Research Paper on Accounting Standards
AS-1: DISCLOSURE OF ACCOUNTING POLICIES
This standard deals with the requirement of disclosing significant accounting policies adopted in the preparation of financial statements and the manner in which they are to be disclosed in the financial statements. This facilitates better understanding of financial statements and enables meaningful inter-firm comparison.
The standard defines ‘Accounting Policies’ as specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. The primary consideration behind the selection of accounting policies is that the financial statements should represent a true and fair view of the state of affairs of the enterprise and its working results. Besides the ‘true and fair’ consideration, other major considerations being Prudence, Substance-over-form and Materiality. Further, the standard states three fundamental assumptions, namely, Going Concern, Consistency and Accrual, which govern the preparation and presentation of financial statements.
Standard requires disclosures of all significant accounting policies adopted in the preparation of financial statements. These disclosures should form a part of financial statements and should normally be disclosed at one place. Any change in accounting policies having a material effect in the current period or reasonably expected to have a material effect in the subsequent years should be adequately disclosed along with its financial effect to the extend ascertainable. Further, the standard requires adequate disclosures to be made in case of non-compliance with fundamental accounting assumptions.
AS-2: VALUATION OF INVENTORIES
Inventories are assets: a) held for sale in the ordinary course of business; or b) in the process of production for such sale; or c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories are to be measured at lower of cost and net realisable value. Net realisable value means estimated selling price as reduced by the estimated cost of completion and estimated cost necessary to make sales. While, the cost of inventories comprise of all cost of purchases, cost of conversion and other cost incurred in bringing the inventories to their present location and condition. Standard specifically requires exclusion of abnormal losses, storage costs, administrative overheads and selling and distribution overheads from the valuation of inventories. For valuation of different types of inventories, each item may be dealt with separately or similar items may be dealt with as a group for determining lower of cost or net realisable value.
Standard requires that cost of inventory should be arrived by using first-in, first-out (FIFO) or weighted average cost formulae. However, for inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs. Standard further defines standard cost method and retail method as two techniques for the measurement of costs. It is obligatory that the financial statements of an enterprise should disclose besides the carrying amount of inventory, the formulae used and classification of items of inventory.
AS-3: CASH FLOW STATEMENTS
Cash flow statements exhibits sources and uses of cash and cash equivalents. Cash comprises cash-in-hand and demand deposits with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible into known amount of cash and that are subject to an insignificant risk of change in value. Cash flow statement need to be prepared as per the format as prescribed by the standard thereby classifying the cash flows during the period as operating, investing and financing activities.
Cash flow from operating activities is primarily the cash flows that arise out of principal revenue producing activities of the enterprise. This can be reported using either a) direct method or b) indirect method. Under direct method, major classes of gross cash receipts and gross cash payments are disclosed. Under indirect method, we report cash from operations, which are calculated with the help of net profit or loss. Cash flows from investing activities are flows that arise from acquisition and disposal of long-term assets and other assets not included in cash equivalents. Cash flows from financing activities are flows that arise as a result of changes in the size and composition of the owner’s capital and borrowings of the enterprise.
Further, the standard gives a special treatment for certain specified transactions. Cash flow from foreign currency transactions will not form a part of cash flow statement, but need to be disclosed as a part of reconciliation of cash and cash equivalents. Cash flows from extra-ordinary items need to be properly classified and separately disclosed. For investments in associates, subsidiaries and joint ventures, only the cash flow between itself and the investee need to be disclosed. Cash flow from acquisition or disposal of subsidiaries should be presented separately and classified as investing activities. Disclosures of non-cash transactions are excluded from the preview of cash flow statement.
Each enterprise need to disclose the components of cash and cash equivalents and should present a reconciliation of the amount in the cash flow statement with the equivalent items reported in the balance sheet. Further, the amount of cash and cash equivalent balance held by the enterprises that are not available for use by it with explanation of management should be adequately disclosed.
This standard deals with the requirement of disclosing significant accounting policies adopted in the preparation of financial statements and the manner in which they are to be disclosed in the financial statements. This facilitates better understanding of financial statements and enables meaningful inter-firm comparison.
The standard defines ‘Accounting Policies’ as specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. The primary consideration behind the selection of accounting policies is that the financial statements should represent a true and fair view of the state of affairs of the enterprise and its working results. Besides the ‘true and fair’ consideration, other major considerations being Prudence, Substance-over-form and Materiality. Further, the standard states three fundamental assumptions, namely, Going Concern, Consistency and Accrual, which govern the preparation and presentation of financial statements.
Standard requires disclosures of all significant accounting policies adopted in the preparation of financial statements. These disclosures should form a part of financial statements and should normally be disclosed at one place. Any change in accounting policies having a material effect in the current period or reasonably expected to have a material effect in the subsequent years should be adequately disclosed along with its financial effect to the extend ascertainable. Further, the standard requires adequate disclosures to be made in case of non-compliance with fundamental accounting assumptions.
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AS-2: VALUATION OF INVENTORIES
Inventories are assets: a) held for sale in the ordinary course of business; or b) in the process of production for such sale; or c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories are to be measured at lower of cost and net realisable value. Net realisable value means estimated selling price as reduced by the estimated cost of completion and estimated cost necessary to make sales. While, the cost of inventories comprise of all cost of purchases, cost of conversion and other cost incurred in bringing the inventories to their present location and condition. Standard specifically requires exclusion of abnormal losses, storage costs, administrative overheads and selling and distribution overheads from the valuation of inventories. For valuation of different types of inventories, each item may be dealt with separately or similar items may be dealt with as a group for determining lower of cost or net realisable value.
Standard requires that cost of inventory should be arrived by using first-in, first-out (FIFO) or weighted average cost formulae. However, for inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs. Standard further defines standard cost method and retail method as two techniques for the measurement of costs. It is obligatory that the financial statements of an enterprise should disclose besides the carrying amount of inventory, the formulae used and classification of items of inventory.
AS-3: CASH FLOW STATEMENTS
Cash flow statements exhibits sources and uses of cash and cash equivalents. Cash comprises cash-in-hand and demand deposits with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible into known amount of cash and that are subject to an insignificant risk of change in value. Cash flow statement need to be prepared as per the format as prescribed by the standard thereby classifying the cash flows during the period as operating, investing and financing activities.
Cash flow from operating activities is primarily the cash flows that arise out of principal revenue producing activities of the enterprise. This can be reported using either a) direct method or b) indirect method. Under direct method, major classes of gross cash receipts and gross cash payments are disclosed. Under indirect method, we report cash from operations, which are calculated with the help of net profit or loss. Cash flows from investing activities are flows that arise from acquisition and disposal of long-term assets and other assets not included in cash equivalents. Cash flows from financing activities are flows that arise as a result of changes in the size and composition of the owner’s capital and borrowings of the enterprise.
Further, the standard gives a special treatment for certain specified transactions. Cash flow from foreign currency transactions will not form a part of cash flow statement, but need to be disclosed as a part of reconciliation of cash and cash equivalents. Cash flows from extra-ordinary items need to be properly classified and separately disclosed. For investments in associates, subsidiaries and joint ventures, only the cash flow between itself and the investee need to be disclosed. Cash flow from acquisition or disposal of subsidiaries should be presented separately and classified as investing activities. Disclosures of non-cash transactions are excluded from the preview of cash flow statement.
Each enterprise need to disclose the components of cash and cash equivalents and should present a reconciliation of the amount in the cash flow statement with the equivalent items reported in the balance sheet. Further, the amount of cash and cash equivalent balance held by the enterprises that are not available for use by it with explanation of management should be adequately disclosed.
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