Conceptual Framework Lec 01 Part 8
Transcript
00:00By the way, we used to do the same accounting.
00:02See what he did?
00:04He took revenue in terms of financial capital, maintenance money,
00:07reduced the cost of sales, and what did we get?
00:10Profit.
00:11This is what we used to do, isn't it?
00:13If he gives admin selling in the paper, he will also reduce it.
00:16But what we have been studying since childhood and will continue to study in the future,
00:19we don't get inflation adjusted in it.
00:23Inflation adjust?
00:24If you look at his SOFB,
00:26he is saying the same thing.
00:27That the thing of 10,000 sold for 14,000,
00:29there is 14,000 cash,
00:31there was 10,000 opening,
00:32earned 4,000 profit,
00:34if we add the profit, how much will be the equity?
00:37The opening capital was 10,000,
00:39earned 4,000 profit,
00:40so the capital will increase, the equity will increase,
00:42and how much will be the closing equity?
00:4414,000.
00:45Very simple.
00:46Now tell me,
00:48that in terms of financial capital, maintenance, money,
00:50he is taking the money of PNL and SOFB.
00:54We will do the same thing that we have been doing since childhood.
00:56We will take revenue,
00:57we will reduce the revenue,
00:59we will reduce the purchase fees,
01:01we don't adjust inflation.
01:03Do we adjust inflation?
01:05No, we don't.
01:06In which?
01:07Financial capital, maintenance, money terms.
01:10But in real terms, you adjust inflation.
01:14But in real terms, which inflation is being adjusted?
01:17General?
01:18Or specific?
01:20There was a question in front of you,
01:22you yourself did the research.
01:24This has general inflation.
01:26General inflation is the investor's perspective.
01:30The investor is the one who is thinking.
01:34The investor says,
01:36how much was the opening capital?
01:40How much was the capital business starting from 10,000?
01:44And how much was the profit?
01:47He says, profit is not 4,000.
01:51I got 4,000 in my pocket,
01:54but the value of the money has decreased.
01:56Where will the 500 go?
01:59It will go to inflation.
02:01If this person
02:03has made a profit of 4,000
02:06and takes all 4,000 as a dividend,
02:10then what will be his closing capital?
02:1310,000.
02:15And now the chair that took 10,000,
02:17will not get it in 10,000.
02:20The chair that took 10,000
02:22has now become inflation.
02:24Now it will not get it in 10,000.
02:26The business will not work.
02:28That is why he says,
02:30general inflation is 5%.
02:32First keep that 5% inflation reserve.
02:34Then tell me what I have earned.
02:36So he says,
02:38you took 10,000.
02:40So how much is the inflation in this?
02:425%.
02:44So tell me, how much will 5% of 10,000 be?
02:46500.
02:49It will go to the inflation reserve.
02:51So effectively he did not make a profit of 4,000.
02:53How much did he make?
02:553500.
02:57And how much can he take as a maximum dividend?
02:593500.
03:01If he takes 4,000,
03:03then the business will not work.
03:05Financial capital maintenance
03:07in real terms,
03:09whose prospective is it?
03:11Investors' prospective.
03:13Investors' prospective.
03:15The investor has not invested
03:18in just one company.
03:20The point of an investor is,
03:22he will invest wherever he gets returns.
03:24Maybe he has invested in 10 companies.
03:26So he looks at the general inflation,
03:28how much is actually reserved in my profit.
03:30If he earned 10 rupees,
03:32and 5 rupees went to inflation,
03:34then how much did he actually earn?
03:365 rupees.
03:38So he deserves inflation.
03:40Who? Investors.
03:42And he looks at the net income.
03:44If a person has 100 rupees,
03:46and it becomes 110,
03:48and the reason for that is only inflation.
03:50You bought an item in the morning,
03:52for example, gold.
03:54It was 1 lakh in the morning,
03:56in the evening it will be 1,10,000.
03:58So the next day,
04:00if you want to buy the same weight,
04:02you need 1,10,000.
04:04Now that will not come in 1,00,000.
04:06So you need 1,10,000
04:08for your business investment.
04:10So the investor looks at the general inflation
04:12and calculates how much he earned.
04:15Financial Capital Maintenance,
04:17in real terms,
04:19how much is the sale?
04:2114,000.
04:23How much is the CGS?
04:2510,000.
04:27But what is the difference between 500 and 100?
04:295% or 10%?
04:31Is it a general rate or a specific rate?
04:33It's a general rate.
04:35So the increase in inflation
04:37that he earns,
04:39he says that in real terms,
04:41in money terms, he earned 4,000.
04:44In real terms,
04:46out of 4,000, 500 went to inflation
04:48and what did I earn?
04:50I earned 3,500.
04:52So when he calculates the cash,
04:54he is saying 14,000.
04:56But he says equity is 10,000.
04:58What is 500?
05:00Inflation Reserve Maintenance.
05:02Just like we maintain
05:04Plant Replacement Reserve.
05:06Because in the future,
05:08when we have to buy a plant,
05:10we should have enough money
05:13Similarly, why are we maintaining
05:15the Inflation Reserve?
05:17Because those things have become expensive.
05:19If you don't place those things
05:21and if you don't buy them,
05:23you won't get what you get before.
05:25So what does he keep?
05:27Inflation Reserve.
05:29So he added 10,000 to the Inflation Reserve.
05:3110,000 became 500.
05:33And then he said,
05:35I didn't earn 4,000,
05:37but I earned 3,500.
05:39Let's look at someone for half a minute
05:42In which, general inflation
05:44is incorporated
05:46with the perspective of
05:48investors.
06:12Sir,
06:14in case of real terms,
06:16we will add it to the DVD.
06:18Yes, son.
06:20In case of real terms,
06:22we will add it to the DVD.
06:24No, no, I have earned 4,000 from business.
06:26No, no,
06:28in case of real terms,
06:30we will add 12,000 to the DVD.
06:32In case of real terms,
06:34I have earned 4,000.
06:36The shareholder will say,
06:38give me a dividend of 4,000.
06:41In fact, the investor himself will say,
06:43this is the investor's perspective.
06:45He will say, for this business,
06:47I needed 10,000.
06:49Now the value of money has decreased.
06:51Now you need 10,500.
06:53Because 5% is inflation.
06:55So he himself will say,
06:57I have earned 4,000.
06:59Add 500 to the Inflation Reserve.
07:01Give me the remaining 3500.
07:03If you want, take it.
07:05Otherwise, add it to the Retained Earnings.
07:07So he decides from the earned.
07:10If you wanted something in a reserve,
07:12where would you shift it from?
07:14From Retained Earnings.
07:16So we will shift it from the profit earned here.
07:18First, we will complete our account.
07:20So that we can meet the inflation.
07:22And then we can take the remaining.
07:24Does anyone have any objection?
07:26Financial Capital Maintenance,
07:28Money Terms,
07:30just like we used to do accounting.
07:32Financial Capital Maintenance,
07:34in real terms,
07:36what inflation is taken in it?
07:39If you have any objection,
07:41you can ask it in question 6 or 8.
07:43I will show you now.
07:45What is written in front of us?
07:47Sir,
07:49in real terms,
07:51what inflation is taken in it?
08:03Yes Sir.
08:05Yes, dear.
08:07Ask the question again.
08:09Who was asking?
08:11Who is asking?
08:13No, no.
08:15Who was asking earlier?
08:17You tell.
08:19If someone asks you a question in an interview,
08:21you will not send it.
08:23You tell.
08:25You tell your own problem.
08:27Sir, in real terms,
08:29what inflation is taken in it?
08:31In equity?
08:34Before Registration.
08:36From where did you start your business?
08:38May God bless you.
08:40May God bless you.
08:42What can we do?
08:44It is written here.
08:46Ex-Limited Commons Business
08:48on 1st January Year 1
08:50with a single item of inventory
08:52which cost 10,000.
08:54He started his business from 10,000.
08:56If you bring 10,000 to the business,
08:58what will be the capital opening?
09:0010,000 is the opening capital.
09:03What is capital from profit?
09:05It increases.
09:07Financial capital maintenance
09:09was in money terms.
09:11Inflation does not adjust in that.
09:13He added 4,000 to the profit
09:15and told the closing equity of 14,000.
09:17But what did he say here?
09:19Inflation and money did not have
09:21that much power.
09:23Business will not run from 10,000.
09:25To do business of the same level,
09:2710,000 and 500 are required.
09:29He has kept 500 in reserve.
09:32Now we have physical capital maintenance.
09:36Physical capital maintenance
09:38is a management prospective
09:40which actually runs the business.
09:48In this, specific inflation is taken.
09:52What is specific?
09:54Specific inflation to business
09:56which is running the business.
09:59Now,
10:01the investor says,
10:03I gave you 10,000.
10:05You have earned
10:07brought down capital.
10:09You have earned
10:11profit 4,000.
10:13Out of this 4,000,
10:15you keep 500
10:17in inflation reserve
10:19and give us
10:213500 profit.
10:23Is it right?
10:26But he says,
10:28the particular item
10:30which we were selling,
10:32for example,
10:34the plant,
10:36the plant which we sold
10:38for 10,000,
10:40this amount is specific inflation.
10:42How much?
10:4410%.
10:46If you want to sell the same plant,
10:48how much will you get?
10:50How much will you get?
10:5210,000.
10:55How much will you get?
10:57110%.
10:59Sir, if we give you 3500,
11:01the plant will not come.
11:03The business will shut down.
11:05Management does not look at
11:07general inflation.
11:09It looks at inflation connected
11:11to my business.
11:13It looks at specific inflation.
11:15It says, Sir,
11:17don't take 3500 from us.
11:19Put the extra 1000 in reserve
11:21so that we can buy
11:24the plant.
11:26How much do you get?
11:283000.
11:30Otherwise, the business will not work.
11:34Management looks at
11:36what I am doing.
11:38The investor is looking at the market.
11:40He thinks I took 3500.
11:42But you are the manager.
11:44If I give him 3500,
11:46this item will be 10% expensive.
11:48It will not come for 10,000.
11:50How much will it cost?
11:52If I give him 3500,
11:54this item will not come.
11:56The business you started
11:58with 10,000,
12:00you need 11,000 to run it.
12:02If you have earned 4000,
12:04take 3000.
12:06We will have to keep 1000 in reserve.
12:08Look at the income statement.
12:10Revenue is 14,000.
12:12What is the cost of sale?
12:14How much is the inflation adjustment?
12:16Specific inflation adjustment.
12:18He said you earned 3000.
12:21If you look at the equity,
12:23what was the adjustment before?
12:2510,000.
12:27He took 1000 as adjustment.
12:29Inflation.
12:31He took the reserve.
12:33How much is that? 11,000.
12:35Now his capital is
12:3711,000 to 14,000.
12:39How much did he earn?
12:413000.
12:43This means that
12:45we will adjust the capital.
12:47We will put inflation on the opening capital
12:50and adjust the capital.
12:52The opening capital is 11,000.
12:54Closing is 14,000.
12:56He did not earn 4000.
12:58How much did he earn?
13:003000.
13:02With this discussion,
13:04let's look at another example.
13:19Let's look at another example.
13:49Let's look at another example.
14:19Let's look at another example.
14:49Thank you for watching.