Category: Commerce Notes PPT

Several financial statements tend to follow certain accounting concepts and principles. However, there are some cases where relevant and important information is not present in some of the statements and that is due to some of these accounting principles and concepts. One of the cases might be due to the contingent assets. Here in the notes about contingent assets, we are going to figure out some of the details that students need to know about in the chapter.

 

What are Contingent Assets? 

A contingent asset can be considered as a potential asset for the company or any sort of economic benefit that the company can have. The main thing about the contingent asset is while it might not exist in the present times, there is a chance of it appearing in the future. There are certain cases where the occurrence of some particular events or the non-occurrence of such events led to the formation of a contingent asset. The company doesn’t have control over such events and hence the economic interest which arises from such contingent gains is something that is important. A great contingent asset example is that a company when locked in certain legal disputes gets a fairly good chance of winning or getting some entitlements to make claims. 

In these notes for contingent assets and liabilities, we are going to discuss both of these topics so that students can have an idea about the chapter and can score good marks in the examinations.

 

When is a Contingent Asset Not Recognized as an Asset? 

After learning the contingent assets meaning, it is now important for the students to know when the contingent asset is not recognized as an asset. Well, there might be certain conditions in accounting concepts that might lead to the absence of the contingent assets in the balance sheet. In case of uncertain events where the company is not in control of the events, there might be times when some of the contingent assets are not included. 

Also, according to the conservatism principle, some uncertain events of the future really must be recognized. However, any future incomes which are uncertain cannot be recognized in the present. So, the contingent asset will be included in the latter group for sure. This is what students get to know from the notes of provisions, contingent liabilities and contingent assets.

 

Disclosure of Contingent Assets 

When it comes to the contingent assets definition, students can refer to the notes. However, some other details are not mentioned clearly. With our notes, students can have all the details that they want to have in the first place. There are mentions of contingent asset recognition and so much more. With help of our notes, students can know the meaning of contingent assets in the best way. 

After understanding the meaning of contingent assets, we are going to learn about the IAS 37 Provisions Contingent Liabilities And Contingent Assets. IAS stands for International Accounting Standard and according to that, there is a specific outline of the treatment provided to contingent liabilities and contingent assets too. In a similar way Accounting Standard 29 was made by ICAI to deal with such treatment details. 

According to Accounting Standard 29, the contingent asset will not be disclosed while making the financial statements and that is due to the existence of the concept of prudence in accounting. However, when it comes to the approving authorities, they are allowed to make such mentions of the contingent liabilities and the contingent assets. However, the contingent asset disclosure can be made in the reports in the cases mentioned below. 

• If the economic benefits are probable and are pretty much likely to happen in a sure and certain manner 

• In case the amount or value of the asset or the benefit can easily be estimated in a reliable way

It is imperative that the contingent assets are completely monitored in a close manner. Once, this has been made certain that there will be a rise of economic benefits, these contingent assets can easily be included in all the different financial statements which are made. Then that particular asset will not be considered as a contingent asset example.

 

Contingent Liabilities 

There are certain cases or transactions when the final outcomes will not be known at that exact same time. Some examples of the incidents would include insurance claims, litigations, and pending disputes. So, the liabilities rising during those situations will be known as contingent liabilities.

The supply of a firm is determined by its costs. Now, supply and demands both indicate the price. Therefore, to determine the process of price and the forces for supply, one must unearth the nature of costs. The cost concept is an important chapter in economics, thus, both traditional and modern theories play a significant role in this study.

Cost concept is important, especially when it comes to financial decision making for your business. The study of the cost concept in accounting provides the base for understanding pricing. On the professional level, it helps managers in taking correct decisions like the concept of fixed cost, the concept of variable cost, price quotation, and others.  

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Accounting and Economic Costs

Accounting costs are expenses that are caused by form production. Therefore, all the payments that are made by a company to its suppliers and other clients come under the accounting costs. Accounting costs are also known as explicit costs. These include rent, utility bills, interest payments, etc. These costs are actually direct costs that are associated with the business. Accounting costs are accounted for each expense made and then recorded in ledgers or accounting software.

Economic costs are usually used for comparing two separate courses of action. It helps in the evaluation process of a particular action for a business. The costs are calculated based on the accounting costs and also subtracting implicit costs. Now, the calculation of implicit costs is analyzed based on the current resources and their cost estimation. Also, the impact on the business from these resources is taken into account. 

Outlay and Opportunity Costs

Outlay cost is incurred when a strategy is executed or is needed to acquire an asset. This is an important part of the cost concept. Outlay costs can also be paid to the vendors for the requirement of goods like services and inventory. These are actually concrete expenses incurred for achieving specific goals. Outlay costs are easily recognizable and measurable due to the payment done to outside vendors. However, in the case of opportunity costs, they are not actually incurred and directed to the outside parties by a company.

Coming to the opportunity costs, it represents the potential benefits missed out by an individual, investor, or even a company when choosing a better option over another. The idea of opportunity costs is a pivotal factor in the cost concept and classification. As per the studies of economics, opportunity costs can be easily overlooked if you are not careful. For this reason, you need to learn more about the cost concept in accounting. Most of the financial reports do not show opportunity costs, thus, business owners use this concept to make proper decisions. 

Direct and Indirect Costs

When it comes to the cost concept in accounting, learning these two variables can be of great help. Direct costs are simple expenses of a company that can be connected to specific cost objects. These can include anything from the costs of projects, departments, labour, equipment, raw materials, and so on. Most of the direct materials and labour constitute direct costs. In the study of cost concept and classification, direct cost varies. For example, smartphone hardware is a direct cost because the production is dependent on other units as well. 

Looking into the indirect costs, they often extend beyond the expenses that are incurred when creating a product including the costs required for maintenance and running business operations. After computing the direct costs, most of the overhead costs are leftover. Some of the clear examples are materials and supplies required by a company for everyday operations. These items may contribute as a whole from a business perspective but are not assigned when it comes to the creation of a service. To stay away from complications, it is good to make yourself more knowledgeable about the various aspects of cost concept and classification.

Fixed and Variable Costs

There are different measures of costs in a cost theory. These are the concept of fixed cost and the concept of variable cost. When it comes to the cost concept in accounting, determining these two variables is crucial. Remember, fixed costs do not vary based on production. For example, the rent paid for a facility. 

On the contrary, variable costs keep changing based on the quantity of production. The wages that are paid to the workers in a company are a form of variable costs. This is because the number of workers may need to increase if there is a hike in the production line. Producing more goods means the requirement for more costs. However, the costs vary based on the amount of work done by each worker.

• Fixed costs demand the fixed expenditure of funds without considering the level of output like interest on loans, rents, depreciation, and others.

• Variable costs are based on the function of output in the production line, including wages and costs of raw materials. 

Therefore, the total sum of fixed and variable costs determines a company’s overall costs. 

The economic cost concept will only help you gain a better insight into the company’s financial future and plan the business operations accordingly.

In brief, Decentralization can be defined as the organizational structure.  In such a structure, the top management of a firm entrusts the middle and lower-level management with the responsibility to take decisions pertaining to the firm’s daily operations.

To elaborate, they are responsible for planning, crafting suitable strategies and taking necessary decisions to boost the proficiency at each level and in turn, optimizing the overall productivity of the company.

Owing to its numerous benefits and positive influence on the company’s performance, business owners tend to prioritize the structure of power delegation. Resultantly, they can make the most of the time and opportunity to focus on the major concerns of their business and also to plan its expansion. 

In the era of globalisation, where the entire world is connected and turned into a small village, decentralisation is a development process facilitating development ideas that are pro-poor, pro-nature and protects the regional characteristics in the development process. This process will help in bringing out the voice of the depressed, poorest of the poor and make decisions that are democratic and also help in the representation of the local communities in the decision making process. 

Types of Decentralization

1. Democratic Decentralization

It is the transfer of political authority and devolution of powers to the low levels of administration that are below the center. For example, the transfer of power to the states and district authorities from the center is a form of political decentralization.

2. Administrative Decentralization

It is the transfer of power to make decisions that involve utilization of natural resources, mobilization of other resources, administrative authority. It is again divided into divestment, devolution and deconcentration. Divestment is when the powers are transferred to some voluntary organizations from the government. A delegation is an exclusive form in which the powers and authority are delegated to the subordinate officials. 

3. Fiscal Decentralization

It is the devolution of economic powers to the lower rungs. This is again divided into two elements. One is devolution of power to spend the money and allotting them with some funds. Another element is to allow the lower levels to collect revenue in the form of taxes and cess charges.

 

Features of Decentralization in India

• Reservation provision exists for the SC, ST, women and OBC at times. This reservation is extended to panchayat level administration also

• Article 243E of the Indian constitution clearly mentions forming local level panchayats and also makes a provision to constitute the next panchayat before the completion of its term. 

• The constitution also recognizes that the panchayats need some powers to function and made a provision making the state government devolution some powers to the panchayats. 

 

Importance of Decentralization

Now that we have gained a basic idea about decentralization let’s glance through its vital role in a commercial set-up mentioned below –

1. Accelerates  Decision Making

Since middle and lower-level management is in charge of everyday operations, it accelerates the process of decision making. The freedom to take prompt decisions further enables them to execute their decisions quickly and effectively.

2. Improves Leadership Skills

As employees have the freedom to perform tasks individually, it offers them substantial exposure. In turn, it helps to create a work environment; wherein, employees can hone their executive skills significantly. As they learn to improve their skills and take responsibility for various tasks, it enhances the overall productivity of the firm. 

3. Improves Administration

As the manager at each level is allowed to make decisions pertaining to their department, it offers them more room to bring necessary adjustments through the course of operation. In turn, it not only helps to improve the quality of the department’s performance as and when required but also allows them to come up with suitable solutions to tackle departmental challenges. All of this helps to improve the quality of administration at each level significantly. 

4. Facilitates  Greater Control

With the help of decentralization, top management can evaluate the performance of different departments more effectively. Further, it helps them to review and identify the prevailing shortcomings and helps to bring necessary changes to the same. This not just helps to lower the occurrence of operational shortcomings but also offers greater control over each area of operation.

Test your Knowledge: In what other ways do you think decentralization is essential for a firm?

 

Advantages of Decentralization 

Moving on, let’s quickly check out how a firm benefits through decentralization –

1. Facilitates Smooth Communication

With the presence of fewer hierarchical levels, there is a smooth flow of communication between the superiors and subordinates in each department. In turn, such a set-up comes in handy for the top management and keeps them informed about the grievances and functioning of each department.

Additionally, it allows them to reach out to their subordinates as and when required and implement decisions more effectively.

2. Promotes Expansion 

With the middle and lower-level management being more involved with the everyday operation, the top management seeks the opportunity to focus on expansion and sustenance of profitability. 

Further, with decentralization management is more adept at identifying areas that require more attention or reforms to emerge as more productive. This helps management to make necessary changes quickly and with more effect, thus facilitating expansion and profitability in a real sense.  

3. Motivates Subordinates

Decentralization is an effective way to boost the morale and feeling of job satisfaction among employees. Being entrusted with responsibilities around the department offers them a sense of belonging and further inculcates a team spirit in them.

Although decentralization lays a positive impact on the productivity of a firm, it brings forth specific challenges as well.

 

Disadvantages of Decentralization

Take note of these common challenges of a decentralized firm –

1. External factors

Factors like market fluctuations, government policies and intervention and trade union movement often present a challenge to optimize the productivity of a company through decentralization. 

2. Lack of coordination

Each department is given due powers to delegate their operations adequately. However, different departments may not be eager to cooperate, which defeats the purpose of a decentralized structure altogether. 

Give your opinion: Imagine yourself as an owner of a company. How would you overcome the shortcomings of a decentralized firm?

 

Difference Between Centralisation and Decentralization

Check out the table below to find out the difference between centralisation and decentralization –

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Diagrams are an essential operational tool for the presentation of statistical data. They are objects, mainly geometrical figures such as lines, circles, bars, etc. Statistics elaborated with the help of diagrams make it easier and simpler, thereby enhancing the representation of any type of data.

What is Diagrammatic Representation of Data?

Representation of data assisted by diagrams to increase the simplicity of the statistics surrounding the concerned data is defined as a diagrammatic representation of data. These diagrams are nothing but the use of geometrical figures to improve the overall presentation and offer visual assistance for the reader. 

What are the Types of Diagrams used in Data Presentation?

The type of diagram suitable for data presentation solely depends on the particular dataset and its statistical elements. There are multiple types of diagrams used in data presentation. They can be broadly categorized in the following types of one-dimensional diagrams –

A. Line Diagram

Line diagram is used to represent specific data across varying parameters. A line represents the sequence of data connected against a particular variable. 

Properties of Line Diagram –

1. The Lines can be used in vertical and horizontal directions.

2. They may or may not have uniform scaling 

3. The line connecting the data points state the statistical representation of data.

Example: Arjun, Sayak and Mainak started monitoring their time of reporting for duty for a certain week. A-Line diagram to represent their observed data on average reporting time for those days would look like –

()

So, as per the Line Diagram, it can be easily determined that Arjun reported for work mostly at 9:30 AM while Sayak and Mainak’s most frequent times of entry at work is 10:30 AM and 10:50 AM respectively. 

B. Bar Diagram

Bar Diagram is used mostly for the comparison of statistical data. It is one of the most straightforward representations of data with the use of rectangular objects of equal width.

Properties of Bar Diagram –

1. The Bars can be used in vertical and horizontal directions.

2. These Bars all have a uniform width.

3. All the Bars have a common base.

4. The height of the Bar usually corresponds to the required value.

Example: A dataset comparing the percentile marks obtained by Shreyasi and Monika in Science subjects in the examination can be represented with the help of a Bar diagram as –

()

From this diagram, we can easily compare the percentile marks obtained by Shreyasi and Monika in the subjects Mathematics, Physics, Chemistry and Computer Science. 

C. Pie Chart

To know what a Pie Diagram is, it is advised to brush up on the fundamentals of the geometrical theories and formula of a Circle. For the statistical representation of data, the sectors of a circle are used as the data points of a particular dataset. A sector is the area of a circle formed by the several divisions done by the radii of the same circle.

Example: In a recent survey, a dataset was created to figure how many participants of the survey thought that Tenure or Tenor is the correct spelling in the field of Banking. A Pie Chart would present the collected data as –

()

With the help of this Pie Chart, it can be easily determined that the percentage of participants in the survey who chose ‘Tenor’, to be the correct spelling of the word for use in the field of banking, is 25% whereas 45% picked ‘Tenure’ as the correct answer. 20% opted for both to be correct while 10% of them were not sure with their attempt.

Advantages of Diagrammatic Presentation

There are several advantages in the presentation of data with the various types of diagrams. They are –

1. Makes it Much Easier to Understand

The presentation of data with the help of diagrams makes it easier for everybody to understand, which thereby makes it easier to grasp the statistics behind the data presented. Diagrammatic data presentation is quite common in newspapers, magazines and even in advertising campaigns so that the common mass can understand what the data is trying to reveal. 

2. Presentation is Much Simpler

With the help of diagrams, presentation of extreme values – extensive unstable data as well as small complicated data complex can be simplified exponentially. 

3. Comparison Operations are More Interactive

Datasets that require comparison of their elements use the application of diagrams for representation. Not only is the presentation attractive, but it is also ideal for showcasing a comparison in statistics.

4. Accepted Universally

Every academic and professional field, let it be Economics, Commerce, Science, Engineering, Statistics, etc. make use of diagrams across the world. Hence, this metric of data presentation is universally accepted.

5. Improves the Representation of Data as a Whole

Statistics are incomplete if diagrams are tables that are not implemented for the presentation of data. Hence, the use of diagrams helps in the overall statistical concept of data representation.

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Relevance of Diagrammatic Presentation of Data

Diagrams are visually pleasing and are a great way of representing any form of data. The heavy statistics that we generate can be easily represented via diagrams such as bar charts, pie charts etc. It makes the presentation look neater and more organized. They visually aid the reader in understanding the exact situation and are also very easy to look at.  They save a lot of time and confusion and have a universal utility.  All students must learn how to represent data through diagrams so that they can present facts and figures in an organized manner.

Does have Anything on the Diagrammatic Presentation of Data?

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Introduction

Market, by its very nature, leads to the formation of both perfect and imperfect competition within it. Imperfect competition can be further categorized into oligopoly, monopoly, and monopolistic competition.

Let’s find out more about monopoly and monopolistic competition!

 

What is a Monopoly?

Monopoly has such a type of market structure, where there is only one firm present in it. This firm enjoys absolute power in producing and selling the product or service. Products offered in a monopoly market do not have any close substitutes. 

Monopoly is most likely to be found in the public utility sector.

Also, the combined effect of various characteristics of the monopoly market ensures that the market player is a sole price setter. Buyers cannot influence prices. Price is set by the firm taking into account the demand elasticity of a product, product demand, and maximization of profit.

 

Example of Monopoly

An instance of monopoly competition can be found in the government sector. Government has a monopoly over infrastructure such as dams, railways etc.

These sectors count as a monopoly market with the government as the only entity because the competition is non-existent. The characteristics of the services and products in such a market are determined by the government.

 

What is Monopolistic Competition?

Monopolistic competition is the market setting that includes differentiated products offered by a handful of sellers present in the market. Product differentiation is undertaken through packaging, brand name, trademark etc. 

Monopolistic competition is evident in the manufacturing industry. 

The characteristics of monopolistic competition such as differentiated products and a handful of sellers influence the prices of products or services. Consumers in a monopolistic market buy more products when prices are comparatively lower. Firms set product prices, taking into consideration marginal cost and revenue as well as profit maximization.

 

Example of Monopolistic Competition

Monopolistic competition can be seen on television programmes. With the advent of globalization, consumers have greater choice in the variety of shows from which to choose. The television programmes offered across the world are also diverse. However, there are only a few companies that broadcast those shows.

Major differences between monopoly and monopolistic competition have been discussed below.

 

Monopoly vs Monopolistic Competition

It can be understood that, in a monopoly market, the seller has the discretion to charge different prices to different sets of customers. It is known as price discrimination. However, in monopolistic competition, there exists non-price competition. Sellers in this market cannot adopt a price discrimination policy for their customers.

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Both the Comparative and the Common-Size financial statements give a more or less view of the financial statement of the company. Common-size financial statements present all the financial items under their head in percentage terms. While the Comparative financial statements present the financial data for numerous years side by side. This data is to be presented in the form of absolute values, percentages, or both.

The striking difference between the comparative and the common size financial statements is that comparative financial statements present the financial information for several years side by side in the form of absolute values or percentages or both. Whereas the common size financial statements present all these items in percentage terms more often.

Comparative Financial Statement

The Comparative financial statements are the set of complete financial statements an entity issues, by revealing its information for more than one reporting period. The financial statements which are included in this statement are:

• The Income Statement shows the results for multiple periods.

• The balance sheet shows the financial position of the entity.

• The cash flow statement is defined as more than one period.

Variation of comparative concept also exists which is to report the information for each of the 12 previous months. The comparative financial statements are quite useful for the following reasons:

• This provides a comparison of an entity’s financial performance over multiple periods, which will help to determine the trends of the business. 

• The statements also reveal unusual spikes in the information which will help to indicate the presence of accounting errors. 

• This statement also enables a comparison of the expenses and revenues. This will help in the process of Cost Management. 

• The statements predict future performance.

Are Comparative Financial Statements Required?

A comparative statement is a type of document that is used to compare a particular financial statement with the period statements. The Previous financials are presented alongside the latest figures in side-by-side columns, this enables the investors to identify the trends, the track on which a company’s progress is determined and the same can be compared with industry rivals.

Comparative statements are used to figure out finances which is a good practice for the business owner. 

Common Size Financial Statement

The common size income statement is another type of income statement in which basically each line item is expressed as a percentage of the value of revenue or the sales. Common size financial statements analyze and then compare a company’s performance over several periods with varying sales figures.

Analysts analyses this common size as an income statement whereby dividing each line item (for example, gross profit, operating income, and sales and marketing expenses) by the top line (sales). Then this item is then expressed as a percentage of sales.

Example of a Common Size Income Statement

The standard figure that is used in the analysis of a common size income statement is the total sales revenue. The common size percentages are then calculated to show each line item as a percentage of the standard figure or the revenue.

This is quite important to note that the common size calculation is the same as calculating the margins for a company. The net profit margin is the net income that is divided by the sales revenue, and this is typically the common-size analysis. This is the same for calculating the gross margin (sales revenue minus the cost of goods sold, divided by sales revenue), and the operating margin (that is the gross profit minus the selling & general administrative expenses, divided by the sales revenue).

Difference Comparative Financial Statement and Common Size Financial Statement 

The main differences between the comparative analysis and the common size analysis are chalked as follows −

Comparative Analysis

• This analysis shows the previous year’s financial results which occur side by side along with the changes in the amount or its percentage.

• This compares the current year’s results with the base year.

• This is a horizontal analysis.

• The results are expressed in both forms – percentages as well as pictorial form.

• Both provide an inter and intra firm which can be compared.

• This helps in internal decision making.

• The statements are useful to compare results with their previous financial years.

• Quite an importance of individual figures is shown in a statement with a comparative analysis.

Common Size Analysis

• This shows the results of the same year in percentage form.

• Common Size analysis compares figures of the same year.

• This is a vertical analysis.

• The results are to be expressed in percentages only.

• Only inter-firm are required to be compared.

• This common size statement prepares the references for the stakeholders.

• This is used to compare the company’s results with their competitors.

• This shows the relative importance of the individual figures in the statement.