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Explain this concept with the help of an example. Ans. Financial Statements are used to find the financial health of a company or of an individual. There are two basic statements to be considered. The Statement is simply Assets less liabilities. In the example picture I have listed all of the Assets, which in include your house, 401k, car, savings, and furniture. I then listed the accounts that are owed, including house, car, and Visa. Add up all of the Assets. Add up all of the Liabilities. Subtract the Liabilities from the Assets and you have the Net Worth. A positive net worth means you have more assets than you have debts. This is a good thing. A negative net worth means you have more debts than you have things of worth. Not so good. A business uses several accounting reports to keep track of its assets. These reports include the balance sheet, income statement, retained earnings Statement and statement of cash flows. Businesses rely on these reports for many reasons which include finding out whether or not the company is profitable, where a company is spending its capital, and what the total value of the company is. Companies also use these reports for planning for the future. One of the most important reports is the balance sheet. The balance sheet provides a snapshot of the company’s assets and liabilities on the final day in a given period the balance sheet really has three different sections such as assets, liabilities and the owner’s equity. Another report widely regarded as important in a business is the income statement. Another common financial statement is the statement where you list all of your income and then all of your expenses. This can be for a week, month, or year. In the example shown I'm using monthly increments. You will note that in the month of Feb the Property Tax bill is due which drives the Net Cash Flow negative. But the months of Jan and Mar are positive, so money will have to be managed from these months to fill the gap in Feb. Again, if the Net Cash Flow is positive you are in good shape. If negative, you must increase your income or decrease your expenses to bring it back in balance. We have a team of qualified professional accountants who will provide you with services such as: • Preparing financial statements • Preparing balance sheets • Preparing income statements • Financial report analysis Preparing financial statements and reports require meticulous checking and shrewd accounting knowledge. The statutory relevance of each of these statements makes it all the more critical for your business. Keeping this in mind, we have devised processes in preparing the most accurate statements and reports for you. You can leverage our experience in preparing the following statements: • • • • • • • Trial balance journal entries and adjustment entries General ledger preparation Balance sheet preparation Cash flow statements Fund flow statements Bank reconciliation statements Statement of retained earnings
• Income statements You can outsource to us bookkeeping and accounting data entry, regular maintenance and upkeep of your financial books as well. Preparing financial statements – The Outsource to India approach • • • • • Day to day maintenance of records which help you draw financial statements at any point in time Accurate and error free statement preparation ensuring smooth and hassle free corporate audits Compliance with country specific statutory regulations and relevant accounting/auditing standards Usage of latest bookkeeping and accounting software such as QuickBooks, Net suite, Peachtree, MAS 90, MAS 200, MAS 500, Quicken, MYOB, SAGE, Intuit Pruderies and Lacerate Generation of financial reports coupled with expert analysis of financial statements Error free preparation of statements ensured by stringent quality measures. We can guarantee an accuracy level of almost 98% Q.2 (A) When is the change in accounting policy recommended and what are the disclosure requirement regarding the change in accounting policy? (B) Explain IFRS. Ans. (A) Accounting Policy
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. If refers to specific accounting principles and methods of accounting adopted by the enterprise while preparing and presenting the financial statement. The management of each enterprise has to select appropriate accounting policies based on the nature and circumstances of the business they are in. some of the areas in which different accounting policies may be adopted are:➢ ➢ ➢ ➢ ➢ ➢ ➢ ➢ ➢ Treatment of expenditure during construction, Methods of depreciation, amortization, Conversion or translation of foreign currency items, Valuation of inventories, Valuation of investments, Treatment of goodwill, Valuation of fixed assets, Recognition of profit on long-term contract and Treatment of contingent liabilities.
A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability. Change in Accounting Policies:The change in accounting policy is recommended only in the following circumstances— ➢ ➢ If is required by statute for compliance with an accounting standard If is considered that the change would result in a more appropriates presentation of the financial statements of an enterprise.
Disclosure in case of change in Accounting Policy:➢ If change has a material effect in current period and the effect of change is ascertainable the amount of change should be disclosed. ➢ If change has no material effect in current period but which is reasonably accepted to have a material effect in later periods, the fact of such change should be appropriately disclosed. ➢ If the change has a material effect in current period and the effect of change is not ascertainable wholly or in part, the fact should be disclosed. (B) IFRS (International Financial Reporting System)
International Accounting Standards Board (IASB) that companies and organizations can follow when compiling financial statements. The creation of international standards allows investors, organizations and governments to compare the IFRS-supported financial statements with greater ease. Over 100 countries currently require or permit companies to comply with IFRS standards. The International Financial Reporting Standards were previously called the International Accounting Standards (IAS). Organizations in the United States are required to use the Generally Accepted Accounting Principles (GAAP). Objective:The main objective of IFRS are----1) To develop in public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statement. 2) To promote the use and rigorous application of those standards. 3) In fulfilling the objectives associated above to take account of, as appropriate, the special needs of small & medium-sized entities & emerging economies. 4) It should also provide the current financial status of the entity to all the users of financial information. Benefits:The main benefits of IFRS are— 1) 2) 3) 4) Encourage international investing & there by increase in foreign capital inflow. Benefit the economy by increased international business. More relevant, reliable, timely & comparable information to investors. Better understanding of financial statements would benefit investors who wish to invest outside the country. 5) Capital at lesser cost from foreign market. 6) Professional opportunity to serve international clients. 7) Increased mobility to work in different parts of the world either in industry or practice.
Q.3 Journalise the following transaction: 01.01.09 02.01.09 03.01.09 04.01.09 05.01.09 Bought goods for Rs.10,000 Purchased goods from X Rs.20,000 Bought goods from Y for Rs.30,000 against a current dated cheque Purchased goods from Z [price list price is Rs.30,000 and trade discount is 10%] Bought goods of the list prce of Rs.1,25,000 from M less 20% trade discount and 2% cash discount. Paid 40% of the amount by cheque Returned 10% of the goods supplied by X Returned 10% of the goods supplied by Y Particulars Purchase a/c To Cash A/c (Bought goods for Rs. 10.000) 02.01.0 9 Purchase a/c To X (Purchased goods from X Rs. 20.000) 03.01.0 9 Purchase a/c To Y (Bought goods from Z) 04.01.0 9 Purchase a/c To Z (Purchased goods from Z) Dr. 27.000 27.000 Dr. 30.000 30.000 Dr. 20.000 20.000 Dr. LF Debit (Rs.) 10.000 10.000 Credit (Rs.)
06.01.09 07.01.09 Ans. Date 01.01.0 9
Purchase a/c To Bank To Cash a/c To Discount
1.00.000 40.000 58.800 1.200
(Bought goods of the list price of Rs. 1.25.000 From M less 20% trade discount and 2% cash discount) 06.01.0 9 Cash a/c To Purchase return a/c (Returned 10% of the goods supplied by X) 07.01.0 9 Cash a/c To Purchase return a/c (Returned 10% of the goods supplied by Y) Dr. 3.000 3.000 Dr. 2.000 2.000
Note:On 05.01.09 it’s assumed that all the payment are made on same day of purchase. Q.4 Bring out the different between Funds Flow Statement and Cash Flow Statement, mention up to what point in time they are similar and from where the different begin. Ans. Fund Flow Statement
“A statement of sources and application of funds is a technical device designed to analyses the change in the financial condition of a business enterprise between two dates.” In brief it may be said that fund statement focuses on flow of funds between the various assets and equity items during the accounting period. And analysis base4d on this statement is generally called “fund flow statement”. Meaning of fund:The term “fund” refers t cash, to cash equivalent or to working capital and all financial resources which are used in business. Meaning of flow of fund:The term “flow of funds” refers to change or movement of funds or change in working capital in the normal course of business transactions.
FIRM BUSINESS TRANSACTIONS
INFLOW OF OUTFLOW OF FUNDS FUNDS
Cash Flow Statement Cash flow is the life blood of a business which plays a vital role in an entire economic life. Cash flow s refers to actual movement of cash into and out of an organization. In other words, the movement of cash inclusive of inflow of cash and outflow of cash. When the cash flow into the organization, it represents ‘inflow of cash’. Similarly when the cash flows out of the business concern, it called as “cash outflow”. In order to ensure cash flows are adequate to meet current liabilities such as tax payments, wages, amounts due to trade creditors, it is essential to prepare a statement of changes in the financial position of a firm on cash basis is called as “cash flow statement”. This statement depicting movement of cash position from one period to another. The cash flow statement is intended to:-
1. provide information on a firm's liquidity and solvency and its ability to change cash
flows in future circumstances 2. provide additional information for evaluating changes in assets, liabilities and equity
3. improve the comparability of different firms' operating performance by eliminating
the effects of different accounting methods 4. Indicate the amount, timing and probability of future cash flows. The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets. Difference between Funds flow statement and Cash flow statement
Funds Flow Statement Funds Flow Statement showing the source & application of funds during the period.
Cash Flow Statement Cash Flow Statement showing changes in inflow & outflow of cash during the period.
FFS is showing the fund for the future activates of the Company.
CFS is showing the fund for present activates of the company
Fund Flow statement helps to measure the causes of change in working capital. Fund flow statement is prepared on the basis of fund or all financial recourses. Fund Flow analysis helps to management for intermediate and long term financial planning. Statement of changes in working capital is required for the presentation of Fund Flow statement.
Cash flow statement focuses on the causes for the movement of cash during a particular period. Cash Flow statement is based on cash basis of accounting. Cash flow statement guides to the management for short term financial planning. For cash Flow statement no such statement is required.
Q.5 (A) Determine the sales of a firm with the following financial data. Current Ratio Acid Ratio Current Liabilities Inventory Turnover Ratio 1.5 1.2 8,00,000 5 times
(B) What is Du-Pont chart? Ans. (A)
Du-Pont Chart:Return on investments represents the earning power of the company. It depends on Net profit ratio and capital turnover ratio. A change in any of these ratios will change the firm’s earning capacity. This chart shows how the return on capital employed is affected by various factors such as cost of goods sold. Change in working capital, change is selling and administrative expenses etc. this chart helps the management in detecting the core issues that confront the management and it helps in effective use of capita.At the apex of the Du Pont chart is the Return on Total Assets (ROTA), defined as the product of the NetProfit Margin (NPM) and the Total Assets Turnover Ratio (TATR). As a formula this can be shown as,Follows:(Net profit/Total asset)= (Net profit/Net sales)*(Net sales/Total assets).
The left side of the Du Pont chart shows details underlying the net profit margin ratio. A detailed Examination of this side presents areas where cost reductions may be effected to improve the net profit margin. The right side of the chart highlights the determinants of total assets turnover ratio. If this study is supplemented by the study of other ratios such as inventory, debtors, fixed asset turnover ratios, a deeper insight into efficiencies and inefficiencies of asset utilization can be sought. The basic Du Pont analysis can be extended to explore the determinants of the Return on Equity (ROE). Return on equity= Asset turnover * Net profit margin*leverage (Net profit/Equity)= (Net profit/Sales)*(Sales/Total assets)*(Total assets/Equity) Importance of Du-Pont Analysis:-Any decision affecting the product prices, per unit costs, volume or efficiency has an impact on the profit margin or turnover ratios. Similarly any decision affecting the amount and ratio of debt or equity used will affect the financial structure and the overall cost of capital of a company. Therefore, these financial concepts are very important to evaluate as every business is competing for limited capital resources. Understanding the interrelationships among the various ratios such as turnover ratios, leverage, and profitability ratios helps companies to put their money areas where the risk adjusted return is the maximum. Q.6 From the following data calculates the:(A) Break-even point expressed in terms of sale amount/revenue. (B) Number of units that must be sold to earn a profit of Rs. 60, 000 per year Ans. (A)
Break-even point (in units) = Fixed costSales-Variable cost
Break-even point (in amount) = Fixed cost (FC)Sales-Variable cost (S-V) × Sales
Given, Sales price (per unit) =RS. 20 Total Variable cost (per unit) = Rs. 11+3 = Rs. 14 Total Fixed (per year) = Rs. 5, 40,000+2, 52,000 = Rs. 7, 92,000
B.E.P. (in unit) = 7,92,000(20-14) , = 7,92,0006 , = 132000 (per unit)
B.E.P. (in Rs.) = 7,92,000(20-14) × 20, = 7,92,0006 × 20, = Rs. 26, 40,000. (B)
Sales (in unit) = F.C. +Profit ( Traget)(S-V)
Sales (in unit) = 7,92,000+60,000(20-14) , = 8,52,0006, = 1, 42,000 (units)
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