Business Finance 2 (Assignment 1) – Sabyasachi Rathore, Roll No- 28

Q1. (B) All of the above

Q2. (C) Adverse Option

Q3. (A) Cashflow Statement

Q4. (B) II AND III

Q5. Realization concept is when Income is recognized as and when it is ‘earned’. It is not, therefore, necessary to
wait until the customer settles his or her bill. This avoids the fluctuations in reported income which might
arise if everything was accounted for on a cash basis.
Accrual Concept is when Expenses are recognized as and when they are incurred, regardless of whether the
amount has been paid.
Q6. Accelerating Revenues- One way to accelerate revenue is to book lump sum payments as current
sales when services are actually provided over a number of years.
o Delaying Expenses - It is way in which the expenses are delayed or recorded at a time other than the
expense is realized.
o Accelerating Pre-Merger Expenses - It may appear counterintuitive, but before a merger is
completed, the company that is being acquired will pay—possibly prepay—as many expenses as
possible. Then, after the merger, the earnings per share (EPS) growth rate of the combined entity
will appear higher compared to past quarters. Furthermore, the company will have already booked
the expenses in the previous period.
o Non-Recurring Expenses - By accounting for extraordinary events, non-recurring expenses are one-
time charges designed to help investors better analyze ongoing operating results. Some companies,
however, take advantage of these each year. Then, a few quarters later, they "discover" they reserved
too much and put an amount back into income
o Other Income or Expense - Other income or expense is a category that can hide a multitude of sins.
Here companies’ book any "excess “reserves from prior charges
o Pension Plans - If a company has a defined benefit plan, it can use the plan to its advantage. The
company can improve earnings by reducing the plan's expenses. If the investments in the plan, then
grow faster than the company's assumptions, the company could record these gains as revenue.
o Off-Balance-Sheet Items - A company can create separate subsidiaries that can house liabilities or
incur expenses that the parent company does not want to disclose. If these subsidiaries are set up as
separate legal entities that are not wholly owned by the parent, they do not have to be recorded on
the parent's financial statements and the company can hide them from investors.

Q7.

Case Gross profit Cash flow

1 Increases No change
2 No change outflow
3 Increase No change
4 Decrease No change
5 Decrease No change
Q8.

• The main role of regulation in the financial system is to guarantee fair and efficient markets and financial
stability.
• India has two primary financial services regulators - the Reserve Bank of India (RBI) regulating India’s
banking industry and the Securities & Exchange Board of India (SEBI) regulating the capital markets
industry.
• Banks -
o Reserve Bank of India
o Securities and Exchange Board of India
o Insurance Regulatory and Development Authority of India
o Pension Fund Regulatory and Development Authority
o Forward Markets Commission
• Superannuation Products - Pension Fund Regulatory and Development Authority (PFRDA)
• General Insurance companies - Insurance Regulatory and Development Authority of India (IRDAI)
• Stock brokers - Securities Exchange Board of India (SEBI)
• Mutual Funds - Securities and Exchange Board of India (SEBI)
• Market for listed securities - Securities and Exchange Board of India (SEBI)
• Foreign exchange dealers - Securities and Exchange Board of India (SEBI)
• Money changers - Reserve Bank of India

Q9.

• Cost Concept - Assets shall be recorded in the books of accounts at historical cost and not at fair
price. Historical cost includes cost of acquisition and any other expenses including to bring the
asset to its location and condition of use.
o Going Concern Concept - It is known as the assumption of continuity. Accordingly, the
business shall continue for a long foreseeable future. The owner does not have any
intention to wind up the business.

• The board of directors should check if the unusual transaction is partially being covered by any of
the accounting concept and then come up with a miscellaneous concept which stands true for the
unusual transaction.
• Always applying accounting policy may not be a good idea because in business one should always
expect worst. According to the prudence concept the organization provide expected losses but
shouldn’t recognize anticipated profits.

Q10.

• Investment Banks – Their role includes underwriting new stock issues, handling mergers and
acquisitions and acting as a financial advisor. Their core source of income include brokerage,
underwriting fess during mergers and acquisitions and the creation of centralized products.
• Pension Scheme - In simple terms, a pension scheme is just a type of savings plan to help you save
money for later life. It also has favorable tax treatment compared to other forms of savings. A
pension scheme is issued by a company or a government to its employee or citizens. A part of
employee’s salary is taken and later when he or she retires it is paid in form of multiple payments
or annuities called pension.
• Life insurance company - A life insurance company in shores the light of the person its main
sources of funds are through the premiums paid the application of funds is in basically 2 ways the
first one is to clear to clear the claims from the benefactress and the second one is investing in the
market for further return.
Q11. Understanding what the regulatory requirements are that the two bodies demand, there would be
a lot of similarities and differences in the regulatory requirements would be the most primal
problem. So therefore, before investing one has to be thorough with not just one but two
regulators. And with that comes the need to check the different accounting standards mandated
by the two regulators.

Q12.

• It is hard to prepare an insurance companies account because of the unprecedented nature of the
insurance business. No one can tell for certain when and how much claim the company has to pay
in a financial year.
• The claims reserve is funds set aside for the future payment of incurred claims that have not yet
been settled. The outstanding claims reserve is an actuarial estimate, as the amounts liable on any
given claim is not known until settlement. Money for the claims reserve is taken from a portion of
the premium payments made by policyholders over the course of their insurance contracts. An
outstanding claims reserve is recorded as a liability on a company’s balance sheet.

Q13.

ADVANTAGES DISADVANTAGES
It would create a single set of accounting It would lead to concerns with standards
standards around the world. manipulation.
It would reduce the time, effort, and expense of It would require global consistency in auditing
preparing multiple reports. and enforcement.
It would make it easier to monitor and control It would increase the amount of work placed on
subsidiaries from foreign countries. accountants.
It would improve the rates of foreign direct It would require changes at the educational level
investment around the world. as well.

• IFRS
o National Company Laws.
o Principles, concepts and conceptions.
o Stock exchange requirements.
o Good practice leading companies.

• A company's cash flow statement measures the flow of cash in and out of a business, while a
company's balance sheet measures its assets, liabilities, and owners' equity. The statement of
comprehensive income reports the change in net equity of a business enterprise over a given
period.
Q14.

1) Ans

particulars Amount

Revenue 1500000

Cost of Sales -647000

Gross Profit 853000

Administrative Staff
-3000
wages

Distribution Cost -266000

584000

Interest -10000

Profit for the year 547000

ii) ABC Ltd. Statement of changes in equity for the year ended 31st March 2019

Revaluation
Share Capital Retained Earnings Total
Reserve

Opening ₹
₹ 1,80,000.00 ₹ 2,50,000.00 ₹ 6,30,000.00
Balance 2,00,000.00

Revaluation ₹ 5,40,000.00 ₹ 5,40,000.00

Profit or the
₹ 5,74,000.00 ₹ 5,74,000.00
year

Dividend Paid ₹ -45,000.00 ₹ -45,000.00

₹
Closing Balance 2,00,000.00 ₹ 7,20,000.00 ₹ 7,79,000.00 ₹ 16,99,000.00

Particulars Amount

Non-current Assets

Property, Plant and Equipment 16,72,000

Current Assets

Inventory 30,000

Trade Receivables 2,10,000

Equity and Liabilities

Equity

Share Capital 2,00,000

Revaluation Reserve 7,20,000

Retained Earnings 7,79,000

16,99,000

Non-current Liability

Loan 145,000

Current Liability

Trade Payables 50,000

Bank 18,000

68,000

Total Equity and Liabilities 19,12,000

Notes:

1) Property, Plant and Equipment

Cost or
Land Building Machinery Vehicles Total
Valuation

Opening
6,00,000 4,00,000 1,50,000 3,25,000 14,75,000
Balance

Revaluation 2,00,000 3,00,000 5,00,000

Closing
8,00,000 7,00,000 1,50,000 3,25,000 19,75,000
Balance
 2) Depreciation

Cost or
Land Building Machinery Vehicles Total
Valuation

Opening
40,000 80,000 1,70,000 2,90,000
Balance

Revaluation -40,000 -40,000

Closing
7,000 15,000 31,000 53,000
Balance

Net book
8,00,000 6,93,000 55,000 1,24,000 16,72,000
value

3) Cost of Sales

Cost of Inventory Consumed 3,50,000

Factory running costs 1,00,000

Manufacturing wages 1,75,000

Depreciation of buildings 7,000

Depreciation of Machinery 15,000

6,47,000

4) Cost of Distribution

Advertising Cost 55,000

Delivery Vehicle running costs 60,000

Sales Salaries 1,20,000

Depreciation of Vehicles 31,000

2,66,000

Q15. Income Statement

PARTICULARS AMOUNT
Revenue from Operations 66,000
Other Income 200
Total Revenue 66,200
 EXPENSE AMOUNT
Purchase of stock in trade 1,000
General & Administrative 14,121
Employee Benefit Expenses 14,000
Utility Expenses 4,583
Depreciation 8,042
Total Expenses 38,746

Profit before interest at tax 27,456

Profit Year Ended 31st December 2019 19,454

Notes:

REVENUE FROM OPERATIONS

3. G&A
Office Building Rent 15,917
Minus -1,796
14,121
Depreciation (3,500+2,000) * (11/12) 5,042

Balance Sheet as at 31st December 2019

PARTICULARS AMOUNT
Assets
Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets 49,958
(ii) Accrued Income 11,000
Current Assets
(a) Inventories 1,000
(b) Trade Receivables 1,500
Cash 6,200
(c) Other Current Assets 1,796
Total Assets 71,454

Liability
Current Liabilities
1) Shareholder Fund
 Share Capital 32,000
Reserve at Surplus 22,454

Non-Current Liability
1) Trade Payable 3,000
Other non-current 4,000

Made By- Sabyasachi Rathore