PROJECT WORK GUIDELINES FOR PROJECT WORK IN ACCOUNTANCY (ISSUED BY CBSE) ‘The Board has introduced Project Work in Accounting for class Xl in the optional Part B ‘Financial Statement Analysis. It is expected that the Project Work will help the students in developing the skills to comprehend, analyse and interpret accounting data of the business firms and make it meaningful for taking business decisions UNIT-WISE WEIGHTAGE OF MARKS Project Work Duration: 1 Hour 30 Minutes Marks: 20 Marks Unit 1: Project File “4 Marks - As per Requirement (given below) Unit 2 : Written Test 12 Marks - One Hour Unit 3 : Viva Voce 4 Marks As Per Requirement (given below) UNIT 1: PROJECT FILE (4 Marks) Objectives + (i) To enable a student to complete the accounting process in real business situations and apply the tools of analysis as per the syllabus for a comprehensive project. (i) To develop the competence of reading accounting data from quarterly or half yearly or annual reports of business firms and interpreting the information on the basis of given guidelines to present the desirable Information in required format in the Project File for specific projects. Guidelines for Teachers : During the academic session, the students will work on at least three types of projects out of which one will be comprehensive in nature. The comprehensive projects will involve the students from the initial stage of accounting to the preparation and analysis of financial statements. The data provided or the project statement will be as close as the real life situations. The project statement should cover all important aspects like investments, financing, operating, adjustments to final accounts, etc. in a condensed form. The situations given in these problems will require a student to derive meaningful information for taking decisions for purpose of investment, expansion, financing, etc. Two projects will be of specific nature using atleast one tool of analysis in each. The data for these will be drawn mainly from quarterly or half yearly or annual reports of corporate sector. Student will analyse the Information given in the financial statements as follows. (a) Performance of Segments keeping in mind their three parameters Revenue, Net Profit and Capital Employed of companies on quarterly or half yearly or annual basis. This is widely published and reported by the companies. It can be picked up either from the newspapers or from the websites of the companies. {b) Comparison of Revenue, Net Profit and Earning Per Share (EPS) on quarterly or half yearly or annual basis with the help of comparative or common size statements ‘The Projects given in these guidelines are on sample areas of business activities like Segment Reporting, ete, The teachers and students are free to explore more such areas of business activities for specific projects. There are four tools of analysis given in the syllabus for the analysis of Financial Statements, namely (i) Comparative Statement, (ii) Common Size Statements, (ii) Ratios and (iv) Cash Flow Statement. Any one or more of these tools are to be used to derive conclusions. No project is to be prepared on the tools, but these Accountancy ~ 12 0tools are to be used to achieve the object of the project. For instance, there will not be any project on the ‘Ratios’ as such, but ratios will be used in the development of the project to reach a conclusion. Scope : For the purpose of Project Work, the following ratios will be included : Liquidity Ratios: Current Ratio, Liquidity Ratio. Solvency Ratios: Debt to Equity; Total Assets to Debt, Proprietary Ratio. Activity Ratios Inventory Turnover, Debtors Turnover, Payables Turnover, Working Capital Turnover, Fixed Assets Turnover, Current Assets Turnover. Profitability Ratio : Gross Profit Ratio, Operating Ratio, Net Profit Ratio, Return on Investment, Earning Per Share ~ Price Earnings Ratio. A few projects have been given in detail a the end of the guidelines for practice. The student is expected to analyze the facts, and present the information in a meaningful manner for interpretation. Teachers are expected to discuss these problems thoroughly with the students and encourage them to come out with solutions. They are also expected to collect the quarterly or half yearly or annual Segment reports and Revenue and Net Profit reports of companies from newspapers or from the websites of the companies and formulate their ‘own problems for Project Work UNIT 1: PROJECT FILE (4 Marks) Students will prepare a Project File to record their work related to the problems attempted by them in the following format 1. First page ofthe file should describe ttle of work, identity of student, school, and the teacher concerned. 2. Index to indicate columns for title of work, page no., date, teacher’s remarks and signature. 3. The Format for Project Work will be 3 Statement of the problem / Name of the Project 2 Objectives > Period of Study 2 Source material 2 Tools of Analysis used 2 Processing and Tabulation of data 2. Diagrammatic / graphic presentation-pie-diagrammes, bar diagrammes and graphs > Derivations, Interpretation and Conclusion 3. Assumptions (if any) Project File should be neatly handwritten and presentable with page numbers. Each step of the solution needs to be highlighted. Conclusions drawn should be placed in boxes at the end. Evaluation Guidelines for the Examiner While evaluating the Project File, marks are to be awarded out of four, based on 2 Content > Coverage 2 Presentation 3. Interpretation and Conclusion 2 Originality and Quality of work Accountancy ~ 12 @UNIT 2: WRITTEN TEST (12 Marks) TIME: 1 Hour Objectives = (i) To give them exposure to analyse the financial statements of business firms and help them to derive meaningful Information there form, (a7 To know how effectively the students can derive conclusions and express them. Guidelines for Teachers : Teachers will discuss with students the sample questions for this test and develop question papers for the purpose in their house examinations. Guidelines for Examiners : Students willbe given 2 application-oriented problems of 6 marks each covering the tools for analysis of financial statements. The question paper will be set in consultation with the school teacher. No question similar to ‘the question given in the 3 hour question paper of the Board, should be asked here. Only such questions, relating to financial statements of companies should be asked which encourage thinking on practical lines. The external examiner will discuss with the internal examiner all the projects completed during the year and set the questions accordingly. On the day of the examination both should come prepared with at least 10 questions each. Both the internal and external examiners must agree on the nature and scope of questions asked. It must be ensured that multiple sets of papers are prepared. Marks will be awarded on the steps taken, data identified and solution arrived at. UNIT 3 : VIVA VOCE (4 Marks) Objectives : (0) To assess whether the student has understood topic covered and is able to express. (if To assess whether the project fle presented by the student is genuine and prepared by him only. Guidelines for Teachers : (i) During the course of the academic year, the teacher must give thorough practice to the students on ‘Viva Voce’ examination on each aspect of the project report and file. (ii) During all internal examinations, ‘Viva Voce’ examination should form an integral part of the practical examination. (ii) Wherever possible, the teacher may invite a colleague/expert from another school for asking questions. This will rehearse the students for the final examination. Guidelines for Examiners : ‘The work done by students in Project File will form the basis of asking questions. The external examiner will ask 2-3 questions to test the authenticity of the work done in the files. Marks will be awarded out of 4 in consultation with the school teacher, Viva Questions : Should relate only to the project = (i) To check the authenticity of the work and (if) To check that the student understands the idea behind the Project Accountane °PROFORMA OF PROJECT FILEPRESENTATION OF PROJECT WORK ‘After completing the project work, itis to be presented for evaluation in a file. A proforma of Project File is given below PROJECT FILE 1. Title of Work 2. Name of the Student 3. Class, A, Section ne 5. Roll No. allotted by CBSE 6. Name of the Teacher 7. Name of the School 8 Session ACKNOWL EDGEMENT | would like to convey my heartfelt thanks to Mr/Mrs,/Ms. -s my Accountancy teacher who always gave valuable suggestions and guidance during the completion of this project. He/She has been a source of inspiration during the completion of my project work. He/She helped me to understand and remember important details of the project that | would have otherwise lost. My project has been a success only because of his/her guidance. Name of the Student Roll no. allotted by CBSE Accountancy ~ 12CERTIFICATE This is to certify that Mr/Ms of Class Of eesnnnsnnennees Public School has completed his/her project file under my supervision, He/She has taken proper care and shown utmost sincerity in completion of this project. | certify that this project is upto my expectation and as per the guidelines issued by CBSE. Mr /Mrs./Ms. (PG. Commerce/Head of Commerce Department) (Signature) INDEX St. | Title of the Project Work Page Source | Remarks | Teacher's No. no. Signature 1. | Comprehensive Project xx self Specific Project 1 x Economic Times 3. | Specific Project i! Xx Economic Times Accountancy ~ 12 ©)Note : Components of Formulae for Accounting Ratio: These are used as per financial statements (or final accounts) of sole trader, partnership and company. The distinction is given below Tn case of Sole Trader/Partnership ‘In Case of Company Components of formula of accounting ratios as per| Components of formula of accounting ratios as per ‘Trading and Profit and Loss Account and Balance | Statement of Profit and Loss and Balance Sheet Sheet 1. Short-term Investment 1. Current Investment 2. Stock 2. Inventory 3. Debtors/Bills Receivable 3. Trade Receivables 4. Cash in Hand / Cash at Bank 4. Cash and Cash Equivalents 5. Creditors + Bills Payables 5. Trade Payables 6. Long-term Assets 6. Non-Current Assets 7. Long-term Liabilities 7. Non-Current Liabilities 8 Long-term Investment 8, Non-Current Investment 9. Total Sales 9. Total Revenue from Operations 10. Cost of Goods Sold/Sales 10. Cost of Revenue from Operations 11. Cash Sales 11, Cash Revenue from Operations 12, Credit Sales 12. Credit Revenue from Operations Accountancy ~ 12 ”Comprehensive Project 1 1. Name of the Project : A Study of the business of M/s Alpana Kids Garments 2. Objectives of the Project : (i) To know whether M/s Alpana Kids Garments is a success or a failure (il) To know whether the Bank will give loan for their business. 3. Period of Study : One year ending 31st March 2015 4, Analystical tools used : Necessary Accounting Ratios 5. Source Material : Project Statement PROJECT STATEMENT : M/s Alpana Kids Garments Mr. Kanha had 1,000 shares of ICICI Ltd. of € 100 each. In March, 2014, he sold his shares @ € 980 each. With this amount, he decided to set up a business of Kid Garments on 1 April, 2014 under the name of M/S Alpana Kids Garments. He decided that all transactions should be made through bank and deposited the whole money in Dena Bank. He purchased a running factory of Kid Garments consisting of Factory Land and Building 4,00,000, Plant and Machinery & 3,50,000, Furniture € 50,000, Stock & 90,000 but agreed to pay % 9,50,000 as purchase consideration. He later approached his banker for a loan to meet the working capital requirement. Bank advanced loan amounting to € 4,00,000 @ 10% p.a. He purchased a Laptop for € 30,000. His transactions for the year ending 31st March, 2015 were as follows : z ‘Total Purchases (¥ 8,30,000 in credit) 12,40,000 Total Sales (€ 15,25,000 in credit) 20,50,000 Wages 2,30,000 Carriage inwards 20,500 Power and Lighting 15,500 Salary of Staff and Manager 1,25,000 Postage and Call 4,200 Printing and Stationery 3,800 Advertising 16,700 Insurance Premium 12,100 Conveyance 13,200 Cash received from Debtors 12,10,000 10% Fixed Deposit in Dena Bank 5,00,000 Paid to Creditors 6,50,000 Receivable received from debtors 4,00,000 Bills accepted in favour of creditors 80,000 Drawings during the year @ & 5,000 p.m. 60,000 You are required to (1) Journalise these transactions and post them into ledger accounts and prepare a Trial Balance. (2) Prepare Trading and Profit and Loss Account for the year ended 31st March, 2015 and Balance Sheet as at that date after considering the following adjustments: A ceountaney - 12 ®Adjustments : (A) Closing stock & 1,10,000 (ii) Depreciate Land and Building by 5%, Plant and Machinery and Furniture by 10% and Computer by 25%. (iif) Salary Outstanding & 8,000 and wages outstanding % 15,000. (iv) Insurance premium Prepaid © 1,200. (v) Accrued Interest & 25,000 {3) Comment on the profitability and short-term solvency of the firm when similar firms earn Gross Profit @ 20% and Net Profit @ 10%. (4) Also compute Interest Coverage Ratio to see whether the firm can meet its interest burden regularly in future. (5) In future M/s Alpana Kids Garments would be in need of more funds for expansion purpose. For this ‘they are planning to approach the bank for further loan. Suggest on the basis of the ratios calculated above, whether bank can grant more loan to this firm ? Sol. In the Books of Alpana Kid Garments a Journal Date Parialars te] oe | eR 21s prt or | Bank Ave be 9.80.00 Toccpital Ne +,80,000 (For commenced business) Apri ot. [Land and Bulaing fe De 400,000 Plant and Machinery Ale or 350,000, Furniture A/c o 50,000 Stock A/e or 90,000 Goodwill Ae (al. Fig) or 60,000 To Bank Ale +9,50,000 (for sundry assets taken over for €9,50,000 and payment made forthe same) Bank Ale De 400,000 To 10% Bank Loan A/c 400,000 {Forbankloan taken) Office Equipment Ale De 30,000 ‘To Bank Ale 30,000 (For laptop purchased in cash) ross. [Purchases Ae De 1240,000 ToBank Ale 410,000 ToCrediors Ae 830,000 (For goads purchased in cath and on cre) Bank Ale De 5,235,000 Debtors Ne De 15,25,000, ToSales Ale 20,50,000 (For goods sold on cash and credit) wages Ale De 2,30,000 Cerviage inwards Afe or 20,500 Power and Lighting A/c or 415,500 Salaries Ne oe 125,000 Postage and Call A/c o ‘4200 Printing and Stationery Ale be 3800 Advertising A/c or 16,700 Insurance Premium Ae or 12,100 Conveyance Ne or 13,200 “To Bank A/e 441,000 Accountane °wank we : “eiieo00 ~ To Debtors Ne (Forcath received from debtors) Creditors Ale Be 650,000 To ank Ale 650,000 (For amount paid to creditors) 10% Fred Deposit NE co 5,00,000 ToBank Ne 3,00,000 (Foramount transferred from current ae to fixed deposit a) Bil Receivable Ale Or 1,00,000 ToDebtors 140,000 (Forbils received from debtors) Creditors Ale Be 20000 ‘ToBills Payable A/c 30,000 (For acceptance given to creditors) Drawings Ale 60,000 To Bank Ale 60,000 (For drawings made during year) Grand Total '3651000_| 86,81,000 Ledger Accounts Dr Bank A/c cr. Dae Partulars Le | ome Partie aad 201 2018 Apri ot | To Capital Ne 980,000 | Apri 01 | ay Land & Building Ae 400,000 4,00,000 aprit ot | 8y Plant & Machinery A/c 350,000 To 10% Bank Loan Ae 5,25,000| gon ox | BY Furniture Nec 50,000 sao.n0 | on Oy | By Stock re 30,000 To Sales Alc Pe 8 | By Goodwill A/c 60,000 ‘April 02 | gy office Equipment Ale 30,000 To Debtors Ale by Purchases Ale 410,000 By Wages A/c 2,30,000 By Carriage AVe 20,500 By Power & Lighting Ale 15,500 By Salary Ae 125,000 By Postage & Call Ne 4.200 By Printing & Stationery Ae 3800 By Advertising Ale 16,700 By Insurance A/c 32,100 By Conveyance A/c 33200 By Creditors Ale 650,000 By 10% Fixed Deposit Ale 500,000 8y Drawings Ae 60,000 By Balance c/a 74,000 31,5000 31,35,000 2015 ‘apa or | To Balance 6/4 74,000 Dr. Capital A/c cr. = Partials TT ® | ome Pariulars TS 201s 2014 Mar. 31 | To Balance c/é 90,000 | pri ot | 8y Bank Ae 2015 Apri 1 | ay Balance b/d 80,000 Accountancy ~ 12 0)Dr. Land and Building A/c cr Date Partials Te] ® | ome Partials iealaae! 2018 2015 ‘april ox | 10 Bank Ale 400,000 | war 31 | By Balance oft 400,000 2015 ‘april 02 | to Balance b/d 400,000 Dr. Plant and Machinery A/c cr. Date Particulars a Paris ieee 2018 2015, ‘ort o2 | To Bank Ale TSOBOO] Mar. 31 | By Balance c/ 330000 2015 ‘sprit 02 | To Balance b/d 3,50,000 Dr. Furniture A/c cr. Date Partai TA] ® | ome Parr m=] 2o1e 201s ‘april 02 | 10 Bank Ale SODOo] Mar. 31 | By Balance c/a 30,0007 2015, April 02 | To Balance b/6 50,000 Dr. Stock A/e cr. Date Particulars TL ® | ome Paris m= ore 2015, ‘sprit 02 | To Bank Alc BODO] Mar. 31 | By Balance c/a 30,000 2015 ‘april 02 | To Balance b/d 90,000 Dr. Goodwill A/c cr Date Partials [© [ome Pariulars orale! 2014 2015 ‘april 02 | 10 Bank Aje GODOT] Mar. 31 | By Balance c/a Eo) 2015 ‘april 02 | to Balance b/d 60,000 Dr. 10% Bank Loan A/e cr. Date Particulars TT ® [ome Paris ieee 2015 row ‘Mar 31 | To Balance o/d “FOO DGO] April on | By Bank Ale 00000 aos ‘pail 01 [By Balance b/d 400,000 Dr. Office Equipment A/c cr Date Partai TL ® | ome Parr m=] 2014 2015 ‘april 02 | To Bank Ale 30,000] Marc 31 | By Balance e/a 30,000 2015, April 01 | To Balance b/d 30,000 Dr. Purchases A/c cr Date Particulars TT ® | bate Partials Vesa 21a [To Bank Ale “430,000 | 2015 To Creditors Ale 8,30,000 | Mar 31 | By Trading Ale 140,000 7240000) 12,40,000 Accountancy ~ 12 oyDr. Creditors A/c . Date Paris Le | ose Paros mI 2018-15 | To Bills Payable Ale ‘0,000 | 2014 | By Purchases Ae 830,000 To Bank Ale 6.50,000 To Balance ef 3,00,000 830,000 830,000 2015 ‘apr ot | By Balance b/d 100,000 Dr. Debtors A/c cr Date Part TL ® | one Paria me 2018 | To Sales Ale 1525000 [2015 | By Bank ae 32,10,00, by Bills Receivable Ale 100,000 Mar. 31. | By Balance c/a 2,15,000 1525000, 1525000, 201s ‘apa or | To Balance 6/4 215,000 Dr. Sales A/c cr. Date Particulars aE] ® | ome Partials irae 201s pore | y Bank Are 525,000 Mar 31 | To Tading Ae 20;50,000 By Debtors afe 15,25,000, 20,50,000 2050000 Dr. Wages A/c cr. Date Parte mL _® | oate Paros net eee 2oue 2015; To Bank Ale 2,30.000 | Mar. 31 | ey Trading Ale 2,30,000 Dr. Carriage Inwards A/c , Dae Paria TL * | one Paria ie 2018 2015 To Bank Afe 20500 | Mar 31_| y Trading Ale 20,500 Dr. Power and Lighting A/c cr. Date Particulars aT ®| ome Particles a 71s 2015; To Bank Ale 15,500| mar. 31_| by Tading Ae 15,500 Dr. Salaries A/c cr. Dae Partai w]e] one Parte mm 2018 125,000 | 2015 1 Bank Ale ‘Mar 31_| By Prost and Loss Ne 1,25,000 Dr. Postage and Call A/c . Date Paris eT _® | ate Paros a 2018 “3200 | 2015 To Bank A/c Mar. 31 | By Prot and Loss Ae 4,200 Dr. Printing and Stationery A/e cr. Date Particulars a a Parcs irae 201 2015 To Bank Ale 3,800] mar 31_[ by Profit and toss Ae 3,800 A ceountaney - 12 2)Dr. Advertising A/c cr Date Particulars bes] aeaicae tio Particulars ieiaael owe 2015, ‘To Bank Ale 16,700 | Mar. 31 | By Profit and Loss A/c 16,700 Dr. Insurance Premium A/c cr. Dae Parseulars Te] ® ome Pariulare m=] 2018 201s To Bank Ale 12,200 | Mar. 31 | By Profit and Loss A/c 12,100 Dr. Conveyance A/c cr. Date Particulars TL ® | bate Panui m=] 2018 2015, To Bank A/c 13,200 | Mar 31 | By Profit and Loss A/c 13,200 Dr. 10% Fixed Deposit A/c cr. Bate Parsulars [ebm Partials TF zoe 20s To Bank Ae SOODGD] mar 31 | By Balance b/d SoU 201s ‘april o1_[To Balance b/d 5,00,000 Dr. Bills Receivable A/c cr. Date Particulars TL ® | bate Paroles vee 2015 201s | To Debtors Ae TOOBOO] Mar. 31 | By Balance c/a 00,000, Aprit ox | 10 Balance b/4 7100,000 Dr. Bills Payable A/c cr. Date Particulars a Paris eae! 2015 ‘Mar 31 | 10 Balance cfd BODOG] 2018 | wy crecitors Ae BO,000. ‘April 02 | By Balance b/d mma) Dr. Drawings A/c cr. Bate Parseulars Tm] e | ome Pariulare m=] zoe 20s ‘orl 02 | To Bank Ale GODOT] Mar 31 | By Balance e/a EXO) To Balance b/d anal ‘Trial Balance 1s ot 31st March, 2015 Sen Name of ledger Accounts De Balance ] Gr Balance z z 1 | ani 7a00| — 2 | cantar ~ | 380000 3. | Land and Busing 490000) - 4 | ant and machinery 350000] - 5. | Furniture soon) - 6._| stock sooo] - Accountancy ~ 12 413)7. | 6oodwit ‘60,000 = 8, | 10% Bank Loan - | 400.000 9. | office Equipment 30,000 - 10, | Purchases 12,40,000 - 11, | Creditors = | 1,00.000 12, | debtors 215,000 - 13, | Sales = | 2050000 14, | Wages 2,30,000 . 15. | carriage 20,500 - 16. | Powerand lighting 15500 . 17. | Salaries 3.25,000 . 18, | Postage and Call 4200 - 19, | Printing and stationery 3,800 5 20. | Advertising 16,700 a 21, | insurance Premium 12,100 . 22. | Conveyance 13,200 . 23, | 108 Fixed Deposit 5,00,000 a 24, | Bills Receivable 100,000 ] 25, | Bills Payable - 80,000 26. | Drawings 160,000 7 '36,10,000 | _36,10,000 (2) Preparation of Trading and Profit and Loss Account and Balance Sheet ‘Trading and Profit & Loss A/e Dr. for the year ending March 31, 2015 cr Particulars = Particulars = “To Opening Stock ‘20,000 | By Sales 20,50,000 To Purchases 12,40,000 | By Closing Stock 1110,000 ‘To Wages 2,30,000 ‘Add: Outstanding Wages 15,000 | 245,000 To Carriage inward 20500 ‘To Power and tighting 15,500 ‘To Gross Profit c/d 5.49,000 ‘otal | 23,60,000, ‘otal | 23,60,000 ‘TosSlaries 11.25,000 By Gross Profit b/d 549,000 ‘Add : Outstanding Salaries 8,000 | 1,33,000 | By Accrued interest 25,000 ‘To Postage and Call 4,200 ‘To Printing and Stationery 3.800 To Advertising 16,700 To insurance Premium 32,100 Less Prepaid Insurance Premium (1,200) } 10.900 ‘To Conveyance 13,200 ‘To Depreciation Land and Building 20,000 Plant and Machinery 35,000 Furniture 5,000 Office Equipment 7.500 ‘To Outstanding interest on Bank Loan 40,000 ‘To Net Profit transferred to Capital Ale 2,98,700 ‘otal | 5,74,000, Total Accountancy ~ 12 4)Balance Sheet 2 at March 21, 2015 bites z Assets z ‘ils Payable 30,000 | Bank 7,000 Creditors 100,000 | ils Receivable 1400.00 urstanding Wages 15,000 | debtors 215,000 Outstanding Salaries 8,000 | closing Stock 410,000 BankLoan Prepaid Insurance Premium 11200 ‘Add: Outstanding interest 440,000 | accrued intrest 25,000 copia Land and Buiaing 400,000 pening capal 980,000 ess: Depreciation (20,000) | 3,80,000 ‘Add Net Profit 284,700 Plant and Machinery ‘3330;000 72,68,700, ess: Depreciation (35,000) | 3:1,000, L635 Drawings (60,000) | 12,04,700 | rurniture 50,000, ess: Depreciation 15,000) | 45,000 office Equipment 30,000, tess: Depreciation 700] 22,500 Sood =| 60.000 10% Fixed Deposit 500,000 ‘out | 7547700 roval [7547,700 (3) Comment on the profitability and short-term solvency of the firm : (0 Calculation of Profitability Ratios Gross Profit Ratio = Gross Profit , 499 = %5,49,000 1 Net Sales € 20,50,000 "1 let Profit Ratio = Net Profit 2 2,84,700 peace Net Sales “10° g 20,50,000 coe Cost of Goods Sold + Operating Expenses Operating Ratio i : Net Sales 100 =... % where, (a) Cost of Goods Sold Sales ~ Gross Profit % 20,50,000 ~ 5,49,000 = & 15,01,000 (b) Operating Expenses = (Administrative and Selling and Distribution Expenses) = 1,33,000 + 4,200 + 3,800 + 16,700 + 10,900 + 13,200 + 20,000 + 35,000 + 5,000 + 7,500 + 40,000 = & 2,89,300 (15,01,000 + 2,89, 300) , 499 = 37,90,300 499 - 0,50, 0 00 = 30,50, 000 *100 = 87.33% (if) Calculation of Short Term Solvency Ratios. Operating Ratio _Cutrent Assets _ Current abilities where, Current Assets = Bank-+ 8/R + Debtors + Closing Stock + Prepaid Expenses + Accrued Interest 74,000 + 100,000 + 2,15,000 + 1,10,000 + 1,200 + 25,000 = 5,25,200 Current Liabilities 8/? + Creditors + Outstanding Wages + Outstanding Salary + Outstanding (0) Current Ratio Interest £80,000 + 1,00,000 + 15,000 + 8,000 + 40,000 = 2,43,000, 5,25,200 <3.91.4 Current Ratio 3B Accountancy ~ 12 415)@ (s) ai Ans. a2 Ans. a3. Ans. a4 Ans. as. Ans. a6. Ans. a7. Ans. as. Ans. a9. Ans. 2} Liquid Ratio = Liquid Assets _ Ne Current Liabilities Lguid Assets = Current Assets ~ Closing Stock ~ Prepaid Expenses = 5,25,200 ~1,10,000 1,200 = 4,14,000 Liquid Ratio = 4.14,000 : 2,43,000 a (i) Comments (1) The Gross Profit ratio is 26.78% against the industry standard of 20%. Thus, cost of goods sold of our firm is less than that of industry. (2) The Net Profit is 13.89% against the industry standard of 10% whieh is quite good. (3) The Current Ratio is 3.91 = 1 and Liquid Ratio is 1.71 : 1 against the ideal standard of 2: 1 and 1:1 respectively, Thus, short-term solvency position is satisfactory. Profit before Interest and Tax Interest Coverage Ratio Ghed rests Net profit (& 2,84,700) + Interest on Loan (& 40,000) Interest on Loan (® 40,000) 8.1 times (approx) Conclusion : (2) After analysing the above ratios itis concluded that the business is a success. (2) The bank should grant further loan as the above ratios are favourable, VIVA QUESTIONS Which is the basic objective of book-keeping ? ‘The main objective of book-keeping is to maintain systematic records of financial transactions. ‘What do you mean by capital ? Capital isthe amount invested by the proprietor in his business. State the Formula for calculating capital. Capital = Assets ~ Outside Liabilities What is a journal ? Ajournalisa book of original entry in which all the business transactions are recorded in chronological order, Le., date wise. ‘What do you mean by ledger ? A ledger is a principal book that contains all the accounts. Why is the journal called book of prime entry or book of original entry ? A journalis called as book of original entry (or prime entry} as all the business transactions are first of all recorded in this book. Why is the ledger called as the book of final entry ? Ledger is called the book of final entry as its the ultimate destination of al the transactions. What is journalising ? The process of recording transactions in the journals called as journalising, What is meant by LI? LF. refers to Ledger Folio, -e., page number of ledger account where posting of journal has been made. Column of LF. is shown in journal Accountancy ~ 12 6)Q.10. Ans. Qu. Ans. Q.12. Ans. 13. Ans. a1. Ans. Qs. Ans. Q.16. ‘Ans. Qa. ‘Ans. Q.18. Ans. Q.19. ‘Ans. Q.20. Ans. Q.21. ‘Ans. Q.22. Ans. Q.23. Ans. Q.24. ‘Ans. Q.25. Ans. Q.26. Ans. Q.27. ‘Ans. What is meant by 1. Lf. refers to journal folio, ie, page number of Journal from where itis posted in the ledger. Column of J. is shown, in the Ledger. What is meant by accounting cycle ? ‘An accounting cycle refers to the complete order of business transactions from recording to the preparation of financial statements (e., Journal-Ledger-Trial Balance ~ Financial Statements) What are liabilities ? Liabilities refer to the financial obligations of an enterprise to the outsiders, ie., other than the owners. What are assets ? Assets are those resources of an enterprise which can be measured in terms of money. What is meant by revenue ? ‘Amount charged for goods sold or services rendered are referred as revenue. Income in the form of interest, royalty, commission, dividend, etc. are also revenue. What is purchases ? Buying of goods either for resale purposes or for manufacturing process is called purchases. What is sales ? Sales is the amount at which goods are sold or services are rendered. What is basic accounting equation ? Assets = Capital + Liabilities. What is a voucher ? ‘Any documentary evidence in support of a business transaction is called a voucher. What is double entry system of book-keeping ? Double entry system of book-keeping isa system in which every transaction is recorded at two places, Le., once fon the debit side and once on the credit side. What Trial balance is a statement with debit and credit balances of ledger accounts to test the arithmetical accuracy of books of accounts. 1s agreement of tral balance a conclusive proof that books of accounts are correct ? No, agreement of trial balance is not a-conclusive proof that books of accounts are correct. Two sided errors like error of omission, compensatory error or error of principle may remain undetected, What is a Trading Account ? Trading Account i the part of financial statements that reveals the result of sales and cost of goods sold during an accounting period. What is gross profit ? Gross profit is the excess of sales over cost of goods sold. What is Profit and Loss Account ? Profit and Loss Account is a part of financial statements that reveals the result of business operations in the form of net profit or net loss during an accounting period. What is net profit ? Net profit is the excess of revenues (whether operating or non-operating) over expenses and losses (whether operating or non-operating) during an accounting period. What is a Balance Sheet ? A Balance Sheet is a statement of assets, liabilities and capital of an enterprise at a given date. What is closing stock ? Goods lying unsold at the closing date of accounting year is called closing stock. It includes raw-material, semi finished goods and finished goods. atrial balance ? Accountancy ~ 12 “7a.28. Ans. a.29. Ans. 4.30. Ans. 31. Ans. Q. 32. Ans. Q. 33. Ans. a. 34. Ans. 2.35. Ans. 0.36. Ans. 0.37. Ans. a. 38. Ans. a. 39. Ans. 2.40. Ans. Qi. Ans. 42. Ans. 0.43. Ans. ‘At what price should closing stock be valued and why ? The closing stock is valued at cost price or market price whichever is ess. tis based on the principle of conservatism Give two examples of trade receivables? (i) Sundry Debtors (i) Bills Receivable ‘What do you mean by depreciation ? Depreciation is the reduction in the intrinsic value of fixed assets due to use or apse of time. What is a provision ? Provision refers to the amount retained by way of providing for a definitely existing liability whose amount cannot be determined accurately, e.g, provision for bad and doubtful debts; provision for discount on debtors, provision for taxation, etc. Is capital a liability for business? State the accounting prin Yes, Business entity concept. ‘What is capital expenditure ? Expenditure incurred for acquisition of fixed assets like building, machinery, furniture, etc. are called capital expenditure. The benefit of these assets accrue to firm over a number of accounting periods. ‘What is revenue expenditure ? Expenditures which are incurred in the current year and the benefit of which is also enjoyed by the firm during. the same accounting period, are called revenue expenditure e.g. purchase of goods, wages, salary, rent, etc. ‘What is a current asset ? d here. le ap All those assets which are likely to be converted into cash with in a period of one year are called current assets. Itincludes cash, bank, debtors, 8/R, closing stock, prepaid expenses, etc. What is a fixed asset ? Those assets which are acquired for a long period of time for carrying on the business, are called fixed assets. They are not meant for resale purposes. It includes land, building, machinery, furniture, etc. What is a liquid asset ? That portion of current assets which will yield cash at a very short-notice are called liquid assets, e.g., debtors, B/R, short term investment. It also includes cash and bank balance. ‘What is meant by intangible asset ? Those fixed assets which cannot be seen or touched are called intangible assets, e.g., goodwill, patent, trade mark, copyright, ete What isa wasting asset ? All those fixed assets which are exhausted through working, are called wasting assets, e.g., mines, oil wells, ete. What is a current liabilities ? Al those liabilities which are payable with in a period of one year are called current liabilities, e.g., creditors, bills payable, bank-overdraft, outstanding expenses, etc ‘What is prepaid expense ? A revenue expense lke salary, wages, rent, etc. paid during the current year but relates to next accounting period, is called prepaid expense. ‘What is outstanding expense ? ‘A revenue expense, pertaining to current accounting year, due but not paid during the accounting period is called as outstanding expense, e.g., wages due but not paid. What is an accrued income ? ‘Arrevenue income earned by the enterprise during the accounting year but which has not been received during the accounting period, is called an accrued income e.g., accrued interest on investment. Accountancy ~ 12 8)9.46. Ans. a7. Ans. 48. Ans. Q.49. ‘Ans. ycome received in advance’ ? An income which is received by the firm though itis not earned by it til the end of accounting period, is called income received in advance, e.g., advance commission received, etc. What is a current ratio ? . Current ratio measures the numerical relationship between current assets and current liabilities of an enterprise. It is expressed as Current Assets Current Liabilities Current Ratio What is a liquid ratio/quick ratio/ acid test ratio ? Liquid ratio is a relationship of liquid assets with current liabilities of a firm. itis measured as Liquid Assets _ Liquid Rat = Cyrrent Liabilities ~ How will you test the short-term solvency position of an enterprise ? Short-term solvency of any enterprise can be tested by computing current ratio and liquid ratio, The standard current ratio is 2: 1 and standard liquid ratio is 4: 1, What is gross profit ratio ? Gross Profit ratio measures the percentage relationship between gross profit and net sales of a firm during an accounting period. tis calculated as Gross Profit Gross Profit Ratio = Sess trol 100 ..% whi Net Profit ratio measures the percentage relationship between net profit and net sales of a firm during an accounting period. itis computed as, Net Profit Ratio ? NP Ratio = Net Profit x 109 = ..% Net Sales Comprehensive Project 2 1, Name of the Project : A study of the business of ‘Antivirus Computer Classes’ 2. Objectives of the Project : (i) To know whether the business of “Antivirus Computer Classes’ is a success or failure. (i) To know whether the bank will agree to grant loan to the business. 3. Period of Study : Year ending 31st March 2015 4, Analytical tools used : Ratio Analysis 5. Source Mater : The Project Statement of ‘Antivirus Computer Classes’ PROJECT STATEMENT : M/s Antivirus Computer Classes (On Ast April, 2014 Mr. Roop Narain Vijayvergia decided to open a computer training centre ‘Anti Virus Computer Classes’. For this purpose he built the first floor of his house at a cost of €3,50,000 and decided to invest € 2,50,000 as.a further capital in the proposed business. He wanted to start with 30 computers costing € 25,000 each. He approached HDFC Bank and secured a loan to the extent of 80% of the cost of computers @ 10% p.a. The loan was payable in 4 annual instalment along with Interest due. The remaining amount of cost of computers in paid by him. Accountancy ~ 12 (19)The transactions during the financial year 2014-15 were z Purchases of Computers 7,50,000 Security Deposited for electric connection with electricity board 20,000 Security Deposited with VSNL for telephone and Internet connection, 30,000 Purchased Furniture 40,000 Fees received from students 6,50,000 Bought computer stationery 1,10,000 Sale of computer stationery 1,60,000 Wages paid 90,000 Salaries paid 41,25,000 Electricity charges 47,500 Advertisement 2,000 Postage and Call 9,500 General Expenses 6,000 Insurance Premium 4,600 Bought Printer Machine 30,000 He withdrew & 12,000 per month as drawing and repaid the annual instalment of bank loan along with interest ddue on 34st March, 2015, Assume al ransactions took place through HOFC Bank. You are required to: (1) Journalise these transactions after considering the following information : (i) Depreciate building by 5% and computer and Furniture @ 10% p.2. (ii) Salary unpaid 7 9,000 (ii) Advertisement include unissued material worth & 4,000. (iv) Insurance prepaid € 1,500. (v) Stock of computer stationery % 19,500. (2) Post them into Ledger and prepare Trial Balance. (3) Prepare financial statements for the year ended 31st March, 2015. (4) Mr. Roop Narain wishes to expand his business further so he approached his banker for further loan. What ratios shouldhisbanker considerbefore providingloan considering that similar firms earn 60%as Gross Profitand25%asNet Profit? Sol. The Project work is (Planning) ()) To prepare accounting record of Mr. Roop Narain for the accounting year 2014-15. (i) To prepate Trial Balance and his Trading and Profit and Loss Account and Balance Sheet. (ii) To calculate profitability ratios. (iv) To know whether he will get further bank loan or not Necessary data glven to complete the Project Work Execution of Project Work (1) Preparation of Journal, Ledger and Trial Balance. (2) Preparation of financial statements for the year ending 34st March, 2015, (3) Computation of gross profit ratio, net profit ratio and operating ratio to assess profitability (4) Computation of short term and long term solvency ratios to know whether loan be given by bank or not Accountancy ~ 12 2)In the Books of Mr. Roop Narain Vijayvergia a Journal Date Particulars LE] eR) | eR 201 ‘Ape 01 Ale oe 350.000 Bank Ae De 250.000 Tocapital Ale 6,00,000 (For capital invested in business) peor [eankave De 6,00,000 ToBank oan 600,000 (Foloan taken from HOFC Bank Le, BOK of 8 7,50,000) ‘Computers Ae Be 750.000 ToBank Ae 750,000, (For 30 computers purchased @ £25,000 each) anc or [electricity Board De 20,000 VSNL Ale De 50,000 ToBank Ale 70,000 (For security deposited) Furniture Ne De 40,000 ToBank Ne 40,000 (For furiture purchases) ‘Bank Ae De 550,000 ToFees from Students Ne 550,000, (For fee received from computer classes during year) Purchases Ale De 110,00 ToBark Ae 4110.00, (For stationery purchased for computer) Bank Ae De 1160,000 ToSales ale 160,000 (For computer stalonery sold) Wages Ae De 90,000 Salaries Ae De 125,000 Electricity Charges Ae De “47500 ‘Advertisement A/c Be 22,000 Postage and Cal Afe De 9.500 General Expenses Ne oe 6,000 Insurance A/c De +4500 Tosank Ae 3,04,600 (Forexpenses paid) Panter Machine Ae De 30,000 Tosank Ae 30,000 (For printer purchased) Drawings A/c De 144,000 ToBank Ale (For drawing made during year Interest on Bank Loan Ae De 0,000 ToBank Loan Ae 60,000 (For interest due as bank loan i. 10% of €6,00,000) ‘Bank oan Ale De 220,000 ToBank Ne 2,10,000, (For first instalment on loan paid along with interest @ 10% on loan €1,50,000 + € 60,000), athe [Depreciation Ae De 96,500 endof | ToBulling Ve 17,500 theyear | To Computers Ae 75,000 ToFurnitute Ne ‘4.000Salaries A/c 2 ’ "o aries Outstanding Ae 000 (Forsaary de but not pi Tackof Adverisomen Ae or 4,00 To Advertisement A/c 4000 (forsockot atvertsement mate) Prepaid surance Ae o 1500 “To isurnce Af 1500 Aforinsuance resi losing Stock Ae oF 13500 To urhases Ale 19500 (forstockofstatonery puchased for computer et) Tandon 3a, [3800 @ Ledger Accounts Dr. Building A/c cr. Dae Porters TEL 8] ae Porters moe 218 7s Aor ot | 10 capital Ave 3.50000 | Mar 21 | by deprecation Ve 17500 or 31 | 8y talance fa 332,500 3,000 aos Aor.01_ |r plane be 323500 Dr. Bank A/c cr. Oa rica TET € | one Tories me a8 as fono1 | oct Ae 2.50000 | Mer 31 | ay computers Ale 7.50000 Tosank Loan Ne 6.00000 ay Hectiy Bord Securiy 20,000 To ees om Students 6.50000 DyWsne Sear) 50000 Tossese 1160000 By Furiture Ae ‘0000 by urchses Ale 110000 By Wages Ae 0,000 By sais Ne 135000 By Electr Chrges Ne ‘7.500 By advertisment Nc 22,000 By Postage and cal Ae 9500 By General Egense Ve 000 By insurance Ae ‘600 By Printer Nachne 3,000 by Drawing Ne 144000 By Bank Loon Ae 2.10000 By Balance of | “1400 aoe Tea000 ans ton01 | oalance be 400 Dr. Capital A/c Cr. Owe Tarlo Te] € | one Tories me a8 Tore iar 31 | 0 Balance «/8 6.09000] apc 01 | ay eutang We 3.50000 By Bank are 2,50,000 { se0000| 6.00000 2ois 01 | oy tance a 6.00000 Accountancy ~ 12 (22)Dr. Bank Loan A/c cr Date Particulars Le] ome Partulars lm? 2015 2014 Mar. 31 | To Bank Ae 2,10,000 | Apr. 02. | By Bank Ae 6,00,000 Mar. 31 | To Balance cfd 450,000 | Mar. 31 | ay interest afc 60,000 60,000 60,000 2015 ‘ne 01 | By Balance b/a 450,000 Dr. Computers A/c cr. Date Particular tLe] ome Partulars lm] _* 2014 2015 prot | To Bank Ale 7,50,000 | Mar. 31 | By Depreciation fe 75,000 Mar. 31 | By Balance fa 5.75000 2015, pe 01 _| To Balance b/d 5,75,000 Dr. Electricity Board A/c cr. Dae Parivar tLe] me Parteulars le 2018 2015 peor | To Bank Ale 207000] Mar. 31 | By Balance cfd 70,000, 2015, Apr.01_| ToBalance b/d 20,000 Dr. VSNL A/e cr Dae Partials me] etme Partulars in laae 2014 2015 ‘apr 01 | To Bank Ale 50,000 | Mar. 31 | ey Balance cfd 50,000, 2015, Ane 01 | to lance b/d 30,000 Dr. Furniture A/c cr Dae Parteular wpe] me Parseulars l= 201 201s ‘pe ot | To Bank Ne 49,000 | Mar. 31 | By Depreciation Ae 4,000 Mar. 31 | By Balance e/d 36,000 2015 ‘ape 01 | toBalance b/d 36,000 Dr. Fees from Students A/c cr. Ome Parle De] ome Partai 3 2014 [Te Trading Ale 500002014 [By Bank Ale 550,000 Dr. Purchases A/c cr. Date Partials elt ome Particulars m=. 2015 2014 | To Bank ale 130,000 | war. 31 | By Closing Stok ae 19,500 Mar. 31 | By Trading A/c 90,500 Accountancy ~ 12 2)Dr. Sales A/c cr. Date Particulars w]e | ome Particulars ast/ome 2015, 7014 Mar. 31 | To Trading A/c 2,60,000 By Bank A/c 150,000 Dr. Wages A/c cr Date Parton tLe | ome Pariears =] 2015 2015 Mar. 31 | To Bank Ale 90,000 | Mar. 31 | By Trading Ae 90,000 Dr. Salaries A/c ce. Date Parte mL ® [ome Parcs i=t(eRe 2015, 2015, To Bank Ale 1.25,000 | Mar. 31 | By Profit and Loss A/c 134,000 To Salaries Outstanding Ale a 334,000 134,000 Dr. Electricity Charges A/c cr Dae Parseulare tle ome Paras m=] 201s 2o14_| To Bank Ne 447500 _| Mar. 31 | By Profit and Loss A/c 47,500 Dr. Advertisement A/c cr. = Parteula te] ene Paral m=] 201s 2o1a | To Bank Ale 22,000 | Mar. 31 | By tock of Advertisement Ale 4,000 Mar. 31 | By Profit and Loss A/c 13,000 22,000 22,000 Dr. Postage and Call A/c cr. Dae Parteular i] e | ome Paral =] 201s 2014 | To Bank Ne 9500 _ | Mar. 31 | By Profit and Loss Ale 9.500 Dr. General Expenses A/c cr, Dae Particulars te] ® [ ome Partials ist/ene 2014 2015 To Bank Afe 500 _| Mar. 31 | By Profit and Loss A/c 6,000 Dr. Insurance A/c cr Dae Partculae te] ® ome Parte =] 2014 2015 To Bank Afe 4,500 | Mar. 31 | 8y Prepaid insurance A/c 1500 Mar. 31 | By Profit and Loss A/c 3,100 “3,600 3,600 Dr. Printer Machine A/c cr. Date Parteulars a Paricars = 201 2015 ‘ape 01 | To Bank Ae 30000 | Mar. 31 | By Balance c/d 30,000 30.000, 30,000, Ape 01 | To Balance b/d 30,000 Accountancy ~ 12 2)Drawings A/c cr. Date Particulars TT ® [ome Particulars ieee To Bank Ae 744,000 | war. 31 | By Balance e/d 744,000 201s ‘pr. 01 | To Balance b/s 4.441000 Dr. Interest on Bank Loan A/c cr. Ome aricuare Te] * | ome Pariulare m=] 2015 20s Mar 31 [To Bank Loan A/c 160.000 _| Mar 31 | By Profit and Loss A/c 50,000 Dr. Salaries Outstanding A/c cr. Ome Faricuare a Parola Te 201s 201s Mar 21 | To Glance c/a 3,000 | war. 31 | By Salaries A/c 9,000 201s ‘apr. 01 [By Balance b/d 9,000 Dr. Stock of Advertisement A/c cr. Ome Faricuare a a Parseular Te 201s 2015 Mar 31 | To Advertsement ale 4000] ar 31 | By Balance oft 4,000 2015, ‘apr 01 | To alance bid 4,000 Dr. Prepaid Insurance A/c cr. Ome Fariculare a Partai Tm _® 2015 2015 Mar 31 | To Insurance Ale F500] Mar. 31 | By Balance c/d 7300 2015, ‘apr. 01 | To alance bid 1,500 Dr. Closing Stock A/c cr. Ome Parcs TL ® | ome Parle m=] 2015, 2015, war 31 | To Purchases Ale T5500 Mar. 31 | By Balance c/et T9500 201s, ‘pr O1 | To Balance b/d 193500 Dr. Depreciation A/c cr Ome Parcs TL ® | ome Parr m=] 2015 2015 ar. 31 | To Building A/c 17500 | Mar31 | ey Profe and Loss Ae 96500 Mar 31 | To Computer fe 75,000 Mac 31 | To Furniture Ae 4,000 36,500 35,500 Accountancy ~ 12 25)Trial Balance as at March 31, 2015 We Name of ledger Accounts ‘Balance | Balance z z 7 | pulang 332500 2. | eank 4.400 - 3. | capital =| 600,000 4. | bank toan =| 450,000 5. | computers 675,000 - 6. | electricity Board 20,000 - 2 [vem 30,000 . 8. | Furniture 35,000 - 9._| Fees ram Stucents =| 50,000 10. | purchases 99,500 - an | sales =| 160,000 12. | Wages 90,000 - 13. | salaries 1.34000 - 14. | eletrety charges 47500 - 15. | Advertisement 18,000 - 16. | postage and call 9500 - 17. | General expenses 6,000 - 38, | insurance 3,100 - 19. | Printer Machine 30,000 - 20. | Drawings 1.44,000 - 21. | ntereston Bank Loan 60,000 - 22. | Depreciation 96,500 - 23,_| salaries Outstanding =| 3000 24. | stockof Advertisement 4000 - 25. | Prepaid insurance 1.500 . 26._| Closing Stok of Goods (31-03-2015), 19.500 . Tost | 18,69,000 | 18,69,000 8) Financial Statements ‘Trading and Profit and Loss A/c Dr. {for the year ending March 31, 2015 or. Partials z ariulrs x To Purchases 50,500 | y sales A/c 160,000 To wages 90,000 | ay Fees fom Stents 550,000 To Gros Profit fa 623,500 ‘otal [6.205000 Total [8.10000 ‘oSalaies 1,34,000| By Gross Profit b/d 529,500 “To Electricity Charges ‘47500 ToAdvertsement 18,000 “To Postage and Call 9.500 To General Expenses 6,000 Toinsurance 3,100 ‘To nterest on Bank Loan 60,000 “To Depreciation Building 17500 ‘Computers 75,000 Furniture 4000 | 96500, ‘To Net Profit transferred to Capital Ae 254900 ‘ota [639,500 Total [635500 Accountancy ~ 12 @)2 Accountane ince Sheet as at 31st March, 2015 ‘abies fe Aesete z Salary Outstanding 9,000 | Bank 3400 BankLoan 450,000 | prepaid insurance 1500 Capital Closing Stock 19,500 ‘Add: Net Profit Stock af Advertisement 4,000 Building 350,000 ess: Drawings 70900) Less: Depreciation 117500 | 332,500 Computers 750,000 125s: Depreciation 75,000 | 6,75,000 Furncure ess Depreciation 4000 | 36,000 Printer Machine 30,000 Electricity Board (Security Deposit) 20,000 SNL (Security Deposit) 0,000 total [7769900 ‘al [75,6900 (4) Banker should consider the following ratios before providing loan Profitability Ratios (i) Gross Profit Ratio = GrOssProfit , 499 = 6:29.500 , 99 77.7195 Sales 8,10,000 i . 46100 = 2:54,900 499 = (ii) Net Profit Ratio = 100, '8, 10,000 100 = 31.46% __ (Cost of Sales + Operating Expenses) (ii) Operating Ratio = Sper 100 where (a) Cost of Sales = Sales —Gross Profit 8,10,000 ~ 6,2,500 = 1,80,500 (b) Operating Expenses = Salaries + Electricity Charges + Advertisement + Postage + General Expenses + Insurance + Interest + Depreciation = 1,34,000 + 47,500 + 18,000 + 9,500 + 6,000 + 3,100 + 60,000 + 96,500 oe Operating Ratio = (1,80,500 + 3,74, 600) , 5,55,100 , 199 = peta = (EI IN a= $I ts Comments : 2 The Gross Profit Ratio of Mr. Roop Narain is 77.71% against industry standard of 60% which is quite good. 9 The Net Profit Ratio of firm is 31.46% against industry standard of 25%. Its also good. Solvency Ratios : () Short-term Solvency Ratios. Current Assets Current Liabilities (6) Current Ratio where Current Assets Bank + Prepaid insurance + Stock of Stationery + Stock of Advertisement 400 + 1,500 + 19,500 + 4,000 = 26,400 Outstanding Salaries + instalment of Bank Loan (tobe paid next year) 9,000 + 1,50,000 = 1,593,000 26,400 = 26,400 9.47 1,58,000 ~ 0174 Current Liabilities Thus, Current Ratio @(6) Debt Equity Ratio Long -TermLoan _ Bank Loan (after 1 year repayment) Owner Fund ‘Owner Fund 3,00,000 7,210,900 ~ 942° Conclusion : ai Ans. a2 Ans. a3. Ans. aa. Ans. as. Ans. a6. Ans. a7. Ans. as. Ans. as. Ans. Q.10. Ans. Q.11. Ans. Q.12. Ans. Short-term solvency is very poor as current ratio is hardly 0.17 : 1 against standard ratio of 2: 1. Debt Equity Ratio indicates that long-term borrowing is only 0.42 : 1 against standard ratio of 2: 1. So loan can be granted by bank but firm should improve its short-term liquidity position as the current ratio is very poor. VIVA QUESTIONS ‘What is an “accounting entity concept” ? ‘According to this concept, a business is treated as a separate entity Its quite distinct from its owner, ‘What is money measurement concept ? ‘According to this concept, only those transactions are recorded in the books of accounts which can be measured in terms of money. Under which accounting principle, the caliber or quality of the management not disclosed in the balance sheet? Money measurement principle. ‘What is a cash book ? ‘A cash book is a special journal or a subsidiary book in which all cash transactions are recorded directly, Le., without recording transactions in the journal. Is cash Book a book of original entry ? Yes, Cash Book is a book of original entry since all cash transactions of the firm are first recorded in the Cash Book. Is cash book a journal or a ledger ? Cash Book is both a Journal and a Ledger. Iti journal as all cash and bank transactions are first of all recorded init. Ibis @ ledger also as whenever Cash Book is prepared, cash and bank accounts are not opened again in the ledger. ‘What is the difference between cash account and cash book ? Cash account is a part of ledger accounts while cash book is part of subsidiary books. Entries which are recorded in the cash book do not appear in journal Purchase of furniture on credit should be recorded in purchase book or Journal proper? Journal proper. ‘What is meant by financial statements ? Financial Statements refer to two statements, namely an Income statement (ie., Trading and Profit and Loss Account) and a Balance Sheet. ‘What is a Debt Equity Ratio ? Debt equity ratio measures the relationship between long-term debts and Owners’ Capital/Shareholders’ Fund/ Net Worth. It is measured as, Debt Equity Rat Long-Term oan ae ‘Shareholders’ Fund/Net Worth The standard ratio is 2: 1. Lower ratio is considered better. What is operating ratio ? Operating ratio measures the percentage relation between cost of sales and operating expenses to net sales during an accounting period. State whether payment of long-tem loan will result Decrease, increase, decrease or no change in Debt-Equity ratio. A ceountaney - 12 2)Segment Reporting : Specific Projects Segments are (i) The products of a company like Alto, Dezire and Gypsy of Maruti (i) The area of operation of company like Consumer Care Business, Food Business and Personal Care Business of Dabur and Passenger transport, Goods transport of a Transport Company, (ii) The Geographical areas served by a service company like Northern Railway, Eastern Railway and Western Railway, etc. of Indian Railways. It Is mandatory for companies to report the progress of each segment as per AS-17 issued by the Council of the Institute of Chartered Accountants of India since April 1, 2001. It ensures full disclosure about the revenue from each segment, the profit from each segment and the amount of capital allocated to each segment. These reports are on quarterly, half yearly and annual basis. Thus, every segment gets full attention of the management and the shareholders also come to know the financial position of each segment. It is required for true and fair disclosure as well Segment reporting is only one area of business reports. The students should explore more such areas from the company reports for relevant specific projects. For the sake of practice and exercise the students should visit the company’s websites and check the quarterly reports for segment performance, This will be the source ‘material for the projects. 1. Name of the Project Specific Project 1 Analysis of performance of each segment of DCM Shriram Industries Limited with reference to: (i) Revenue (if) Profits (ii) Capital Employed 2. Objectives (i) To study the contribution of various segments of DCM Shriram Industries Limited, through different ratios. (i) To comment on increase / decrease in Return on Investment Ratio, Net Profit Ratio, Capital Employed Turnover Ratio and Total Profit and Revenues in three segments namely + Sugar * Industrial fibres and related products * Chemicals 3. Period of Study Financial year ended March 31, 2014 and Fourth Quarter ended March 31, 2014 for the three segments of the company, 4, Tools used for Analysis (a) Common Size Statements; and (b) Accounting Ratios 5. Source Material The Economic Times, New Delhi, Dated : June 15, 2014 DCM Shriram Industries Limited Kanchenjunga Building, 18 Barakhamba Rood, New Delhi-110001 Audited Financial Results for the Year Ended 31st March, 2014 Accountane 29) ers.) 5 a "Nine Month Ended | Quarter Ended | Yeor Ended Audited ne. siizis | aaa 30324 | s1as4 sae 7 [Revenue rom Operation sa 18499 | 10235 | Tacs ] 50025 2. | otberincome 369 os | 200 | a6 | 573 -12isi pends (0) Cost of Materia Consumed 23753 2693 | 12674 | 36446 | 29343 (6) Purchase of Stockin Trade 36 - =| ase z (2) Change in Stockin rade 543 2023) | (40.73) | (3420) | (085) (4) Employees Compensation Expense 4224 1732 | 120 | aas6 | asst (e) interest 1790 45s | 213 | 22 | 2038 () Depreciation and Amortization Expenses 3s aa | 2] uss| 73 (a) Workin rosress 4638 1975 | 1805 | seas | sssi () Power and Fuel 3430 zor | saa | 4227 | 249 (Other Expenditure 4377 2026 | 2211 | 640s | asi 5. | Exceptional items (132) (oss) | (assy | aan | 2a 6. | Profit before Tax 43.96 sso} as7 | 4936 | 3597 7. | Provision for Tax 43.86 sso} e97 | 4936 | 3sa7 ‘current Tax am ss) | asm | es] 65s Deferred Tax 369 on] rer | ar | ase Fringe benefit Tax oa 029 | 108 - et Prost 26m 2ar | 697 | 2909 | 2480 Equity capital (2) Paid-up Equity Share Capital Face value € 20) 1530 1530 | 1373 | 1530 | 1373 10, | Reserves excluding revaluation Reserves 11750 | 9182 41, | Basicand duted earings per Share forthe period (2) 1748 ass | 390] 1902 | a730 12, | Aggregate of non-promoter Shareholding Number of shares (000) 10956 109s | 9504 | 10956 | 9504 Percentage of Shareholding n106% rsx | 092% | 75% | so2x Segment wise Revenue, Results and Capital employed @/crs.) s ‘Nine Month Ended | Quarter Ended | Yeor Ended Audited Portcuars , siazi3__| a1aa430aa4 | auaas 213.6 T [Seament Revenue (e) Sugar 30038 9632 | ease | 966s | 32201 (6) lndustrial Fibres and elated products 105.39 oso | 3222 | 10619 | 14aeo (0) Chemicals 12395 azar |_37a9 | asa | m8 Total 529.68 was09 | teas | iar? | S038 (4) ess: Inter segment revenue 0.03, 010 =| 023 | os ‘Net Sales/income from Operations oo wis | ies [rises | ae 2 | Segment Results Profit before Tox and interest (o) Sugar* 4730 1000 | 1169] 5730 | 38.40 (6) Industrial Fbres and related products 1387 oss | 412 | 1436 | 27.08 (a) Chemicals 747 sor | 2a] as | 227 (4) es: (interest 37.00 453 | 210] isa | 2438 (i) Other unallocable Expenditure ne of 798 aar| or] 225 | 736 Lunallcabe income Profit Before Tax aa 330 | esr | aaa6 | 3557 3. | Searentwise Capital Employed (Segment assets-Segment Labilies) (o) Sugar* 16434 zigz2 | 23134 | 2172 | 231.36 (©) Industri Fibres and related products 88.68 siaz | esos | aii | 466 (2) Chemicals 83.68 aser | rae | ase1 | 7a82 Total 336.66 3a5.5 | soaez | 3055 | soee2 Accountancy ~ 12 0)Note : 1. Previous year figures are not comparable because of amalgamation with Daurala Organics Limited and the Company effective from 01.01.2014, 2. The observations of the Auditors in their Report on the accounts for the year ended 31.3.2014 have been addressed in the accounts for the year ended 31.03.2014 except for liabilities/benefits, if any, arise out of reorganisation arrangement of DCM Limited which are not determinable at this stage. 3. During the year, cane crushing capacity was expanded from 8,000 TCD to 10,000 TCD. The interim dividend @ & 1 per equity share of & (10%) declared by the Board in its meeting held on 08.03.2014. Floating & 1.74 Cr, including dividend tax, was confirmed as the final dividend for the year. 5. Shri Gyanendra Kumar was appointed Whole Time Director w.e. 01.02.2014 in place of Shri D.D. Nigam, who retired on 31.03.2014. 6. One investor's complaint pending the beginning of the quarter and one complaint revived during the quarter have been redressed. 7. Previous period figures have been regrouped/recast, wherever necessary. Place : New Delhi For and on behalf of the Board Date : 14.06.2014 Tilak Ohar* Chairman and Managing Director 6. Processing of Data 1. Common size statement of Segment Wise Revenue 1. Compare the Revenue from operations of each segment of DCM Shriram Industries Ltd. with total Revenue from Operations for the year ended March 31, 2014, 2. Use the following formula to calculate percentage and degrees for making pie diagram, Revenue of the Segment poceuaee Total Revenue x100 9% Revenue of the Segment oe Total Revenue % 360 ‘Common Size Statement showing Inter-Segment Comparison of Revenue (Jor the year ended March 31, 2014) S or a =ns Segme T/crores He Reve Diagram es - aaa a Pie chat representing Segment Revenue ws. (55.49%) suror 8660" oy Industri Fibre FI] crenit ne =) (20.80%)Il, Common size statement of Segment Wise Profits Processing of Data : 1. Compare the profit of each segment of DCM Shriram Industries Ltd. with total profit for the year ended March 31, 2014. Use the following formula to find out percentage and degrees for making a pie diagram. Profit of the Segment Percentage = Trotter me Seement . 100 __ % Profit of the Segment Degrees = “TotalProfit% * 360 Common Size Statement showing Inter-Segment Comparison of Profit, (for the year ended March 31, 2014) _ Z/crores Pie Diagram TS aa c222(S.an) | 20s3(#) Son 4 va (8 i oa (50) al ea) Pie Chart representing Revenue (Profits) of the Three Segments (Year ended March 31, 2014) 2ag.i1" <— (68.92%) Sugar Industrial Fibre aor f. < (13.8%) 62.18" Chemicals (27.27%) Ml. Common size statement of Segment Wise Capital Employed Processing of Data : 1. Compare the Capital Employed of each segment of DCM Shriram Industries Ltd. with Total Capital Employed for the year ended March 31, 2014. 2. Use the following formula to calculate percentage and capital employed. Capital employed of the Segment Total CapitalEmployed —* 200 Percentage 1% Copital Employed of the Segment Uae ‘Total Capital Employed % % 360 Accountancy ~ 12 2)Statement Showing Inter-Segment Comparison of Capital Employed Turnover Ratio (Year ended March 31, 2014) 3 Cotaemoies | XCnmtemnore | oops crores (4100) Pie Diagram (| sugar 2er10) ser 2006 (| industria ores an relate products 81.12(8) 2103 75.70 (a | Chemical 85.81(¢) 2226 soa Total 385.650), 100% 360" Pie Chart representing Capital Employed in the Three Segments (for the year ended March 31, 2014) 208.16" oy 56.71 Cad) soa" i ae Industrial Fibre = Cash outflow has increased by 122.95%. Accountancy ~ 12 4s)Aud Bu Particulars x x Net Profit before Interest and Tax 530,000 6,00,000 i) nol = Net Prof before interest and Tar. 499 20.000. a £00,000. 00 «: : Capital Employed 25,00,000 "10° 30,00,000 * 100 = 20% Net Profi after tax 265,000 300,000 (i) Net Profit Ratio = Net Profit afer 2, 199 285.000. 100 = 10% 0.000 00 Fevenve from Operations 36,50,000 35,06,000 * 100° 10.3% B Limited is earning better profit margin yet the return on capital employed of A Ltd. is better. It is making better and efficient use of its financial resources. Net credit revenue from operations ‘Average trade receivables _ __Number of days na year Trade Receivables Turnover Ratio |. Trade Receivables Turnover Ratio Debt Collection Period (in days) Xia. Yuta. Trade Receivables, = ___#7,00,000 ___ %7,00,000 €10,00,000 ___ @ 10,00,000 Turnover Ratio ©, 20,000 + & 80,000 - %1,00,000 | ®2,80,000 + € 1,20,000 ¥ 2,00,000 2 2 Times Times Debt Collection Period (in | 365 days. 365 days aa = 2 82¥8. = 52 days (approx) SEAS 73 days ‘After analysing the above ratios, it is clear that debt collection department of X Ltd. is not working efficiently as compared Y Ltd. Itis evident from the data given below : Particular xual vied z z Days Granted as 30 ‘Actual Days for Collection 52 2B Delayed Collection Tay = Days Saved 2 Tas Accountane)| a PRACTICAL PAPER Time Allowed : 1 Hour] [Maximum Marks :12 1. Amit Ltd. and Sumit Ltd. require bank loan for 3 years to be repaid over a period of 3 years. Following information is given to you Raton ‘Amita. Sumit ‘arvent Ratio Every 2 Liquid Ratio 13:1 aa Debt Equity Ratio nal asa Interest Coverage Ratio astimes| 10 8mee Suppose you are a bank officer and both the companies have approached the same bank. Find (i) Ifyou wish to give loan to only one company, which will it be ? (id If you could grant loan to both companies, would you prefer to advance loan to both the companies. If yes, why? 4 2. Payment of rent or any expense is an operating outflow. The following information is given for two years 2013-14 and 2014-15, Find out whether this outflow has increased or decreased in the year 2014-15 in relative terms. 4 nto) Parsee 2013-34 @) [2013-24 ®) Rent outstanding inthe beginning 000 [12,000 Rent oustanding a the end x00] 4000 Prepaid Rent in the betinning 8000} 7,000 Prepaid Rent at the end 7000} 9,000 Rent charged to statement of Profit andloss s;00| 45,000 3, Shyam and Sunder went to Stock Exchange. Syam purchased shares worth 6,000 and sold for ® 6,600. Sunder purchased shares for @ 5,000 and sold them for & 5,600. Who is a better investor and why? 2 4, A businessman starts his business with € 10,00,000. He borrows & 20 lakh @ 18% p.a. from the bank. He bought ‘a machine for & 8,00,000 and paid rent ¥ 24,000 in advance for two months. He bought goods of & 3,60,000 for ‘cash. He sold goods for & 4,00,000 for cash, He also pald interest on loan for two months, Find out cash flows on account of various activities. 2 SOLUTIONS 4. Conclusion : (i) The current ratio of Amit Ltd is 2.6 : 1 and that of Sumit Ltd is 2 : 1 against the standard ratio of 2:1. Short- term solvency position of both the companies is sound though Amit Ltd is better placed. (if) The liquid ratio of Amit Ltd is 1.3 : 1 and that of Sumit Ltd is 1 : 1 against the standard ratio of 1: 1. Both companies are good but Amit Ltd is better placed. Accountancy = 12. 4)(ii), Debt equity ratio of Amit Ltdis 1 : 1 and that of Sumit Ltd is 1.3: 1 against the standard of 2:1. Both companies prefer to rely less on borrowed fund but still Amit Ltd is better placed (iv) Interest coverage ratio of Amit Ltd is 15 times in relation to 10 times in case of Sumit Lid Both are good ‘companies, Decision : (i) IFloan is given to only one company, it should be given to Amit Ltd as itis comparatively better in relation to Sumit Lt (7) However, bank can provide loan to both the companies as financial position of both the companies is on sound footing, 2. To know the flow of cash due to rent, rent account is to be prepared for both years: Rent Account Dr. for the year ended 31st March 2014 cr. Prius ‘Amount Prius ‘Amount @ @ To Balance b/s ‘8,000 | 6y Balance b/a ‘8,000 (Prepaid in begining) {Outstanding inthe beginning) ToBank Ne 41,000 | By statement of Profit & Loss 5,000 (Rent paid during the year) {ent charged uring the year) ToBalanee ef 1,0 | by Balance ef 7900 (Outstanding atthe end) {Prepaid atthe end) 60,000 60,000 Rent Account Dr. for the year ended 31st March 2015 cr. Paras z Partials z To Balance b/s 7,00 | By Balance b/a 11,000 (Prepaid in begining) (Outstanding inthe beginning) To bankale 56,000 | By statement of Profit & Loss 45,000 (Rent pad during the year) (Rent charged during the year) ‘To balance ed +4000 | By Balance cfd 9,000 (Outstanding atthe end) (Prepaid at the end) 55,000 65,000 Rent paid during the pervious year = © 41,000, Rent paid during the current year = 54,000 Thus, increase in cash outflow due to rent during the current yearis _€ 13,000 3. Profit % of Shyam = Profit % of Sunder = 600 5000 * 10° S00 100 = 10% 100 = 2% Since the profit % of Mr, Sunder is more than Mr. Shyam, thus it can be concluded that Sunder isa better investor. Accountane as) -12 74. Cash Flow from Various Activities (0) Cash flow from Operoting Activities z Purchase of goods for cash (3,60,000) Payment of Rent (24,000) Sale of goods for cash 4,00,000 Cash flow from operating Activities 16,000 (id. Cosh low from Investing Activities Purchase of Machinery & 8,00,000) Cash used in Investing Activities 18,00,000) (i) Cosh low from Financing Actes: —— Capital contribution % 10,00,000 loan from Bank % 20,00,000 Interest paid on Bank loan for 2 months (60,000) (20,00,000 28 x 2 100 * 12 Cash flow from financing activities % 29,40,000 Accountancy ~ 12 (60)Ee PRACTICAL PAPER Time Allowed : 1 Hour] (Maximum Marks :12 1, Following table gives the actual and standard ratio of Crown India Ltd. for the year 2014-15: SNe Partials Aewat | Sandard 1 | Curent Assets/Current bites : a 2. | Cost of Revenue from Opertionsinventory : A 3. | Net credit Revenue from Operations/Trade Recehables « 3B 4, | net Prot before interest and tax/Captal Employed 40 Critically examine the above mentioned ratios. 3 2. From the following particulars regarding credit sales in 2013-2014 and 2014-2015, Is it correct to say that cash inflow from collection from debtors has improved in the year 2014-2015? a wia2018 | 20182015 z z ‘Opening balance of trade recsvables sooo] Closing balance of trade receivables 24000] 60,000, Credit Revenue from operations 240,000 480,000, Discount allowed 000] 6,000 Bad debts 2000} 4,000 Returns Inward 500] 3,000 What is the amount of change in cash flows? 3 3. The following comparative percentages are computed from the financial statements of two companies, XYZ Ltd and POR Utd, XYZ Ltd. PR Ltd, (0) Net income to Revenue from Operations 2% 9% Revenue from operations 80,000 95,000 Net Income to capital Employed 15% 12% Opening Receivables 10,000 8,000 Closing Receivables 12,000 8,000 Which company appears to be more successful? Give reasons, 3 4 If Credit purchases are 36,00,000 and cash purchases are 25% of total purchases. Find out the cash flow from operating activities when rent paid is € 1,50,000 and commission received & 2,50,000. 3 SOLUTIONS (i) The current ratio (Le., Current Assets/Current Liabilities) of the company is much higher than the standard, Company is comfortable in making timely payment to Its creditors. However, it seems that itis not using its funds effectively. It must invest the surplus fund in investments so that it may earn interest/dividend on idle fund. (i) The inventory turnover ratio (Cost of revenue from operations) is also higher than the standard. It indicates that company is rapidly turning over its inventory. 2 Accountane 1)(iii) Trade Receivables turnover ratio (Net Credit Revenue from Operations/Trade Receivables) is also higher than the standard ratio. It implies that company is efficient in collecting its debt. (iv) Return on investment (Net Profit/Capital employed) of the company is lower than the standard ratio. t means. that company is not using capital employed effectively Suggestion : ‘The company should try to push its sales so that turnover ratios may improve. Higher sales will yield higher ret profit: It will also improve the return on capital employed. 2. Cash flow from Debtors for the year ended 2013-2014 : Dr. ‘Trade Receivables A/c cr, Partials ‘amount Particulars ‘amount ® @ To Balance 6/4 50,000 By Cash Ae (Bale) 2,54,000 ‘ToCredit Revenue from operations 240,000 | By Discount allowed +4000 By Bad debts 2,000 By Return inwards 000 By Balance fa 24,000 790,000 2,90,000 Cash flow from Debtors for the year ended 2014-2015 Dr ‘Trade Receivables A/c cr. Parieuae mount Paria Amount @ ® Tosalance 6/8 74;000 | By Cash ATE (Bal Fe) 26,00 “oCredit Revenue from operations 480,000 | By Discount alowed 6,000 By Bad debts 4000 By Return inwards 8,000 By Balance cfs 0,000 5908000 508,000 Increase in cash flow during the year = & 4,26,000 ~& 2,54,000 = 1,72,000 3. XYZ Ltd is earning more on its Revenue as compared to POR Ltd. Rate of Return on Investment of XYZ Ltd is more than POR Ltd. This indicates that the overall performance of XYZ Ltd is better than POR Ltd. XYZ Ltd is more successful as itis utilizing its invest ment more efficiently than POR Ltd. 4. Credit Purchases © 36,00,000 Cash Purchases are 25% of total purchases, Let Total Purchases = 2 x Cash Purchases = 25% of x Credit Purchases = x~ 25% of &x Accountancy = 12. (2)75 36,00,000 = 5p, x= € 48,00,000 Cash Purchase 5% of & 48,00,000, Cash Purchase = @ 12,00,000 Cash flow from operating Activities Cash Purchases Payment of Rent A/c Commission Received Cash used in operating Activities 2s Accountancy 63) 12 z (22,00,000) (2,50,000) 2,50,000 (21,00,000)