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) Submitted by: Deepak Kumar Assignment Set – 1
1. Journalise the following transactions: 01.01.09 Bought goods for Rs. 10000 02.01.09 Purchased goods from X Rs. 20000 03.01.09 Bought goods from Y Rs. 30000 against a current dated cheque 04.01.09 Purchased goods from Z [price list is Rs. 30000 and trade discount is 10%] 05.01.09 Bought goods of the list price of Rs. 125000 from m less 20% trade discount and 2% cash discount. Paid 40% of the amount by cheque 06.01.09 Returned 10% of the goods supplied by X 07.01.09 Returned 10% of the goods supplied by Y Ans. Journal Entries Date 01.01.09 02.01.09 03.01.09 04.01.09 Particulars Purchase A/c Dr. To Cash A/c Purchase A/c Dr. To X A/c Purchase A/c Dr. To Bank A/c Purchase A/c Dr. To Z A/c To Discount Received A/c Purchase A/c Dr. To Bank A/c To M A/c To Discount Received A/c X A/c Dr. To Purchase Return A/c Y A/c Dr. To Purchase Return A/c Debit 10000 20000 20000 30000 30000 30000 27000 3000 123000 39200 58800 25000 2000 20000 3000 3000 Credit 10000
1. Explain errors of omission and errors of commission. Ans. There are certain errors which will disturb the Trial Balance in the sense that the Trial Balance will not agree. These errors are easy to detect and their rectification is also simple. For example, if the debit column total of the Trial Balance exceeds the credit column total, the possibilities may be a casting error in any account, posting of a wrong amount and a balancing error. These errors are easy to detect and you can, within a
short time, arrive at an agreed Trial Balance. In the era of advanced information technology, when you will be using software packages for accounting purposes, the possibility of these types of errors and consequently, a disagreed Trial Balance is nil. However, there are certain errors which are not detected through a Trial Balance. In other words, a Trial Balance would agree in spite of these errors. These errors are very difficult to detect because you will not be aware of such errors. The examples of such errors are errors of principle, errors of omission, errors of commission, compensating errors, etc. An error committed because of lack of knowledge of the basic accounting principles is called an error of principle. For example, wages paid for installation of machinery is debited to Wages Account instead of Machinery Account. If a transaction is not recorded in the journal, it will not be reflected in the ledger and subsequently, in the Trial Balance. This is an error of omission. If the amount received from Mr. X is wrongly posted in the account of Mr. Y, an error of commission has occurred. Finally, if the effect of one error is set off by another error, then it is a case of a compensating error. For example, if the Sales Account is undercast by Rs.10,000 and say, the salary account is also undercast by the same amount, these errors get cancelled and hence will not affect the Trial Balance. Rectification of Errors Rectification of errors depends on the stage at which the errors are detected. There are mainly two stages in the accounting process when errors can be detected: Stage 1: Before preparation of the Trial Balance. Stage 2: After the Trial Balance but before preparation of the final accounts. Stage 1: Before preparation of the Trial Balance As the Trial Balance is not prepared it implies that the ledger balances are not drawn, i.e., account is not closed. So, it becomes easy to rectify errors detected at this stage. There can be two types of errors. (a) An error affecting only one account or more than one account in such a way that no journal entry is possible for its rectification; (b) An error affecting two or more accounts in such a way that a complete journal entry can be passed for its rectification. In case of type (a) errors, we have to go to the relevant account(s) and put the figure on the right side of the account. No journal entry is necessary. 2. Goods returned by the customer Mr. X of R 5,650 has been posted in the Return Inward Account as Rs.5,560 and in Mr. X A/c. as Rs.6,550. Mr. X’s Account Dr. Date Particulars JF Amount (Rs.) Date Particulars To Rectification 900 JF Cr. Amount (Rs.)
(6,550 – 5,650) Return Inward Account Dr. Date Particulars JF Amount (Rs.) Date Particulars To Rectification (5,650- 5,560) 90 JF Cr. Amount (Rs.)
In case of type (b) errors rectifications will be done with the help of a journal entry. Here, please note that rectification entries are passed in the Journal Proper. Example 1. Cash received from Ram posted to Shyam account Rs.7,000. Here both Ram’s and Shyam’s accounts are affected by an equal amount. The rectification entry to be passed will be: Shyam’s Account Dr. 7,000 To Ram’s Account 7,000 (Cash received from Ram wrongly Credited to Shyam, now rectified) 2. Salary paid Rs.6,000 has been posted to Rent account The rectification entry will be: Salary Account Dr. 6,000 To Rent Account 6,000 (Salary paid wrongly debited to Rent Account, now rectified) 3. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s Account. Here although both Jadu’s and Madhu’s accounts are affected, a journal entry is not possible for rectification because the error is on the same side of both the accounts. In order to rectify the error both Jadu’s and Madhu’s accounts are to be credited. So, to rectify the error we have to straightway open the ledger accounts: Jadu’s Account Dr. Date Particulars JF Amount (Rs.) Date Particulars By Rectification JF Cr. Amount (Rs.) 8,640
Madhu’s Account Dr. Date Particulars JF Amount (Rs.) Date Particulars By Rectification JF Amount (Rs.) Cr.
8,640 Stage: 2 After the trial but before the final accounts Once the Trial Balance is prepared, all ledger balances are drawn. In that case, to rectify any error, it should be done in such a way that the Trial Balance agrees. In other words, if an account is to be debited for rectification, another account has to be credited by the same amount. Otherwise, the Trial Balance will not tally. This is possible only if the rectification is done with the help of journal entries. So far as type (b) errors of stage 1 are concerned, the process of rectifying the errors is exactly the same in stage 2 as well. The same journal entries are to be passed. The difficulty arises with type (a) errors of stage 1. This is because type (a) errors do not have necessary information to complete a journal entry. You may note here that type (a) errors are of such a nature that the Trial Balance will not agree if there exist such errors. Thus, if you are in a hurry and your Trial Balance is not tallying, you can put the difference to an artificial account created temporarily and make the Trial Balance tally. Such an artificial account is called the Suspense Account. The existence of the ‘Suspense Account’ in the Trial Balance implies that there exist type (a) errors. Once type (a) errors are detected, these are to be rectified by passing journal entries and, upon rectification of all such errors, the Suspense Account will be automatically eliminated from the Trial Balance. The technique for passing journal entries in these cases is to put the Suspense Account to fill in the unknown side or the difference in amount. Example 1. Purchase Account undercast by Rs.1,500 Here we have only one account, i.e., purchases account. But to complete the journal entry, we need at least two accounts. The unknown side will be taken care of by the Suspense Account. Thus, the rectification entry will be: Purchases Account Dr. 1,500 To Suspense Account 1,500 Cash received from Ram Rs.650 was debited in his account. Here, Ram’s account should have been credited. But erroneously, his account has been debited. To rectify the error, his account should be credited by double the amount – one for setting off the error and the other for making the correct entry. Thus, the rectification entry will be: Suspense Account Dr.1,300 To Ram’s Account 1,300 2. From the following balances extracted from Trial balance, prepare Trading Account. The closing stock at the end of the period is Rs. 56,000 Particulars Stock on 1-1-2004 Returns inwards Returns outwards Amount in Rs. 70700 3000 3000
Purchases Debtors Creditors Carriage inwards Carriage outwards Import duty on materials received from abroad Clearing charges Rent of Business shop Royalty paid to extract materials Fire insurance on stock Wages paid to workers Office salaries Cash discount Gas, electricity and water Sales
102000 56000 45000 5000 4000 6000 7000 12000 10000 2000 8000 10000 1000 4000 250000
Particulars To Opening Stock To Purchases Less Returns Outwards To Carriage Inwards To Wages To Fire Insurance on stock To Gas, Electricity and Water To Import duty To Clearing charges To Royalty paid to extract materials To Gross Profit
Trading Account Amount (Rs.) Particulars 70700 By Sales 102000 Less Return Inwards 3000 99000 By Closing Stock 5000 8000 2000 4000 6000 7000 10000 91300 303000
Amount (Rs.) 250000 3000 247000 56000
3. Why wealth maximization is superior to profit maximization? Ans. The firm’s investment rationale and financing decisions are continuous. It is generally agreed that the financial goal of the firm should be the maximization of the owners’ economic welfare. The owners’ economic welfare can be maximized by maximizing the shareholders’ wealth as reflected in the market value of shares. Profit maximization and wealth maximization are two important aspects. Profit Maximization: Profit maximization means increasing the rupee income of firms. Pricing of goods is a very important function and is determined by the type of economy in which the firm is functioning. This may be done by market competitive forces if the economy is a market economy and by Government in a Government -controlled economy. Firms in a market economy can function the best only if they produce goods and services desired by the customers and prices are as competitive as possible for the customers to have a wide choice of products available at very competitive prices. It is generally held that under conditions of free competition, businessmen pursuing their own self-interests also serve the interest of society. When individual firms pursue the interest of maximizing the profits, society’s resources are efficiently used. The profit maximization objective has been criticized in recent years. This objective developed in the early 19th century when private property, self-financing and single entrepreneurship were the order of the day. With the passage of time, businesses have had a complete change-over and now there is a divorce between ownership and management. Today’s corporates are financed by shareholders and lenders but are run by professional managers. In reality, the objectives of these two constituents – owners and managers may conflict with each other. In the present circumstances, profit maximization is regarded as unrealistic and difficult. An alternative to profit maximization is the objective of wealth maximization which is discussed below. Wealth Maximization: This is also known as value maximization and net present worth maximization. Shareholders’ Wealth Maximization (SWM) is an appropriate an operationally feasible criterion to choose among the alternative financial actions. SWM is the maximization of the net present value or wealth of a course of action to shareholders. A financial action that creates wealth for shareholders is desirable. The benefits are measured in terms of cash flows. In investment and financing decisions the flow of cash is important and not the accounting profits. Increasing the shareholders’ economic welfare is equal to increasing the utility of their consumption over time. The wealth created by the company is echoed in the market value of company’s shares which in other words is a reflection of the firm’s financial decisions.
Other Objectives Besides the above objectives, there are other objectives of financial management. These include: Ensuring operational efficiency by efficient and effective utilization of finances and other resources. Ensuring financial discipline in the management. Building reserves for growth and expansion.
4. Following are the extracts from the Trial Balance of a firm as on 31 March 20X7 Dr. 205000 Cr. 10000 1800 3000 1000
Sundry Debtors Provision for Doubtful Debts Provision for Discount on Debtors Bad Debts Discount
Additional Information: 1. Additional Bad Debts required Rs. 4000 2. Additional Discount allowed to Debtors Rs. 1000 3. Maintain a provision for bad debts @10% on debtors 4. Maintain a provision for discount @ 2% on debtors Required: Pass the necessary journal entries and show the relevant accounts including final accounts. Ans. Journal entries as on 31 March 20X7 Particulars Bad Debts A/c Dr. To Sundry Debtors A/c Provision for Doubtful Debts A/c Dr. To Bad Debts A/c P & L A/c Dr. To Provision for Doubtful debts A/c Provision for Discount A/c To Discount on Debtors A/c P & L A/c Dr. To Provision on Doubtful Debts A/c Debit 4000 7000 7000 17100 17100 1000 1000 2818 2818 Credit 4000
Provision for Doubtful Debts A/c Particulars To Bad Debts A/c To Bal c/d Amount 7000 20100 27100 Provision for Discount on Debtors A/c Particulars To Discount on Debtors A/c To Bal c/d Amount 1000 3618 4618 Bad Debts A/c Particulars To Bal b/d To Sundry Debtors Amount 3000 4000 7000 Particulars Amount By Provision for Doubtful Debts A/c 7000 Particulars By Bal b/d By P & L A/c Amount 1000 2828 4618 Particulars By Bal b/d By P & L A/c Amount 10000 17100 27100
Calculation of Provision required Debtors as per Trial Balance 205000 Less Additional Bad Debts 4000 201000 10% on 201000 = 20100 Opening Balance in Provision Account 10000 Less Bad Debts w/o - 7000 3000 Provision needed 201000 Therefore Provision required to be made 20100-3000 = 17100 Calculation of Provision of Discount
Debtors as per Trial Balance Less Additional bad Debts Less Additional Provision
205000 - 4000 201000 - 20100 180900 = 3618
2% of 180900
Profit and Loss Account Particulars To Bad Debts +New Bad Debts +New R .D.D -Old R.D.D Amount 3000 4000 20100 27100 -10000 17100 1000 3618 4618 1800 2818 Particulars Amount
Discount as per Trial Balance +New Provision -Old Provision
Balance Sheet Particulars Amount Particulars Current Assets Sundry Debtors -Bad Debts -R.D.D -Reserve for Discount on Debtors Amount 205000 -4000 -20100 180900 -3618 177282
February 2011 Bachelor of Computer Application (BCA) – Semester 3 BC0044 – Accounting and Financial Management – 4 Credits (Book ID: B0805) Submitted by: Deepak Kumar Assignment Set – 2
1. What is over capitalization? How do we know overcapitalization has occurred? Ans. Over-capitalization Over-capitalization arises when the present capital of the company is not effectively or properly used. There is excess capital available in the company than the actual requirement. A firm is said to be over-capitalized when its earnings are not sufficient to pay dividends to the investors. For example, if the company’s rate of return is 12% and it earns a profit of Rs. 100000 on an investment of Rs. 1200000, we get the fair rate of return to be less than the profits earned. Fair rate of return is 1200000*12% which is Rs. 144000. The company is earning less than the fair return in the industry. The company is said to be over-capitalized because the earning of the company is (100000/1200000)*100 which is 8.33% and this is less than the fair rate return of the industry. How do we know over-capitalization has occurred?
Actual capitalization of the company exceeds the capitalization warranted by the activity levels. Earnings are lower than the expected returns. There is a fall in the rate of dividends declaration. There is a fall in the market value or the market price of the shares of the company.
Causes of over-capitalization:
If a company acquires assets at inflated prices than the book values, overcapitalization occurs. Acquiring unproductive assets, mostly intangible in nature like goodwill, patents, etc. High initial costs by way of preliminary expenses. A company being set up in boom time pays more on acquisition of assets. Once the boom time subsides, it will find the capital over capitalized. Raising more capital than the required amount. Company borrows money at high rates of interest than the moneys could be put into profitable use. A company postponing plant repairs and maintenance will find itself over-capitalized as the efficiency of the plant stands reduced. Excessive taxation by government leaves very little money with the company. The money may be insufficient to meet its daily requirements and the company may resort to borrowings. Borrowing beyond a certain limit leads to over-capitalization
Effects of over-capitalization Fall in profits
Fall in dividend rates Loss of investors’ confidence Fall in market prices of shares.
2. Explain permanent and temporary working capital. Ans. Working capital management involves managing the different components of current assets and current liabilities. It is an effort to try to maintain a healthy relationship between these two so that a satisfactory level of working capital is maintained. It is very important for a firm to maintain a satisfactory level of working capital, otherwise there are chances of the firm becoming insolvent and going bankrupt. The interface between CA and CL is therefore very important and forms the main subject under working capital management. Permanent and Temporary Working Capital: Permanent working capital is the minimum investment in the form of inventory of raw materials, work-in-progress, finished goods, stores and book debts to facilitate uninterrupted operations in a firm. This minimum level is called the permanent or fixed working capital. It is permanent like the firm’s fixed assets are. Over and above this, the firm’s working capital requirements fluctuate depending upon the cyclicality and seasonality of product demands. This is referred to as the variable or fluctuating or temporary working capital. These two aspects can be graphically shown as follows:
3A. What are the assumptions of EOQ Model? Ans. Economic Order Quantity (EOQ) EOQ refers to the optimal order size that will result in the lowest ordering and carrying costs for an item of inventory based on its expected usage. Answers to questions such as: What should be the quantity ordered for each replenishment of stock, how many orders should be placed to get the raw materials or should the entire requirement be procured once or in installments and if installments, how many of them – these are sought to be explained by the EOQ model. The optimum level of inventory is referred to as the Economic Order Quantity. It is the economic lot size. EOQ is defined as that level of inventory order that minimizes the total cost associated with the inventory management. It is that level one unit beyond which is additional cost to the firm and one unit below may hamper production process. The model is based on the following assumptions; nevertheless, it is the most widely used technique in inventory control. Constant or uniform demand: The firm knows with certainty the annual consumption of a particular item of inventory. Constant unit price: The EOQ model is based on the assumption that the per unit price of material does not change and is constant irrespective of the order size. Constant carrying costs: Unit carrying costs are known to vary substantially as the size of inventory increases or decreases. Firms derive economies of scale by increasing order size. However, the EOQ model assumes the carrying costs to be constant. Constant ordering costs: Ordering costs are assumed to be constant whatever the number of orders are and whatever the size is.
B. Consider the following data of X Ltd. Calculate EOQ Annual Usage = 10000 units Fixed cost per order= Rs. 150 Purchase price per unit= Rs. 20 Carrying cost= 25% Ans. EOQ = sqrt2 x A x S/C A = Annual Usage S = Ordering Cost C = Cost of carrying inventory per unit per annum Annual Usage = 10000 units Cost per order = Rs.150 Carrying Cost = 25% Purchase price per unit = Rs.20 EOQ = sqrt2 x 10000 x 150/5 EOQ = sqrt2 x 1500000/5 EOQ = sqrt2 x 300000 EOQ = sqrt600000 EOQ = 774.59 Note: (C = 20 x 25% = 5)
4. Explain the objectives of cash management Ans. Cash Management Cash is the most important current asset for a business operation. It is the force that drives business activities and also the ultimate output expected by the owners. The firm should keep sufficient cash at all times. Excessive cash will not contribute to the firm’s
profits and shortage of cash will disrupt its manufacturing operations. The term ‘cash’ can be used in two senses – in a narrow sense it means the currency and other cash equivalents such as cheques, drafts and demand deposits in banks. In a broader sense, it includes near-cash assets like marketable securities and time deposits in banks. The distinguishing nature of this kind of asset is that they can be converted into cash very quickly. Cash in its own form is an idle asset. Unless employed in some form or another, it does not earn any revenue. Cash management is concerned with (a) management of cash flows into and out of the firm, (b) cash management within the firm and (c) management of cash balances held by the firm – deficit financing or investing surplus cash. Cash management tries to accomplish at a minimum cost the various tasks of cash collection, payment of outstandings and arranging for deficit funding or surplus investment. It is very difficult to predict cash flows accurately. Generally, there is no correlation between inflows and outflows. At some points of time, cash inflows may be lower than outflows because of the seasonal nature of product sale thus prompting the firm to resort to borrowings and sometimes outflows may be lesser than inflows resulting in surplus cash. There is always an element of uncertainty about the inflows and outflows. The firm should therefore evolve strategies to manage cash in the best possible way. These can be broadly summarized as: Cash planning: Cash flows should be appropriately planned to avoid excessive or shortage of cash. Cash budgets can be prepared to aid this activity Managing cash flows: The flow of cash should be properly managed. Steps to speed up cash collection and inflows should be implemented while cash outflows should be slowed down. Optimum cash level: The firm should decide on the appropriate level of cash balance. Balance should be struck between excess cash and cash deficient stage. Investing surplus cash: The surplus cash should be properly invested to earn profits. Many investment avenues to invest surplus cash are available in the market such as, bank short term deposits, T-Bills, inter corporate lending etc. The ideal cash management system will depend on a number of issues like, firm’s product, competition, collection program, delay in payments, availability of cash at low rates of interests and investment opportunities available. Motives of Holding Cash Objectives of Cash Management: This can be studied under two heads: (a) meeting payments schedule and (b) minimize funds committed to cash balances. Meeting payments schedule: In the normal course of functioning, a firm will have to make many payments by cash to its employees, suppliers, infrastructure bills, etc. It will also receive cash through sales of its products and collection of receivables. Both these do not happen simultaneously. A basic objective of cash management is therefore to meet the payment schedule in time. Timely payments will help the firm to maintain its creditworthiness in the market and to foster good and cordial relationships with creditors and suppliers. Creditors give a cash discount if payments are made in time and the firm can avail this discount as well. Trade credit refers to the credit extended by the
supplier of goods and services in the normal course of business transactions. Generally, cash is not paid immediately for purchases but after an agreed period of time. There is deferral of payment and is a source of finance. Trade credit does not involve explicit interest charges, but there is an implicit cost involved. If the credit terms are, say, 2/10, net 30, it means the company will get a cash discount of 2% for prompt payment made within 10 days or else the entire payment is to be made within 30 days. Since the net amount is due within 30 days, not availing discount means paying an extra 2% for 20day period. The other advantage of meeting the payments in time is that it prevents bankruptcy that arises out of the firm’s inability to honour its commitments. At the same time, care should be taken not to keep large cash reserves as it involves high cost. Minimize funds committed to cash balances: Trying to achieve the second objective is very difficult. A high level of cash balances will help the firm to meet its first objective discussed above, but keeping excess reserves is also not desirable as funds in its original form is idle cash and a non-earning asset. It is not profitable for firms to keep huge balances. A low level of cash balances may mean failure to meet the payment schedule. The aim of cash management is therefore to have an optimal level of cash by bringing about a proper synchronization of inflows and outflows and check the spells of cash deficits and cash surpluses. Seasonal industries are classic examples of mismatches between inflows and outflows. 5. The income statement of Vignesh Ltd is as follows: To Opening Stock Purchases Direct Expenses Gross Profit To Admn Expenses Selling Expenses Non-Operating exp Net Profit 200000 By Sales 800000 Closing Stock 100000 200000 1300000 100000 By Gross Profit Profit on sale of 80000 investments 40000 Dividends received 80000 3000000 1200000 100000
1300000 200000 60000 40000 300000
Calculate the Gross Profit Ratio, Net Profit Ratio, Operating Ratio, Operating Profit Ratio and Expense Ratio. Ans. Gross Profit Ratio = (Gross Profit/Net Sales) x 100 = (200000/1200000) x 100 = 16.67%
Net Profit Ratio
= = = = =
(Net Profit/Net Sales) x 100 (80000/1200000) x 100 6.67% (Cost of Goods sold + Operating Expenses)/Net Sales Opening stock + Purchases + Direct Expenses – Closing Stock 200000 + 800000 + 100000 - 100000 1000000 Administrative expenses + Financial Expens4es + Selling expenses 100000 + 80000 180000 (1000000 + 180000)/1200000 1180000/1200000 x 100 98.33% (Operating Net Profit/Net Sales) x 100 Net Profit + Non-Operating Expenses – Non-Operating Incomes 80000 + 40000 - (60000 + 40000) 120000 - 100000 200000 (200000/1200000) x 100 1.67%
Operating Ratio Cost of Goods sold
= = Operating Expenses = = = = = =
Operating Profit Ratio = Operating Net Profit = = = = Operating Profit Ratio = = Expense Ratio Expense Ratio =
Operating Expenses/Net Sales x 100 = 1,80,000/ 12,00,000 x 100 = 15.00 %
6. Explain the steps involved in Funds Flow Statement. Ans. Meaning of Fund Flow Statement Fund may be interpreted in various ways as (a) Cash, (b) Total current assets, (c) Net working capital, (d) Net current assets. For the purpose of fund flow statement the term fund means net working capital. The flow of fund will occur in a business, when a transaction results in a change i.e., increase or decrease in the amount of fund. According to Robert Anthony, the Fund Flow Statement describes the sources from which additional funds were derived and the uses to which these funds were put.
Different Names of Fund-flow Statement A Funds Statement
A statement of sources and uses of fund A statement of sources and application of fund Where got and where gone statement Inflow and outflow of fund statement Objectives of Fund Flow Statement The main purposes of Fund Flow Statement are: 1. To help to understand the changes in assets and asset sources which are not readily evident in the income statement or financial statement. 2. To inform as to how the loans to the business have been used. 3. To point out the financial strengths and weaknesses of the business. Format of Fund Flow Statement Sources Fund from operation Non-trading incomes Issue of shares Issue of debentures Borrowing of loans Acceptance of deposits Sale of fixed assets Sale of investments (Long Term) Decrease in working capital Applications -Fund lost in operations -Non-operating expenses -Redemption of redeemable preference share -Redemption of debentures -Repayment of loans -Repayment of deposits -Purchase of fixed assets -Purchase of long term instruments -Increase in working capital
Steps in Preparation of Fund Flow Statement 1.Preparation of schedule changes in working capital (taking current items only). 2.Preparation of adjusted profit and loss account (to know fund from [or] fund lost in operations). 3.Preparation of accounts for non-current items (Ascertain the hidden information). 4.Preparation of the fund flow statement.
Format of Schedule of Changes in Working Capital Particulars Previous Year Current Year Increase in W/c Current Assets Cash in hand Cash at bank Bills Receivable Debtors Inventory Prepaid expenses
Decrease in W/c
Short-term investment (A)Total Current Liability Bills payable Creditors Outstanding expenses Accrued Expenses Income received in advance Bank overdraft Cash credit from banks Short-term loan Short-term deposit Provision for taxation Proposed dividend Provision against current assets (B)Total Working Capital © (C=A-B) Increase in W/C Decrease in W/C Fund from operation can be ascertained by preparing adjusted profit and loss account. It may be prepared in statement form or account form.
Format of Adjusted Profit and Loss Account To Bal. B/d (P&L Account Dr. Bal.) By Bal. B/d(P&L account Cr. Bal.) To Non-operating expenses By Non-operating incomes To Depreciation on fixed assets By Profit on sale of investment To Goodwill written-off By Profit on sale of Fixed asset To Patent & trademark off By Dividend on investment To Preliminary expenditure By Interest on investment To Discount on issue of shares and By Rent received, gift received debentures To Loss on sale of investment By Damages received under law To Loss on sale of fixed assets By Transfer from general reserve To Damages paid under law To Premium on redemption of profit share and debentures To Interim dividend To Dividend declared (A)Total
To ascertain the hidden information, we have to prepare accounts for all non-current items of assets and liabilities (whether adjustment is given or not) then only easier to find the inflow and outflow of funds.
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