Adl01, Sample of Business plans

14 pages, 6645 words

ADL-03: Accounting for Managers

ASSIGNMENT – A

Q1 Ans:

|Bank Reconciliation Statement as on 31-3-1979 |

|Particulars |Debit (Rs) |Credit (Rs) |

|Balance as per cash book |180,000 | |

|Cheques deposited but not collected (2500+3500+1900) | |7,900 |

|Cheques issued but cleared in April (2500+4500+4000) |11,000 | |

|Cheque received from customer but not cashed | |1,000 |

|Bank Interest |2,500 | |

|Bank Charges | |1,000 |

|Balance as per Pass book | |183600 |

| |193,500 |193,500 |

14 pages, 6925 words

The Business plan on Hdfc Bank

... -Rs.50/- per instrument Cheque Collection Outstation Cheque collection on HDFC Bank Locations—————-Free Outstation Cheque Collection on non-branch locationsCorrespondent bank locations: Rs.3/- per Rs.1, ... if AQB is less than Rs. 2,50,000/- Cheque Book Charges (Issued by Bank) 500 cheques leave Free per month. Charges Rs. 2/- per ...

Q2 Ans:

a) No violation

b) No violation

c) Going Concern: refers to a company’s ability to continue functioning as a business entity. It is the responsibility of the directors to assess whether the going concern assumption is appropriate when preparing the financial statements. A company is required to disclose in the notes to the financial statements whether there are any factors that may put the company’s status as a going concern in doubt.

Q3 Ans:

|Trading Account of M/S Jayshree Trade, Bombay – year ending 31-12-1992 |

|To Opening Stock |80000 |By Sales (after deduction of sales returns) |376250 |

|To Purchases (after deduction of purchase |275200 |By closing stock |5000 |

|To Wages |8000 | | |

|To Carriage inward |2500 | | |

|To import duty on purchases |2000 | | |

|To Gross Profit |13550 | | |

| |381250 | |381250 |

| | | | |

|Profit and Loss Account – year ending 31-12-1992 |

6 pages, 2848 words

The Term Paper on Sacrificing Company Profit For The Welfare Of The Society

Even though a companys main existence is to earn a profit, a company that cares about the environment is less likely to be plagued with fraud and unethical behavior from its employees. This is because employees become more committed to a company who they believe is not only paying their salary but also trying to operate in the most environmental friendly manner as well as giving back to the ...

|To General Expenses |1450 |By Gross Profit |13550 |

|To discount allowed |200 |By Discount received |300 |

|To Salaries |15000 |By Interest |300 |

|To Advertisement |2500 |By Interest due from bank but not received |150 |

|To Rent and Taxes |2000 | | |

|To Printing Stationary and Postage (including |1150 | | |

|To Depreciation on building |900 | | |

|To Depreciation on Furniture |400 | | |

|To Bad Debts (After all deductions) |1800 |By Net Loss |11100 |

| |25400 | |25400 |

| | | | |

|Balance Sheet as on 31-12-1992 |

|Liabilities |Rs |Assests |Rs |

|Capital (61,300 less drawings and net loss) |39700 |Cash in Hand |100 |

|Bill Payable |1400 |Bills Receivable |2000 |

|Creditors |8000 |Balance with Bank of Baroda |4700 |

5 pages, 2339 words

The Essay on The risk management of asset and liabilities by developing countries

The risk management of assets and liabilities by developing countries. Greater access to the international financial markets has bestowed many benefits on developing countries, but it has also exposed them to the vicissitudes of these markets. In addition to the macroeconomic challenges posed by large, potentially volatile flows, the sizable external foreign currency debt of many developing ...

|Unpaid expenses on printing |250 |Furniture & Fixtures (less depreciation) |3600 |

| | |Building (less depreciation) |17100 |

| | |Interest due but received from bank |150 |

| | |Sundry Debtors (after deducting all bad debts) |16700 |

| | |Closing Stock |5000 |

| |49350 | |49350 |

Q4. Ans:

Financial statements show the financial performance of a company. They are used for both internal-, and external purposes. When they are used internally, the management and sometimes the employees use it for their own information. Managers use it to plan ahead and set goals for upcoming periods. When they use the financial statements that were published, the management can compare them with their internally used financial statements. They can also use their own and other enterprises’ financial statements for comparison with macro economical data and forecasts, as well as to the market and industry in which they operate in.

The four main types are balance sheets, profit and loss accounts, cash flow statements, and income statements.

Balance Sheets

Balance sheets provide the observant with a clear picture of the financial condition of the company as a whole. It lists in detail the tangible and the intangible goods that the company owns or owes. These good can be broken further down into three main categories; the assets, the liabilities and the shareholder’s equity.

Assets

Assets include anything that the company actually owns and has disposal over. Examples of the assets of a company are its cash, lands, buildings, and real estates, equipment, machinery, furniture, patents and trademarks, and money owed by certain individuals or/and other businesses to the particular company. Assets that are owed to the company are referred to as accounts-, or notes receivables.

2 pages, 790 words

The Essay on Balance Sheet and Income Statement

However, this also takes away from the overall control from the majority of its owners and company founders. There are many different types of companies that fall under this category. They range from anywhere between trucking to retail and anything in between. These companies are traded constantly with their stocks going up and down based on how people feel about the company. The four areas that ...

• Current Assets include anything that company can quickly monetise. Such current assets include cash, government securities, marketable securities, accounts receivable, notes receivable (other than from officers or employees), inventories, prepaid expenses, and any other item that could be converted into cash within one year in the normal course of business.

• Fixed Assets are long-term investments of the company, such as land, plant, equipment, machinery, leasehold improvements, furniture, fixtures, and any other items with an expected useful business life usually measured in a number of years or decades (as opposed to assets that wear out or are used up in less than one year. Fixed assets are usually accounted as expenses upon their purchase. They are normally not for resale and are recorded in the Balance Sheet at their net cost less (less is accounting term for minus) accumulated depreciation.

• Other Assets include any intangible assets, such as patents, copyrights, other intelectual property, royalties, exclusive contracts, and notes receivable from officers and employees.

Liabilities

Liabilities are money or goods acquired from individuals, and/or other corporate entities. Some examples of liabilities would be loans, sale of property, or services to the company on credit. Creditors (those that loan to the company) do not receive ownership in the business, only a (usually written) promise that their loans will be paid back according to te term agreed upon.

• Current Liabilities are accounts-, and notes-, taxes payable to financial institutions, accrued expenses (eg.: wages, salaries), current payment (due within one year) of long-term debts, and other obligations to creditors due within one year.

• Long-Term Liabilities are mortgages, intermediate and long-term loans, equipment loans, and other payment obligation due to a creditor of the company. Long-term liabilities are due to be payed in more than one year.

Shareholder’s equity

The shareholder’s equity (also called as net worth, or capital) is money or other forms of assets invested into the business by the owner, or owners, to acquire assets and to start the business. Any net profits that are not paid out in form of dividends to the owner, or owners, are also added to the shareholder’s equity. Losses during the operation of the business are subtracted from the shareholder’s equity.

3 pages, 1158 words

The Term Paper on Credit Card Debit for College Students

College is a place where young adults get bombarded with all new types of responsibility. Some college students handle it very well, while others struggle to embrace their newfound responsibilities. One problem that has been causing turmoil in the past decade or so is credit card debt. More and more college students are receiving credit cards and using them to purchase anything from food to paying ...

Assets are calculated the following way:

Assets=Liabilities+Net worth

Balance sheets show how the assets, liabilities, and the net worth of a business are distributed. They usually are prepared at set periods of time, for example at the end of each quarter. It is always prepared at the end of fiscal years.

The periodic preparation of the balance sheets, the owner and/or the manager of the company can see historic-, and current trends andalsothe general performance of the corporation. It allows decision makers to make adjustments when needed, like the proportion of liabilities to assets.

All balance sheets contain the same categories of assets, liabilities and net worth figures. Assets are arranged in decreasing order of their liquidity . Liabilities are listed in order of how soon they must be repaid, followed by retained earnings (net worth of owner’s equity).

The categories and formats of Balance Sheets are established by a system known as Generally Accepted Accounting Principles (GAAP).

The system is applied to all companies, large or small, so anyone reading the Balance Sheets can readily understand what it is saying.

Profit and Loss Account

Profit and loss accounts (abbreviated as P&L account) summarize the incomes and expenses of a company in a given period of time. It also includes accruals too, which are incomes that will be realized only after the particular Profit and Loss Account statement was prepared.

Cash-Flow Statements

These statements show how money is predicted to move around (hence the phrase cash flow) at a given period of time. It is useful for planning future expenses. It shows whether or not there will be enough money to carry out the planned activities and whether or not the cash coming in are enough to cover the expenses. The cash flow statement is useful in the determination of the company’s liquidity in a given period of time.

3 pages, 1397 words

The Essay on Balance Sheet Cash Account Income

Financial Accounting MidTerm I. Debit vs. Credit. Debit Debit = left side of T-accountOn the Balance Sheet a debit indicates: 1. An increase in an asset 2. A decrease in a liability 3. A decrease in shareholders' equity items. Credit Credit = Right side of T-accountOn the Balance Sheet a credit indicates: 1. A decrease in an asset 2. An increase in a liability 3. An increase in shareholders' ...

Income Statements

Income statements measure the company’s sales and expenses over a specific period of time. They are prepared each month and fiscal year end. Income statements show the results of operating during those accounting periods. They are also prepared using the Generally Accepted Accounting Principles (GAAP) and contain specific revenue and expense categories regardless of the nature of the company.

Conclusion

Financial statements are useful, because they show the financial condition of a company at a given period. There are many types of financial statements uses and purposes, measuring different financial aspects of the company. They can be used for both internal-, and external uses

Q5 Ans:

A trial balance is a list and total of all the debit and credit accounts for an entity for a given period – usually a month. The format of the trial balance is a two-column schedule with all the debit balances listed in one column and all the credit balances listed in the other. The trial balance is prepared after all the transactions for the period have been journalized and posted to the General Ledger.

Trial Balance is not an account. It is only a list or schedule of balances of ledger accounts including cash and bank balances. It is prepared on a particular date. The accounts having a debit balance are entered in the debit amount column and credit balance accounts are entered in the credit amount column. The totals of the two sides of the accounts may also be used to prepare trial balance. The sum of each column should be equal. The standard format of a trial blance is given below :

|Trial Balance of——— as on ————- |

| | | | |

The name of the business firm is written on the top of the statement with Trial Balance. Under this we write the date on which Trial Balance is prepared.

Trial Balance has three columns : Name of the Ledger Account, Debit Amount and Credit Amount. In the ledger account column we write the name of the account. In the Debit amount column we write the amount of debit balance of the account (or the total of the debit side of the account).

Similarly in the credit amount column we write the amount of credit balance of the account (or the total of the credit side of the account)

There are three methods of preparing Trial Balance

(i) Balance Method

(ii) Total Method

(ii) Balance Totals Method

(i) Balance Method:

In this Balance method, the balance of each account (which may be debit balance or credit balance) is extracted and written against each account; we write debit balance in the debit column and credit balance in the credit column.

(ii) Total Method

In this method the total of both sides of every account in the ledger is written against the name of the respective account without balancing them in the form of debit and credit balances respectively.

(iii) Balance totals Method

Trial Balance is prepared by combining the first and second methods. However, in practice the trial balance is prepared with debit and credit balances of various accounts in the ledger. Normally balance method is used.

ASSIGNMENT – B

Q1 Ans:

|Plant A/C |

|To balance b/d |75000 |By Depreciation A/C |7000 |

|To Bank A/C ( Purchases) |16500 |By Balance C/F |84500 |

| |91500 | |91500 |

| | | | |

|Provision for Tax A/C |

|To Bank (tax paid) |14000 |By Balance b/d |15000 |

|To Balance C/F |17500 |By Provision for Tax (P&L) |16500 |

| |31500 | |31500 |

| | | | |

|Adjusted P&L A/C |

|To Depreciation on Plant |7000 |By Balance b/d |15250 |

|To provision for Tax |16500 |By Cash inflow from profit |40050 |

|To General Reserve |5000 | | |

|To Dividend |11500 | | |

|To balance C/F |15300 | | |

| |55300 | |55300 |

|Funds Flow Statement – year ending 31 December 1996 |

|Particulars |Amount (Rs) |Amount (Rs) |

|(A) Cashflow from Operating Activities | | |

|* Net-profit before tax |40050 | |

|Change in Working Capital | | |

|Add – Decrease in Stock – 13000 | | |

|Add – Decrease in Debtors – 7900 |20900 |60950 |

|Less – Decrease in Creditors |75000 | |

|Less – Increase in Goodwill |2500 |(-16550) |

|Less – Payment of Tax |14000 |(-14000) |

|Cash Flow from Operations | |(-30550) |

| | | |

|(B) Cash Flow from Investing Activities | | |

|Purchase of Plant |(-16500) | |

|Sale of Building |5000 | |

|Cash flow from Investing | |(-11500) |

| | | |

|(C ) Cash Flow from Financing Act | | |

|Bank Loan taken |32600 | |

|Payment of Dividend |(-11500) | |

|Share capital issues |25000 | |

|Cash Flow from Finance | |46100 |

|Increase in Cash | |4050 |

|Opening Cash Balance | |250 |

|Closing Cash balance | |4300 |

Q2. Ans:

|Machinery Account |

|1/7/1994 |To cash A/C (Purchases) |40000 |31/12/1994 |By Depreciation A/C |2000 |

| | | |31/12/1994 |By Balance C/F |38000 |

| | |40000 | | |40000 |

|1/1/1995 |To Balance B/D |38000 |31/12/1995 |By Depreciation A/C |3800 |

| | | |31/12/1995 |By Balance C/F |34200 |

| | |38000 | | |38000 |

|1/1/1996 |To Balance B/D |34200 |31/12/1996 |By Depreciation A/C |3920 |

|1/7/1996 |To cash A/C (Purchases) |10000 |31/12/1996 |By Balance C/F |40280 |

| | |44200 | | |44200 |

|1/1/1997 |To Balance B/D |40280 |30/6/1997 |By Cash A/C (Sales) |9500 |

| | | |30/6/1997 |By Loss on Sales |5120 |

| | | |30/6/1997 |By Depreciation on sold |770 |

| | | |31/12/1997 |By Depreciation A/C |2489 |

| | | |31/12/1997 |By Balance C/F |22401 |

| | |40280 | | |40280 |

|1/1/1998 |To Balance B/D |22401 | | | |

Q3 Ans:

|Profit and Loss Account |

|Less Reserve for Bad debts = 3600 |2700 | | |

| | | | |

|Balance Sheet |

| | |Less Reserve Bad Debts @8% of 60000 = 4800 |55200 |

Case Study

1Ans:

Vishal & Company

2Ans:

10%

3Ans:

Vishal & Company has got the better rate of return. The difference in the rate of return is due to higher investment.

4Ans:

Vishal & Co.

5Ans:

6ANs:

Bharat & Co.

7 Ans:

Bharat & Co.

8Ans:

Depreciation is already provisioned for in both the companies

9Ans:

Vishal and company.

ASSIGNMENT – C

Q1Ans: The systematic recording, reporting, and analysis of financial transactions of a business. Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit.

Objectives of Accounting

• To keep systematic records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear.

• To protect business properties: Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor.

• To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss.

• To ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., where he stands; what he owes and what he owns? This objective is served by the balance sheet or position statement.

• To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.

Limitations of Accounting

• Financial accounting permits alternative treatments

• Financial accounting does not provide timely information

• Financial accounting ignores important non-monetary information

• Financial Accounting does not provide detailed analysis

• Financial accounting does not disclose the present value of the business.

Q2. Ans:

Accounting is a four stage process of recording, classifying, summarizing and the interpretation of the financial statements.

Bookkeeping is a part of Accounting. It is merely a mechanical aspect of recording, classifying and summarizing transaction.

Q3. Ans: A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. In accounting, it is recognized by an entry in the books of account. It involves a change in the status of the finances of two or more businesses or individuals. examples of a financial traction would be – Making a purchase , Taking a loan , All the events that take place in you bank accounts like credits , debits etc , A credit card Transaction – Buying on credit or using a debit card where the purchase is made and funds are debited from your bank account.

Q4Ans:

Fixed asset, also known as a non-current asset or as property, plant, and equipment (PP&E), is a term used in accounting for assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases, only tangible assets are referred to as fixed

Floating assets are not permanent and these are ever changing assets that change depending on the business eg cash , accounts receivable , notes receivable, finished products , goods in in the process of manufacturing, raw material, supplies etc. Fixed assets are those which are fixed in nature like Plant, machinery, building, land, patent rights, good will etc.

Q5Ans:

Creditors for goods is the amount that a company owes to vendors for products purchased by it on credit. This is a current liability as the expectation is that the due payments would be made by the company in less than a years time.

Q6 Ans:

Material facts are documents pertaining to the historical events of the facts being justified

Q7Ans:

Dual concept may be stated as “for every debit, there is a credit.” Every transaction should have two sided effect to the extent of same amount. This concept has resulted in accounting equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of owner’s equity and outsider’s liabilities. This may be expressed in the form of equation:

A – L = P

Where A stands for assets of the entity.

L stands for liabilities (outsider’s claims) of the entity

P stands for proprietor’s claim (capital) on the entity.

Q8 Ans:

Gross income is the actual amount of money you make on a job before taxes and insurance are deducted.

Net income is the actual amount of money you take home weekly/monthly after all taxes, medical insurance…etc have been deducted.

Q9 Ans:

Double Entry accounting is the basis of the standard system used by businesses and other organizations to record financial transactions. The system is called ‘double entry’ because each transaction is recorded in at least two accounts. Each transaction results in at least one account being debited and at least one account being credited with the total debits of the transaction equal to the total credits.

Q10 Ans:

As per this concept only those transactions which can be measured in terms of money are recorded. Since money is the medium of exchange and the standard economic value, this concept requires that those transactions alone that are capable of being measured in terms of money be only be recorded in the books of accounts

Q11 ANs.

The convention of consistency means that same accounting principles should be used for preparing for financial statements for different periods. It enables the management to draw important conclusions regarding the working of the concern over a longer period. It allows a comparison in the performance of different periods. If different accounting procedures and processes are used for preparing financial statements of different years then the results will not be comparable because these will be based on different postulates. The concept of consistency does not mean that no change should be made in accounting procedures. There should always be a scope for improvement but the changes should be notified in the statements. The impact of changes of procedures should be clearly stated. It will enable the readers to analyze information according to new procedures. In the absence of any information regarding the change, it will be presumed that old methods have been used this time also. Whenever, consistency is not followed this fact may be fully disclosed. For example, if a change in the method of charging depreciation is made or a change is made in the method of allocating overhead expenses to different products, a foot note to the financial statements should be given indicating the extent of change. If possible, net monetary effect of these changes should also be given. Consistency may be of three types:

1. Vertical consistency

2. Horizontal consistency

3. Third dimensional consistency

Q12 ANs:

It is an outflow of cash or other valuable assets from a person or company to another person or company. This outflow of cash is generally one side of a trade for products or services that have equal or better current or future value to the buyer than to the seller. Technically, an expense is an event in which an asset is used up or a liability is incurred. In terms of the accounting equation, expenses reduce owners’ equity. The International Accounting Standards Board defines expenses as decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Direct Expenses are those expenses which are incurred in relation to manufacture of products directly Eg: Machinery repairs, Labour, Factory etc.

Indirect Expenses are those expenses which are incurred after manufacturing of goods. Eg: Administrative Exp, Advertisement, Selling & Distribution etc.

Q13 ANs:

A balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a “snapshot of a company’s financial condition”. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business’ calendar year.

Q14 Ans:

A Trial Balance is a statement of ledger account balances within a ledger, at particular instance. It’s main purpose is to check mathematical/ arithmetic accuracy of accounting.

Q15 Ans:

Income statement (also referred as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations)[1] is a company’s financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the “top line”) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the “bottom line”).

It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes.[1] The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.

The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.

Q16 Ans:

Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions. Based on these reports, management may:

▪ Continue or discontinue its main operation or part of its business;

▪ Make or purchase certain materials in the manufacture of its product;

▪ Acquire or rent/lease certain machineries and equipment in the production of its goods;

▪ Issue stocks or negotiate for a bank loan to increase its working capital;

▪ Make decisions regarding investing or lending capital;

▪ Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business

Q17 Ans:

Importance of Financial statements are declarations of information in financial terms about an enterprise that are believed to be fair and accurate. They describe certain attributes of the enterprise that are important for decision makers, particularly investors (owners) and creditors.

Q18 Ans:

Accounting Ratio may be defined as the arithmetical expression of the relationship between two accounting figures. For example, gross profit and sales, net profit and sales, sales and total assets, etc.

According to J Betty, “ the term accounting ratio is used to describe significant relationships which exist between figures shown in a balance sheet, in a profit & loss account or in a budgetary control system, or in any part of the accounting organisation.”

Q19 Ans:

A current asset is an asset on the balance sheet which can either be converted to cash or used to pay current liabilities within 12 months. Typical current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory and the portion of prepaid liabilities which will be paid within a year.

Q20 Ans:

current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer. A more complete definition is that current liabilities are obligations that will be settled by current assets or by the creation of new current liabilities.

Q21 ANs:

The difference between current assets and fixed assets are as follows:

Current assets are flexible in nature, easy to en-cashable and floating money to company whereas

Examples of Current assets are:

Cash – at hand and at bank

Inventories

Sundry Debtors

Advance and Deposits

Fixed assets are Fixed in nature in other words non-moving assets, not easy to encash, regularly depreciated.

Examples of Fixed Assets are:

Land and Building

Furniture and Fittings

Tools and tackles

Plant and Machinery

Computer ( including accessories and UPS)

Q22 ANs:

The ratio which establishes a relationship between current assets and current liabilities of a business is called current ratio. A current ratio of 2:1 is considered to be acceptable.

Objectives and Significances:

i) Current ratio is a measure of the ability of a firm to meet its short-term obligations when due.

ii) It is calculated to assess short-term financial position and solvency of the firm.

iii) It indicates margin of safety available to short-term creditors.

iv) Current ratio focuses management attention on the efficient management of working capital.

Q23 ANs:

Inventory turnover ratio establishes the relationship between the cost of goods sold during a given period and the average amount of inventory carried during that period. Higher ratio indicates that more sales are being produced by a unit of investment in stocks. The objective of computing inventory turnover ratio is to ascertain whether investment in stock has been efficiently used or not. A low stock turnover may reflect dull business, over investment in stock, accumulation of stock.

Q24 Ans:

Gross Profit Ratio: Gross profit ratio expresses the relationship between gross profit and net sales. Gross profit is the difference between sales and cost of sales. Normally the higher ratio is considered good. Gross profit ratio is a reliable guide to the adequacy of the selling prices and efficiency of trading activities.

Operating Profit Ratio: This ratio establishes the relationship between operating profit and sales. The objective of computing this ratio is determining the operational efficiency of the management. Operating profit means excess of gross profit over other operating expenses.

Q25 ANs:

The Working Capital Turnover Ratio provides a measure to compare the depletion of working capital to the generation of sales over a specific period of time. The ratio provides investors with a look at how effectively a company is leveraging its working capital to generate sales. High or increasing working capital turnover is generally a good sign as it shows that either the company is achieving greater sales with the same or a lesser amount of working capital or it has been able to maintain its sales with reduced working capital. Each of these cases can be reflective of the company successfully streamlining its operations.

Q26 Ans:

An operating ratio is a mathematical calculation used to determine a company’s operational efficiency. The traditionaloperating ratio compares the company’s operating expenses to its net sales. Total net sales are calculated by taking gross sales revenues minus sales returns, discounts, and allowances. This ratio helps companies determine how well they can generate sales revenues based on the expenditures during a specific time frame. The information for this financial ratio is usually contained on a company’s income statement.

Q27 Ans:

This ratio is computed to establish the relationship between net credit sales and average debtors. This ratio indicates the number of times the receivables are turned over in a year in relation to sales. It shows how quickly debtors are converted into cash. It indicates the efficiency of the staff entrusted with collection of debts. A high ratio is better since it would indicate that debtors are being collected more quickly.

Q28 ANs:

Net Profit Ratio: This ratio establishes the relationship between net profit and net sales. Net profit ratio indicates the overall efficiency of the business. Higher the net profit ratio, better the business.

Operating Ratio: This ratio establishes the relationship between cost of goods sold plus operating expenses with net sales. This ratio indicates the extent of sales that is absorbed by cost of goods sold and operating expenses.

Q29 Ans:

Every company prepares it balance sheet at the end of its accounting year. It reveals the financial position of the company at a certain point of time. It does not present any analysis. It is simply a statement of assets and liabilities of the concern. Its usefulness is, therefore, limited for analysis and planning purposes. The statement of sources and application of funds serves the purpose, which is popularly known as ‘Funds Flow Statement’.

Funds-Flow-Statement is a widely used tool in the hands of financial executives for analyzing the financial performance of a concern. Good concerns always prepare such statement along with the balance sheet at the end of year. This statement shows how the activities of a business have been financed or how the available financial resource have been used during a particular period. But it is quite different from income statement which is primarily a presentation of revenue and expenses items and computation of net income for the period while the funds flow statement is a report of financial operations of a business undertaking. It generally reports changes in current assets and current liabilities and is much useful for financial executives, financial institutions and creditor for the analysis of financial position of the company.

Q30 Ans:

In every day usage, the term depreciation denotes the decrease in the value of tangible assets due to wear and tear, deterioration an decay of assets with the passage of time, and damage or destruction. It is treated as an expense and is charged against profits of the concern. According to statutory provisions, charging of depreciation to profit and loss account is a must in order to ascertain the net profits available for the distribution of dividend to shareholders. The provision of depreciation is also necessary to have a true and fair view of the fixed assets of the company.

There are so many methods of providing depreciation on fixed asset and the company is free to adopt any of these methods which suits to6the needs of the business. But the method once adopted should be followed throughout the life of the asset unless there is some exceptional circumstances. The firm should establish a sound depreciation policy taking in view the general principles of providing depreciation and the statutory provisions relating to depreciation because it affects considerably the profits, profitability and the production capacity of to be concern. So, it is the responsibility of the Finical executives to see whether the provision of adequate an reasonable depreciation is being made or not.

Q31 Ans:

(1) Loss from operations. Loss from operations either decreases the current assets or increases the current liabilities or in other words reduces the funds. It may either be shown as application of funds in the Funds Statement or as a reduction in sources of funds.

(2) Purchase of Fixed Assets. If any fixed asset like building, machinery, furniture or investments is purchased, it will reduce the current asset (cash) without any corresponding decrease in current liability. It is, thus, an application of funds. Purchase of asset against issue of share capital is not application of funds.

(3) Repayment of loans, Redemption of Debentures or preference share capital. Any such repayment including the payment of premium on redemption of debentures or preference shares is an application of funds because it reduces the current assets.

(4) Payment of Dividend. Payment of dividend (and not proposed dividend) is an application of fund if paid in cash. If bonus shares are issued, it shall not be treated application of funds.

Q32 Ans:

The difference between position statement (balance sheet) and funds flow statement is as follows:

(i) Balance sheet is a statement showing the financial position of the concern on a particular date. The asset side portrays the development of resources in various type of properties an liabilities side indicates the manner in which these resources are obtained. It shows all assets and liabilities whether current or fixed, tangible or intangible etc., while Funds Flow Statement shows the changes in current assets an current liabilities during a particular period of time.

(ii) Balance Sheet shows the total financial position on a particular date and in this way, it is of a historical nature an therefor, its utility is very limited for the management. On the other hand, Funds Flow Statement is a comparative statement of assets and liabilities and depicts the changes in working capital during the period of two Balance sheets.

(iii) Funds Flow Statement is an analysis and control device for the management. Management can ensure the long term an the short term solvency of the firm by studying the internal funds flow cycles. It is a modern technique of knowing the inflows and outflows of funds during a particular period. Balance Sheet represents the balance of various assets an liabilities and does not present analysis of any kind.

(iv) There are two views of h financial position of the firm-long term an short-term. Short-term financial position means the technical solvency of the firm in the near future while on the other hand, long-term financial position means future financial structure of the firm. Both are inter-relate but there is a differences in their analysis. The short-term view of the financial position of the firm ca not be had from the Balance Sheet.

Q33 Ans:

There is a plenty of business transactions which results in flow of funds or which cause changes in working capital. For this purpose, all the business transactions classified into (a) those transactions which increase funds i.e. sources of funds (b) those transactions which decrease funds i.e. application of funds. Identification of transactions causing for increase or decrease in funds is essential for funds flow statement analysis. The following transactions do not affect the flow of funds. These are

• Transactions between two current assets. (For ex. conversion of stock into cash)

• Transactions between two current liabilities.

• Transactions between current assets and current liabilities.

• Transactions between two non-current or fixed assets.

• Transactions between two long-term liabilities.

• Transactions between non-current assets and long-term liabilities.

It is clear from above, transactions between a current account (non-current account) and another current account (non-current account) does not affect flow of funds. The first three is connected with current account; the last three belongs to non-current account. As against this concept, any transaction between a current account and a non-current account affect funds. These are;

• Transaction between a long term liability and a current asset.

• Transaction between a long term liability and a current liability.

• Transaction between a non-current asset and a current asset.

• Transaction between a non-current asset and a current liability.

Q34 Ans:

any transaction between a current account and a non-current account affect funds. These are;

• Transaction between a long term liability and a current asset.

• Transaction between a long term liability and a current liability.

• Transaction between a non-current asset and a current asset.

• Transaction between a non-current asset and a current liability.

Q35 ANs:

Overhead are costs that are indirectly related to the sales process. For example, the cost of electricity in a factory is an overhead cost in the production of toys.

To clarify – overhead costs are expenses not directly related to the production of goods for sale. While electricity would be an example of an overhead expense in a office, etc… in a manufacturing environment where electricity is directly tied to the usage of machines used to produce items (in this example toys) it would be better classified as a cost of goods sold. In almost all cases an expense such as real estate taxes or routine building maintenance would be consdiered overhead.

Q36 ANs:

If the cost can be tracked towards a cost object, then it is called overhead absorption.

If the cost can not be tracked with respect to a specific cost center or cost object, then the entire cost is distributed to all the cost centers, based on the usage ratio. This is called Overhead apportionment.

Q37 ANs:

These are Non-Funds Items: Items which do not increase the current liability or decrease the current asset are non-fund items.

Q38 Ans:

Cash Flow statement is an essential tool for short term financial analysis and planning

Its main advantages are as follows:

(i) Planning and Co-ordination of Financial Operations. Cash Flow Statement is useful is evaluating Financial policies and current cash position. Since cash is the basis for carrying on operations, the Cash Flow Statement prepared on an estimated basis for the next accounting period will enable the management to plan and co-ordinate the financial operations probably. The management comes to know how much cash is needed in the future and at what time and how can it be arranged-how much internally and how much from outside. It is especially useful in preparing cash budgets.

(ii) A Control Device. Cash Flow statement is also a control device for the management. A comparison of cash flow statement of previous year with the budget for that year would indicate to what extent the resources of the enterprise were raised an applied according to the plan. Thus a comparison of original forecast with actual results may highlights trends of movement that might otherwise go undetected.

(iii) Useful to internal Financial Management. Since it gives a clear picture of cash inflow from operations (and not income flow of operation), it is, therefore, very useful to internal financial management in considering the possibility of retiring ling-term debts, in planning replacement of plant facilities or in formulating dividend policies.

(iv) Profit and Cash Positions. It enables the management to account for situation when business has earned huge profits yet run without money or when it has suffered a loss and still has plenty of money at the bank.

(v) Short-term Financial Decisions. Cash Flow Statement helps the management in taking short-term financial decisions. Suppose, if firm wants to know its state of solvency after one month from to date, it is possible only from Cash Flow analysis and not from Fund Flow Statement. Shorter the period, greater is the importance of Cash Flow Statement.

Q39 ANs:

Non-cash items include any outflows or inflows that are accrued over time such as deprecitaion/amortization expenses or accretion expenses but are not necessarily physical cash outflows (the money is not going anywhere perse).

Hope that helps.

Q40 Ans:

Cash from Operations (Sales/Accounts Receiveable)

Cash from Loans

Cash from Capital Investment/Stock issuance (Equity)

———————–

Sales

Working capital turnover Ratio = = x times

Working Capital

Credit sales

Debtors’ turnover Ratio = = x times

Average Debtors

Q4. Ans:

Assets

Liabilities

Shareholder’s equity

Profit and Loss Account

Cash-Flow Statements

Conclusion

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