Institute of Rural Management Anand

PGDM-RM41 – Term I – End Term Examination

<Financial Accounting>
< 1st November 2020>
<Amit kr Godara, P41003>

2. Net profit margin = Profit after tax/ sales*100

NPM (for company A) = (18000-7000-3000)/(40000)*100=20%
NPM (for company b) = (20000-14400-2500)/(30000)*100=10.33%

Interest coverage ratio= EBIT/Interest

ICR (for company A) = 18000/3000= 6 times
ICR (for company b) = 20000/14400= 1.388 times

Return on equity = profit after tax/Equity fund*100

ROE (for company A) = 8000/35000*100=22.8%
ROE (for company B) = 3100/20000*100=15.5%

Debit equity ratio = Total long term debt / owners fund

DOE (for company A) = 20000/35000= .5714
DOE (for company A) = 60000/20000= 3
Net profit of company A is higher show that A is earning more profit.
Return on equity of A is higher show that A gives better returns. Company B has higher amount
of debt . So we can come to conclusion that company A is good for investment in future.

5. (2)
The amount by which a company reduces its fixed asset for a single accounting period in
called depreciation. It is the gradual conversion of the cost of an asset into the expense.
Accumulated depreciation represents the amount that has been written off over the life of
the assest. It can be accounted in financial statement in two ways:
Depreciation is accounted as expense in profit and loss account.
Accumulated depreciation is our liability in Balance sheet.
 Institute of Rural Management Anand
PGDM-RM41 – Term I – End Term Examination
<Financial Accounting>
< 1st November 2020>
<Amit kr Godara, P41003>

Generally, accumulated depreciation will be higher in second year because it is the sum
of both first and second year’s depreciation while depreciation is the sum of only that
year.

3. (B) Relocation cost are not directly written in the acquisition of the items of PP&E.
Therefore carrying amount of the items pf PP&E should not be adjusted by relocation cost as
it will benefit the company in the future. Business can not be allowed to continue if an entity
does not incur the expenditure.so intangible asset is created but its value cannot be
measured effectively. So it should not be accounted in balance sheet. Relocation cost should
be written as expense in which they are incurred.

(C) NCL started producing and saled the sub quality cables because it had produces cables of
higher quality as compared to what is produced in test run. Expenses incurred after the
commercial production should not be capitalized. If these cost were incurred during test run
then only is should have been added to equipment cost. It should be accounted in expenditure of
the firm. Losses incurred should not be added to the equipment cost.

(A) Cost of land = 5,00,000 + 25000 (legal fees) + 10,000 (title insurance) + 50, 000(net cost of
demolition) - 10000 (Salvage value)
Cost of land = 5,85,000- 10000= 5,75,000
 Institute of Rural Management Anand
PGDM-RM41 – Term I – End Term Examination
<Financial Accounting>
< 1st November 2020>
<Amit kr Godara, P41003>

Solution 4.

COMMON SIZE P&L HORIZONTAL

2019 2020
Particulars
(in lakh) (%) (in lakh) (%)
sales 900,000 100 1600000 100

Cost of goods sold 480000 53.3 1,020,000 63.8

Gross profit 420000 46.7 580,000 36.3
Selling and administrative expenses 160000 17.8 200,000 12.5
Operating income 260000 28.9 380,000 23.8
Interest expense 60000 6.7 80,000 5.0
Income before taxes 20000 2.2 300,000 18.8
Income tax expense 60,000 6.7 90,000 5.6
Net income 140000 15.6 210,000 13.1

From above we can see in year company’s expense in 2020 (63.8%) is more as Cost of
goods sold is more as compared to 2019 (53.3%). In year 2019 company’s gross profit
(36.3%) is also higher as compared to 2019(46.7%). Though the selling, administrating
expenses have increased in 2020 (17.8%) as compare to 2019 (12.5%). The profit or net
income in year 2019is higher (15.6%) as compared to 2020 (13.1%). So, company’s
position in year 2019 is better ac compared to 2020.
 Institute of Rural Management Anand
PGDM-RM41 – Term I – End Term Examination
<Financial Accounting>
< 1st November 2020>
<Amit kr Godara, P41003>

5. (1) Mr. Akash’s decision to stop depreciation due to higher market value of an asset is
wrong. According to accounting standards, assets except for land should be depreciated,
as they have a fixed life. Here, ware house should be depreciated.

Solution of 1 st qsn given below

S
Institute of Rural Management Anand
PGDM-RM41 – Term I – End Term Examination
<Financial Accounting>
< 1st November 2020>
<Amit kr Godara, P41003>
5 (3) Company is in maturity stage as because Financing activity is zero which is
characteristics of company’s maturity stage and also we can see that operating activity
brings significant cash flow which is used to meet company’s investment activities.