Course – Financial accounting & Analysis

Solution
Answer-1
Introduction:
Decision making is essential part for running a
business. Many stake holders (such as investor, debtors, customer,
supplier) are involves in a business and all these stake holders has to make
some decision about business. For making the decisions the stake holders
have a requirement of relevant economic information. Accounting can
provide the relevant economic information to stakeholders.
So, Accounting is defined as the process of identification of user’s
information requirement , collecting, summarizing , processing and
communication of economic information to permit informed judgments and
decision by the users of accounts.
Concept:
There are following three methods for recording of accounting
information in accounting statement:
1. Cash Accounting: in cash accounting method transaction of revenue
and expanses are recorded in the period in which they are actually
received or paid and not when they were incurred .this method is
simple and commonly used by small business.
2. Accrual Accounting: Accrual accounting is based on the matching
principle, which is intended to match the revenue and expenses
recognition. This method gives a more accurate picture of company’s
true financial condition. Transaction are recorded when they are
incurred even though payment is not completed. Most of company’s
follow accrual accounting.

3. Mixed system or hybrid accounting: Mixed system combine both

cost and accrual accounting, since the inventory /liability /expenses are
recorded on accrual basis and assets /income are recorded on cost
basis.
Accounting information comprises of both internal and external users.
Internal users:
All managers of different functional responsibility area such
as marketing, Finance, Human resource and general management
employee, Owner are internal users. All the above managers uses the
accounting information in following manner.
Karagiri is a Pune based startup that works with 800 families across India.
The startup is in the business of handloom saris. In this start up the Internal
users of accounting information are
- Owner of company to make high level decision of new investment.
- Marketing manager,
- Finance manager ,HR manager
- All the families who are associated with the business.
External users:
- Investor who want to invest
- Bankers ,creditors, lenders
- Govt authorities /taxation department intended to know whether the
appropriate tax has been collected or not.
- Suppliers of miscellaneous Raw material, Machinery
- External agencies involved in designing / crafting, weaving.
- Customers who want to purchase the Sari have a great demand in
Indian culture.
- Lab our Unions for ensuring the labor payment by revised wages
The accounting Information can be used in following Manner.
Allocation of Budget /Expenses- Finance manager can assess the
projection of fund requirement and its availability ,for investment, and how
the fund can be arranged, how much expenses can be made for resources
(man, machine, and material ,sales after services) for production of Sari. It
also provide help to maintain the cash flow in Business.
Product Promotion and price fixation Marketing manager uses the
accounting information to make decision of price fixation of sari, and sales
promotion/advertisement of product through e market place..
Profitability: accounting information provides the help to businessman for
calculating the profit earned and monitor the progress of the business. It also
helps to higher Management to make appropriate decision for further
improvement and ensuring debtors to repay the debt with in time..
Tax obligations:
The accounting information provide the information of
govt tax liability and provide the correct information of total tax obligation
such as (sales tax, GST, Income tax )which is to be submitted to Govt as per
schedule.
Deployment of Appropriate Manpower and Regularization of
payment/wages:
It provides the information to HR team regarding the deployment of efficient
Manpower (designer, weaver, etc) and their regular payment of
wages/bonus as per revised rates.
Conclusion: For production of handloom Karagiri sari various costs are
involved (manpower cost, material cost, advertising cost, production cost etc.
. The new startup has to generate Accounting information reports to provide
forecasting of income, projection of fund requirement and availability of fund,
comparison of financial result helps to manage the capital utilization,
maintain the cash flow and positive sustainable growth rate to attract the
debtors and lenders. Thus it help a new start up to enhance its productivity
and profitability for further investment in initial stage of company.

Answer 2:
Balance Sheet: All accounting information of a business Firm is
only provided In the form of Financial Statement/balance sheets. Which
provide the following information:
1. It provide the result of business operations during the accounting
period and reveals the financial position of an entity.
2. It shows amount of asset and liabilities of the company.
3. Income statement is also particular use for investors and lenders.
4. Investors uses the last year net income to predict the future income
and make decision of investment.
 5. Lenders and creditors use the information to form an opinion about
the ability to repay loans.
6. It is prepared only after preparing the profit and loss account as the net
income revealed by the profit and loss account is added to the owners’
capital.
7. On the both side of balance sheet there should be same total. Because
capital is always equal to difference of assets and liabilities.
By The study of balance sheet of Amul , following various element and
terminologies can be find and easily understand .
Equity Share Capital: Equity share capital is defined as the money
contributed by owners and investors towards the capital of company.it is
also known as share Capital or Equity.
Reserve Fund and Other Funds: It is defined as cumulative profit that
a company has earned and retained overtime, Retained profit is the profit
balance after paying the dividend to shareholders.
2. Asset:
Assets are defined as the economic resources controlled by
the business firm which can provide the future cash flow to the Firm.it
must be own by company and it must be a result of past investment
and generate the economic benefit for company.
These are classified as:
A. Fixed Assets (Non-Current assets):
Non-Current assets include
fixed assets and other long term assets such as investment which
is not acquired for purpose of sale. Fixed assets are shown their net
value after accounting their accumulated depreciation. Fixed assets
are of two types:

(i) Tangible assets: these assets have a physical existence Exp:

land, building, machinery, furniture etc.
(ii) Intangible Assets: These assets are not having physical
existence Exp: copyright, Trademark, brand, goodwill.
Capital Work in progress: it is an asset account ,it is used to record the
current cost related to long term project ,on ce the project finished the cost
will be the part of a property, plant and equipment asset account
Amul Industries Balance sheet
 A. Investment:
It refers to the money invested outside the business in form of
share, bonds or other instruments.
Non-Current Investment: Investment made for more than 1 year is called
long term investment long term investment is a non-current asset.
Current investment: it is defines as the investment which is ready to be
realizes and it is made for less than 1 year.
.B. Current Assets:
Current asset is available in form of cash or are meant to
be converted in cash or other current assets during accounting period or
operating cycle of business. Short term investment are included in current
asset.
Short term Loans and advance: Those loan and advances which are
expected to be recoverable in term of cash or other kind within 12 month
from reporting date.
Inventories: inventory is defined as the stock of finished goods and the raw
goods used for production, it is come under current asset of company.it is
buffer between production and fulfilment of order.
Trade Receivable: it is defines as the sales of product or service completion
on credit but the payment is still not paid by customer.
Cash & bank Balance: It is defined as the cash amount available in your
bank account and it can be fluctuating over the period.
Other Current assets: these assets are not very common and significant
like cash & cash equivalents, inventory, trade receivable but expected to be
converted in cash within 12 month of reporting date.
C Liabilities: it is claim to assets of parties other than owner, loan, bonds,
creditors, unpaid expenses are liabilities.libilities creates negative future
cash flow for business.
Short-term Liabilities: Short-term or current liabilities are those that must
be settled within one year .Ex:- Creditors (account payble), outstanding
expenses.
Long-term Liabilities: it includes borrowing from bank or financial institutes
for more than one year Trade.
Long-term Borrowings: liabilities that present money borrowed from bank
or other lenders to fund ongoing ventures or operations of a business that
will not come due within one year called long term borrowing.
Short-term Borrowings : : liabilities that includes money borrowed ( loan
repayable /demand) ,deposits ,other loan and advances that has to be come
for due within one year called short term borrowing.
Long-term Provisions: it is defined as the money set aside for the
employee benefit (such as gratuity leave encashment etc ) and provision of
warranties etc.
Short-term Provisions: this is defines as the money set aside for employee
short term benefit (i.e. bonus, incentive,), and other provisions dividend,
taxation which is to be dealt with in a period.
Deferred Liability: it is defined as the tax assessed is due for current period
and has not yet paid.
Trade Payable: it is defined as the money that still company owes (has to
pay but not yet paid) to his vendor against inventory related goods and
business supplies or raw material.
Other current Liabilities: these are short term debts which can be clubbed
together and not important enough to have own line in balance sheet so
grouped together.
Conclusion:
On the basis of above elaborated guidance Mr. kohli can
easily understand the financial balance sheet of Amul Industries and
according to that he can analyse the Amul industries market position. From
its balance sheet Mr. kohli gets the information about asset and liabilities, its
share capital, investments and the Cash or bank balance etc on that basis
he can decide for Investment.
Answer3 (a):
Income: it is defined as the net profit .ie. what is balance after taxes and
expenses are subtracted from revenue.
Income= Revenue - Expenses
Expense: all cost incurred by an entity is not called expense but It is defined
as the cost which relates to the operations of current financial year or to the
revenue earned during the year.
Concept: as per the question the dividend has declared but it is not yet
received in the current financial year that is called accrued income.to account
for such an income which is not realized in current financial year accrued
income account is debited and relevant income account is credited.
The example of accrued incomes are - that the interest on securities and
deposits is earned over the time but not due for collection by the firm till
completion of cycle. The company rendered the services and which have not
been billed and collected the payment.
The effect of this entry is that the amount of income for accounting period
increased and a new asset account in form of accrued income is created.
Since it being a income account so it should be recorded in profit loss
account on credit side part.
Accounting entry of the accrued income is as follows
Account Description Dr. Cr.
Accrued income on securities A/c xxxxx
To income account xxxx

As per given question you have purchased 10 share of L& T @ Rs. 50

per share and L&t declare dividend which means income has been created
but yet not received so it is a accrual income .i.e. the income earned by the
dividend is posted profit and loss account and second effect is that an asset
account is created in balance sheet.
The income from dividend = 50 X10 = Rs.500
Accounting record of Accrued income account on div is
Account Description Dr. Cr.
Accrued income receivable account A/c 500
To Dividend income account 500

Conclusion: Income or revenue against rendered services must be

recorded in the financial year in which they are earned so we have to
maintain the record of dividend amount received from L&T by posting in our
account books.

Answer 3 (b);-
Introduction:
As per accrual system of accounting - the income or expenses must be
recorded in accounts whether it is accrued or earned, i.e. even if the payment
yet not realized in cash. The expenses must be recoded when due
irrespective of spent.
Concept:’ income received in advance irrespective of the supply not yet
made exp- insurance premium received in advance by insurance company
so this could not be the part of revenue until the related goods have been
supplied or the services have been rendered.
Till such times these receipts are treated as liability .the purpose of
adjustment entry is to transfer the part of liability to the revenue that has been
earned during the accounting period.
Part of payment received which has not been earned at the end of
accounting year is known as the advance received or unearned income .
account for such income relevant income account is debited and the income
received in advance account is credited
Accounting entry for same will be as follows
In given question mehta brothers received 100 % payment on 5 march 2019
but delivery should be made in next month so this amount is called the
advance receivable.

Account Description Dr. Cr.

Bank Account xxxxx

To advance against goods account xxxxx

The selling price of goods = 50000 + .1x50000= 55000
Accounting entry for this accounting year is as given below
Account description Dr Cr
Bank Account 55000
To advance against goods account 55000

Revenue of 5500 and cost 0f goods 50000 must be entered in account books
in april 2019 since sale has not realized, since revenue only recognized when
transfer of title and ownership occurs as per accounting standard.
Revenue is also not recognized since the corresponding expense of rs,
50000 cost of goods sold must not be recognized in current financial year.
Mehta brothers must have account for trade advance received in 2018-19.
in next year 2019-20 they can account for income of Rs 55000 credit in profit
and loss account statement expense Rs 50000 on credit side of profit loss
account.
Conclusion: everyone must follow all accounting convention and standards
and should post the entries according to the financial accounting standards
to prepare the financial statement. Since all these standards gives
appropriate and accurate information about the business activities and
processes.