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Conceptual Framework Lec 01 Part 8
HM RANA UMAR FAROOQ The best teacher of CMA USA
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7/20/2024
Category
📚
Learning
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00:00
By the way, we used to do the same accounting.
00:02
See what he did?
00:04
He took revenue in terms of financial capital, maintenance money,
00:07
reduced the cost of sales, and what did we get?
00:10
Profit.
00:11
This is what we used to do, isn't it?
00:13
If he gives admin selling in the paper, he will also reduce it.
00:16
But what we have been studying since childhood and will continue to study in the future,
00:19
we don't get inflation adjusted in it.
00:23
Inflation adjust?
00:24
If you look at his SOFB,
00:26
he is saying the same thing.
00:27
That the thing of 10,000 sold for 14,000,
00:29
there is 14,000 cash,
00:31
there was 10,000 opening,
00:32
earned 4,000 profit,
00:34
if we add the profit, how much will be the equity?
00:37
The opening capital was 10,000,
00:39
earned 4,000 profit,
00:40
so the capital will increase, the equity will increase,
00:42
and how much will be the closing equity?
00:44
14,000.
00:45
Very simple.
00:46
Now tell me,
00:48
that in terms of financial capital, maintenance, money,
00:50
he is taking the money of PNL and SOFB.
00:54
We will do the same thing that we have been doing since childhood.
00:56
We will take revenue,
00:57
we will reduce the revenue,
00:59
we will reduce the purchase fees,
01:01
we don't adjust inflation.
01:03
Do we adjust inflation?
01:05
No, we don't.
01:06
In which?
01:07
Financial capital, maintenance, money terms.
01:10
But in real terms, you adjust inflation.
01:14
But in real terms, which inflation is being adjusted?
01:17
General?
01:18
Or specific?
01:20
There was a question in front of you,
01:22
you yourself did the research.
01:24
This has general inflation.
01:26
General inflation is the investor's perspective.
01:30
The investor is the one who is thinking.
01:34
The investor says,
01:36
how much was the opening capital?
01:40
How much was the capital business starting from 10,000?
01:44
And how much was the profit?
01:47
He says, profit is not 4,000.
01:51
I got 4,000 in my pocket,
01:54
but the value of the money has decreased.
01:56
Where will the 500 go?
01:59
It will go to inflation.
02:01
If this person
02:03
has made a profit of 4,000
02:06
and takes all 4,000 as a dividend,
02:10
then what will be his closing capital?
02:13
10,000.
02:15
And now the chair that took 10,000,
02:17
will not get it in 10,000.
02:20
The chair that took 10,000
02:22
has now become inflation.
02:24
Now it will not get it in 10,000.
02:26
The business will not work.
02:28
That is why he says,
02:30
general inflation is 5%.
02:32
First keep that 5% inflation reserve.
02:34
Then tell me what I have earned.
02:36
So he says,
02:38
you took 10,000.
02:40
So how much is the inflation in this?
02:42
5%.
02:44
So tell me, how much will 5% of 10,000 be?
02:46
500.
02:49
It will go to the inflation reserve.
02:51
So effectively he did not make a profit of 4,000.
02:53
How much did he make?
02:55
3500.
02:57
And how much can he take as a maximum dividend?
02:59
3500.
03:01
If he takes 4,000,
03:03
then the business will not work.
03:05
Financial capital maintenance
03:07
in real terms,
03:09
whose prospective is it?
03:11
Investors' prospective.
03:13
Investors' prospective.
03:15
The investor has not invested
03:18
in just one company.
03:20
The point of an investor is,
03:22
he will invest wherever he gets returns.
03:24
Maybe he has invested in 10 companies.
03:26
So he looks at the general inflation,
03:28
how much is actually reserved in my profit.
03:30
If he earned 10 rupees,
03:32
and 5 rupees went to inflation,
03:34
then how much did he actually earn?
03:36
5 rupees.
03:38
So he deserves inflation.
03:40
Who? Investors.
03:42
And he looks at the net income.
03:44
If a person has 100 rupees,
03:46
and it becomes 110,
03:48
and the reason for that is only inflation.
03:50
You bought an item in the morning,
03:52
for example, gold.
03:54
It was 1 lakh in the morning,
03:56
in the evening it will be 1,10,000.
03:58
So the next day,
04:00
if you want to buy the same weight,
04:02
you need 1,10,000.
04:04
Now that will not come in 1,00,000.
04:06
So you need 1,10,000
04:08
for your business investment.
04:10
So the investor looks at the general inflation
04:12
and calculates how much he earned.
04:15
Financial Capital Maintenance,
04:17
in real terms,
04:19
how much is the sale?
04:21
14,000.
04:23
How much is the CGS?
04:25
10,000.
04:27
But what is the difference between 500 and 100?
04:29
5% or 10%?
04:31
Is it a general rate or a specific rate?
04:33
It's a general rate.
04:35
So the increase in inflation
04:37
that he earns,
04:39
he says that in real terms,
04:41
in money terms, he earned 4,000.
04:44
In real terms,
04:46
out of 4,000, 500 went to inflation
04:48
and what did I earn?
04:50
I earned 3,500.
04:52
So when he calculates the cash,
04:54
he is saying 14,000.
04:56
But he says equity is 10,000.
04:58
What is 500?
05:00
Inflation Reserve Maintenance.
05:02
Just like we maintain
05:04
Plant Replacement Reserve.
05:06
Because in the future,
05:08
when we have to buy a plant,
05:10
we should have enough money
05:13
Similarly, why are we maintaining
05:15
the Inflation Reserve?
05:17
Because those things have become expensive.
05:19
If you don't place those things
05:21
and if you don't buy them,
05:23
you won't get what you get before.
05:25
So what does he keep?
05:27
Inflation Reserve.
05:29
So he added 10,000 to the Inflation Reserve.
05:31
10,000 became 500.
05:33
And then he said,
05:35
I didn't earn 4,000,
05:37
but I earned 3,500.
05:39
Let's look at someone for half a minute
05:42
In which, general inflation
05:44
is incorporated
05:46
with the perspective of
05:48
investors.
06:12
Sir,
06:14
in case of real terms,
06:16
we will add it to the DVD.
06:18
Yes, son.
06:20
In case of real terms,
06:22
we will add it to the DVD.
06:24
No, no, I have earned 4,000 from business.
06:26
No, no,
06:28
in case of real terms,
06:30
we will add 12,000 to the DVD.
06:32
In case of real terms,
06:34
I have earned 4,000.
06:36
The shareholder will say,
06:38
give me a dividend of 4,000.
06:41
In fact, the investor himself will say,
06:43
this is the investor's perspective.
06:45
He will say, for this business,
06:47
I needed 10,000.
06:49
Now the value of money has decreased.
06:51
Now you need 10,500.
06:53
Because 5% is inflation.
06:55
So he himself will say,
06:57
I have earned 4,000.
06:59
Add 500 to the Inflation Reserve.
07:01
Give me the remaining 3500.
07:03
If you want, take it.
07:05
Otherwise, add it to the Retained Earnings.
07:07
So he decides from the earned.
07:10
If you wanted something in a reserve,
07:12
where would you shift it from?
07:14
From Retained Earnings.
07:16
So we will shift it from the profit earned here.
07:18
First, we will complete our account.
07:20
So that we can meet the inflation.
07:22
And then we can take the remaining.
07:24
Does anyone have any objection?
07:26
Financial Capital Maintenance,
07:28
Money Terms,
07:30
just like we used to do accounting.
07:32
Financial Capital Maintenance,
07:34
in real terms,
07:36
what inflation is taken in it?
07:39
If you have any objection,
07:41
you can ask it in question 6 or 8.
07:43
I will show you now.
07:45
What is written in front of us?
07:47
Sir,
07:49
in real terms,
07:51
what inflation is taken in it?
08:03
Yes Sir.
08:05
Yes, dear.
08:07
Ask the question again.
08:09
Who was asking?
08:11
Who is asking?
08:13
No, no.
08:15
Who was asking earlier?
08:17
You tell.
08:19
If someone asks you a question in an interview,
08:21
you will not send it.
08:23
You tell.
08:25
You tell your own problem.
08:27
Sir, in real terms,
08:29
what inflation is taken in it?
08:31
In equity?
08:34
Before Registration.
08:36
From where did you start your business?
08:38
May God bless you.
08:40
May God bless you.
08:42
What can we do?
08:44
It is written here.
08:46
Ex-Limited Commons Business
08:48
on 1st January Year 1
08:50
with a single item of inventory
08:52
which cost 10,000.
08:54
He started his business from 10,000.
08:56
If you bring 10,000 to the business,
08:58
what will be the capital opening?
09:00
10,000 is the opening capital.
09:03
What is capital from profit?
09:05
It increases.
09:07
Financial capital maintenance
09:09
was in money terms.
09:11
Inflation does not adjust in that.
09:13
He added 4,000 to the profit
09:15
and told the closing equity of 14,000.
09:17
But what did he say here?
09:19
Inflation and money did not have
09:21
that much power.
09:23
Business will not run from 10,000.
09:25
To do business of the same level,
09:27
10,000 and 500 are required.
09:29
He has kept 500 in reserve.
09:32
Now we have physical capital maintenance.
09:36
Physical capital maintenance
09:38
is a management prospective
09:40
which actually runs the business.
09:48
In this, specific inflation is taken.
09:52
What is specific?
09:54
Specific inflation to business
09:56
which is running the business.
09:59
Now,
10:01
the investor says,
10:03
I gave you 10,000.
10:05
You have earned
10:07
brought down capital.
10:09
You have earned
10:11
profit 4,000.
10:13
Out of this 4,000,
10:15
you keep 500
10:17
in inflation reserve
10:19
and give us
10:21
3500 profit.
10:23
Is it right?
10:26
But he says,
10:28
the particular item
10:30
which we were selling,
10:32
for example,
10:34
the plant,
10:36
the plant which we sold
10:38
for 10,000,
10:40
this amount is specific inflation.
10:42
How much?
10:44
10%.
10:46
If you want to sell the same plant,
10:48
how much will you get?
10:50
How much will you get?
10:52
10,000.
10:55
How much will you get?
10:57
110%.
10:59
Sir, if we give you 3500,
11:01
the plant will not come.
11:03
The business will shut down.
11:05
Management does not look at
11:07
general inflation.
11:09
It looks at inflation connected
11:11
to my business.
11:13
It looks at specific inflation.
11:15
It says, Sir,
11:17
don't take 3500 from us.
11:19
Put the extra 1000 in reserve
11:21
so that we can buy
11:24
the plant.
11:26
How much do you get?
11:28
3000.
11:30
Otherwise, the business will not work.
11:34
Management looks at
11:36
what I am doing.
11:38
The investor is looking at the market.
11:40
He thinks I took 3500.
11:42
But you are the manager.
11:44
If I give him 3500,
11:46
this item will be 10% expensive.
11:48
It will not come for 10,000.
11:50
How much will it cost?
11:52
If I give him 3500,
11:54
this item will not come.
11:56
The business you started
11:58
with 10,000,
12:00
you need 11,000 to run it.
12:02
If you have earned 4000,
12:04
take 3000.
12:06
We will have to keep 1000 in reserve.
12:08
Look at the income statement.
12:10
Revenue is 14,000.
12:12
What is the cost of sale?
12:14
How much is the inflation adjustment?
12:16
Specific inflation adjustment.
12:18
He said you earned 3000.
12:21
If you look at the equity,
12:23
what was the adjustment before?
12:25
10,000.
12:27
He took 1000 as adjustment.
12:29
Inflation.
12:31
He took the reserve.
12:33
How much is that? 11,000.
12:35
Now his capital is
12:37
11,000 to 14,000.
12:39
How much did he earn?
12:41
3000.
12:43
This means that
12:45
we will adjust the capital.
12:47
We will put inflation on the opening capital
12:50
and adjust the capital.
12:52
The opening capital is 11,000.
12:54
Closing is 14,000.
12:56
He did not earn 4000.
12:58
How much did he earn?
13:00
3000.
13:02
With this discussion,
13:04
let's look at another example.
13:19
Let's look at another example.
13:49
Let's look at another example.
14:19
Let's look at another example.
14:49
Thank you for watching.
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14:56
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