1.

Wildcat Ltd, a manufacturing company sold a machinery for Rs 8 lacs at the year
end. The company had purchased the machinery four years back for Rs 15 lacs and had
depreciated the same using written down value method of depreciation @ 20%. As an
accounts executive of Wildcat Ltd, calculate the WDV of the asset for the four years,
accumulated depreciation for four years and profit/loss on sale, if any.

Answer:
Machinery account
Date Particular Amount Date Particular Amount
1st year 1st year
April-01 To bank a/c 1500000 March-31 By depreciation a/c 300000
March-31 By balance c/d 1200000
1500000 1500000
2nd year 2nd year
April-01 To balance b/d 1200000 March-31 By depreciation a/c 240000
March-31 By balance c/d 960000
1200000 1200000
3rd year 3rd year
April-01 To balance b/d 960000 March-31 By depreciation a/c 192000
March-31 By balance c/d 768000
960000 960000
4th year 4th year
April-01 To balance b/d 768000 March-31 By depreciation a/c 153600
To profit and loss
March-31 185600 March-31 By bank a/c (sale) 800000
a/c
953600 953600

WDV of the asset for the four years

WDV of the asset for 1st year – 15 Lac – 20% = (1200000)
WDV of the asset for 2nd year- 12 Lac – 20% = ( 960000)
rd
WDV of the asset for 3 year- 9.6 Lac -20% = (768000)
& At 4th year machinery is sold- 0

Accumulated depreciation for four years

Depreciation for 1st year 300000
nd
Depreciation for 2 year 240000
Depreciation for 3rd year 192000
th
Depreciation for 4 year 153600

Therefore, accumulated depreciation(Total Sum of Depreciation Value) = 885600

Profit/loss on sale
Profit on sale of machinery = Rs. 185600 (as calculated above)
2. Mr. Shil Wants to record the financial transactions of his newly started business.
Discuss what accounting steps/stages he need to adhere so that the transactions can be
duly recorded and processed in order to prepare the financial statements.

Answer: A business is started with a view to earn profits, to grow and to sustain in the long
runs. Profits will earn through the transactions like purchases, sales of goods and services,
incurring various expenditures etc. As we are business man we have to know about in detail
of various types and amount of earnings as well as expenses also, the nature and value of
assets possessed during a particular period.

A systematic accounting procedure is the only way to ascertain a profits is earn or loss
incurred from the business for to a particular period. To make in technical sound decision a
business enterprise needs accounting information. Government agencies, regulatory bodies,
analysts and individuals need accounting information at various level points of time and at
different levels.

Accounting is perhaps one of is old structure management information system. It has evolved
in response to the social and economic needs of society. Accounting as an information system
is concerned with identification, communication and measurement of economic information
of an organization to its users who is needed the information for rational decision making.
The accounting system is a means to provide a reliable financial information to all the
interested parties.

Definition given by American Accounting Association (AAA) in 1966.

“Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by the users of the information.”

Definition given by AICPA in 1970.

“Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature, and about economic activities, that is intended to be useful in making
economic decisions.”

According to these definitions, Accounting means:

● Classifying of the recorded data by grouping the similar nature of transactions.
● Summarising the information at the end of the financial period its generally it take a
one year around.

Accounting steps/stages we need to adhere so that the transactions can be duly recorded and
processed in order to prepare the financial statements are as follows:
1. Identifying the transactions and events – Identifying the transaction and events was
the first step in the accounting process. It recognise the transaction of financial
character that are essential to be record in the books of accounts. When money, goods
and service are transferred from one person to the another person, it is known as
transaction.
2. Measuring – Measuring means expressing the value of events and transactions in
terms of money (Rupees in India). Measuring has become an important challenge for
the accountants and the business entities. This is due to the following reasons:
a) Changing nature of business activities – The mainly toughest of today’s
business models has also changed the way accounting needs to be done.
Technology enabled services like web designing and financial services like
 wealth management are the thriving businesses. The nature of such business
activities is such that it becomes difficult to measure the transactions in terms
of money.
b) Business crossing international borders – All business material today, whether
it is small or big they have transactions crossing the borders. They have
spending or earnings and payables and receivables in foreign currencies.
Before they recorded first they measuring such transactions is a big challenge
as they have to be translated into home currency.
3. Recording – After measuring the transactions the next step is the recording. It deals
with recording of identified transactions and events in a systematic manner in the
books of original entry in according with the principles of accounting. The book in
which transactions are first recorded is called the Journal.
4. Classifying – All the recorded transactions do not make any sense until and unless
they are processed and presented in a manner that is useful to the intended user. The
functions of classifying and summarising serve this purpose. Classifying deals with
periodic grouping in transactions of similar nature. For this purpose, a separate book
called Ledger is maintained. It’s a book where it all transactions of similar nature are
maintained at one place. The transactions that appear in the books of original entry
(Journal) are transferred to appropriate places in the book of final entry (Ledger) by a
process called Posting. For example, all purchases of goods made for cash or on credit
on different dates are brought to purchases account.
5. Summarising – In The end of any business is to make a profit. To know if this
objective was achieved, it is necessary to summarise all the transactions that occurred
and are recorded. That analyse total expenses or losses, total income or gain, total
assets, and total liabilities. That function involves in preparation of financial
statements such as income statement, balance sheet, statement of changes in financial
position, and cash flow statement etc.
6. Analysing – Analyse deals with the establishment of relationship between the various
group of items taken from balance sheet. That purpose is to identify the financial
strengths and weaknesses of an enterprise. That involves using various tools like
Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, etc.
7. Interpreting – Interpreting explains the importance of all the data in a manner that
the end users of financial statements or balance sheet can make a meaningful
judgment about the financial position and profitability of the business.
8. Communicating – Communicating deals with communicating the analyse and
interpret data in the form of financial statements to the users of financial information.
For example, Profit and Loss account, Balance Sheet, Cash Flow and Funds Flow
statement, Auditor’s report, etc. It is an important part of Accounting to decide what
to communicate, how to communicate, how much to communicate, when to
communicate, and in what form to communicate.

3 a. Following information is available in respect of a company named, as Beta Ltd

Particulars Amount
Profit before taxes Rs 50 lakhs
Dividend declared per share Rs2
Price of the share prevalent on stock exchange Rs 200
Applicable tax rate 35%
Share capital of company 5 lakh shares of Rs 10 each
Calculate-
Earnings per share
Dividend Pay-out Ratio
Price earnings ratio

Answer: Earnings per share

Earnings per share = Profit available for equity shareholders

Number of equity shares

Calculation of Profit available for equity shareholders

Profit before taxes Rs 50 lakhs
Less: tax @ 35% Rs 17.50 lakhs
Profit (after tax) available for equity shareholders Rs 32.50 lakhs

Earnings per share = Profit available for equity shareholders

Number of equity shares

= 32.50 lakhs
5 lakhs

= Rs. 6.5 per share

Dividend Pay-out Ratio

Dividend Pay-out Ratio = Dividends Per Share

Earnings per share

= Rs. 2
Rs. 6.5

= Rs. 0.30769

=30.77%

Price earnings ratio

Price earnings ratio = Market value per share

Earnings per share

= Rs. 200
Rs. 6.5

= Rs. 30.77 times

b. Prepare the cash flow statement from investing activities of Alpha Creative Ltd for
the
year ended March31, 2019
Particulars Amount
 Plant acquired 160000
Claim received for loss of plant in fire 45500
Unsecured loans given to subsidiaries 595000
Interest on loan received from subsidiary companies 72500
Also give reasons for the classification of above activities as inflow /outflow

Answer: Cash flow statement

Particulars Amount
Cash flow from investing activities
1. Plant acquired (160000)
2. Claim received for loss of plant in fire 45500
3. Unsecured loans given to subsidiaries (595000)
4. Interest on loan received from subsidiary companies 72500
Net cash flow from investing activity (637000)

Reason:
1. Separate disclosure of cash flows from investing activities is important because they
represent the extent to which expenditures have been made for resources intended to generate
future income and cash flows and therefore will be deducted from net cash flow. Examples of
cash flows arising from investing activities are given below:
● Cash payments to obtain shares, warranty instruments of other enterprises other than
the instruments those held for trading purposes.
● Cash advances and loans made to third party - other than advances and loans made by
a financial enterprise where in it is operating activities.

That transaction is result in outflow of cash.

2. Financial managers report inventory damage losses in operating cash flows, which is the
other name for cash flows from operating activities. They add merchandise losses back to net
income when calculating operating cash flows, because the business incurred the expense but
didn't dole out cash for it in the first place. This accounting treatment -- that is, adding non-
cash charges back to operating cash -- is important to guide corporate leadership in liquidity
management. Other non-cash expenses include depletion, amortization and depreciation.
Liquidity management consists of tools, strategies and approaches a business relies on to
make money, keep it, invest it and run a solvent operation -- meaning, one that produces
more assets than debts at the end of a given period.

This transaction will result in inflow of cash.

To record inventory damage, a corporate bookkeeper debits the commodities damage account
--part of the "unusual losses" master account -- and credits the inventory account. The book
keeper, in effect, writes off the damaged inventory's worth, and this constitutes a loss for the
company. Merchandise write-off reduces an organization's net income and goes into a
statement of profit and loss, also referred to as an income statement.

3. Cash outflows from investing activities include:

● Payments for purchase of property
● Payments for purchase of debt or equity securities of other entities
● Payments for purchase of plant
● Payments for purchase equipment
As the loan has been provided to subsidiaries, this transaction will result in outflow of cash
from the company.

4. In this transaction, company will receive interest on loan received from subsidiary
companies. That is better to disclose it under the same headings where relevant investments
are disclosed in statement of cash flows i.e. investing activities. This transaction will result in
inflow of cash.

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