Analysis Examining why variances occur.

3. Types of Variances in Standard Costing

Type of Variance Meaning

Material Variance Difference between standard and actual material costs.
Labor Variance Difference between standard and actual labor costs.
Overhead Variance Difference between standard and actual overhead costs.
Sales Variance Difference between standard and actual sales revenue.

4. Material Cost Variance (MCV)

Formula:
MCV = (Standard Material Cost - Actual Material Cost)

MCV is further divided into:

1. Material Price Variance (MPV) = (Standard Price - Actual Price) ×
Actual Quantity
2. Material Usage Variance (MUV) = (Standard Quantity - Actual
Quantity) × Standard Price

5. Labor Cost Variance (LCV)

Formula:
LCV = (Standard Labor Cost - Actual Labor Cost)

LCV is further divided into:

1. Labor Rate Variance (LRV) = (Standard Rate - Actual Rate) × Actual
Hours
2. Labor Efficiency Variance (LEV) = (Standard Hours - Actual Hours) ×
Standard Rate
6. Overhead Variance

Type of Overhead VarianceFormula

Fixed Overhead Variance Standard Fixed Overheads - Actual Fixed Overheads
Variable Overhead Variance Standard Variable Overheads - Actual Variable
Overheads

7. Sales Variance

Type of Sales Variance Formula

Sales Price Variance (SPV) (Actual Price - Standard Price) × Actual Sales Quantity
Sales Volume Variance (SVV) (Actual Quantity - Standard Quantity) × Standard Price

8. Interpretation of Variances

Variance Type Meaning

Favorable Variance Actual cost is lower than standard cost (Good Performance).
Unfavorable Variance Actual cost is higher than standard cost (Bad Performance).

Example:
• If standard material cost = ₹50,000 but actual cost = ₹45,000 →
₹5,000 Favorable Variance.
• If standard labor cost = ₹60,000 but actual cost = ₹65,000 → ₹5,000
Unfavorable Variance.

9. Advantages of Standard Costing

Helps in cost control.

Improves efficiency and productivity.
Helps in budgeting and forecasting.
Identifies areas needing improvement.

10. Limitations of Standard Costing

 Setting accurate standards is difficult.
Does not suit all industries, especially services.
May demotivate workers if targets are unrealistic.
Does not consider inflation or price fluctuations.

Quick Revision of Unit 9

Standard Costing compares predetermined costs with actual costs.

Variance Analysis helps find cost differences and reasons.
Variances are classified into Material, Labor, Overhead, and Sales Variances.
Favorable Variance means lower actual cost, Unfavorable Variance means higher
actual cost.
Helps in cost control, efficiency, and decision-making.

Quick Test on Unit 9

Part 1: Multiple Choice Questions (MCQs)

1. What is the purpose of Standard Costing?
a) To increase expenses
b) To control costs and improve efficiency
c) To eliminate all variances
2. Material Variance is the difference between:
a) Budgeted and Actual Revenue
b) Standard and Actual Material Costs
c) Total Sales and Total Expenses
3. Which formula is correct for Material Price Variance (MPV)?
a) (Standard Price - Actual Price) × Actual Quantity
b) (Standard Quantity - Actual Quantity) × Standard Price
c) Standard Price × Standard Quantity
4. An unfavorable variance occurs when:
a) Actual costs are lower than standard costs
b) Actual costs are higher than standard costs
c) There is no difference between standard and actual costs
5. Which of the following is NOT a type of variance?
a) Material Variance
 b) Labor Variance
c) Cash Flow Variance

Part 2: Short Answer Questions

1. Define Standard Costing and its benefits.
2. Explain Variance Analysis with an example.
3. What are the two components of Material Cost Variance (MCV)?
4. How is Labor Efficiency Variance (LEV) calculated?
5. List two advantages and two limitations of Standard Costing.

Unit 10: Financial Reporting and Recent Trends

Now, let’s go through Unit 10: Financial Reporting and Recent Trends in an easy and
structured manner.

1. What is Financial Reporting?

Financial Reporting is the process of presenting financial data to stakeholders,

including investors, creditors, and regulatory authorities.

1.1 Objectives of Financial Reporting

Provide accurate financial information to stakeholders.

Ensure transparency and compliance with laws.
Help in investment and credit decisions.
Assist in financial planning and analysis.

2. Components of Financial Reporting

Component Purpose
Balance Sheet Shows financial position at a specific date.
Profit & Loss Statement Shows income, expenses, and profit/loss over a period.
Cash Flow Statement Tracks cash inflows and outflows.
Statement of Changes in Equity Shows changes in shareholders’ equity.
Notes to Accounts Explains accounting policies and additional details.

3. Regulatory Framework for Financial Reporting in India

Regulatory Body Role

Ministry of Corporate Affairs (MCA) Governs corporate laws and accounting policies.
Institute of Chartered Accountants of India (ICAI)Develops accounting standards.
Securities and Exchange Board of India (SEBI) Regulates financial disclosures for
listed companies.
Reserve Bank of India (RBI) Regulates financial reporting for banks.

4. Accounting Standards in India

Framework Purpose
Indian Accounting Standards (Ind AS) Aligns with IFRS for global financial reporting.
Accounting Standards (AS) Used by smaller firms for financial statements.
International Financial Reporting Standards (IFRS) Global framework for
multinational companies.

5. Recent Trends in Financial Reporting

Trend Explanation
Ind AS Convergence Indian firms are adopting Ind AS, which aligns with IFRS.
Digital Financial Reporting Companies are using AI and software for real-time reporting.
Environmental, Social, and Governance (ESG) Reporting Companies disclose their
impact on sustainability.
Integrated Reporting Combines financial and non-financial data in reports.
Blockchain in Accounting Used for secure and transparent financial transactions.

6. Corporate Social Responsibility (CSR) Reporting

6.1 What is CSR Reporting?

CSR Reporting discloses a company’s social, environmental, and ethical
responsibilities.

6.2 CSR Reporting in India

• Companies with a net worth of ₹500 crore or more must spend 2% of
their average net profit on CSR activities.
• CSR activities include education, healthcare, environmental
sustainability, rural development, etc.

7. Benefits of Financial Reporting

Ensures compliance with laws and regulations.

Improves transparency and credibility.
Helps investors in decision-making.
Assists in performance evaluation and business planning.

8. Limitations of Financial Reporting

Financial reports are historical and may not reflect real-time business conditions.
Non-financial aspects (employee skills, goodwill, customer satisfaction) are not
measured.
Possibility of manipulation (window dressing in reports).
Complex and costly compliance requirements.

Quick Revision of Unit 10

Financial Reporting provides financial data to stakeholders.

Key components include Balance Sheet, P&L, Cash Flow, and Notes to Accounts.
Ind AS, IFRS, and AS govern financial reporting in India.
SEBI, ICAI, MCA, and RBI regulate financial reporting.
Recent trends include ESG reporting, digital reporting, and blockchain in accounting.
CSR Reporting is mandatory for large companies in India.

Quick Test on Unit 10

Part 1: Multiple Choice Questions (MCQs)
1. Which regulatory body develops accounting standards in India?
a) SEBI
b) RBI
c) ICAI
2. What is the primary purpose of financial reporting?
a) To maximize company profits
b) To provide accurate financial data to stakeholders
c) To increase market competition
3. Which financial statement tracks cash inflows and outflows?
a) Balance Sheet
b) Profit & Loss Statement
c) Cash Flow Statement
4. Which accounting framework is aligned with IFRS in India?
a) AS
b) Ind AS
c) GAAP
5. CSR reporting is mandatory for companies with a net worth of:
a) ₹500 crore or more
b) ₹100 crore or more
c) ₹1,000 crore or more

Part 2: Short Answer Questions

1. What is Financial Reporting, and why is it important?
2. List the key components of financial reporting.
3. Explain the role of SEBI and ICAI in financial reporting.
4. What are the recent trends in financial reporting?
5. Define CSR Reporting and its requirements in India.

Quick Revision Notes for Financial Reporting Statements and Analysis

(For 1st Semester MBA – Lovely Professional University)

I have compiled ready-reckoner material with key concepts, formulas, and easy-to-
understand examples for quick revision before your exam.

Unit 1: Introduction to Accounting

What is Accounting?

Accounting is the process of recording, classifying, summarizing, and interpreting

financial transactions.

Example: If a company buys raw materials for ₹50,000 and sells finished goods for
₹80,000, accounting records both transactions and calculates profit.

Types of Accounting

Financial Accounting – Records business transactions.

Cost Accounting – Tracks costs for decision-making.
Management Accounting – Helps in planning and control.

Golden Rules of Accounting

Account Type Debit Credit

Personal The receiver The giver
RealWhat comes in What goes out
Nominal Expenses & losses Incomes & gains

Accounting Concepts & Principles

Going Concern – Business will continue indefinitely.

Accrual Concept – Record transactions when they happen, not when cash is
received.
Matching Concept – Expenses should match related revenues.
 Unit 2: Financial Statement Analysis

Types of Financial Statements

Balance Sheet – Shows financial position (Assets = Liabilities + Equity).

Profit & Loss Statement – Shows profits and losses.
Cash Flow Statement – Shows cash inflows & outflows.

Ratio Analysis (Key Ratios & Formulas)

Category Ratio Formula Ideal Value

LiquidityCurrent RatioCurrent Assets / Current Liabilities 2:1
Profitability Net Profit Margin (Net Profit / Sales) × 100 Higher is better
Efficiency Inventory Turnover COGS / Average Inventory Higher is better
Solvency Debt-Equity RatioTotal Debt / Shareholder’s Equity Less than 2:1

Example: If a company has ₹2,00,000 in assets and ₹1,00,000 in liabilities, its

current ratio = 2:1 (Good Liquidity Position).

Unit 3: Corporate Financial Statements

Key Financial Statements & Their Uses

Balance Sheet – Used by investors to check financial health.

Profit & Loss Statement – Used by management for decision-making.
Cash Flow Statement – Used by creditors to analyze liquidity.

Example: If a company has ₹5 lakh in assets and ₹2 lakh in liabilities, it means the
company is financially stable with more assets than liabilities.

Unit 4: Ratio Analysis

Liquidity Ratios – Show short-term financial health.

Profitability Ratios – Measure earning ability.
Solvency Ratios – Show long-term financial stability.
 Market Ratios – Help investors evaluate shares.

Example: If Net Profit is ₹1,00,000 and Sales is ₹10,00,000,

Net Profit Margin = (1,00,000 / 10,00,000) × 100 = 10% (Good Profitability).

Unit 5: Cash Flow Statement

Operating Activities – Day-to-day business (sales, salaries).

Investing Activities – Buying/selling assets.
Financing Activities – Raising capital, loans, dividends.

Example: If a company sells land for ₹10 lakh (Investing Activity) and issues shares
for ₹5 lakh (Financing Activity), these transactions will be recorded in the Cash Flow
Statement.

Unit 6: Budgetary Control

Fixed Budget – Does not change with activity level.

Flexible Budget – Adjusts based on production volume.
Zero-Based Budgeting (ZBB) – Justify every expense from zero.

Example: A company plans to spend ₹1 lakh on marketing, but due to high

competition, it increases to ₹1.5 lakh (Budget Deviation).

Unit 7: Inventory Valuation

FIFO (First-In, First-Out) – Oldest stock used first.

LIFO (Last-In, First-Out) – Newest stock used first.
Weighted Average Cost (WAC) – Uses an average cost per unit.

Example: If a company buys 10 units at ₹50 and 10 units at ₹60, the Weighted
Average Cost = ₹55 per unit.

Unit 8: Marginal Costing and Profit Planning

 Marginal Cost = Variable Cost per Unit.
Break-even Point (BEP) = Fixed Costs / Contribution per Unit.
Higher Contribution → Higher Profitability.

Example: If a company has Fixed Costs = ₹10,000 and Contribution per Unit = ₹50,
Break-even Sales = 10,000 / 50 = 200 units.

Unit 9: Standard Costing and Variance Analysis

Material Variance – (Standard Cost - Actual Cost).

Labor Variance – (Standard Hours - Actual Hours) × Standard Rate.
Favorable Variance = Cost Savings.

Example: If the standard cost of materials is ₹50,000 but actual cost is ₹45,000,
Variance = ₹5,000 Favorable (Good Performance).

Unit 10: Financial Reporting & Recent Trends

Ind AS (Indian Accounting Standards) – Aligns with IFRS.

Digital Financial Reporting – Use of AI & automation.
CSR Reporting – Companies must spend 2% of profits on social causes.

Example: A company with ₹10 crore profit must spend ₹20 lakh on CSR activities
(education, healthcare, environment).

Extra Exam Tips & Strategies

Smart Revision Tips

Focus on key formulas and concepts from each unit.

Solve previous year’s question papers to understand exam patterns.
Use flashcards and short notes for quick recall.

Memory Tricks for Quick Learning

 Use Mnemonics – Example: “FIFO” → First In, First Out (Oldest stock used first).
Associate with real-life examples – Example: Balance Sheet is like a financial selfie of
a company.
Use Mind Maps & Diagrams – Draw charts for ratio analysis & budgeting.

Time Management in Exam

Start with easy questions first to gain confidence.

Allocate time per question (e.g., 2-3 minutes for MCQs, 5-7 minutes for
calculations).
Write formulas first in numerical answers to get stepwise marks.

Final Checklist Before Exam

Revise all key concepts & formulas from this Ready-Reckoner.

Solve 1-2 practice tests to check preparation.
Keep calm & confident, and attempt all questions carefully.

Additional Notes for Financial Reporting Statements & Analysis (MBA – LPU)

Here are some extra notes covering advanced concepts, practical insights, and key
points that will help you prepare even better for your MBA 1st Semester Exam.

1. Advanced Notes on Financial Statements

Balance Sheet – Additional Insights

Classifications of Assets & Liabilities

• Current Assets: Cash, Inventory, Debtors (Short-term).
• Non-Current Assets: Machinery, Buildings (Long-term).
• Current Liabilities: Creditors, Outstanding Expenses.
• Non-Current Liabilities: Long-term Loans, Debentures.

Key Balance Sheet Formulas

 • Net Worth = Total Assets - Total Liabilities
• Working Capital = Current Assets - Current Liabilities
• Debt-to-Equity Ratio = Total Debt / Shareholder’s Equity

Example: If a company has ₹10 lakh in assets and ₹3 lakh in liabilities,

Net Worth = ₹7 lakh (Financially stable company).

Profit & Loss Statement – Extra Details

Types of Profits:
• Gross Profit = Sales - Cost of Goods Sold (COGS)
• Operating Profit = Gross Profit - Operating Expenses
• Net Profit = Operating Profit - Taxes & Interest

Additional Ratios for P&L Analysis:

• Gross Profit Margin = (Gross Profit / Sales) × 100
• Operating Profit Margin = (Operating Profit / Sales) × 100
• Net Profit Margin = (Net Profit / Sales) × 100

Example: If Net Profit = ₹2 lakh and Sales = ₹10 lakh,

Net Profit Margin = (2,00,000 / 10,00,000) × 100 = 20% (Good Profitability).

Cash Flow Statement – Additional Breakdown

Direct vs. Indirect Method:

• Direct Method: Lists all actual cash receipts and payments.
• Indirect Method: Adjusts net profit for non-cash expenses
(Depreciation, Provisions).

Important Adjustments in Indirect Method:

• Depreciation (Added back to profit).
• Increase in Current Liabilities (Added to cash flow).
• Increase in Current Assets (Deducted from cash flow).

Example: If a company has Net Profit = ₹1 lakh, Depreciation = ₹10,000,

 Increase in Creditors = ₹20,000,
Operating Cash Flow = ₹1,00,000 + ₹10,000 + ₹20,000 = ₹1,30,000.

2. Extra Notes on Ratio Analysis & Decision-Making

Advanced Profitability Ratios

Earnings Per Share (EPS) = Net Profit / Total Shares

Return on Capital Employed (ROCE) = (EBIT / Capital Employed) × 100
Return on Assets (ROA) = (Net Profit / Total Assets) × 100

Example: If Net Profit = ₹2 lakh, Total Shares = 1,00,000,

EPS = 2,00,000 / 1,00,000 = ₹2 per share.

Additional Efficiency Ratios

Accounts Receivable Turnover = Net Credit Sales / Average Receivables

Fixed Asset Turnover = Sales / Fixed Assets
Working Capital Turnover = Sales / Working Capital

Example: If Sales = ₹10 lakh, Fixed Assets = ₹5 lakh,

Fixed Asset Turnover = 10,00,000 / 5,00,000 = 2 times.

3. Budgeting & Variance Analysis – Practical Insights

Real-World Use of Budgeting

Companies use Zero-Based Budgeting (ZBB) to control unnecessary expenses.

Flexible Budgets are used in industries with fluctuating demand (Hotels, Airlines).

Common Variance Analysis Issues

Material Price Variance may increase due to inflation.

Labor Efficiency Variance may worsen due to lack of training.
 Example: If Standard Material Cost = ₹50,000 and Actual Cost = ₹55,000,
Material Variance = ₹5,000 Unfavorable (Company paid extra).

4. Inventory Valuation – Advanced Notes

When to Use FIFO? – When prices are rising, FIFO shows higher profits.
When to Use LIFO? – When prices are rising, LIFO lowers tax liability.

Example: If a company bought 100 units at ₹50 each and later 100 units at ₹60 each:
• FIFO: Sells ₹50 units first (Lower COGS, Higher Profit).
• LIFO: Sells ₹60 units first (Higher COGS, Lower Profit).

5. Latest Trends in Financial Reporting (Important for MBA)

AI & Automation in Accounting – Companies use AI for real-time reporting.

Blockchain in Financial Transactions – Used to prevent fraud.
ESG (Environmental, Social, and Governance) Reporting – Companies disclose
sustainability impact.

6. Quick Formulas Cheat Sheet (For Last-Minute Revision)

Concept Formula
Current RatioCurrent Assets / Current Liabilities
Quick Ratio (Current Assets - Inventory) / Current Liabilities
Debt-Equity RatioTotal Debt / Shareholder’s Equity
Break-even Sales (Units) Fixed Costs / Contribution per Unit
Return on Equity (ROE) (Net Profit / Shareholder’s Equity) × 100
Material Price Variance (MPV) (Standard Price - Actual Price) × Actual Quantity
Labor Rate Variance (LRV) (Standard Rate - Actual Rate) × Actual Hours

Final Exam Tips for Success

Focus on Conceptual Understanding – Don’t just memorize formulas; understand

their meaning.
Use Mnemonics & Visual Aids – Example: FIFO = First In, First Out (Oldest Stock
First).
Solve Past Year Papers – Helps understand exam patterns.
Time Management Strategy – Allocate 1-2 minutes for MCQs, 5-7 minutes for
practical problems.
Attempt Numerical Questions First – They carry fixed marks and are easy to score.
Keep Answers Structured – Define, Explain, Example, Formula (DEE
Formula).