Financial Accounting

Jun 2025 Examination

PLEASE NOTE: This assignment is application based, you have to apply what you
have learnt in this subject into real life scenario. You will find most of the information
through internet search and the remaining from your common sense. None of the
answers appear directly in the textbook chapters but are based on the content in the
chapter

Q1. Financial Analysis of AlphaEx Ltd.

You are given the following partial financial information for AlphaEx Ltd. for the year
ended March 31, 2024:

Required:

1. Compute the Cost of Goods Sold (COGS) and Gross Profit for the year ended March
31, 2024. (2 Marks)

2. Prepare the Income Statement (from Net Sales down to Net Income) for the year
ended March 31, 2024. Clearly show each line item, including your calculations for Cost
of Goods Sold, Gross Profit, Operating Income, and Net Income after tax. (3 Marks)

3. Calculate the ending Retained Earnings on March 31, 2024, after the company closes
its Net Income into Retained Earnings. Show your computation step by step. (2 Marks)

4. Using the year-end balances, compute and interpret two financial ratios—for
example, the Current Ratio and the Debt-to-Equity Ratio. In a brief paragraph, discuss
what these ratios indicate about AlphaEx Ltd.’s liquidity and long-term solvency. (3
Marks)

Total Marks: 10

1. Income Statement (Partially Reported)

Item Amount (₹)

 Net Sales 9,00,000
Beginning Inventory (April 1, 2023) 60,000
Net Purchases 3,20,000
Ending Inventory (March 31, 2024) 50,000
Operating Expenses (excluding depreciation) 1,40,000
Depreciation Expense 30,000
Interest Expense 20,000
Income Tax Rate 25%

2. Balance Sheet (Selected Items as at March 31, 2024)

Item Amount (₹)

Cash & Cash Equivalents 1,00,000
Accounts Receivable 80,000
Inventory 50,000
Property, Plant & Equipment (net) 4,00,000
Accounts Payable 40,000
Long-Term Debt 2,00,000
Common Stock 1,50,000
Retained Earnings (at the beginning) 80,000

Ans 1.

Introduction

Understanding the performance, stability, and future development prospects of a company

depends critically on knowledge of financial analysis. Examining financial statements—
including the balance sheet and income statement—helps one evaluate profitability, liquidity,
and financial situation. Financial analysis helps companies decide strategically, control
spending, and increase operational effectiveness. These assessments help stakeholders and
investors ascertain whether making investments in a firm is feasible. Debt-to---equity ratios
and current ratios help one understand financial risk and liquidity. Examining income,
expenses, assets, and liabilities helps businesses to see areas of strength and weakness. This
procedure guarantees openness in financial reporting and encourages data-driven decision-
making, thereby enabling companies to keep long-term sustainability in a competitive
market.

Concept and Analysis

One important financial tool that offers understanding of a company's profitability over a
certain period is the income statement. It covers net income, net sales, cost of goods sold,
gross profit, running expenses. Examining the income statement allows companies to
evaluate general profitability, cost control effectiveness, and revenue generating capability.
The direct costs of manufacturing items—that is, the cost of commodities sold—are what
guide pricing policies and profit margins. While operating income shows earnings after
subtracting company-related expenses, gross profit shows the success of fundamental
business operations prior to operating expenses. After all expenses—including taxes and
interest—net income, sometimes referred to as the bottom line, shows the ultimate profit.

The balance sheet offers a moment in time view of a company's financial situation. To
ascertain financial soundness, it ranks assets, debts, and equity. Among the assets are cash,
accounts receivable, inventory, property, plant, and machinery. Liabilities are monetary
commitments including long-term debt and accounts payable. Reflecting the ownership share
in the company, equity consists of retained earnings and common shares. A robust balance
sheet shows financial strength; too many liabilities could imply financial risk.

By offering quantifiable insights into many facets of corporate performance, financial ratios
are absolutely vital in financial research. By means of a comparison between current assets
and current liabilities, the current ratio evaluates a company's capacity to satisfy temporary
needs. Better liquidity shown by a larger ratio shows that the business can readily pay off its
debts. By means of a comparison between total debt and total equity, the debt-to---equity
ratio gauges financial leverage. A smaller percentage shows financial stability, meaning the
business depends more on equity than borrowed money. These statistics let companies assess
their financial situation, control risk, and make strategic decisions.

Financial Analysis of AlphaEx Ltd. for the year ended March 31, 2024:

Step 1: Compute Cost of Goods Sold (COGS)

The formula for Cost of Goods Sold (COGS) is:

 COGS=Beginning Inventory+ Net Purchases−Ending Inventory

Given Data:

 Beginning Inventory = ₹60,000

 Net Purchases = ₹3,20,000
 Ending Inventory = ₹50,000

Calculation:

COGS=60,000+3 , 20,000−50,000=₹ 3 , 30,000

Step 2: Compute Gross Profit

The formula for Gross Profit is:

Gross Profit=Net Sales−COGS

Given:

 Net Sales = ₹9,00,000

 COGS = ₹3,30,000

Calculation:

Gross Profit=9 , 00,000−3 ,30,000=₹ 5 ,70,000

Step 3: Compute Operating Income

The formula for Operating Income is:

Operating Income=Gross Profit−Operating Expenses−Depreciation

Given:

 Operating Expenses = ₹1,40,000

 Depreciation Expense = ₹30,000

Calculation:

Operating Income=5 ,70,000−1 , 40,000−30,000=₹ 4 , 00,000

Step 4: Compute Net Income Before Tax

The formula for Net Income Before Tax is:

 Net Income Before Tax =Operating Income−Interest Expense

Given:

 Interest Expense = ₹20,000

Calculation:

Net Income Before Tax =4 ,00,000−20,000=₹ 3 ,80,000

Step 5: Compute Net Income After Tax

The formula for Net Income After Tax is:

Net Income After Tax =Net Income Before Tax−Income Tax

Income tax is calculated as:

Income Tax=Net Income Before Tax × Tax Rate

Given:

 Income Tax Rate = 25%

Calculation:

Income Tax=3 , 80,000 ×0.25=₹ 95,000

Net Income After Tax =3 , 80,000−95,000=₹ 2 , 85,000

Step 6: Compute Ending Retained Earnings

The formula for Ending Retained Earnings is:

Ending Retained Earnings=Beginning Retained Earnings +Net Income After Tax

Given:

 Beginning Retained Earnings = ₹80,000

 Net Income After Tax = ₹2,85,000

Calculation:

Ending Retained Earnings=80,000+2 , 85,000=₹ 3 ,65,000

Step 7: Compute Financial Ratios

Current Ratio

The formula for Current Ratio is:

Current Assets
Current Ratio=
Current Liabilities

Current Assets Calculation:

 Cash & Cash Equivalents = ₹1,00,000

 Accounts Receivable = ₹80,000
 Inventory = ₹50,000

Total Current Assets=1 , 00,000+80,000+ 50,000=₹ 2 , 30,000

Current Liabilities:

 Accounts Payable = ₹40,000

2 ,30,000
Current Ratio= =5.75
40,000

Debt-to-Equity Ratio

The formula for Debt-to-Equity Ratio is:

Total Debt
Debt-to-Equity Ratio=
Total Equity

Total Debt:

 Long-Term Debt = ₹2,00,000

Total Equity Calculation:

 Common Stock = ₹1,50,000

 Ending Retained Earnings = ₹3,65,000

Total Equity =1 ,50,000+ 3 ,65,000=₹ 5 ,15,000

2 , 00,000
Debt-to-Equity Ratio= =0.39
5 , 15,000
 Parameter Value (₹)

Cost of Goods Sold (COGS) 3,30,000

Gross Profit 5,70,000

Operating Income 4,00,000

Net Income Before Tax 3,80,000

Income Tax 95,000

Net Income After Tax 2,85,000

Ending Retained Earnings 3,65,000

Current Ratio 5.75

Debt-to-Equity Ratio 0.39

Interpretation of Financial Ratios

1. Current Ratio (5.75): A current ratio above 1 indicates that AlphaEx Ltd. has strong
liquidity and can easily cover its short-term liabilities with its current assets. A ratio of 5.75
suggests that the company has a high level of liquidity and may have excess current assets.

2. Debt-to-Equity Ratio (0.39): A low debt-to-equity ratio suggests that AlphaEx Ltd. is not
highly leveraged and relies more on equity financing than debt. This indicates financial
stability and lower financial risk, as the company is not overly dependent on borrowed funds.

Conclusion

Financial analysis is an essential tool for businesses, investors, and stakeholders to evaluate a
company’s financial health and make informed decisions. By analyzing income statements,
balance sheets, and financial ratios, companies gain valuable insights into profitability,
liquidity, and stability. This analysis helps businesses identify areas for improvement,
manage financial risks, and enhance operational efficiency. Ratios such as the current ratio
and debt-to-equity ratio provide a clear understanding of a company’s liquidity and financial
leverage. Effective financial analysis supports strategic planning, investment decisions, and
long-term growth. As financial data continues to drive business decisions, organizations must
ensure accuracy and transparency in financial reporting to maintain trust and achieve
sustainable success.
Q2A. A mid-sized manufacturing company has suffered significant losses over the past
two years, casting doubt on its ability to continue as a going concern. Critically examine
how the concept of going concern influences the accounting process in such a situation.
In your analysis, discuss the ethical and professional judgments an accountant must
make when deciding whether the business should continue applying going concern
assumptions in its financial statements. (5 Marks)

Ans 2A.

Introduction

The going concern concept in accounting states that a corporation will always operate. If a
company is losing money, its survival is questioned. Accountants must determine whether the
going concern assumption is still valid and present the business's financial status. This
hypothesis hurts financial transparency, liability recognition, and asset value. Financial
reporting accountability and transparency rely on ethical and professional judgement.
Accountants must assess legal and financial factors before using the going concern
assumption.

Concept and Application

Definition as well as Value of the Going Concern Principle

Under the going concern theory, a company will keep running for the foreseeable future free
from intention or requirement for liquidation. This assumption lets financial statements be
written using historical cost rather than liquidation value approach. Accountants have to find
out whether a company can be a going concern if its financial stability calls for doubt. A
corporation classified as non-going concern could have to modify the valuation of its assets
and liabilities, which would cause notable changes in financial reporting.

Financial Indicators and Evaluating Going Concern Concerns

Questions about a company's capacity to remain as a going concern surface when it suffers
ongoing losses, diminishing cash flow, significant debt, or operational inefficiencies.
Accountants have to examine debt-to---equity ratios, net income patterns, and liquidity ratios
among other financial markers. Important warning signals are negative cash flows, debt
obligation difficulty, and legal actions against the business. Before changing the financial
statements, managers and auditors have to assess these metrics.

Accounting Treatment When One Is Not Sure About Going Concern

Should an entity be unsure about its future activities, the financial statements have to show
sufficient disclosures. Based on their net realizable value rather than historical cost, assets
could need revaluation. Liabilities need to be reevaluated to represent instantaneous
responsibility. Businesses unable to support the going concern assumption must construct
their financial statements using a liquidation foundation of accounting, therefore
fundamentally changing the value and presentation of financial data.

Professional and ethical assessments of applying going concern assumption

Whether a company should keep applying the going concern assumption depends much on
accountants. They have to be professional sceptics and make sure financial figures are not
deceptive. Ethical issues demand of accountants to give stakeholders honest and open
disclosures. Although management could have incentives to hide financial problems in order
to draw in money or get loans, accountants have to keep honesty and follow accounting rules.
When business owners encourage accountants to show an optimistic picture, ethical
conundrums may result. Therefore, professional judgment and regulatory framework
compliance are very vital in financial reporting.

Conclusion

Going concern is crucial to financial reporting because it impacts asset value, liability
recognition, and investor confidence. Accountants must assess a company's financial
resilience and adjust financial statements. Maintaining stakeholder trust, avoiding financial
deceit, and being transparent need ethical and professional judgement. The going concern
idea ensures that financial statements accurately and fairly evaluate a company's financial
status, allowing creditors, investors, and regulators to make informed decisions.
Q2B. Financial accounting is based on fundamental principles and assumptions that
guide the preparation of financial statements. However, with the rapid advancement of
technology and the increasing complexity of modern business transactions, some argue
that traditional accounting frameworks may no longer be sufficient. Critically evaluate
the relevance of traditional financial accounting principles (such as the historical cost
principle, accrual basis, and consistency) in today’s business environment. In your
response, analyze potential modifications or alternative approaches that could enhance
financial reporting accuracy and decision-making for stakeholders. (5 Marks)

Ans 2B.

Introduction

Fundamental principles in financial accounting promote uniformity, comparability, and

dependability in financial reporting. Accounting concepts including historical cost, accrual
basis, and consistency have long governed financial statement creation. Traditional
frameworks struggle to fulfil current company demands due to technology, globalisation, and
complicated financial operations. Traditional accounting procedures must be updated to
include digital assets, fair value accounting, and real-time reporting. This conversation
questions established accounting concepts and examines alternative methods that improve
financial reporting and decision-making.

Concept and Application

Historical Cost Principle: Its Limitations

The historical cost principle holds that rather than their current market value, assets should be
noted at their original acquisition price. This guarantees objectivity and stop asset value
manipulation. But in volatile markets particularly, this concept does not fairly represent the
actual economic value of assets. For instance, the value of real estate and financial
instruments varies; so, using historical cost does not give correct financial depiction. By
reflecting asset values depending on current market conditions, the move towards fair value
accounting helps businesses to increase relevance and openness in financial reporting.

Modern Business Transaction Accrual Basis of Accounting

Accounting records revenues and expenses based on an accrual basis—that is, rather than
cash exchange. By connecting sales with related expenses, this approach offers a more
realistic picture of financial success. Modern companies, however, depend more and more on
intricate financial operations like real-time financial reporting, subscription-based income,
and cryptocurrency transactions. Effective capture of real-time financial performance
depends on the accrual approach perhaps not always. To better financial forecasting and
decision-making, several companies support a hybrid strategy combining predictive analytics
with aspects of cash accounting.

Consistency Principle and the Demand of Flexibility

To guarantee comparability, the consistency principle mandates businesses to follow the

same accounting techniques throughout several reporting periods. Analyzing financial trends
requires investors and stakeholders to have this basic idea. Rigid adherence to conventional
accounting practices, however, may impede adaptation given fast technological changes and
shifting corporate structures. Dynamic companies in sectors like fintech and e-commerce
need adaptable reporting systems with industry-specific financial data. Using dynamic
reporting techniques helps to keep comparability while increasing financial accuracy.

Other Methodologies to Improve Financial Reporting

To overcome customary limits, real-time financial reporting, artificial intelligence in

accounting, and integrated reporting have grown increasingly popular. Companies may
deliver current financial data without waiting for regular evaluations using real-time
reporting. AI and data analytics automate processes, reduce errors, and identify financial
patterns. Integrated reporting combines financial, non-financial, and ESG data to show firm
success. These approaches provide a more full and real-time financial picture, improving
decision-making.

Conclusion

Traditional accounting concepts are consistent and reliable, but they must adapt to current
business. Alternative frameworks that improve financial transparency and flexibility are
needed due to historical cost, accrual accounting, and consistency issues. Financial statements
reflect economic reality thanks to fair value accounting, real-time financial reporting, and AI-
driven analytics. Accounting frameworks must combine dependability and flexibility as firms
innovate to enhance decision-making, regulatory compliance, and stakeholder trust in
financial reporting.