Ejaz Ali Haroon

Module 6
Syllabus: Balance sheet preparation-principles and interpretation-forecasting
techniques-business financing-sources of capital- Capital and money markets-international
financing-FDI, FPI, FII-Basic Principles of taxation-direct tax, indirect tax-GST

BALANCE SHEET
A balance sheet is a financial statement that summarizes a company's assets, liabilities and
shareholders' equity at a specific point in [Link] gives an account of what the company owns
and owes, as well as the amount invested by shareholders.
Uses of balance sheet
 It shows the financial position of the business concern.
 It shows what the firm owes to others and also what others owe to the firm.
 It shows the nature and value of the assets.
 It also reflects the liquidity of a firm.
Characteristics
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 It is a statement and not an account STUDNTS
 It is always prepared on a particular date, and thus shows the position of the company
at that date.
 The headings are Liabilities and Assets.
 It shows the financial position of the business concern.
 It shows what the firm owes to others and also what others owe to the firm.
 The totals of Liabilities and Assets always are equal.

Balance sheet always adheres to the following formula:

Assets = Liabilities + Shareholder’s Equity
This equation is known as Basic Accounting Equation. The terms in this equation are
explained below.
Assets
An asset is a resource or property having a monetary/economic value possessed by an
individual or entity, which is capable of producing some future economic benefit.
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Assets Current Assets Assets Tangible Assets

Fixed Assets Non-tangible Assets

 Current Assets: Assets which are easily convertible into cash.

Eg:- stock of products, inventory, marketable securities, short-term investments, fixed
deposits in banks, accrued incomes(income earned but not received yet ), bank balances,
Sundry debtors(people who have to pay money to the business firm), prepaid expenses etc.
Current assets are generally of a shorter life span. Current assets can also be termed as liquid
assets.
 Fixed Assets: Fixed assets are of a fixed nature in the context that they are not readily
convertible into cash. They require elaborate procedure and time for their sale and converted
into cash.
Eg:-Land, building, plant, machinery, equipment, furniture etc.
Other names used for fixed assets are non-current assets, long-term assets or hard assets.
Generally, the value of fixed assets generally reduces over a period of time (known as
depreciation).
 KTU STUDNTS
Tangible Assets: Tangible assets are those assets which we can touch, see and feel. All
fixed assets are tangible. Moreover, some current assets like inventory and cash fall under the
category of tangible assets too.
 Intangible Assets: Intangible assets cannot be seen, felt or touched physically by us.
Eg:- goodwill, franchise agreements, patents, copyrights, brands, trademarks etc.

Liability
In simple words, liability is an obligation of the entity to transfer cash or other
resources to another party.
--Current Liability is one which the entity expects to pay off within one year from the
reporting date.
--Non-Current Liability is one which the entity expects to settle after one year from the
reporting date.

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Current liability Non-Current liability

Bank Overdraft ( Extra money borrowed from bank account) LongTerm Bank Loan
Short Term Bank Loan Debenture
Sundry Creditors
( People from whom company has taken a benefit without
complete payments)
Tax Payables

We have the Basic Accounting Equation as:-

Assets = Liabilities + Shareholders' Equity
 Initially,the company is not in existence. Since the business has not yet started it has
neither assets nor liabilities.
Assets = Liabilities + Shareholders' Equity
0 = 0 + 0
 Now, Mr B now started the business with an amount of Rs.50000. In accounting we
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have to consider the businessman and the business as two separate factors. This is
known as Dual entity Concept.
When Mr.B invests the amount, the business will have
Assets = Liabilities + Shareholders' Equity
50000(cash) = 0 + 50000(owner’s investment) ---- (Equation is satisfied)
 He purchased some goods for Rs. 10000 to the business. Now, the cashis reduced by
RS. 10000 and goodsworth Rs. 10000 will be added to the business. New equation will
be:-
40000(cash) + 10000(goods)= 0 + 50000(owner’s investment) ----(Equation is satisfied)
 He purchased furniture worth Rs. 15000. This will reduce the cash by Rs.15000and
will increase furnitureasset by same amount.
40000(cash) + 10000(goods) = 0 + 50000(owner’s investment) ---- (Equation is satisfied)
 He sold goods for cash [Link] will reduce his goods by Rs. 8000 and increase
the cash by same amount.
48000(cash) + 2000(goods) = 0 + 50000(owner’s investment) ---- (Equation is satisfied)
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 He bought goods on credit from Mr.C for Rs. [Link] will increase the stock of
goods by Rs. 30000 and his creditors by same amount.
48000(cash) + 32000(goods) = 30000(creditors) + 50000(owner’s investment) ----
(Equation is satisfied)
 He opened a bank account for his business by depositing Rs.5000 . Now bank balance
will increase by 5000 and cash balance will reduce by same amount.
43000(cash)+32000(goods)+50000(bankbalance)= 30000(creditors) + 50000(owner’s
investment) ---- (Equation is satisfied)
 He sold goods worth Rs.20000 on credit to Mr.Y. This will increase the debtors by Rs.
20000 and decrease the stock of goods of worth the same amount.
43000(cash) + 12000(goods) + 50000(bank balance) + 20000(debtors) = 30000(creditors) +
50000(owner’s investment) ---- (Equation is satisfied)
 He also sold goods to Mr. K for Rs.4000 .This transaction will increase the cash by
Rs.4000 and reduce the worth of goods by same amount.
47000(cash) + 8000(goods) + 5000(bank balance) + 20000(debtors) = 30000(creditors) +

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50000(owner’s investment) STUDNTS
---- (Equation is satisfied)
 He took loan of Rs.20000 from bank for business purposes. Then we have :-
67000(cash) + 8000(goods) + 5000(bank balance) + 20000(debtors) = 30000(creditors) +
20000 ( bank loan) 50000(owner’s investment) ---- (Equation is satisfied)
Thus whatever transaction takes place, the basic accounting equation will always be satisfied.

BUSINESS FORECASTING
Forecasting is the process of making predictions of the future based on past and present data
and most commonly by analysis of trends.
Business Forecasting Qualitative forecasting and Quantitative forecasting

Qualitative forecasting Quantitative forecasting

 Techniques are subjective, based on the  Used to forecast future data as a
opinion and judgment of consumers and function of past data.
experts.
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 Used when past data are not available.  Some of the patterns in the past data are
 Applied to intermediate or long-range expected to continue into the future.
decisions.  Applied to short- or intermediate-range
 Examples: - Delphi technique, Nominal decisions.
Group Technique (NGT), sales force  Examples: - Associative forecasting or
opinions, executive opinions, market trend projection, last period demand,
research, opinion and judgmentand simple and weightedN-Period moving
historical life-cycle analogy. averages,simple exponential smoothing,
Poisson process model based
forecasting and multiplicative seasonal
indexes.

Qualitative forecasting -- THE DELPHI TECHNIQUE.

The Delphi technique uses a panel of experts to produce a forecast. Each expert is
asked to provide a forecast specific to the need at hand. After the initial forecasts are made,

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each expert reads what every other expert wrote and is, of course, influenced by their views.
A subsequent forecast is then made by each expert. Each expert then reads again what every
other expert wrote and is again influenced by the perceptions of the others. This
process repeats itself until each expert nears agreement on the needed scenario or numbers.
NOMINAL GROUP TECHNIQUE.
Nominal Group Technique is similar to the Delphi technique in that it utilizes a group
of participants, usually experts. After the participants respond to forecast-related questions,
they rank their responses in order of perceived relative importance. Then the rankings are
collected and aggregated. Eventually, the group should reach a consensus regarding the
priorities of the ranked issues.
SALES FORCE OPINIONS.
The sales staff is often a good source of information regarding future demand. The
sales manager may ask for input from each sales-person and aggregate their responses into a
sales force composite forecast. Caution should be exercised when using this technique as the
members of the sales force may not be able to distinguish between what customers say and

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what they actually do. Also, if the forecasts will be used to establish sales quotas, the sales
force may be tempted to provide lower estimates.
EXECUTIVE OPINIONS.
Sometimes upper-levels managers meet and develop forecasts based on their knowledge of
their areas of responsibility. This is sometimes referred to as a jury of executive opinion.
MARKET RESEARCH.
In market research, consumer surveys are used to establish potential demand. Such marketing
research usually involves constructing a questionnaire that solicits personal, demographic,
economic, and marketing information. On occasion, market researchers collect such
information in person at retail outlets and malls, where the consumer can experience—taste,
feel, smell, and see—a particular product. The researcher must be careful that the sample of
people surveyed is representative of the desired consumer target.

Quantitative forecasting
Quantitative forecasting techniques are generally more objective than their qualitative

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counterparts. Quantitative forecasts can be time-series forecasts (i.e., a projection of the past
into the future) or forecasts based on associative models (i.e., based on one or more
explanatory variables).
ASSOCIATIVE FORECASTING AND TREND PROJECTION
In this technique, we develop an association between an independent variable and a
dependent variable.
For eg:-
--There is always an association between sales of bikes in an area and percentage of the
young population living in that area.
--Cool Drinks sales can be related to temperature.
--Increase in energy cost leads to price increases in products and services.
Thus in all these cases we can see an association between one variable and another. We have
to form a general linear regression equation between the two variables by which we can
forecast the future trends.
Linear regression equation will be y = a + bx ,where

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y = predicted (dependent) variable b = slope of the line

x = predictor (independent) variable a = value of y when x = 0
Value of a = y – bx where y denotes mean value of y , x denotes mean value of x
Value of b = Σ [( y- y )(x –x )]
Σ (x – x)2
Once the value of a and b are calculated, we can form the general equation and forecast the
future trends.
Solved Examples
 Develop a trend equation and calculate the sales for the 6 th and 7 th month
Month 1 2 3 4 5
Sales 150 143 159 169 165

Answer :Since we have to forecast the sales, take sales as “y” variable and month as “x”
variable
x y x-x y-y (x-x)(y-y) (x - x )2
1 KTU 150 2 STUDNTS 5 10 4
2 143 1 12 12 1
3 149 0 6 0 0
4 168 2 13 26 4
5 165 3 10 30 9
Σ x = 15 Σy =775 Σ(x-x)(y-y) =
Σ(x-x)2= 18
x= 15/5 = 3 y = 155 78

b = Σ [( y- y )(x –x )]= 78/ 18 = 4.34

Σ (x – x)2 Thus, y = 141.98 + 4.34x
a = y - bx = 155- ( 4.34* 3) = 141.98
Sales for 6th month ---- y = 141.98 + (4.34* 6) = 168 units
Sales for 7th month ---- y = 141.98 + (4.34* 7) = 172 units

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Business Financing
--Analyses the different methods to obtain investments for business purposes.
--Business financing can be made possible through financial markets or by international
investments.
Financial Markets-The financial market is a broad term describing any marketplace where
trading of securities including equity shares, bonds, currencies etc occurs.
Financial markets are of 2 types--- Capital market and Money market.

BASIS FOR
MONEY MARKET CAPITAL MARKET
COMPARISON

Meaning A segment of the financial market A section of financial market

where lending and borrowing of short where long term securities are
term securities are done. issued and traded.

Financial Treasury Bills, Commercial Papers, Shares, Debentures, Bonds,

instruments Certificate of Deposit (from banks), Retained Earnings,etc
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Institutions Central bank, Commercial bank, Commercial banks, Stock
Non-bank financial institutions, bill exchange, etc
brokers, acceptance houses, and so
on.

Risk Factor Low Comparatively High

Liquidity High Low

(convertibility to
cash)

Purpose To fulfill short term credit needs of To fulfill long term credit needs
the business. of the business.

Time Horizon Within a year More than a year

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BASIS FOR
MONEY MARKET CAPITAL MARKET
COMPARISON

Merit Increases liquidity of funds in the Mobilization of Savings in the

economy. economy.

Return on Less Comparatively High

Investment

International Investments
-Investments made by a company or individual in one country towards business interests in
another country.
 Foreign Direct Investment (FDI) as the name suggests is investing directly in another
country. A foreign company which is based in some other country like France invests
in India either by setting up a wholly owned subsidiary or getting into a joint venture

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with some company based in India and then conducts its business in India.
Examples: Various software companies like IBM India which is initially based in Unites
States but has opened its subsidiaries in different part of [Link] Suzuki is yet another
example in which Suzuki of Japan had joint ventured with MarutiUdyog Ltd.

 Foreign Portfolio Investment (FPI) is similar to FDI in a way that this is also direct
investment but investment is onlyin financial assets such as stocks, bonds etc. of a
company located in another country. When a foreigner buys shares of Indian Based
Company, it is a FPI. In contrast to FDI, a portfolio investment is an investment made
by an investor who is not involved in the management and day-to-day business of a
company.
Example: Any foreign company or individual invests in the shares of Infosys (based in
India).

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 Foreign Institutional Investor (FII) is an investor or group of investors who bring

FPIs. Institutional investors include insurance companies, pension funds and mutual
funds. They participate in the secondary market of economy. To participate in the
market of India, FIIs must register themselves with Securities and Exchange Board of
India (SEBI).

FDI vs FPI
FDI FPI
Investment in productive assets (whose value increase
Investment in financial assets like
over time) like plant and machinery, new unit or
stocks, bonds, mutual funds, etc.
subsidiary for a business
Investment gives investors only
Investment gives investors ownership right as well as
ownership right and not
management right
management right

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Engage in decision making of a firm
STUDNTS Not involved in decision making
Investors can plan for long but often
Investors enter a country with long-term approach
have short-term plans
Investors can easily depart from the
Investors cannot depart from the country easily
country
FPI is less important as compared to
FDI is more important for a country
FDI

Taxation
 Taxation refers to compulsory or coercive money collection by a levying authority,
usually a government.
 Principles of taxationare a set of criteria which act as a guide to the government when
designing and implementing a new tax.
They are:
1. Taxes should be proportional to peoples’ income.
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2. Taxes should be certain, not arbitrary.

3. Taxes should be levied at a convenient time.
4. The cost of the collection of the tax should be as low as possible.
5. Tax assessment and determination should be easy to understand by an average tax
payer.
6. Taxes should be just enough to generate revenue required.

Taxes are of two types: -Direct Tax & Indirect Tax

Direct Tax Indirect Tax

--Taxes that cannot be transferred or --Taxes which can be shifted from one person
shifted to another person. to another person.
Eg:- Income tax has to be paid by the Eg:- Value Added Tax (VAT) is included in
individual himself who earns taxable the bill of goods and services that we procure
income . from others. The initial tax is levied on the

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--Taxes are paid in entirely by a taxpayer manufacturer or service provider, who then
directly to the government shifts this tax burden to the consumers by
charging higher prices for the commodity by
including taxes in the final price.
--The liability as well as the burden to --Liability to pay the tax lies on a person who
pay tax resides on the same individual then shifts the tax burden to another
--Involve higher administration cost individual.
Examples:- --Lower administration costs.
 Income Tax: Levied on and paid by Examples:-
the same person according to tax  Excise Duty: Payable by the manufacturer
brackets as defined by the income tax who shifts the tax burden to retailers and
department. wholesalers.
 Corporate Tax: Paid by companies  Sales Tax: Paid by a shopkeeper or retailer,
and corporations on their profits. who then shifts the tax burden to customers
 Wealth Tax: Levied on the value of by charging sales tax on goods and services.

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property that a person holds.  Custom Duty: Import duties levied on

 Estate Duty: Paid by an individual in goods from outside the country ultimately
case of inheritance. paid for by consumers and retailers.
 Gift Tax: An individual receiving the  Entertainment Tax: Liability is on the
taxable gift pays tax to the government. cinema owners, who transfer the burden to
cinemagoers.
 Service Tax: Charged on services rendered
to consumers, such as food bill in a
restaurant.

GST ( Goods and Service Tax)

The Indian constitution divides taxation powers between centre and states. Both levels
of government have some exclusive areas where they can levy tax. There are two important
problems with the current arrangement.
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Consider ashirt manufactured in UP. The central government, therefore, levies its
indirect tax called central excise at the factory gate. Subsequently, a shirt reaches a retail
outlet and is bought by a consumer. The state government, at this stage, levies a tax on
consumption named value added tax (VAT). So, we have a tax at the factory gate which adds
to the cost of the shirt and another tax on the final [Link] these shirts are transported to
another states to trading purposes, each state will levy tax on it at different stages. Thus,
multiple taxes are levied on the same commodity at different places and different stages.
Thus, India is politically one country, but economically it is fragmented. GST will put an end
to this concept. It will create single economic zone in the entire country.
Goods and Services Tax (GST) is an indirect tax reform which aims to remove tax
barriers between states and create a single market. Once this step is taken, the tax barriers
between states, and centre and states will disappear.
Goods and Services Tax (GST) is an indirect taxation in India merging most of the
existing tax system into single system of taxation.

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GST is basically an indirect tax that brings most of the taxes imposed on most goods
and services, on manufacture, sale and consumption of goods and services, under a single
domain at the national level
A dual GST system is planned to be implemented in India as proposed by the Empowered
Committee under which the GST will be divided into two parts:
 State Goods and Services Tax (SGST)
 Central Goods and Services Tax (CGST)
Advantages
 It will lower the cost of goods and services, give a boost to the economy and make the
products and services globally competitive
 GST will be levied only at the final destination of consumption based on VAT
principle and not at various points
 It will also help to build a transparent and corruption-free tax administration.
 GST will bring more transparency to indirect tax laws.
Items excluded from GST
Petroleum products
Alcohol
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Electricity
Sample balance sheet : Balance sheet of ABC limited as on 31-03-2017

Assets Amount Liabilities Amount

 Fixed Assets  Current liabilities
-Land xxxx -Short term loans xxxx
-Building xxxx -Sundry creditors xxxx
-Furniture xxxx -Bank overdraft xxxx
Total Fixed Assets xxxx (a) Total Current liabilities xxxx(a)
 Current Assets  Non- Current liabilities
-Cash in hand xxxx -Long term loans xxxx
-Inventory & Stock xxxx Total Non-Current liabilities xxxx(b)
-Sundry debtors xxxx
Total Current Assets xxxx (b)  Owner’s Equity xxxx(c)
 Intangible Assets
-Goodwill xxxx (c)  Total liability & Equity xxxx(a+b+c)
xxxx(a+b+c)
 Total Assets
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