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Financial, Cost and ManagementAccounting

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Course outline

o Fundamentals of Accounting

o Mechanics of Accounting

o Financial Statement Analysis

o Introduction to Cost and Management Accounting

Cost Volume profit analysis

o Budgetary Control, Standard costing and Varianceanalysis

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Important Terminology Unit I

Accounting and Book - Keeping

Accountancy

Assets

LiabilitiesAccounting principles and policies

Accounting cycle and process

Accounting Equation

Generally Accepted Accounting Principles ( GAAP)International Financial Reporting Standards ( IFRS)

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Introduction

Accounting is a term as the language of the businessand is a part of accountancy . The basic function of alanguage is to serve as a means of communication. Itcommunicates the results of business operations to

various parties who have some stake in the business.Need for accounting : A person who is runningbusiness must know

i. What he owns?

ii. What he owes?

iii. Whether he has earned a profit or loss of running abusiness?

iv. What is his financial position?

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Accountancy & Book- keeping

refers to a systematic knowledge of accounting.

It tells us why and how to prepare the books ofaccounts and how to summarise the accounting

information and communicate it to the interestedparties.

Book keeping is a part of accounting and is concernedwith record keeping and clerical in nature.

The basic objective is to maintain systematic record ofall financial transactions.

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DEFINITIONS

Accounting is the art of recording, classifying and summarizing insignificant manner and in terms of money, transactions and eventswhich are, in part, at least of a financial character and interpretingthe results thereof.

The function of accounting is to provide Quantitative information,primarily of financial nature, about economic entities, that is neededto be useful in making economic decisions.

Accounting is the process of identifying, measuring and

communicating economic information to permit informed judgmentsand decisions by users of the information.

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FUNCTIONS OF ACCOUNTING

Recording:- This is the basic function of accounting. Itis essentially concerned with not only ensuring that allbusiness transactions of financial character are in factrecorded but also that they are recorded in an orderlymanner. Recording is done in the book journal.

Classifying:- This is concerned with the systematicanalysis of the recorded data, with a view to grouptransactions or entries of one nature at one place.Classification is done in the book termed as Ledger.

Summarising:- This involves presenting the classified

data in a manner which is understandable and useful.This process leads to preparation of the followingstatements. Namely Trial Balance, Income Statementand Balance sheet.

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Functions

Dealing with financial transactions.

Analysing and Interpreting:- This is final function of

accounting. The recorded financial data is analysed andInterpreted in a manner that the end-users can make ameaningful judgement about the financial conditionand profitability of the business operations.

Communicating:- The accounting information afterbeing

meaningfully analysed and interpreted has to becommunicated in a proper form and manner to the properperson.

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Importance & Objectives

Importance of Accounting Information. Proprietors. Managers. Creditors.

Prospective Investors. Government. Employees. Citizen.

Objectives of Accounting.

To keep systematic records. To protect business properties. To ascertain the operational profit or loss. To ascertain the financial position of business. To facilitate rational decision making.

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ACCOUNTING PRINCIPLES

They are a body of doctrines commonly associated withthe theory and procedures of accounting, serving as anexplanation of current practices and as a guide forselection of conventions or procedures where alternativesexist.

It is defined as those rules of action or conduct whichare adopted by the accountants universally while recordingaccounting transaction. It is also termed as AccountingStandards.

Accounting principles are classified into two categories.Namely Accounting concepts and Accounting conventions.

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ACCOUNTING CONCEPTS

The term concepts include those basic assumptions uponwhich accounting is based.

Separate Entity Concept Money Measurement Concept Cost Concept Going Concern Concept

Dual Aspect Concept Realisation Concept Accrual Concept

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ACCOUNTING CONVENTIONS

Customs and traditions which guide theaccountants while preparing the accountingstatements.

Consistency

Full Disclosure

Conservatism

Materiality

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ACCOUNTING POLICIES

Accounting policies refer to specificaccounting principles and the methods ofapplying those principles adopted in the

preparation and presentation of financialstatements. The choice of appropriateaccounting principles in the specificcircumstances of each enterprise calls forconsiderable judgment by the management of

the enterprise

example:-Methods of depreciation

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Accounting Cycle

A complete sequence beginning with the

recording of the transactions and ending withthe preparation of the final accounts.

Jounalising

Posting

Balancing

Trial BalanceIncome Statement

Balance Sheet

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Accounting Process & Equation

o An overview of the steps of cycle,beginning with a transaction andending with the closing of the booksand reversing entries.

o Equation

Assets= Capital+Liabilities or

Shareholders equity= Assets Liabilities

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GAAP

Generally Accepted Accounting Principles :

Standard framework of guidelines for financialaccounting. It includes the standards, conventions ,

and rules accountants follow in recording andsummarising transactions, and in the preparation offinancial statements.

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7 Ps

o Principle of regularity: Regularity can be defined asconformity to enforced rules and laws. This principle isalso known as the Principle of Consistency.

o Principle of sincerity: According to this principle, theaccounting unit should reflect in good faith the realityof the company's financial status.

o Principle of the permanence of methods: Thisprinciple aims at allowing the coherence andcomparison of the financial information published bythe company.

o Principle of non-compensation: One should showthe full details of the financial information and not seekto compensate a debt with an asset, a revenue with anexpense, etc.

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7 Ps

o Principle of prudence: This principle aims atshowing the reality "as is" : one should not try to makethings look prettier than they are. Typically, a revenueshould be recorded only when it is certain and a

provision should be entered for an expense which isprobable.o Principle of continuity: When stating financial

information, one should assume that the business willnot be interrupted. This principle mitigates the principleof prudence: assets do not have to be accounted attheir disposable value, but it is accepted that they areat their historical value.

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7 Ps

o Principle of periodicity: Eachaccounting entry should be allocatedto a given period, and split accordinglyif it covers several periods. If a clientpre-pays a subscription (or lease,etc.), the given revenue should be

split to the entire time-span and notcounted for entirely on the date of thetransaction

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IFRS

International Financial Reporting Standards are standardsand interpretation adopted by the International AccountingStandards Board (IASB). In April 2001, the IASB adoptedall IAS and continued their development, calling the new

standards IFRS.Assumptions

Accrual basis: The effect of transactions and otherevents are recognised when they occur, not as cash isreceived or paid.

Going concern: The financial statements are preparedon the basis that an entity will continue in operation forthe foreseeable future.

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Mechanics of Accounting

Transaction of a business refers to an event therecognition of which gives rise to an entry in accountrecords.

Account is a summary of the relevant transactions atone place relating to a particular head. It records not onlythe amount of transaction but also their effect anddirection.

Accounts can be broadly classified into Personal

Accounts and Impersonal Accounts.

Impersonal Accounts are further classified into RealAccounts and Nominal Accounts.

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Classification

Personal Accounts:- These are the accounts of persons with whom thebusiness deals. Ex: Sold goods to kumar, paid cash to ravi.

DEBIT THE RECEIVER

CREDIT THE GIVER

Real Accounts :- These are the accounts of tangible objects ie. Assetsowned by an enterprise and carrying probable future benefits.

Ex: cash received from ravi.

DEBIT WHAT COMES IN

CREDIT WHAT GOES OUT

Nominal Accounts :- These accounts are opened to explain the natureof transactions. Nominal accounts include accounts of all expenses,losses, incomes and gains.

Ex: Paid wages, commission received.

DEBIT ALL EXPENSES AND LOSSES

CREDIT ALL GAINS AND INCOMES

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Meaning and Rules of Debit &

Credit

Debit means to enter an amount of a

transaction on the left side of an account,Credit means to enter an amount of a

transaction the right side on an account.Dr. and Cr. are the abbreviated form of

debit and credit.

Both debit and credit may represent either

increase or decrease depending upon thenature of an account.

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Journal

Journal:- The book in which the business transactions are recorded in achronological order, after analysing them and classifying the benefitsaccording to the principles of debit and credit is called journal.

The transactions in the journal are recorded on the basis of the rules ofdebit and credit.

Debit is that aspect of transaction that causes:

An increase in an Asset, a decrease in Liability

An increase in Expense or Loss, a decrease in Income or Gain

An increase in Drawings, a decrease in Capital

Credit is that aspect of transaction that causes:

A decrease in Asset, an increase in Liability

A decrease in Expense or Loss, an increase in Income or Gain

A decrease in Drawing, an increase in Capital

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Advantages of journal entries

A businessman can find out the information whenrequired, quickly and easily.

When any difference arises with regard to pasttransactions, the trader can satisfy by explaining the

dates and the circumstances of the differences. It helps in the preparation of final accounts at the end

of the year.

Business transactions have been classified into threecategories:

Transactions relating to persons, properties and assetsand to incomes and expenses.

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PROFORMA OF JOURNAL

Date particulars L.F Debit Rs. Credit Rs.

o Date:- The date on which the transaction was entered is recordedhere.

o Particulars:- The two aspect of the transaction are is recorded in

the column i.e., the details regarding accounts which have tobe debited and credited.o L.F:- It means ledger folio .the transactions entered in the journal

are later

on posted to the ledger procedure regarding posting thetransactions in the ledger

o Debit:- In this column, the amount to be debited is entered.o Credit:- In this column, the amount to be credited is shown.

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Problems

1) From the following transactions journalise.

a) Rent paid.

b) Salaries paid.

c) Interest received.

d) Dividends received.

e) Furniture purchased for cash.

f) Machinery sold.

g) Outstanding for salaries.

h) Paid to Suresh.i) Received from Mohan (the proprietor).

j) Lighting.

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2) Pass journal entries from the following

1.Jul.1,2007,Ajit started business with cash Rs 40,000.

2.Jul.3,he paid into the Bank Rs 2,000.

3.Jul.5,he purchased goods for cash Rs 15,000.

4.Jul.8,he sold goods for cash Rs 6,000.

5.Jul.10,he purchased furniture and paid by cheque Rs 5,000.

6.Jul.12,sold goods to Arvind Rs 4,000.

7.Jul.14,he purchased goods from Amrit Rs10,000.

.

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8.Jul.15,he return goods to Amrit Rs 5,000.

9.Jul.16,he received from Arvind Rs3,960 in full settlement

10.Jul18,he withdraw goods for personal use Rs1,000.

11.Jul.20,he withdraw cash from business for personal use Rs 2,000.

12.Jul.24,he paid telephone charges Rs 1,000.

13.Jul.26,cash paid to Amrit in full settlement Rs4,900.

14.Jul.31, Paid for stationery Rs 200, rent Rs 500 and salaries to staff

Rs 2,000.

15.Jul..31, goods distributed by way of free samples Rs 1,000.

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3) Journalise the transactions given below in the books of Prasad.

April 1 Prasad commenced business with a cash of Rs.30,000.

April 3 Cash sales Rs.4,000.

April 4 Bought Machinery Rs.15,000.

April 7 Sold goods to Raju Rs. 10,000.

April 9 Purchased goods from Ramana Rs.8,000.

April 10 Sold goods to Gupta Rs.5,000.

April 12 Paid for stationery Rs.1,000.

April 14 Carriage expenses Rs.500.

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April 15 Bought furniture for proprietor's residence and paid cash

Rs.7,000.

April 17 Sold goods to Krishna for cash Rs.3,000.

April 22 Received Discount Rs. 800.

April 24 Paid for wages Rs.1,200.

April 26 Sales Rs.15,000.

April 27 Deposited cash with Bank Rs.10,000.

April 28 Received cash from Mahesh Rs.1,500.

April 29 Received Interest on loan from Viswanath Rs.600.

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4) Journalise the following transactions and post them intoLedger

1. Ram started business with a capital of Rs 10,000.

2. He purchased furniture for cash Rs 4,000.

3. He purchased goods from Mohan on credit Rs2,000.

4. He paid cash to Mohan Rs 1,000.

5. He received cash from Suresh Rs 1,000.

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Ledger & Posting

Ledger :- A book containing different accounts

of an entity and facilitates recording of alltypes of transactions related to Personal, Real

and Nominal accounts separately in relatedaccounts.

Posting :- Transferring the debit and credit

items from the journal to the respectiveaccounts in the ledger

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PROFORMA OF LEDGER

Date particulars Amount Rs Date Particulars Amount Rs

Dr CrAccoun

t

Notes:1) It is customary to use words To and By while making posting in the

Ledger.2) The word To is used with the accounts which appear on Debit side

of a Ledger Account.3) Similarly, the word By is used with accounts appear on the Credit sid

of a Ledger Account.

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Trail balance

Trial balance :- It is a statement containing the variousledger balances on a particular date, arranged in the formof debit and credit columns

placed side by side and prepared the object of checkingthe arithmetical accuracy of the ledger postings.

Objects of preparing trail balance:- Checking of the arithmetical accuracy of the accounting

entries. Basis for financial statements. Summarised ledger

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Trial balance Errors

Error of original entry Error of omission Error of reversal Error of commission Error of principle Compensating errors

Transposition error

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Trading Account

This is the first step in preparation of final accounts. It is prepared atthe end of each accounting period to asses the Gross Profit or Gross Loss.

Advantages:-

We can ascertain Gross Profit/Gross Loss.

We can observe the changes in direct expenses.

We can calculate the cost of production.

We can establish the relation between the costs and revenues.

We can analyse the trend in sales.

We can decide the earning capacity of the firm

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PROFORMA OF TRADING ACCOUNT

Particulars Amount

Rs

Particulars Amount

Rs

To Opening stock

To Purchases

Less Returns

To Direct Expenses

TO Gross Profit c\d

BySalesLess Returns

By Closing Stock

By Gross Loss c\d

Dr Cr

Trading Account offor the year ended

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PROBLEMS

From the following ledger balances as on 31-12-2006, prepare Trading Account.

Rs

Stock as on 1-1-2006 2,000

Purchases 38,000Sales56,000

Returns Inward 2,000

Returns Outward 3,000

Closin Stock 12 000

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You are requested to prepare Trading Account from the followinginformation.

Rs

Stock(1-1-2006) 1,000

Purchases 25,000

Sales 35,000

Returns Inward 1,500

Returns Outward 1,000

Direct Wages 2,000

Carriage Inward 3,000

Carriage Outward 1,800Factory Rent 1,000

Office Rent 800

Customs Duty 200

Electricity (motive power) 500

Office Lighting and repairs 700

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PROFORMA OF P&L ACCOUNT

Particulars Amount

Rs

Particulars Amount

Rs

To Gross Loss b/dTo Salaries

To Rent

To Commission

To Advertisement

To Bad Debts

To Discount

TO Net Profit

Transferred to

Capital a/c

By Gross Profit b/dBy DiscountReceived

By Interest on

Drawings

By Profit on Sale of

Assets

By Net Loss

Transferred to

Capital a/c

for the year of ending

Profit and Loss Account of

CrDr

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From the following particulars prepare Profit and Loss Account.

Rs

Gross Profit 2,56,250

Rent6,500

Commission Paid 3,250

Salaries9,750

Taxes 9,750

Trade Expenses 1,625

Bank Charges 1,950

Printing & Stationery 8,125

Packing Charges 1,625

Carriage Outward 6,500

Discount Received 3,250

Discount Allowed 2,112

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From the following Ledger balances of X Ltd, prepare Trading & Profit and LossAccount for the year ended 31st Dec,2006.

Rs

Opening Stock 1,87,500

Purchases 2,71,875

Sales Returns 15,000

Furniture 52,500

Machinery 2,43,750

Carriage Outward 5,625Wages 37,500

Sales 6,90,000

Purchase Returns 9,375

Carriage Inward 7,500

General Expenses 7,500

Salaries 7,500Commission Received 1,875

Discount Allowed 2,750

Bad Debts 1,000

Commission to Agent 1,875

Bank Charges 563

Interest Received 1,125Rent Received 16,875

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Assets- Resources acquired

Circulating/FloatingAssets constantlychange in value throughtransactions that areentered into. These aremeant to be converted into cash at the earliest

opportunity.

Fixed:- these are not meant to be sold but are

meant to be utilized in the firms Business.

Tangible

Which can be seenand felt

Intangible

Which cannot be seen

Fictitious

Assets of which novalue

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Liabilities are claims of the creditors against the enterprise

arising out of past activities that are to be satisfied by thedisbursement or utilisation of corporate resources.

Liabilities

Current

Repayment obligation

Payable within oneyear from the date ofBalance sheet.

Fixed

Other than current

Contigent

Which may arise in

future depending onhappening of anuncertain event.

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PROFORMA OF BALANCE SHEETBalance sheet of

as on-

Liabilities Amount Rs Assets Amount Rs

Capital

Add: Net Profit,

Additional

capital,

Interest on

capital.

Less: Drawings,Int on drawings,Net Loss.

Long term debts

Short term debts

***

***

Fixed Assets :

Good will, Patents,copy right, trade

marks, Land&Buildings, Plant &

Machinery,Furniture & Fittings

etc.

Investments

Current Assets:

Debtors, closing

stock, cash inhand& at Bank

***

***

Permanency Order

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CurrentLiabilities:

Creditors, Bills

payable, BankOverdraft,

OutstandingExpenses,

Income received

in advance.

***

***

Prepaid Expenses

Accrued Incomes

Bills Receivable

***

***

****

PROFORMA OF BALANCE SHEETLiquidity Order

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Current Liabilities:

Outstanding Expenses

Income Received in

AdvanceBills Payable

Bank Overdraft

Creditors

Loans:

Long Term Loans

Short Term LoansCapital:

Capital

ADD: Additional capital

Interest on capital

Net Profit

Less: DrawingsInterest on drawings

***

***

***

Current Assets :

Prepaid Expenses

Accrued Income

Cash in HandsCash at Bank

Bills Payable

Debtors

Investments

Loose Tools

Fixed Assets:Furniture & Fittings

Vehicles

Leasehold Property

Plant & Machinery

Land & Buildings

PatentsTrade Marks

***

***

10)From the following Trial Balance as on 31 Dec 2006 Prepare a Trading and a

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10)From the following Trial Balance as on 31 Dec 2006, Prepare a Trading and aProfit and Loss Account, Balance Sheet.

Trail Balance on 31 Dec 2006

Debit Amount

Rs

Credit Amount

Rs

Cash

Purchases

Traveling Expenses

Carriage

Discount Allowed

Audit fees

Debtors

Furniture

Trade Expenses

General Expenses

Legal Expenses

Penalties

Salaries

Opening Stock

Carriage Outward

Postage

Telephone

Goodwill

Commission

Wages

Drawings

Loose Tools

Interest on Overdraft

1,740

2,69,320

10,510

86,580

1,800

2,746

68,440

2,180

3,250

9,950

2,540

4,300

25,200

5,200

43,810

2,790

1,930

21,270

3,370

13,230

20,340

14,870

1,720

Profit on sales of Assets

Recovery of Bad Debts

Bank Overdraft

Creditors

Commission

Bills Payable

Capital

Purchase Returns

Sales

Interest Received

2,130

1,440

24,420

52,290

3,450

17,780

40,656

1,320

4,72,290

1,310

6,17,086 6,17,086

Closing Stock as on 31-12-2006 Rs 10,580.

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Adjustment Entries

1. Closing Stock.

2. Expenses Outstanding.

3. Prepaid Expenses.

4. Accrued Incomes.

5. Incomes Received in Advance.6. Depreciation on Assets.

7. Bad Debts.

8. Reserve for Doubtful debts.

9. Reserve for discount on debtors.

10. Reserve for discount for creditors.11. Interest on Capital.

12. Interest on Drawings.

13. Stock lost in Accident.

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1. Closing Stock

Closing Stock A/c ..........Dr

To Trading A/c

a) Given in the adjustmentb) Appearing in the Trial balance

2. Expenses Outstanding

Rent A/c .Dr

To Out Rent A/c

a) Given in the adjustment

b) Appearing in the Trial balance

3. Prepaid Expenses

Prepaid Expens A/c. Dr

To Expense A/c


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4) Accrued Income- Income which has been earned duringthe accounting year but which has not yet become due andtherefore has not been received

Accrued Income A/c.DrTo Income A/c



5) Income Received in Advance.

Income A/c ..DrTo Income Received in Advance

Adjustment

1.Should be deducted from the relevant A/c in the Profitand Loss A/c

2. Shown in the Liabilities side of the Balance sheet.

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6)Depreciation

Depreciation A/c .Dr

To Fixed Asset A/c


b) Appearing in the Trial balance7)Bad Debts

Bad Debts A/cDr

To Debtors A/c


Bad Debts should be debited to P&L A/cand Should be deducted from Debtors in the assets side of theBalance Sheet.


To be shown in the Debit side of the P&L A/c

C) Bad debts were given in the Trial Balance

and

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8. Provision for Bad and Doubtful debts

Profit and Loss A/c Dr

To Prov for Bad debts A/c



9. Provision for Discount on Debtors

Profit & Loss A/c..Dr

To Dis on Debtors A/c

10. Provision for Discount on Creditors

Prov for Dis on Creditors..Dr

To Profit & Loss A/c

11.Interest on Capital

Int on Capital A/cDr

To capital A/c

12. Interest on Drawings

13 Stock Lost in Accident

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13. Stock Lost in Accident

Adjustment entries:

1.For the Loss sustained by fire accident

Loss on fire accident A/c .Dr

To Trading A/c

2.Claim received from Insurance Company

Cash A/c Dr

To Loss A/c

3.Loss On fire Transferred to P&L A/c

P&L A/c .DrTo Loss A/c

11 From the following Trail Balance As on 31-3-2007 Prepare

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11. From the following Trail Balance As on 31 3 2007, Preparethe Trading Profit & Loss A/c and Balance Sheet.

Trail Balance

Debit Balance AmountRs

Credit Balance AmountRs

Salaries

PurchasesTrade Expenses

Wages

Carriage

Office Expenses

CommissionBad Debts

6,000

26,0001,000

7,800

400

500

6001,200

Capital

SalesDiscount

Creditors

Bills Payable

25,000

47,000200

21,000

6,800

(1) (2) (3) (4)

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Debtors

Furniture

Machinery

Insurance

Bills Receivables

Opening Stock

Cash in HandsCash in Bank

30,000

3,000

10,000

400

2,000

7,000

5003,600

1,00000.1,00,000

Adjustments:1.Closing Stock Rs. 11,000.2.Outstanding Wages Rs.2,000.3.Prepaid InsuranceRs.50.4.Provide Bad Debts Reserve at 5%5.Depreciation on machinery and furniture by 5%.

12 Prepare Final Accounts of Mr X

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12. Prepare Final Accounts of Mr X

Trial Balance as on 31-12-2006

Particulars Debit Rs Credit Rs

Capital

Drawings

Purchases and Sales

Returns

Debtors, Creditors

Stock (1-1-2006)

Bad debts

Bills Receivable

Bills Payable

Cash in Hand

Office expenses

Sales Van

Expenses of Sales van

Discount

RentTelephone Charges

Postal Charges

Furniture

Commission

Carriage inward

Salaries & Wages

7,500

72,100

1,300

18,200

19,800

3,000

12,000

800

6,210

15,000

1,400

10,700

1,050

3,700

5,000

8,400

3,200

20,000

50,000

95,000

2,700

35,750

23,000

2,910

2,09,360

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Adjustments :

1.Closing Stock Rs61,700.

2.Depreciate Furniture by 10%, Sales van by 20%.

3.Rent Outstanding Rs 900.4.Bad Debts Rs 200.

5.Provide 5% for Bad and Doubtful Debts.

6.!/4 Of salaries and wages belongs to factory.

13 Prepare final accounts

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13. Prepare final accounts.

Debit Balances Amount Rs Credit Balances Amount Rs

Purchases

Furniture

Wages

Machinery

Opening Stock

Sales ReturnsDebtors

Carriage Inward

Salaries

Carriage outward

Rent& Taxes

Cash at bank

25,200

1,600

3,500

20,000

17,525

1,20010,400

200

10,600

503

2,001

8,000

1,00,729

Sales

Capital

Creditors

Purchase Returns

61,604

35,000

3,903

222

1,00,729Adjustments:1. Closing Stock Rs. 16,800.

2. Outstanding Salaries Rs 400: Prepaid rent Rs. 201.

3. Provide 5% to Bad and Doubtful debts on debtors.

4. Depreciation on machinery is 10%.

5. Interest on capital is 5%.

14 Prepare a Trading and Profit &Loss a/c and Balance Sheet

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14.Prepare a Trading and Profit &Loss a/c and Balance Sheet.

Trail Balance as on 31-12-2008

Debit Amount Rs Credit Amount Rs

Drawings

Stock

Bills Receivables

Sales Returns

Purchases

Wages

Salaries

Fixed Deposits

Insurance

Buildings

Furniture

Debtors

Cash in Hand

750

6,920

1,000

300

4,500

70

200

3,000

120

3,000

700

6,000

470

27,030

Capital

Purchase Returns

Bills Payables

Sales

Discount

Creditors

Bank overdraft

15,000

320

1,180

8,300

30

1,300

900

27,030

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Adjustments:

1 Calculate 12% interest on Capital.

2 Insurance Premium Rs 120 was paid for the half year endedwith 31-3-2009.

3 Depreciate buildings and furniture by 10%.

4 Outstanding wages Rs 40.

5 Create provision for bad debts at 10%.also create a provisionfor discount on debtors as well as creditors at 5%.

6 Closing stock as on 31-12-2008,Rs 8,000.

15.Prepare the final accounts of Mr X.

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p

Trial Balance as on 31-3-2009

Debit Rs Credit Rs

Cash in HandGood Will

Purchases

Cash at Bank

Direct Wages

Opening stock

Interest on Loan

Insurance

Carriage on Sale

Carriage on Purchases

Commission

Fittings

Bad Debts

BuildingsPlant & Machinery

Postage

Debtors

Salaries

80040,000

68,000

1,200

2,000

35,000

2,500

900

900

400

500

5,000

200

25,00010,000

500

.25,000

3,000

220900

Sales10% Loan(1-1-2009)

Reserve for Bad Debts

Creditors

Capital

Bills Payable

69,40051,000

500

8,000

90,000

2,000

220900

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Adjustments:

1 Stock as on 31-3-2009 Rs 75,000.

2 Provide 5% for doubtful debts.

3 Provide depreciation 10% on fittings and on Plant & Machinery,5% on Buildings.

4 Mr X has taken Rs 500 worth of stock for his Domestic use.

5 Stock worth Rs 10,000 was destroyed in a fire accident forwhich Insurance company agreed to reimburse Rs 2,000.

SCHEDULE Vl (sec 211)

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( )

Form of Balance Sheet

Balance Sheet of

As at

Liabilities Assets

SHARE CAPITAL

Authorised

Subscribed

Called up

Less Calls unpaid

Add Forfeited Shares

RESERVES AND SURPLUS

Capital Reserves

Capital Redemption reserve

Share premium

Other Reserves

Surplus

Proposed additions to reserves

FIXED ASSETS

INVESTMENTS

In Govt. SecuritiesIn Shares, Debentures or Bonds

Immovable Properties

In the capital of Partnership firms

CURRENT ASSETS,LOANS AND

ADVANCES

A. Current Assets

Stores and spare parts

Stock-in-trade

Work in progress

Liabilities Assets

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SECURED LOANS

Debentures

Loans and Advances from BanksLoans and Advances from

Subsidiaries

Other Loans and Advances

UNSECURED LOANS

Fixed

Deposits

Loans and Advances fromsubsidiaries

Short Term Loans and AdvancesFrom Banks

From others.

Other Loans and Advances

From Banks

From others

Sundry Debtors

Debts outstanding for a

period

exceeding six months

Other debts-

Less provision

Prepaid expensesCash Balance

Bank Balance-

With scheduled banks and

With others

B. Loans and Advances

Advances and Loans to:

Subsidiaries

Partnership firms

Bills of exchange

Liabilities Assets

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CURRENT LIABILITIES AND

PROVISIONS

A Current LiabilitiesSundry creditors

Unclaimed dividends

Interest accrued but not due

B Provisions

Provision for TaxationProposed Dividends

For pf, Insurance, pension and

similar staff benefit schemes

MISCELLANEOUS EXPENDITURE

(to the extent not written off or

adjusted).

Preliminary expenses

Expenses including commission or

brokerage or underwriting orsubscription of shares or

debentures.

Discount allowed on the issue of

shares or debentures.

Interest paid out of capital during

construction.

Development expenditure notadjusted

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Vertical form of Balance Sheetl

Sources of funds

1. Shareholders Funds

a) Capital

b) Reserves and surplus

2. Loan funds

a) Secured loans

b) Unsecured loans

Total

ll Applications of Funds

1 Fixed assets

a) Gross Block

b) Less: Depreciation

c) Net Block

d) Work in Progress

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2. Investments

3. Current Assets, Loans and Advances

a) Inventories

b) Sundry Debtors

c) Cash and Bank balances

d) Other Current Assets

e) Loans and AdvancesLess: Current liabilities and Provisions

a) Liabilities

b) Provisions

Net Current Assets

4. a) Miscellaneous Expenditure to the extent not written off or

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Provision and Reserve

o A provision is an amount set apart for meetingpossible losses and it is a charge against profit. Itshould be debited to P&L account irrespective of thefact whether there is a profit or not.

o Reserve is an appropriation of profit. If there is noprofit, then no reserve can be made. The purpose isto strengthen the financial position of the business.

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Analysis of Financial Statements

o Meaning of Financial Analysis

refers to the process of determining financialstrengths and weaknesses of the firm by establishingstrategic relationship between the items of the balancesheet, Profit & Loss account and other operative data.q is a process of evaluating the relationship

between component parts of a financial statement toobtain a better understanding of a firms position

and performance.

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Financial Statements

o FS are the sources of information on the basis of whichconclusions are drawn about the profitability andfinancial position of a concern.

o Prepared for the purpose of presenting a periodicalreview of report on progress by the management anddeal with the status of investment in the business andthe results achieved during the period under review.They reflect a combination of recorded facts,

accounting principles and personal judgments.

Comparative and common size

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Comparative and common size

analysis

Statements summarize and present related data for a numberof years, incorporating therein changes in individual items offinancial statements. They help in making inter-period and inter

firm comparisons, and also highlight the trends in performance

efficiency, and financial position.Common-size balance sheet

Balance sheet items are expressed as the ratio of each asset tototal assets and the ratio of each liability is expressed as a ratio

of total liabilities is called common size balance sheet.

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RATIO ANALYSIS

A ratio is a simple arithmetical expression

of the relationship of one number to another.

A ratio is an expression of the quantitative

relationship between two numbers.Ratios are classified as-

Short term solvency ratios. Long term solvency ratios. Turnover ratios. Profitability ratios.

Short term solvency ratios are the ratios which measure the short terml fi i l i i f fi I i di h bili

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solvency or financial position of a firm. It indicates the ability to payits current obligation in time.

Current ratio or Working capital ratio = Current assets/ Current liabilities

Note :

1) Current assets include1.Cash in hand & at Bank.

2.Short term investments.

3.Bills receivable.

4.Sundry debtors.

5.Stocks/ inventories.

6. Prepaid expenses.

7.Work in process.

2) Current liabilities include

1. Outstanding expenses/ accrued expenses.

2. Bills payable.

3.Sundry creditors.4.Short term advances.

5.Income tax , Dividends payable.

6.Bank overdraft.

3) Ratio of 2:1 is considered satisfactory

Quick ratio or Liquid ratio or Acid test ratio

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Quick ratio =Quick assets /Quick liabilities.

Note:1 Quick assets =current assets prepaid expenses.

2 Quick liabilities =current liabilities bank over draft.

3 Ratio of 1:1 is considered as satisfactory.Long term solvency ratios or Leverage ratios or capital structureratios convey firms ability to meet the interest costs and repayment

schedules of its long term obligations. It helps in assessing the riskarising from use of Debt capital.

Debt equity ratio= long term debt / share holders fund.Note:1 Long term debt includes mortgage loans , debentures, loansfrom finance corporation.

2 Shareholders funds include Equity share capital +Preference

share capital + Reserves and surplus + profit and loss

account+ share premium preliminary expenses Discount on issue

Fixed assets ratio

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Fixed assets / Long term funds

Notes: 1 This ratio indicates the extent to which the total of fixedassets are financed by long term funds of the firm.

2 Long term funds include long term loans and shareholder funds.

Turnover ratios or Efficiency ratios or activity ratios

1 Stock turnover ratio

Cost of goods sold / averagestock

Note: Cost of goods sold is sales- gross profit.

2 Debtors turnover ratio

Net credit annual sales /average

trade debtorsNote: Trade Debtors include sundry debtors and bills receivable.No provision for bad and doubtful debts be deducted.

3 Creditors turnover ratio

Net annual purchases / average

trade creditors

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Profitability ratios

related to sales.(%)

1. Gross profit ratio

Gross profit/Sales

2. Net profit ratioNet profit/Sales

3. Expenses ratio

Respective particular expense/Sales

Ratios related to Investment1. Earnings per share

Profit after preference dividend/Number ofEquity shares

2 Price earning ratio

Market price per Equity share/EPS

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Problems

Calculate short term solvency ratios from the following.

Rs

Stock 60,000

Sundry debtors 70,000

Cash balances 20,000

Bills receivables 30,000

Pre-paid expenses 10,000

Land and Buildings 1,00,000

Goodwill 50,000

Sundry creditors 20,000

Bills payable 15,000

Tax payable 18,000

Outstanding expn 7,000

2.

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Liabilities Rs Assets Rs

2,000 Equity shares of Rs 100each

1,000 9% pref Shares of Rs 100each

1,000 10% Debentures of Rs100 each

Reserves :General ReserveReserves for

contingencies

Current liabilities

2,00,000

1,00,000

1,00,000

50,000

50,000

1,00,000

6,00,000

Fixed assets

Current assets

4,00,000

2,00,000

6,00,000

Calculate Debt Equity Ratio

3. The comparative balance sheets of a Ltd. Company are given

for the years ending December31 2005 and 2006

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for the years ending December31,2005 and 2006.

2005 2006 2005 2006

Equity Share Capital

Reserve Fund8% Debentures

Mortgage Loan

Sundry creditors

Bills payable

Bank overdraftOutstanding

expenses

Tax liabilities

3,00,000

1,50,0002,00,000

4,00,000

50,000

25,000

40,000

10,000

15,000

11,90,000

4,00,000

2,80,0003,00,000

2,58,000

70,000

35,000

60,000

15,000

20,000

14,38,000

Goodwill

Land& BuildingPlant& machinery

Patents

Stock

Sundry debtors

Bills receivableMarketable

securities

Cash

Prepaid expenses

Sales

Purchases

2,00,000

3,00,0002,50,000

50,000

1,50,000

1,00,000

80,000

18,000

40,000

2,000

11,90,000

5,00,000

3,00,000

2,00,000

4,00,0003,50,000

50,000

2,00,000

80,000

90,000

20,000

45,000

3,000

14,38,000

6,00,000

4,05,000

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Calculate the following for two years.

1 Current Ratio

2 Acid test Ratio

3 Inventory Turnover Ratio

4 Debtors Turnover Ratio

5 Creditors Turnover Ratio

Notes: a) Trade debtors include debtors and bills receivables.

b) Trade creditors include creditors and bills payable.

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Following information is given to you.

Find out 1.Current assets 2. Current liabilities.

i. Current ratio 2.5

ii.

Working capital Rs.90000

Following information is given to you.

Find out 1.Current assets 2. Liquid Assets.3.Inventory

Current ratio 2.5; Acid test ratio 1.5; Current liabilitiesRs.50000

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Given

Current ratio 2.8; Acid test ratio 1.5; Working capital Rs162000.

Find out CA; CL; LA

The ratios relating to Osmos Ltd are given as followsGP ratio 15percent

Stock velocity 6months

Debtors velocity 3months

Creditors velocity 3months

Gross profit for the year Dec31st,2008 amounts to Rs.60000.Closing stock is equal to opening stock.

Find out Sales, Closing stock, Sundry Debtors, Sundry Creditors.

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Your company had the following earnings last year:

Profit before tax Rs 24.46 lakhs.

Tax rate 60%

Proposed dividend 20%

Capital of the company is

9% Preference shares Rs 10 lakhsEquity Shares 30,000 Shares of Rs 100 each Rs 30 lakhs

Reserve in the beginning of the year Rs 22 lakhs.

From the above compute 1 EPS

fcma- 2011

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