JAIIB AFM 18 🔥 ch 13 Cashflow statements - module b

Hello friends good morning to all of you and today in this video we are going to start with the new chapter from the module B that is related to the preparation of final accounts. There is a little problem in the thumbnail of the video that I will get it changed right because it is written Cash Flow Statements and Fund Flow Statements that will be learning but that is not the chapter number 13 Chapter number 13 it is about the preparation of the final accounts. So please confirm the audio video quality as soon as possible so that we can proceed. So do confirm the audio video quality at the earliest so that we can start the session as soon as possible. The complete course of AFM is now available on our website iibf.store. By going there you will get the complete details. If you want previous year questions and mock tests, you want PDF notes, everything is available, also the one liner notes are available, so ODB video quality is working all fine. So let's start the session. So the first topic that we are going to cover about the preparation of the final accounts is related to the adjustment entries. So what are adjustment entries? I already told you a basic thing related to this when we were talking in the last module. That was related to what we follow in accounting? We do follow the actual basis. What does accrual basis mean ? That we do not follow cash basis accounting. Take it until it becomes NPA. Ok ? Till then we follow accrual basis. So whatever your income and expenses are, right? You only need to record those income expenses that relate to your current accounting period. Whether you have received cash , whether you have paid cash or not , it does not matter. So, adjustment entries are passed at the end of the accounting period. To ensure that we correctly determine profit, properly match income and expenses, and provide a true and fair representation of the financial statements. This thing is very important for him. And at the same time, we also have to comply with the matching concept, the accrual concept. That is why we do pass the adjustment entries at the end. Right? Because which system do we follow ? We have to follow the accrual basis of accounting. So one thing to remember is that we follow the accrual basis of accounting. Right? The second thing you have to remember is that since we have income and expenses of the same year, they have to match each other. That is why the adjustment entries are passed. Right? So what are the adjustment entries that are adjusted ? Those are the journal entries. So if we're talking about the adjustment entries, those are what entries that are, the journal entries. Just like entries are passed in the journal properly, similarly entries are passed at the end of the accounting period so that we can convert the accounts from cash basis to accrual basis. clear? So which accounts do we have we were able to convert that cash basis into accrual basis. That's why the entries are passed. clear? So what happens particularly is that we do not record new transactions. We only allocate income and expenses properly. We simply allocate the income and expenses. It's Not Like That We're Recording The New Transactions. Nothing like this happens. So what is a golden rule related to it? The golden rule is related to like one will be a profit and loss account item, right income expense and the other will be a balance sheet item. So the golden rule about the adjustment entry is that every adjustment entry, that is, one entry will affect your profit and loss account item and the second thing will impact the balance sheet item. Clearly, two things impact each other. Let's have a look at the example. Now, an example is given here that rent for the office. Rent for the office for March 2026 is paid in April 2026. If the profit and loss account for the year ended March 31, 2026 is drawn purely from the rent paid ledger balance, the March rent will be missing. Profit will be overstated. This is fixed in the adjustment entries, that is, you paid the rent for the month of March in the month of April, and that was paid the next year. Now if you do not get this adjusted then your profit for the next year will be understated. Right? And your profit for this year will be overstated. Because you did not consider the rent for March. For this you will have to make an entry at the end of the accounting year and that will be the adjustment entry. And what will be that adjustment entry that you will debit the rent account. And you will credit the Rent Payable account. Right? So this is your rent account, as I told you the golden rule just now that you will have a profit and loss account. Second, you will have a balance sheet account. So the rent paid account is a profit and loss account. And which account is the rent payable account? That is a balance sheet account. That is a balance sheet account. It will showcase it in your current liabilities. clear? So that's the funda. Have all the points become clear to us till now? Now the point is related to the categories of the adjustment entries. So the first category of adjustment entry is that related to the outstanding expenses. Who is he related to? It is related to outstanding expenses. Accrued is related to your expenses. Now the expenses are incurred in your year but they are not paid. But those are not paid at outstanding expenses. What are they? Expenses that have been incurred but have not yet been paid. Like salary payable, rent payable, electricity payable, interest payable, what types will all these be? These are all the payables. There are outstanding expenses. Payment has not been made yet. Right? Like what we did last time was that to convert the March rent which was paid in April, we put it in the outstanding account. It was put in the outstanding salary account as it is payable now. I haven't paid yet. So that's a first category. That's a first category. The Second Category It's Related to What? It is related to the prepaid expenses. What are prepaid expenses ? That is, the expenses which you have paid in advance related to the future period. You may have already paid the rent due to late payment. Right? So that's a prepaid expense. Now the prepaid expense becomes your asset. As if you have paid the insurance premium or subscription. Right? So that's basically what? That's a prepaid expense. Understand it as an example. Let's have a look at the example where the annual insurance premium is ₹60,000. Right? And further, it is only ₹15,000 for the period from 1st January to March. The one related to January to March is ₹15,000. And the remaining ₹45,000 will come in your next year's accounting. The remaining pending work from April will come in the next year. So 45,000 will be what? 45,000 will be a prepaid expense. And prepaid expenses which are showcased as what? Those are showcased as the how do you showcase them? They are showcased as current assets in the balance sheet. These are showcased as the current asset in the balance sheet. For example, if there is an entry of Rs 45,000, then what will be the entry that you will debit the prepaid expense account i.e. prepaid insurance account and credit the insurance expense account. This is why this is how basin we're going to head this. The third entry type you have is Accrued and Outstanding Income. Which is related to your gross income or outstanding income. The third type is accrued income which is related to your outstanding income. What does unearned income mean? What do you mean by accrued income? This means that you have earned income but you have not received the money yet. For example, suppose you have charged interest on your loan account but have not actually received the cash yet. You all applied interest on 25th March. Ok? But people have not paid yet. Right? So interest became receivable, commission became receivable, rent became receivable. You know the money has to come to you. You have the right to take the money because the due amount has been paid. So in his case, the amount that is there is also to be adjusted for this also the adjustment entries to be passed. Right? So adjustment entry will have to be passed. If we look at it as an example, here the interest earned on fixed deposit is FD of Rs 10 lakh, at the rate of 7%, the interest earned is Rs 17,500 and on the basis of quarterly addition, you have now credited your interest of Rs 17,500, which is basically not yet credited by the bank. The bank also did not credit it. Right? The bank has not given the credit yet but the interest is crude. So the account which is for gross income will be debited and the income account will be credited because your income will be reduced from there. So it's not just about the income, it's also about the income that was due to you. Ok? She also joins in. clear? The fourth type of adjustment entry is related to the income received in advance. You should get the payment in advance. I should get advance rent and advance commission. So that will be an expense for you. Ok? So where will it be showcased? You received the income before you have earned it. Earnings are not due yet. But you have already received the income. The year is about to end on March 31st. But you have just received the entire rent for the next 3 months. So look at the example, here is an example related to the same, related to rent, that you have received the advance rent of ₹90,000 for 3 months. And then only the 30,000 belongs to the current year only. The remaining rent of Rs 60,000 will remain your liability. So the advance payments that are made are also a liability upon you. Ok? That becomes your current liability. We will keep it in the Income Received in Advance account. So that's these are the four types. So which types are four? The first type is that of an outstanding expense, which means that expenses have been incurred by you during the period but they have not been paid yet. Prepaid expenses that have already been paid. Accrued means that income has been earned. It has not been received yet. And the fourth one is income received in advance. These are the four total categories. Related to the Related to adjustment entries. These are the four related things with you. Is this part clear? Please do confirm. If things are all clear till here. Please confirm as soon as possible if you are clear with these things. So that we can proceed. Ok. Now let's move ahead. It is about the preparation of the profit and loss account. So what did we read in our last video? That we read about that with the trading account we read things. I read related things. But now it is about the profit and loss, that is, when we talk about the final statements, then it remains that first of all you have done the generalization. Then you got the entries posted. Then the balancing was done. The trial balance preparation was done and further rectification of errors etc. was done. everything has. Now the final statements. In the final statements, the first one is the trading account which tells you the gross profit and gross loss. And this gross profit/gross loss will then become the opening balance of the P&LL account. This becomes the opening balance of your P&L account. Now we call this P&L account. Ok? So when will you prepare the P&LL account ? After the trading account. That means, after you know the gross profit and gross loss, you will prepare the PNL account and the purpose is what we want to know the net profit and net loss. Ok? We want to know about net profit and net loss. So that is prepared after the trading account so that we can know the net profit and net loss. So, what is the main objective? So the first thing I have already told you is this. The first thing it's about is preparing the trading account. And then it's about the second stage of financial accounting. Ok? After preparing the trading account. And it is prepared at the end of every accounting period. You prepare it at the end of each accounting period. And for the it is drawn upon the accrual You do it on the basis of accrual basis of accounting. You have to consider all the income and expenses that occur. Whether irrespective cash movement has happened or not, you have to consider everything. That is why the adjustment entries are passed first. Adjustment entries are passed first because you have to follow the matching concept that whatever your income is, whatever your expense is related to the current period, it should match you, right? That's the main thing about it. Is this thing clear? So, the main feature is this is prepared after the trading account and further prepare above the year end. Ah, it's based on cruel accounting. And further which one do we follow in this? We do follow the matching concept. Right? It is important to follow this. Then after that it's about the key items for the profit and loss account. And we can say The Major Components of the Profit and Loss Account. The first one it's about the gross sales. What is about the gross sales? Gross sales are total sales. Right? The total sales including the indirect taxes. So if you are talking about total sales, whatever your amount is, then I am talking about the P&L account. Ok? We are not talking about the trading account right now. So leave the trading account out of your mind, this is about the P&L account. So the first term in the P&L account is gross sales. So your total sales are whatever you sold, okay, whatever you sold, total sales plus all the indirect expenses like suppose there is GST, then add all of them, add the excise component, that will be a gross sale, that will become your gross sale, okay, clear, the second component is about the net sales, net sales is when you remove the indirect taxes from the gross sales, minus indirect taxes, then it is basically your net sales, then that becomes your net sales. Right? And this is particularly comparable revenue. This is used in your ratio analysis. You use these terms mostly, you use these terms mostly in ratio analysis. For example, suppose your gross sales are Rs 50 lakh and you have indirect taxes of Rs 2 lakh. Ok? So what will be the net sales? Net sales will be of 48 lakhs. You have net sales of Rs 48 lakh. Then it is about the cost of goods sold. Cost Cost of goods sold. That means your cost has been increased. So has to produce The Goods Sold. Ok? Which is your cost. We have also read about this COGS in the trading account. You already know that all your direct expenses are included in this. Right? So what is the formula for Cost of Goods Sold ? What is the formula of the cost of goods sold? Your opening stock plus any direct expenses you have incurred will be included in this. Plus your net purchases, whatever the net purchases were, minus the closing stock. This is the formula for the COGS. Then it is about the gross profit that was assumed by what was assumed by the trading account. Gross profit becomes its component. Basically, the opening balance will be formed, so what was the full form of gross profit? It was your net sales. Whatever your net sales are, subtract COGS from it and subtract the cost of goods sold. That is your gross profit. What would a good operating expense be equal to? Whatever your operating expenses are, there are different types of operating expenses. We are having the different types of operating expenses. Like, one thing is administrative expenses. Admin Expenses. Now what are admin expenses ? Like salary is done, office rent is done, telephone is done. But these are the operations that take place. Which are required for operations. That are your operating expenses. Right? The second are selling expenses. For example, suppose you have done marketing. You did the marketing part. Did advertising, took commission. That is your selling expense. The third type of operating expense is depreciation. So depreciation is also your operating expense. Whatever will be incurred on the building, on the machinery, that is your operating expense. So which of these three are yours? These three R's are the operating expenses. These three items are your operating expenses. Admin Expenses, Administration Administrative Expenses and for the Selling Expenses and the Depreciation. Then it is about the operating profit. Operating profit. What is operating profit equal to? Out of gross profit you had gross profit. If you remove operating expenses from that. If you remove the operating expenses from that, then remove the three categories which we have read above. That is your operating profit. It checks the efficiency of your core business operations. What does it refer to? This tells you about the efficiency of your core business. Further it is about the non-operating surplus and deficit. What is non-operating surplus ? Which are not coming from your operation. Your main business is furniture from lets but the money that is coming is coming from the dividends that you have received. Ok? what is it then? Basically that is your non-operating surplus. That will be your non-operating surplus count. clear? This part is clear that what is non-operating surplus or what is non-operating deficit? So if there is profit from there then it is indirectly your business. Ok? So that is the non-operating surplus, then it will be the non-operating surplus, like suppose you got dividend income, you made investment, you got interest, okay there was foreign exchange gain, that is a non-operating surplus, further it is about this, basically we move ahead, a PBIT variant, say PBIT, say EBIT, one and the same thing, PBIT means profit before interest and tax. EBIT means Earnings Before Interest and Tax. Its rule is very simple. Whatever your operating profit is, whatever your operating if you subtract the operating expenses from the operating profit i.e. gross profit, then the profit is obtained. So in operating profit, add the non-operating income that you have to the operating profit. If there is any non-operating expense, subtract it. Subtract the loss. Not Income Expense Loss. Right? Subtract that. You will be having your EBIT. So EBIT measures your profitability before the effects of financing and taxation. That is, profit before interest and tax. Did not get the interest calculated, did not get the tax calculated. But whatever non-operating surplus or non-operating deficit you have, you have accommodated it. That is your EBI. Then it is your interest expense. If you take any bank finance then you will have to pay interest. Paid on term loan. You paid interest on debentures or bonds, lease liability interest. Then it's about the PBT Profit Before Tax. That means if you remove interest from EBIT , it will become PBT. And what is tax liability? Towards the government right it can be current tax as well plus deferred tax, current tax could also be there and the deferred tax could also be there, there can also be an adjustment for that, right and further the last term it is about the PAT that is profit after tax now profit after tax is the final profit which will be available to the shareholders or for the purpose of retained earnings that is your retained earnings that is your retained earnings so we can simply say that we do start from the gross sales. Ok? You start with your gross sales. And then you calculate net sales from it. And further, you subtract the cost of goods sold from it. And you get gross profit. What happens? Gross profit. And from that you subtract the operating expenses. And what are you left with ? You are left with the operating profit. You are left with operating profit. And further out of this operating profit, if you have non-operating surplus, okay? There is non-operating surplus, non-operating income, you will either add it or subtract the non-operating loss. Then You Will Be Left With What? You will be left with the EBIT. You will be left with EBIT. If you subtract interest from end EBIT. Subtract the interest. Then you will be left with the EBT (earnings before tax) and subtract the tax from it, then you will be left with the PAT that is a profit after tax. This is the final amount that will be available. clear? So these are the different components. These are the different components of the profit and loss account. Ok? So gross profit already I told you if you subtract cost of goods sold from net sales you are left with the gross profit like in this case you are given gross sales excise duty opening stock purchase direct expenses closing stock and we are to calculate what we have to calculate gross profit so the first step will be that we are to calculate the net sales what will be the net sales equal to which total you have made sales of ₹80 lakhs. Ok? And further you will remove the excise duty from it. So your net sales have arrived. The P&L net sales arrived at the edge. How much did it cost? You have net sales of ₹75 lakh. The second component is related to COGS. Now what is COGS equal to? That is equal to your opening stock plus any direct expenses plus any net purchases minus your closing stock. This is what is called fula. Now we have done it on this basis. This has been solved. I gave you opening stock of ₹ lakh and then I gave you stock of ₹ 40 lakh. Basically the purchases given are given. Direct expenses of Rs 4 lakh have been given. End closing stock is worth Rs 8 lakh. We Sold It. COGS came to Rs 42 lakh. And who gets the gross profit? Your COGS is to minus his COGS from what? To be subtracted from net sales. That is your gross profit. That is your gross profit. clear? This point has become clear. So that's basically how we can be calculating the gross profit. You may also be asked such questions directly in the exam. The second one it's about the operating profit. Operating profit means that you have to subtract your operating expenses from the gross profit. And there are different types of operating expenses. We are having the administrative expenses, selling distribution expenses or the depreciation that is also your operating expense. Right? So we have to remove them. And further, whatever is left with you after removing them will be your operating profit. As we have Gross Profit now given. Administrative expenses are given, selling and distribution expenses are given, depreciation is given. Right? So you used gross profit. Operating profit minus operating expenses. And that will be your answer. So you have an operating profit of ₹2 lakh. Keep in mind there are three categories. These are the three categories. Administrative Expenses, Selling and Distribution and Depreciation Expenses. These are your operating expenses. Further after that it's about the EBIT. EBIT Is What? EBIT is Earnings Before Interest and Tax. EBIT is Earnings Before Interest and Tax. What is EBIT? When you have operating profit. Ok? Whatever non-operating income you had in the operating profit, you will either add it or if there is a non-operating loss, you will subtract it and further. Ok? That will be your EBIT. This is what EBIT is. So here you will see the non- operating surplus which you have gained on the sale of your fixed assets or dividend income or foreign exchange revaluation gain. That is your non- operating surplus. The money did not come from your main business. It basically comes from selling your asset or revaluing it, thereby increasing your value. That is your non-operating surplus. And non- operating deficit, like if you incur any loss then it will become non-operating deficit. There will be a loss. Ok? So whether you have made a profit or a loss. If there is profit then add it and if there is loss then minus it. This is how we can calculate the EBIT. Further After That It's About The PAT. PAT IS WHAT? PAT is a profit after tax. PAT is a profit after tax. Now the profit after tax , this is the last term. Just remember that PAT is a final term which will be distributed among your shareholders, either this money belongs to the shareholders, the money does belong or you can give it to the shareholders in the form of dividend, that is fine but not all the money has to be given in the form of dividend, we have some retained earnings or we have reserves, that is basically the disclosed reserves which we create, this is the amount related to them. clear? Clear with it? So this is basically how we manage the funds. Those are managed funds. So if you subtract interest and tax from EBIT, that will be your PAT which is a profit after tax. Like here now you have been given EBIT of ₹23 lakhs. The interest on term loan is ₹4 lakh. Income tax is 25%. So, according to that you will be subtracting these terms. That means what did you do? Interest is excluded from EBIT. That will be a PBT that is EBT and PBT is one and the same thing EBT is earnings before tax PBT is profit before tax one and the same thing right and for the tax calculated tax is taken out. That will be a PAT that is a profit after tax. I don't know these terms. Students often get confused. These terms are not clear to them. Right? So make sure that you have to understand these terms basically. Now after that it's about the topic of the Profit and Loss Appropriation Account. The next topic is about the profit and loss appropriation account. So if the part is clear to you, then confirm it as soon as possible. So if you are clear with the component so far. So do you clear the particular part or is it clear to you? Write yes and text it. So that I can get to note that you have been cleared. And after that we are going to start with the Profit and Loss Appropriation Account. Now what does appropriation mean? When you have withdrawn the actual profit. Did you find out what actually is net profit or net loss? So this PAT is basically your net profit. This is either your net profit or this is your net loss. So, that was the main thing. I had told you that we have to calculate this in the profit and loss account. Now about the Profit and Loss Appropriation Account. Now the profit and loss tells us how much profit we have earned. The appropriation account tells us how to distribute and utilize the profit. So it's about the distribution of the profit. And after you create PNL, you move to Profit and Loss Appropriation Account. This is also a nominal account. This is also a nominal account. As we read, trading account is also a nominal account. Look at the profit and loss account, that too is a nominal account. In the same way, the Profit and Loss Appropriation Account is also the Nominal Account. So first of all you create a trading account. After the trading account, you create a profit and loss account. Then after that you prepare profit and loss appropriation account. Then you prepare the balance sheet. Now what is the main purpose? What is the main purpose that we had to create this Profit and Loss Appropriation Account. Because we are to distribute. The first thing is that whatever funds we have, whatever profit we have made, net profit, we have to distribute it among the partners. Or let's say if it is a company, a shareholder company, then we have to apply it as a dividend , make tax adjustments or create reserves. So, This Is What? This is a nominal account. Right? And after we create the Profit and Loss Account, the Profit and Loss Appropriation Account is created. And further, the net profit in this particular scenario is the net profit that is transferred to the credit side of the appropriation account. So you will distribute only if there is profit. So where will you take the profit? Profit will be on the credit side. If there is profit then where will you take it? The profit will be carried to the credit side. So it's basically the appropriation of the profits. It is not related to generation. Right? So you have to transfer money to the reserves. You have to declare dividend. You have to make tax adjustments for previous years. You have to withdraw from the reserves or carry forward the balance. Whatever you have to do. You can be doing this through the Profit and Loss Appropriation Account. Ok? Now the Profit and Loss Appropriation Account has two sides. One it is a credit side. The other one it's related to the debit side. So where will the profit go if there is any? The profit will be on the credit side. So if there is profit, which side will the profit go to? The credit will go on top of the side. Ok? So look at the profit and loss account. If we look at the profit and loss account. So the objective there is simple, in the case of the profit and loss account we just want to ascertain the net profit. But we want to distribute in the profit and loss appropriation account. So profit and loss is created before the appropriation account. After preparing its profit and loss account, the appropriation account is prepared. clear? So what are the things on the credit side? On the credit side you have sources of profit. The net profit of the current year will be received. You can carry forward the surplus pass balance of last year. You can bring it to the credit side. And for the amount you withdrew from the General Reserve or from any other reserve, you can write it on the credit side. You can include income tax provisions which were required earlier but are not required now. Right? So these are the different components which can be on the credit side of the appropriation account. And wherever you want to invest money, suppose you have to take your money to the general reserve. One is that it has to be brought from the General Reserve, that is, if it has to be used then it will come on the credit side. But if you want to deposit money in General Reserve then it will appear on the debit side. Suppose you basically have to put money in the debenture redemption reserve that we have to redeem the debentures. Or you have to basically issue interim dividend. Dividend distribution tax is done. Or you have made some provision for your income tax of previous years which you had not p

… transcript trimmed for display.