Difference between GAAP v/s. IFRS

GAAP v/s IFRS

GAAP (US Generally Accepted Accounting Principles) is the accounting standard used in the US, while IFRS (International Financial Reporting Standards) is the accounting standard used in over 110 countries around the world. GAAP is considered a more “rules based” system of accounting, while IFRS is more “principles based.” The U.S. Securities and Exchange Commission is looking to switch to IFRS by 2015.

What follows is an overview of the differences between the accounting frameworks used by GAAP and IFRS. This is at a broad, framework level; differences in accounting treatments for individual cases may also be added as this gets updated.

Comparison chart

	GAAP	IFRS
Stands for:	Generally Accepted Accounting Principles	International Financial Reporting Standards
Introduction (from Wikipedia):	Generally accepted accounting principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice.	International Financial Reporting Standards are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.
Used in:	United States	Over 110 countries, including those in the European Union
Performance elements:	Revenue or expenses, assets or liabilities, gains, losses, comprehensive income	Revenue or expenses, assets or liabilities
Required documents in financial statements:	Balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement, footnotes	Balance sheet, income statement, changes in equity, cash flow statement, footnotes
Inventory Estimates:	Either last-in, first-out or first-in, first-out	Only first-in, first-out
Inventory Reversal:	Prohibited	Permitted under certain criteria
Purpose of the framework:	US GAAP (or FASB) framework has no provision that expressly requires management to consider the framework in the absence of a standard or interpretation for an issue.	Under IFRS, company management is expressly required to consider the framework if there is no standard or interpretation for an issue.
Objectives Of financial statements:	In general, broad focus to provide relevant info to a wide range of stakeholders. GAAP provides separate objectives for business and non-business entities.	In general, broad focus to provide relevant info to a wide range of stakeholders. IFRS provides the same set of objectives for business and non-business entities.
Underlying assumptions:	The "going concern" assumption is not well-developed in the US GAAP framework.	IFRS gives prominence to underlying assumptions such as accrual and going concern.
Qualitative characteristics:	Relevance, reliability, comparability and understand ability  GAAP establishes a hierarchy of these characteristics. Relevance and reliability are primary qualities. Comparability is secondary. Understand ability is treated as a user-specific quality.	Relevance, reliability, comparability and understand ability  The IASB framework (IFRS) states that its decision cannot be based upon specific circumstances of individual users.
Definition of an asset:	The US GAAP framework defines an asset as a future economic benefit.	The IFRS framework defines an asset as a resource from which future economic benefit will flow to the company.

How to pass the entries in Accounting books (Tally ERP 9)

How to pass the entries in Accounting books (Tally ERP 9)

F2 - To Change Date

F3 - Creat a new Company / Alter the Company / Back up / Restore ...,

F4 - Contra Entry :-

      Eg:- Fund transfer from Bank to Cash in hand A/c.  

      Cr. Bank A/c.

      Dr. Cash in hand 

             Cash in hand to Bank

      

       Cr. Cash in hand A/c. 

       Dr. Bank A/c.

F5 - Payment Advice / Payment Voucher

      

       Eg:- M/s. Rahmat (Supplier) want to pay $50,000/-

             

       Dr. M/s. Rahamat (Supplier)  - $ 50,000/-

       Cr. Cash / Bank A/c.

F6 - Cash Receipts / Bank Receipts

       Eg:- M/s. Anand Engineering Co., - (Customer) - Sundry Debtor Paid to us $ 

              50,000/- 

              Cr. M/s. Anand Engineering Co.,   - $ 50,000/-

              Dr. Cash / Bank

F7 - Journal Entry's

       Eg:- To pass salary entry

              Dr. Salary A/c.

              Cr. Salary Payable A/c.

              At the time of Salary Payment 

              Dr. Salary Payable A/c.

              Cr. Bank / Cash A/c.

       Depreciation Entries :-

              Dr. Depreciation (Indirect Expenses) A/c.

              Cr. Computer (Fixed Assets) A/c. 

       Out Standing Expenses as on 31st March end of the Financial Year :-

              Dr. Telephone Expenses A/c.

              Cr. Telephone Outstanding expenses A/c.

       Discount Journal Entry :-

              Dr. M/s. Rahamat (Supplier A/c.)

              Cr. Discount Received (Indirect Income) A/c. 

Basic Formula for Calculating Retained Earnings

Basic Formula for Calculating Retained Earnings

In addition to explaining the basic formula used to calculate retained earnings, we’ll also look at the various advantages of not distributing all of a company’s profits. Even if a business isn't planning any new acquisitions, it’s still a good idea to keep some reserves.

·         Managing a company’s operations, marketing and sales activities and expense management are but a few of the decisions that management has to deal with. After it has made a profit the company will then need to decide what to do with those profits. Among the options for using profits are: operations, returning cash to shareholders, or keeping cash in reserve for future use. In this article we discuss how to calculate expanding the figure that is reported as retained earnings on balance sheets and presenting an overview of why a company would want to keep a reserve.

Retained earnings represent the amount a company has left after it has paid all its expenses, taxes, and dividends. A company can return all the cash it has left after it has taken care of its obligations, but that would handicap its efforts to expand operations, make acquisitions, and replace equipment. Some investors like when this figure is returned to them in the form of dividends, but most do understand that something must be reinvested for the long term.

·         Saving for the Future

The formula to calculate retained earnings is quite simple. The figure is calculated by adding the net profits (less dividends paid) to the beginning retained earning balance from a previous period:

Retained Earnings (RE) = Beginning RE + Net Income – Dividends

If there is a net loss and it is larger than the beginning retained earnings, there will be what is called negative retained earnings.

Definition of 'Return On Equity - ROE'

Definition of 'Return On Equity - ROE' ?

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares.

Also known as "return on net worth" (RONW).

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income - preferred dividends / common equity.

2. Return on equity may also be calculated by dividing net income byaverage shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period.

Definition of 'Retained Earnings'

The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders' equity on the balance sheet. 

The formula calculates retained earnings by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders:

Also known as the "retention ratio" or "retained surplus".

In most cases, companies retain their earnings in order to invest them into areas where the company can create growth opportunities, such as buying new machinery or spending the money on more research and development.

Should a net loss be greater than beginning retained earnings, retained earnings can become negative, creating a deficit. 

The retained earnings general ledger account is adjusted every time a journal entry is made to an income or expense account.

Definition of 'Cash Flow from Operating Activities'

Definition of 'Cash Flow from Operating Activities':-

Cash Flow From Operating Activities = EBIT + Depreciation – Taxes
Cash Flow From Operating Activities = EBIT + Depreciation – Taxes
Comparing the cash flow from operating activities with EBITDA can give insights into how a company finances short-term capital.
Comparing the cash flow from operating activities with EBITDA can give insights into how a company finances short-term capital.

An accounting item indicating the cash a company brings in from ongoing, regular business activities. Cash flow from operating activities does not include long-term capital or investment costs. It can be calculated as: 

Cash flow from operating activities is reported on the cash flow statement in a company's quarterly/annual report. Income that a company receives from investment activities is reported separately, since it is not from business operations. 

How is dividend to shareholder calculated?

There are three important ways dividends paid by companies are usually declared. Dividend Percentage is relevant for calculating how much you will receive in your hands. But that doesn't tell you which a better dividend paying share is. For that Dividend Payout and Dividend Yield are more relevant. Unfortunately in the media and company reports, you will usually see only Dividend percentage getting reported :-)

1. Dividend percentage - relates to face value of the share. so for e.g. Marico declared a dividend of 37%. Marico shares face value is 1. So for 100 shares, you would get Rs.37
2. Dividend Payout = Dividend per share/Earnings per shareHere you get an idea of how much the company is paying you back as dividends from Net profits; and how much it is retaining for use in the business. A steadily increasing or maintaining dividend payout ratio over the years is a godd indicator of a good share -a company that is shareholder friendly
3. Dividend Yield - = Dividend per share/Price per shareThis is by far the most useful of the dividend measurements. This tells you for every Rs. 100 invested, how many Rs are you likely getting back as dividend (usually good stable companies maintain the dividend payout ratios). E.g there are companies liek Abuja Cement, Grind well Norton or Wyeth Pharma if you buy at to days price, you are likely to get a dividend of approx. Rs. 6 back for every Rs. 100 invested. Remember this is tax free and compares very favorably with FD rates which are taxable!!
So look at all three ratios before you fix on a share for the quality of its dividends. Even a 400% dividend may mean only Rs 4 per share, if the face value is Rs1, but the market value can be anything

Definition of 'Dividend'

Definition of 'Dividend'

1.    A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

Also referred to as "Dividend Per Share (DPS)."

2. Mandatory distributions of income and realized capital gains made to mutual fund investors. 

2.       1. Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.

High-growth companies rarely offer dividends because all of their profits are reinvested to help sustain higher-than-average growth.

2. Mutual funds pay out interest and dividend income received from their portfolio holdings as dividends to fund shareholders. In addition, realized capital gains from the portfolio's trading activities are generally paid out (capital gains distribution) as a year-end dividend.

WORKING CAPITAL MANAGEMENT CALCULATIONS

Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Calculation

• accounts receivable (current asset)

• inventory (current assets), and

• accounts payable (current liability)

Decision criteria

• One measure of cash flow is provided by the cash conversion cycle—the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

• In this context, the most useful measure of profitability is return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed;return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. Seeeconomic value added (EVA).

• Credit policy of the firm: Another factor affecting working capital management is credit policy of the firm. It includes buying of raw material and selling of finished goods either in cash or on credit. This affects the cash conversion cycle.

Management of working capital

• Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

• Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid over production - see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic quantity

• Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.

• Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:

The current portion of debt (payable within 12 months) is critical, because it represents a short-term claim to current assets and is often secured by long term assets. Common types of short-term debt are bank loans and lines of credit.

An increase in working capital indicates that the business has either increased current assets (that it has increased its receivables, or other current assets) or has decreased current liabilities—for example has paid off some short-term creditors, or a combination of both.

Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:

Current Assets – Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances.

Cash balance items often attract a one-for-one, purchase-price adjustment.

Working Capital Management                                                                       

Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue itsoperations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

By definition, working capital management entails short-term decisions—generally, relating to the next one-year period—which are "reversible". These decisions are therefore not taken on the same basis as capital-investment decisions (NPV or related, as above); rather, they will be based on cash flows, or profitability, or both.

Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. The policies aim at managing the current assets (generally cash andcash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.

SAMPLE BUDGET FORMAT

MONTHLY BUDGET FORMAT
	MONTHLY INCOME			PERCENTAGE OF INCOME SPENT
	Item	Amount					62%
	Income 1	$2,500.00
	Income 2	$1,000.00
	Other	$250.00		SUMMARY
				Total Monthly Income	Total Monthly Expenses	Balance
	MONTHLY EXPENSES			$3,750	$2,336	$1,414
	Item	Amount
	Rent/mortgage	$800.00
	Electric	$120.00
	Gas	$50.00
	Cell phone	$45.00
	Groceries	$500.00
	Car payment	$273.00
	Auto expenses	$120.00
	Student loans	$50.00
	Credit cards	$100.00
	Auto Insurance	$78.00
	Personal care	$50.00
	Entertainment	$100.00
	Miscellaneous	$50.00