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					Dy. Controller (Accounts & Costing)
        KPTCL, Bangalore.
           Topics to share with you
Financial Analysis              Investment Analysis
•   Accounting & Book-keeping   •       Capital Budgeting Techniques
                                        •   Pay Back Period
•   Accounting Terminologies
                                        •   Net Present Value
•   Accounting Standards
                                        •   Internal Rate of Return
•   Accounting Concepts
                                        •   Cost Benefit Analysis
•   Accounting Conventions
    Financial Statements
                                    Other Topics
    • Profit and Loss Account
                                    •    Budgetary Control
    • Balance Sheet
                                    •    Cost Accounting
    • Cash flow Statement
                                    •    Auditing
•   Capex Funding vs IR; DSCR
•   Annual Report
  Parties interested in Accounting Information

• Owners or Shareholders   • Government

• Prospective Investors    • Employees

• Debenture Holders        • Consumers

• Financial Institutions   • Stock Exchanges

• Creditors                • Investment Analysts

• Customers                • Economists

• Management               • Researchers

• Employees                • General Public
      Basic Accounting Terms
• Transactions   • Debtor      • Revenue    • Entry
• Event          • Debt        • Expenses   • c/d
• Entity         • Creditor    • Loss       • b/d
• Equity         • Solvent     • Gain       • c/f
• Capital        • Goods       • Profit     • b/f
• Assets         • Purchases   • Debit      • CWIP
• Liabilities    • Sales       • Credit     • Goodwill
• Net worth      • Inventory   • Account    • Bottom Line
      Accounting and Book-keeping
 “Accounting is the language of business to communicate the business
     results to various groups of persons interested in the business.“

“Accounting may be defined as the identifying,
  measuring, recording and communicating of
  financial information.“
  — Bierman and Derbin

According to J.R. Batliboi “Book-keeping may be
 defined as the science as well as the art of
 recording business transactions under appropriate
 accounts."
The purpose of accountancy is to facilitate business and economic
                         development
       Basic Accounting Terms -1
Event : All happenings in an organisation can be termed as Events. All
  events may not be transactions, whereas all transactions are events.

Transaction : “Every financial change which occurs in the business is a
  transaction”. In other words, a transaction refers to any monetary or
  financial event or activity (i.e., an activity having value measurable in
  terms of money) which changes the financial position of the business.
   All events may not be measurable in terms of money, but every transaction is
      measurable in terms of money. An event may or may not cause a change
      in the financial position of the business. On the other hand a transaction
      necessarily causes a change in the financial position of the business.

Entity : Means something or someone having a separate existence. In
  business, a business enterprise having a separate entity or existence
  from that of owners of the enterprise.
   Basic Accounting Terms - 2
Equity : Means the claims against the assets of an enterprise
  or rights in the assets of an enterprise. Owner‟s equity refers
  to owner‟s capital and outsiders‟ equity refer to liabilities of
  an enterprise.
Capital : The amount of money or money‟s worth invested by
  the proprietor into his business at the time of the
  commencement of business is called capital. Capital is also
  defined as owner‟s equity i.e., owner‟s claims against the
  assets of the business.
Assets : Means enough or sufficient economic resources
  owned by a business concern for carrying on the business.
  According to Finney and Miller “ Assets are future economic
  benefits, the rights of which are owned or controlled by an
  Organisation or individuals”.
   Basic Accounting Terms - 3
Liabilities : Mean the claims of outsiders against the business
  concern which bind the business concern to others.
  Examples are loans borrowed, bank overdraft, creditors,
  bills payable, etc.,.

Net worth : Means the excess of the total assets of a business
  over its total liabilities at any particular point of time.   It is
  the net value of assets that belongs to the owner. It is also
  called owner‟s capital.

Debtor : A debtor is a person who owes money to the business.
  He owes money to the business because he has received some
  benefit from the business. A debtor constitutes an asset for
  the business.
   Basic Accounting Terms - 4
Debt : The amount of a business transaction due from a person
  (i.e., debtor) to the business is called a debt.

Creditor : A creditor is a person to whom the business owes
  money. The business owes money to him, because he has
  given some benefit to the business. A creditor constitutes a
  liability for the business.

Solvent : A businessman is said to be solvent when he is able
  to pay his liabilities in full. In other words, a businessman is
  regarded as solvent when his assets exceed his liabilities.

Goods : Goods refers to merchandise, commodities, products,
  articles, things in which a trader deals. In other words, they
  refer to commodities or things meant for resale.
   Basic Accounting Terms - 5
Purchases : Goods purchased by a business are called
  purchases. It may be cash or credit purchase.

Sales : Goods sold by a business are called sales. The sale of
  goods may be cash sales or credit sales.

Inventory : Inventory or stock refers to be stock of finished
  goods held for sale in the ordinary course of business, or the

  stock of raw materials and work-in-progress held for

  consumption in the production of finished goods for sale, or

  stock of consumable stores held for use in the factory.
   Basic Accounting Terms - 6
Revenue : Revenue or income is the earning of a business
  from the sale of goods or from the rendering of services to
  customers during an accounting period.         Examples   are
  Revenue from sale of goods, interest on investments, royalty
  received, discount received, etc.,

Expenses : Expenses are the costs incurred in connection
  with the earnings of revenue. In other words expense is the
  cost of the things or services for the purpose of generating
  income.    Examples are repair expenses, cost of goods
  purchased, salary and wages, interest, etc.,
    Basic Accounting Terms -7
Loss : Loss refers to money or money‟s worth given up without getting
  any benefit in return.    Loss occurs accidentally or involuntarily.
  Examples are loss of goods by fire, loss of machinery in accident,
  damages paid to others, etc.,.        In the Income Statement, any
  expenditure amount in excess of Income is also termed as LOSS.

Gain : Gain refers to revenue which is not generated through routine
  regular business activities.       They are of irregular in nature.
  Examples are profit on sale of fixed asset, refund of tax received,
  winnings in a court case, etc.,.

Profit : Profit is the excess of revenues over the expenses of a given
  period of time, usually a year. Profit results in increase in owner‟s
  capital.
   Basic Accounting Terms - 8
Debit : Means an entry on the debit side or left-hand side of an
  account (when used as a noun).         When it is used as an
  adjective, it is termed as debit side i.e., left hand side of an
  account. When it is used as a verb, it is termed as „to debit‟
  which means to make an entry on the debit side of an
  account.

Credit : Means an entry on the credit side or right-hand side of
  an account (when used as a noun). When it is used as an
  adjective, it is termed as credit side i.e., right hand side of an
  account. When it is used as a verb, it is termed as „to credit‟
  which means to make an entry on the credit side of an
  account.
   Basic Accounting Terms - 9
Account : An account (or its abbreviation a/c) means a
  summarised record of all the transactions relating to a
  particular person, thing (i.e., asset) or a service (i.e., an
  expense or an income) which have taken place during a given
  period of time. It is a ledger record.

Entry : The record of a transaction in the books of accounts is
  known as an entry.

CWIP : Refers to Capital Works In Progress.           It is an
  intermediary account in which the expenditure on on-going
  works is initially booked and transferred to fixed asset
  account (called capitalisation) when the related asset is
  commissioned.
  Basic Accounting Terms - 10
Goodwill : Goodwill typically reflects the value of intangible

  assets such as a strong brand name, good customer relations,

  good employee relations and any patents or proprietary

  technology. Goodwill is seen as an intangible asset on the

  balance sheet because it is not a physical asset such as

  buildings and equipment. .

Bottom Line : The net profit ie., profit after tax (normally called

  as PAT or Profit After Tax) is known as „Bottom Line‟ of a

  Company because it is depicted as the last line in its Profit &

  Loss account.
  Basic Accounting Terms - 11
Carried down or c/d : It is written in a ledger account, at the
  time of balancing it, at the end of an accounting period, to
  indicate that the balance in that account has been carried
  down to the next period.
Brought Down or b/d : It is written in a ledger account, at
  beginning of the next accounting period, to indicate that the
  opening balance in that account has been brought down from
  the previous period.
Carried Forward or c/f : It is written at the bottom of the
  page of a journal or ledger, to indicate that the totals of that
  page have been carried forward to the next page.
Brought Forward or b/f : It is written at the top of the next
  or subsequent page of a journal or ledger, to indicate that the
  totals shown on the top of that page have been brought
  forward from the previous page.
    Some Accounting Terminologies
Net Worth : The net worth of an enterprise represents the excess
  of book value of all assets over the outside liabilities. It
  represents the interest of the shareholders in the enterprise.
  It is normally equivalent to the net equity i.e., Share capital
  plus Reserves plus Retained profits less Unabsorbed losses or
  Expenses.
Earnings Per Share : The profit attributable to each share based
  on the consolidated profit of the period after tax.            Salary


Contingent Liability : Liabilities which are dependent on a
  condition which exists at the balance sheet date, where the
  outcome will be confirmed only on the occurrence or non-
  occurrence of one or more uncertain future events.
    Some Accounting Terminologies
Generally Accepted Accounting Principles (GAAP) : Many

  countries have got their own GAPP. These are ground rules

  covering financial accounting, prescribed by Financial

  Accounting Standard Board, USA, that attempt to strike a

  balance between the criterion of relevance on one hand and

  the criteria of objectivity and feasibility on the other.

Secured / Unsecured Loans : Liability ‘secured’ on asset with

  lender having legal right to proceeds from sale of that asset

  on liquidation, up to the amount of the liability. Liability

  without any such security is ‘Unsecured’ Loan.
  Distinctions One should invariably know
Charged to Revenue :

All items which are taken as expenditure in P&L Account for comparing

   with the Revenue and arriving at profit or loss are stated to have

   been ‘Charged’ to Revenue. These items have to be invariably

   considered for finalising the Accounts. Examples are Salaries,

   interest, etc., which have to be absorbed by the Company invariably.

Appropriation of Profit :

Appropriation means distribution or taking ‘out of’ profit earned.

   Examples are Transfer to Reserves, Payment of Dividend, etc.,.

   Appropriation of profit arises only when the Company has earned

   profit. Other-wise there is no scope for appropriation.
  Distinctions One should invariably know
Capital Expenditure and Revenue Expenditure :
Funds used by a company to acquire or upgrade physical assets
  such as property, industrial buildings or equipment is capital
  expenditure. On the other hand, expenditure incurred for
  running and maintaining the assets or purchasing goods for
  resale is revenue expenditure.
Capital Receipt and Revenue Receipt :
Any receipt either in cash or kind meant for creation of asset is a
  Capital Receipt, whereas the receipt from trading or non-
  trading activities which towards acquisition or asset Liability
  ‘secured’ on asset with lender having legal right to proceeds
  from sale of that asset on liquidation, up to the amount of the
  liability. Liability without any such security is ‘Unsecured’
  Loan.
 Distinctions One should invariably know
Cash Expenditure and Non-cash Expenditure:
Revenue Expenditure involving cash outgo is Cash Expenditure.
  Examples are Salary and wages, Repair expenses, interest,
  etc., . Revenue Expenditure charged to P&L A/c but not
  involving cash outgo is Non-cash expenditure. Examples are
  Deprecation and Return on Equity or Profit.
Revenue Accrued and Actually Realised :
Revenue accrued means revenue earned during a period. It
  includes both revenue accrued and received and also revenue
  accrued but not received during the period. On the other hand
  Revenue Actually Realised is the revenue actually realised in
  cash during the period. Revenue Demand in DCB Statement
  can be compared to ‘Revenue Accrued’ and Collections can be
  compared to ‘Revenue Actually Realised’.
 Double-Entry System of Accounting
Meaning :
The system of making two or double entries of equal
  value in two different accounts in opposite sides in
  the books of each of the contracting parties is
  known as the double-entry system of accounting.
The double-entry system requires that the two
  entries required for a transaction should be made
  in two different accounts for the same value (i.e.,
  for the same amount) and simultaneously (i.e., at
  the same time).
  Financial Statements
Trading (Manufacturing) Account
Profit and Loss Accounts
Balance Sheet
Cash Flow Statement

 Accounting     Accounting Concepts
  Standards       and Conventions
             Accounting Standards
•   AS 1 – Disclosure of Accounting Policies
•   AS 2 – Valuation of Inventories
•   AS 3 – Cash Flow Statements
•   AS 4 – Contingencies and Events occurring after the
    Balance Sheet date
•   AS 5 – Net profit or loss for the period, prior period
    items and changes in Accounting policies.
•   AS 6 – Depreciation Accounting
•   AS 7 – Accounting for Construction contracts
•   AS 8 – Accounting for Research and Development
•   AS 9 – Revenue Recognition
•   AS 10 – Accounting for Fixed Assets
•   AS 11 – Accounting for the Effects of changes
    Foreign Exchange rates
          Accounting Standards
• AS 12 – Accounting for Government Grants
• AS 13 – Accounting for investments
• AS 14 – Accounting for Amalgamations
• AS 15 – Accounting for Retirement benefits in the
  Financial Statements of Employees
• AS 16 – Borrowing Costs
• AS 17 – Segment Reporting
• AS 18 – Related Party Disclosure
• AS 19 – Leases
• AS 20 – Earnings per Share
• AS 21 – Consolidated Financial Statements
• AS 22 – Accounting for taxes on income
          Accounting Standards
• AS 23 – Accounting for Investments in Associates in
  Consolidated Financial Statements
• AS 24 – Discontinuing Operations
• AS 25 – Interim Financial Reporting
• AS 26 – Intangible Assets
• AS 27 – Financial Reporting of Interests in Joint
  Ventures
• AS 28 – Impairment of Assets
• AS 29 – Provisions, Contingent Liabilities and
  Contingent Assets
• AS 30 – Financial Instruments – Recognition &
  Measurement
• AS 31 – Financial Instruments – Presentation
   Accounting Concepts
Money measurement concept
Separate entity concept
Going concern concept
Cost concept
Dual aspect concept
Accounting period concept
Objective evidence concept
Realisation concept
Accrual concept
Matching concept
           Accounting Concepts
Money Measurement Concept : Means, in accounting, a
  record is made only of those transactions or events which
  can be measured and expressed in terms of money. Non-
  monetary events are not recorded.

Separate Entity Concept : Means that, in accounting,
  every business undertaking, whether it is a joint stock
  company or a partnership firm or a sole trading concern, is
  regarded as a distinct unit or entity from the owners who
  own it, and so, the business and the proprietors who own
  the business are regarded as two separate entities capable
  of entering into transactions with each other.
           Accounting Concepts
Going Concern Concept : Means that, in accounting, an
  enterprise is regarded as a going-concern (i.e., concern
  will continue to operate for an indefinitely long period of
  time). There is neither the intention nor the necessity to
  wind up the concern in the foreseeable future. It is also
  called concept of continuity.

Cost Concept : The cost concept means that an asset
  acquired by a concern is recorded in the books of accounts
  at cost (i.e., at the price actually paid for acquiring the
  asset). The market price of the asset is ignored.
           Accounting Concepts
Dual-Aspect Concept : Every business transaction always
  results in receiving of some benefit of some value and
  giving of some other benefit or equal value. So, in
  accounting, a record is made of the dual or the two aspects
  of each transaction, and this is called dual-aspect concept.
Accounting Period Concept : Means that, for measuring
  the financial results of a business periodically, the business
  or working life of an undertaking is split into convenient
  short periods or time called accounting period, and profit or
  loss and financial position of the business are ascertained
  at the end of the accounting period by preparing financial
  statements.
           Accounting Concepts
Objective Evidence Concept : Means that all accounting
  entries should be evidenced and supported by source
  documents or business documents, such as invoices,
  vouchers, etc.,.

Revenue Realisation Concept : Means that revenue is
  earned from the sale of goods or from provision of services
  to customers, and revenue is to be recognised or
  considered to be realised only when goods or services are
  transferred to a customer and the customer becomes
  legally liable to pay to them.
           Accounting Concepts
Accrual Concept : Under this concept, revenues accrue in that
  year in which they are earned, and not in the year in which
  they are actually received, and expenses accounted in the
  year in which they are incurred, and not in the year in which
  they are actually paid. This is the opposite of cash
  accounting, which recognizes transactions only when there is
  an exchange of cash.
Matching Concept : Means that, measurement or determination
  of the profit or loss, the revenues and expenses are matched
  (i.e., compared) and resultant balance is taken as the net
  profit or net loss. In other words, only expenses incurred
  during a particular accounting period for earning the
  revenues of the related period should be considered for the
  computation or profit or loss for that period.
   Accounting Conventions

Convention of Materiality
Convention of conservatism
Convention of consistency
Convention of full disclosure
        Accounting Conventions
Convention of Materiality : Means that, in accounting, a
  detailed record is made only of those business transactions
  which are material (i.e., significant) for the users of
  accounting information. No detailed record is made of
  transactions which are trivial. Example : Purchase and use
  of pencil in a office.
Convention of Conservatism : Means the convention of
  caution, prudence or the policy of playing safe. In other
  words, it means, in the accounting records and the financial
  statements of a business, all the prospective losses, risks
  and uncertainties should be taken note of and provided for,
  but prospective profits should be ignored.
     Accounting Conventions
Convention of Consistency : Means that, the accounting
  practices and methods should remain consistent (i.e.,
  unchanged) from one accounting period to another. It
  means, whatever accounting practice is followed by the
  business enterprise should be followed on a consistent
  basis from year to year.
Convention of Full Disclosure : Means that the material
  facts must e disclosed in the financial statements with
  sufficient details. The idea behind this convention is that
  the financial statements are essentially meant for external
  users. Exclusion of material facts make the financial
  statements incomplete and unreliable.
              Books of Accounts
Journal
   The book of original entry under the conventional method of
    accounting is the journal. It means a day book or a daily
    record.
Account
   Refers to a summarised record of all the transactions relating to
     a person, thing or a service which have taken place during a
     given period of time.
Ledger
   Means a book where the various accounts are kept.
Trial Balance
   It is a schedule or list of balances, both debit and credit,
      extracted from the accounts in the ledger and including cash
      and bank balances from the cash book.
  Classification of Transactions
Transaction in a business enterprise is
 classified under any of the following
 group :
      Asset

      Liability

      Income

      Expenditure
                Trial Balance
• It is a statement of ledger balances under
 various heads of account.
• All the Accounts can be classified under four
 heads viz., Assets, Liabilities, Income and
 Expenditure.
• All Assets and Expenditure heads of account
 show Debit balance.
• All Liabilities and Income heads of account
 show Credit balance.
                                         Contd.,
Trial Balance
 An Example
          Profit and Loss Account
• Content : Income and Expenditure of a Company
  during a specified period.

• What it Depicts? : Financial performance of the
  Company during the said period.

• Revenue : Includes Revenue from Transmission / Sale
  of power, Non-Tariff Income and Subsidies if any.

• Expenditure   :   Includes   Power   Purchase   Cost,
  Employee Costs, R&M Expenses, A&G Expenses,
  Interest, Depreciation and Other Revenue Expenses.
           Profit and Loss Account
• Net Result : Difference between the Income and

  Expenditure may be either Profit or Loss.

• Bottom Line : Net Profit or Loss is also normally

  referred to as ‘Bottom Line’ because it is the last line

  of the Statement / Account.

• Supporting Information : For each item of Income

  and   Expenditure    further   break-up    details   are

  disclosed in separate Schedules.
         Accrual vs Cash Basis
Accrual Concept :
  Revenues are accounted in that year in which they
    accrue and are earned and not in the year in
    which they are actually received.
  Expenses are accounted in the year in which they are
    incurred, and not in the year in which they are
    actually paid.

Cash basis :
  Transactions are recognized and accounted only
    when there is an exchange of cash.
     P / L A/c in Horizontal Form – Format
                    Profit and Loss Account for the year ending 31st March, 20086

                                      Particulars                             Amount
REVENUE :
Revenue from Sale of power to consumers
Revenue from inter-state trading of power
Wheeling Charges
Open Access Charges
Miscellaneous Income from consumers
Non-Tariff Income
                                        Total Revenue
EXPENSES :
Purchase of Power
Employee Costs
Repairs and Maintenance Expenses
Administration and General Expenses
Interest and Finance Charges
Depreciation
Prior Period Expenses (or credits)
Other Expenses
Less : Expenses Capitalised
                                        Total Expenses
Net Profit or Net Loss
Profit and Loss Account
      An Example



          Next Slide
   Profit & Loss Account of a DISCOM – A sample
                    Particulars             Amount         Other Data
REVENUE :                                                Energy Input :
Revenue from Sale of power to consumers        940.91
                                                                     6214 MUs
Revenue Subsidy from the State Government      828.25
Non-Tariff Income                                        Sales :
                                                 7.46
                    Total Revenue                                    4505 MUs
                                              1776.62
EXPENSES :                                               Distribution Loss :
                                              1421.51
Purchase of Power
                                               150.65                  27.50 %
Employee Costs
Repairs and Maintenance Expenses
                                                17.34 Average Cost :
Administration and General Expenses`            28.21              Rs.3.65/unit
Interest and Finance Charges                    41.92 Average Realisation
Depreciation                                    82.20 :
Prior Period Expenses (or credits)               -1.14             Rs.2.09/unit
Other Expenses                                  27.18
                                                         Cross Subsidy :
Return on Equity                                 8.74
                                                                   Rs. 97 Crs.
                     Total Expenses           1776.62
                                                         Capex :
                                                                   Rs.213 Crs.
                     Balance Sheet
• Contents : Assets and Liabilities of a Company
• What it Depicts? : Financial position of the Company
  as at the end of a period.
   The figures shown in Balance Sheet are cumulative
     since the inception of the Company.
• Assets : Broadly classified into Fixed Assets, Investments,
  Current Assets and Deferred Revenue Expenditure.
• Liabilities : Classified as Equity Capital (Share Capital),
  Reserves and Surplus, Loans (Secured and Unsecured),
  Service Line and Security Deposits from Consumers and
  Current Liabilities.                                Contd.,
                    Balance Sheet
• Current       Assets   :   Inventories,   Sundry   Debtors
  (Receivables), Cash and Bank Balances, Loans and
  Advances and Other Assets.

• Current Liabilities : Power Purchase Liabilities, Security
  Deposit from Contractors/Suppliers, Bills payable and
  Provisions.

• Supporting Information : Schedules to the Balance
  Sheet give detailed information for each item of Asset or
  Liability.
   BALANCE SHEET in Horizontal Form – Format
                           Balance Sheet as at 31st March, 2008
                            Particulars                                   Amount
SOURCES OF FUNDS :
Share Capital
Reserves and Surplus
Secured Loans
Unsecured Loans
Deposits from Consumers
                                  TOTAL
APPLICATOIN OF FUNDS :
Fixed Assets –             Gross Block
                           Less Accumulated Depreciation
                           Net Block
Investments
Capital Work in Progress
Current Assets
                           Inventories
                           Sundry Debtors
                           Cash & Bank Balances
                           Loans & Advances
                           Other Assets
                                                    Total Current Assts
Less Current Liabilities & Prov.
                            Net Current Assets
Deferred Revenue Expenditure
                                  TOTAL
Balance Sheet
 An Example
            Cash Flow Statement
• Why Required : To ascertain the movement of Cash
  and the Cash Surplus / Deficit available at the end of a
  given period.
• What it Depicts? : Cash Receipts and Cash Outflow
  whether capital or revenue in nature.
• P&L A/c vs CFS : In P&L A/c only Revenue Income and
  Expenditure items are taken whereas CFS captures all
  Cash Items. In P&L A/c even non-cash items of Revenue
  and Expenses are considered whereas in CFS such items
  are excluded.
• Non Cash Revenue Expenditure : Depreciation and Net
  profit (ROR/ROE) which remain with the Company.
                  Cash Flow Statement
• Capital Receipts : Deposits from consumers, Augmentation
  charges, Capital grants received in cash, etc., are taken as Cash inflow
  items in CFS.
• Internal Resources : Sum of Depreciation, RoE and Capital
  Receipts (other than Borrowings).
• Debt Repayment : Principal repayment amount which is not
  taken to P&L A/c, is a cash outgo item in CFS.
• Internal Resources vs Debt Servicing :
   Cash surplus after Debt Repayment would be available for meeting
     Capital Expenditure.
   Shortfall to make debt repayment out of internal resources force
     the Company for resorting fresh borrowing for repayment of
     existing debt and capex funding (a debt trap position).
Cash Flow Statement
    An Example
Internal Resources vs Capex Funding
• Power Purchase Cost                  Internal Resources
• Transmission Cost                        Plus Deposits

• Employee Costs
• R & M Expenses
• A & G Expenses                Loan Principal Repayment
                                     (Existing Loans only)
• Depreciation
• Interest      &     Fin.                         If Balance is
                                                     Negative
  Charges
                                                    External
• Other Costs
                                                   Borrowing
• ROE                        Capex
                                                       DSCR
                    Annual Report
An Annual Report is presentation of the Company’s
  performance during a period to the Shareholders.
Contents :
  • Chairman’s Statement
  • Director’s Report
  • Financial Statements
  • Comments of C&AG of India
  • Auditors’ Certificate – Observations of Statutory Auditor
    and Management Reply
  • Disclosures
  • Others
      Corporate Governance, Directors’ responsibility statement, Disclosure under
        the Companies rules 1988 (i.e., Energy conservation, Technology
        absorption, Foreign Exchange earnings and outgo, etc.,), Statement
        pursuant to Sec.212 – relating to Subsidiary, Management’s discussion
        and analysis on industry and key issues, Committees of the Board,
        General Body meetings, etc.,
         Metering - Importance
        “ If you can’t measure it,
          you can’t manage it”
• Unless metering is complete, whatever may
  be the level of accuracy in assessing the
  unmetered       sales, the figures are
  susceptible for manipulation and lead to
  biased decisions.
• Tackling of distribution loss based on such
  un-authenticated figures may not yield
                                                          Purchase of
Provision Stores                                       Items Rs. 10000

 (Owner : Mr. X)
                                           In Cash (ie., paid       By Credit (ie., to
                                              in the same            be paid next
                                            month) Rs.7000          Month) Rs.3000


           Sale of Items :
             Rs.12000


In Cash (ie., sold   Credit Sales (i.e.,
  against Cash       sold lbut amount                  Finding Profit or Loss (in Rs.)
 payments in the      will be received
  same month)          Next month)                    Particulars    CASH       ACCRUAL
    Rs.8000                Rs.4000                                   Basis        Basis
                                                      Income             8000        12000

                                                      Costs              7000        10000
                                                      Profit /           1000            2000
Transactions of First Month                           Loss (-)
                                                         Purchase of
  Provision Stores                                    Items Rs. 15000

    (Owner : Mr. X)
                                       In Cash (ie., paid in      By Credit (ie., to
                                         the same month)           be paid next
                                            Rs.12000 +            Month) Rs.3000
                                       Rs.3000 relating to
                                          previous month
             Sale of Items :
               Rs.18000


 In Cash (ie., sold     Credit Sales (i.e.,
   against Cash         sold lbut amount              Finding Profit or Loss (in Rs.)
  payments in the        will be received
   same month)            Next month)               Particulars    CASH       ACCRUAL
Rs.12000 + Rs.2000            Rs.6000                              Basis        Basis
relating to previous                                Income            14000        18000
       month
                                                    Costs             15000        15000
                                                    Profit /          -1000            3000
  Transactions of Second Month                      Loss (-)
          Transactions for TWO Months

            Finding Profit or Loss (in Rs.)

                        CASH          ACCRUAL
    Particulars
                        Basis           Basis

Income                     22000              30000

Costs                      22000              25000

Profit / Loss (-)                0             5000
              Capital
             Budgeting
            Techniques
    Capital Budgeting is concerned with the
allocation of the firm’s scarce financial resources
among the available opportunities comparing the
   future revenue streams with immediate or
        subsequent expenditure streams
           CAPITAL BUDGETING
Importance :
  •   Heavy Investments
  •   Permanent commitment for funds
  •   Long Term impact on profitability
  •   Complication of Investment decisions
  •   Paucity of Funds
  •   Debt Servicing depends on profit margin



                                           Four Things
CAPITAL BUDGETING TECHNIQUES


• Payback Period
• Discounted Cash flow Techniques
 –Net Present Value (NPV)
 –Internal Rate of Return (IRR)
 –Benefit-cost Ratio (BCR)
               PAY BACK PERIOD
Meaning :
   The number of years in which the total investment in a particular
     capital expenditure pays back itself.
How to Calculate :
   • If average Annual Cash inflows are equal then divide the
     Investment by Annual Cash Inflows to get Pay Back Period
     (PBP).
   • If cash inflows are uneven, then cumulative cash inflows is
     compared with investment to see in which year both are equal.
     The period up to that point is PBP.
Merits :
   • Easy to understand
   • Gives importance for speedy recovery of investment
   • Good technique when income streams are regular and even.
Demerits :
   •   Overplay importance on liquidity (overlooking the profitability)
   •   Ignores earnings beyond the pay back period.
   •   Ignores times value of money
   •   Overlooks the cost of capital.
              PAY BACK PERIOD
                         Original Investments
                          ________________
     PBP      =
                           Annual Cash-inflows

Example :
Original Investments                          Rs.2,80,000
Average Annual cash-inflow
(savings after tax but before depreciation)   Rs. 80,000

                    280000
                  ________
       =
                   80000

       =          3.5 Years
               NET PRESENT VALUE
Concept of Present Value (PV) :
     If Re 1 is invested today, the return expected later on is > Re 1.
     Similarly, if an investment proposal earn Re.1 at the end of say 1
       year, the present investment on that project should be < Re.1.
Computation of Present Value (PV) :                                  1
    Present Value is calculated by formula
                                                                  _______
        where : ‘K’is the rate of interest / discount factor in %  (1+K)n
             ‘n‘ is the number of year after which money is
                   received.
Example :
  If the discount rate is 10%, then PV of Re 1 would be as follows
    – PV of Re.1 to be received at the end of the one year is 0.909 ( ie., {1 /
       (10/100)1}
    – PV of Re.1 to be received at the end of the two years is 0.826 ( ie., {1 /
       (10/100)2}
    – PV of Re.1 to be received at the end of the one year is 0.751 ( ie., {1 /
      (10/100)3}. and so on.
Net Present Value : NPV is the difference between present
   value of benefits and present value of costs.
                       Evaluation of Financial Viability
                                without NPV
        Year           Project A   Project B   Project A   Project B
Initial Investment     Rs.50000    Rs.50000
Cash-inflow 1st Year                            Rs.15000    Rs.5000
            2nd Year                            Rs.20000   Rs.15000
            3rd Year                            Rs.25000   Rs.20000
            4th Year                            Rs.15000   Rs.30000
            5th Year                            Rs.10000   Rs.20000
       Total           Rs.50000    Rs.50000    Rs.85000    Rs.90000
Net Cash Inflow
Project A : Rs.85000 - Rs.50000 = Rs.35000
Project A : Rs.90000 - Rs.50000 = Rs.40000
As there is positive Cash Inflows in both cases, both Projects are
financially viable. However Project B is preferred than Project A as the
Net cash inflow is more over five years period
                        Evaluation of Financial Viability
                            using NPV Technique
        Year            Project A   Project B   Discount    Project A   Project B PV
                                                Factor at      PV
                                                  10%
Initial Investment      Rs.50000    Rs.50000
Cash-inflow 1st Year    Rs.15000      Rs.5000    0.909      Rs.13635      Rs. 4545
            2nd Year    Rs.20000    Rs.15000     0.826      Rs.16520      Rs.12390
             3rd Year   Rs.25000    Rs.20000     0.751      Rs.18775      Rs.15020
             4th Year   Rs.15000    Rs.30000     0.683      Rs.10245      Rs.20490
             5th Year   Rs.10000    Rs.20000     0.620      Rs. 6210      Rs.12420
        Total           Rs.85000    Rs.90000                Rs.65395      Rs.64865

Net Present Value :
Project A : Rs.65385 - Rs.50000 = Rs.15385
Project A : Rs.64865 - Rs.50000 = Rs.14865
Based on NPV, Project A is preferred than Project B as the NPV is
more than that of Project B
      Internal Rate of Return (IRR)
Meaning : The rate at which the Investment equates
    the Present Value is the IRR of the project.
Procedure / Method of calculation :
 First determine the NPV using some assumed
  Discount factor.
   By trial and error method change the rate and rework
    the NPV until the Original investment equate the
    Present Value.
   The rate which the Investment equates the Present Value is
    the IRR of the project
 The IRR is compared to the cost of capital and the
  project having higher difference is preferred to the
  other projects.
        BENEFIT TO COST RATIO
Meanings :
  The Benefit to Cost Ratio (BCR) is an extension of NPV
      method wherein the present value of future cash
      inflows is calculated and the resultant value is
      compared with the investment to arrive at ratio of
   ‘Benefit’ to ‘Cost’.
Computation of Benefit to Cost Ratio (BCR) :
   The formula for calculating BCR is           Present Value of Cash Inflows
                                                ____________________
Profitability Index :                                  Net Investment
   – BCR is also called Profitability Index.
   – It gives the rupee return for each rupee invested. If BCR > 1,
       project is acceptable, otherwise reject the project.
   – In cases of more than one project, the project having higher BCR
      is preferred than the others for investment.
                       Benefit to Cost Ratio
                     (BCR or Profitability Index method)
                             NPV of future Cash inflows
                              ___________________
        BCR      =
                                   Investments
  Example :
  Original Investments                              Rs.5000
  PV of future cash inflows                         Rs.5860
  Rs.8,000 (assuming certain discount rate and number of years)
                       5860
                     ________
          =                         =           1.17
                      5000

Higher the BCR, the more desirable is the investment.
                                                                  Never Give Up
Budgetary
 Control
        Budgetary Control
Types of Budget :
   Incremental Budgeting

   Zero Based Budgeting (ZBB)

   Rolling Budget

   Flexible Budget

   Monthly, Quarterly, Yearly
                     Budgetary Control
Capital Budget and Revenue Budget
 Revenue Budget –
    •   Constituents – Power Purchase Cost, Employee Costs, R&M Expenditure, A&G
        Expenses, Interest and Other Expenses.
    •   Importance of KERC Tariff Order – KERC Order de facto Revenue Budget.
 Capital Budget or Project Monitoring process :

         Necessity of taking up future projects
         Evaluation of proposed Capital Program
         Sourcing of proposed capital works
         Execution of Works
         Monitoring of Works
         Post Project Appraisal
               Two Part Tariff
Meaning : Distinguishes the total costs as
 Fixed and Variable Costs.          Tariffs are
 determined taking Annual Fixed Cost into
 consideration and Variable Cost per Unit.
Basis   :      Marginal   Costing   Technique
 principles.
                     Fixed Costs




Cost

                                Total Fixed Cost




       0
           Level of Activity (Like Sales, Production, Generation)
                   Variable Costs

                                   Total Variable Cost



Cost




       0
           Level of Activity (Like Sales, Production, Generation)
                      Break Even Point
                                                    Total Income
                           Break Even Point                  Profit Area

                                                        Total Costs
Cost /
                    Loss Area
Income

Even Fixed                                               Fixed Costs
  Cost not
 recovered
             0
                 Level of Activity (Like Sales, Production, Generation)

      Break Even Point Formula : {(FC) / (SP – VC) }
      Where FC : Total Fixed Cost, SP: Selling Price / unit and
                     VC: Variable Cost unit)
                       Two Part Tariff
                       Components                               Amount (Rs. Crs.)
Fixed Cost (FC) :
1. Interest on Loan Capital
2. Depreciation
3.Return on Equity
4. Operation and Maintenance Expenses
5. Interest on Working Capital
                                             Total Fixed Cost
Fixed Cost per Unit (Total Fixed Cost / Net Energy sent
                          out)
Variable Cost (VC) :
1. Cost of Primary Fuel (Fuel Cost / Unit)
2. Cost of Secondary Fuel (Fuel Cost / Unit)
                                       Variable Cost / Unit
Total Cost per Unit
           ACPS, ARR and CoS
Average Cost of Power Supply (ACPS) : Total pooled
  cost divided by Energy Sold gives the Average Cost of
  Power Supply.

Average Realisation Rate (ARR) : It is the average rate
  at which the revenue is realised per unit. (Realisation on
  accrual basis not on cash basis ie., Demand raised).

Cost to Serve (CoS) : It is the cost incurred to supply
  power at specified voltage or to a specified class of
  consumers.
             Types of Audit
1. Statutory Audit

2. C&AG Audit

3. Internal Audit

4. Cost Audit

5. Management Audit

6. Periodical Audit

7. Special Audit
Internal Audit in KPTCL / ESCOMs
Internal Audit in KPTCL and ESCOMs cover the
  following key areas :
  – Revenue Audit
  – Cash Audit
  – Voucher Audit
  – Audit of Turnkey Works
  – Audit of Projects (ie., Capital Works)
  – Material Audit (Stores, etc.,)
  – Audit of Accounts (Trial Balance, M(F) Accounts,
   etc.,)
          Issues Normally Misunderstood
Capital or Revenue Expenditure make no difference
Cash collection at Revenue Sub-divisions is our Income
Profit shown in P&L Account is available in cash with the Company
Deposits collected from consumers is also our Revenue
Augmentation charges collected is also our Revenue
Company can raise loan to whatever extent it desires
Non-capitalisation of an asset has no financial impact
As the Co.,.is making all payments in time, its financial health is good
Payment of Suppliers and Contractors Bills can be met out of Revenue
Collections.
Sufficient cash is available at Corporate Office for transfer to Unit
Offices for meeting expenditure within the budget allocation
Average Realisation Rate (ARR) means revenue realised ie., collected
per unit of energy sold.
          Issues Normally Misunderstood
Revenue Arrears written off would reduce the Company’s burden
Transmission Cost will be recovered in full irrespective of the quantum
of energy handled/transmitted in the system
ESCOMs will earn profit if the entire revenue demand is collected
during a specified period (ignoring the cost & quantum energy
purhcase & sales)
Entire Depreciation is available as internal resources for taking up
capital works
Maintaining 100% collection efficiency i.r.o. revenue would solve all
financial problems (ignoring the huge accumulated past arrears)
Company is generating resources for meeting capital works program
(either through support from Govt. or out of internal resources)
Thank You

				
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