Financial Accounting & Analysis

Question 1:

Accounting equation is Also known as the balance sheet equation, the accounting equation
formula is Assets = Liabilities + Equity.

This equation should be supported by the information on a company’s balance sheet. The
Accounting Equation is the foundation of double-entry accounting because it displays that all
assets are financed by borrowing money or paying with the money of the business’s
shareholders.

The balance sheet is a more detailed and complex display of the accounting equation. It
shows that the total assets of a business are equal to the total liabilities and shareholder
equity. In other words, all uses of capital (assets) are equal to all sources of capital (debt:
liabilities and equity).

Another way to look at the equation it is:

Shareholder equity = Assets – Liabilities

The Accounting Equation is often called the Basic Accounting Equation.

Transactions of X Ltd.

1. Transaction 1
Purchased furniture for cash(assumed). It increases an asset (furniture)
Rs.6,75,000 and reduces another asset (cash) Rs.6,75,000 . There is no
change in accounting equation as one asset is increasing and another
asset is decreasing.

2. Transaction 2
The business received an cash(in bank account) Rs.12,00,000 from
owner which leads to increase in asset as bank account is asset for
business. The business is liable for this amount to owner. It represents the
capital of the business. Capital also increases by Rs.12,00,000 Capital of
Rs.12,00,000 is equals to assets of Rs.12,00,000. Asset and Capital both
increases by Rs.12,00,000
3. Transaction 3
Goods purchased on credit it increases an asset (goods) by 1,05,000 at
the same time it increases a liability (creditor-Aman enterprises) by
1,05,000.
The accounting equation changes now the assets are Rs.13,05,000 and
the liability is Rs.1,05,000 + capital is Rs.12,00,000. The accounting
 equation matches Asset = Capital + Liability
4. Transaction 4
Goods sold costing Rs.3,00,000 for Rs.4,00,000 on credit. Decrease an
asset (goods) by Rs.3,00,000 and increases another assets (debtors) by
Rs.4,00,000. The difference of Rs.1,00,000 between the two figures is
profit. The profit belongs to owners. It increases business capital.
So the net effect is one asset is increased by Rs.1,00,000 and Capital is
increased by Rs.1,00,000
After this transaction the accounting equation would be, Assets are of
Rs.14,05,000 and Capital is Rs.13,00,000 Liabilities are 1,05,000
5. Transaction 5
Purchased goods from Sneha Enterprises for Rs.6,00,000. It increases an
asset (goods) by Rs.6,00,000 and reduces another asset (bank balance) by
Rs.6,00,000. As there one asset is increasing at the same time another
asset is decreasing by same amount. So there is no change in accounting
equation is remains same as transaction 4.

Accounting equation for the above transactions.

Sr..No Transaction Assets Liabilities (Rs.) Capital (Rs.)

. (Rs.) = +

1. Purchased furniture for cash Rs.675000 - - -

2. Capital introduced by owner by depositing 1200000 - 1200000

1200000 in the bank account.

3. Goods purchased on credit from Aman 1305000 105000 1200000

Enterprises for Rs.105000

4. Goods sold on credit for Rs. 400000. The 1405000 105000 1300000
cost of the goods sold was Rs. 300000

5. Purchased goods of Rs. 600000 from Sneha 1405000 105000 1300000

Enterprises from business bank account.

So, here I would like to conclude my answers by stating

ASSET = CAPITAL + LIABILITIES
14,05,000 = 1,05,000 + 13,00,000
14,05,000 = 14,05,000

Question 2:

Statement of Profit and Loss

Particular Notes Amount

Revenue from operation 505000
Other income 1 4200

Total 509200

Note 1:

Other Income Amount

Dividend receipts 4200

REVENUE FROM OPERATIONS:-

Revenue is at the heart of all business performance. Everything hinges on the sale. Revenue
from operations can be defined as income generated by an entity from its core business
operations. A core business operation means revenue from the main business operations.
Revenue is the gross inflow of economic benefits during the period arising during the
ordinary activities of an entity when those inflows result in increases in equity, other than
increases relating to contributions from equity participants. If a firm is selling goods or
rendering services then the revenue which the firm is generating from those goods or services
is called as revenue from operation. It can be both cash sales and credit sales.
A company has to disclose revenue from operations under the following heads.
 Sale of products (including excise duty or GST)
 Sale of services
 Other operating revenues
Excise duty is an indirect tax payable to the government.
Other operating revenue is the revenue arising from activities which are incidental to the
main revenue earning activities of the company.
Some key points
 Operating revenues are regular income for any business.
 It helps in forming important business decision.
 It also helps shareholders to understand that they should continue with their
investment in your business or not.
  It helps creditors and landers to understand whether the company is in state to repay
their debts or not.
With the help of all the above point we helped Ms. Dorati’s to understand the Revenue From
Operation and now we will analyse Love Doddle Enterprise’s transaction.
Love Doddle is generating inflows by arranging gift hampers. This is her core business. This
is her main operation of business. By selling these hampers she has generated amount of
Rs.5,05,000. As her main business is this only therefore this will be revenue from operation
for her business. She can record this in profit and loss statement under the head revenue from
operations.
REVENUE FROM OTHER INCOME: -

Revenue from Other income is the income which is not derived from the core business. This
is the income which is not generated from the main operation of the business. It is additional
income for a business. Some of the other incomes are recurring and some are non-recurring in
nature.
For example, Rent, dividend, interest, brokerage, royalty, commission, profit or loss on sale
of assets or investments, gain on exchange rate.
A company has to disclose revenue from other income under the following heads.
 Interest income
 Dividend income
 Other non-operating income (net of expenses directly attributable to such income)
Example, Interest received on fixed deposit from bank.

Question 3(a):

Current Ratio and Quick Ratio are liquidity ratios

Current Ratio = Current Asset / Current Liability

Standerd Current Ratio = 2

Quick Ratio = Quick Asset / Current Liability

Standerd Quick Ratio = 1

their Aman Ltd is Better than Roger Ltd becouse both Current and Quick Ratios are higher
than Roger Ltd:

CURRENT RATIO :

The current ratio is a liquidity ratio that measures whether a firm has enough resources to
meet its short-term obligations. It compares a firm's current assets to its current liabilities, and
is expressed as follows:-
Current ratio = Current Assets ÷ Current Liabilities

The current ratio is an indication of a firm's liquidity. Acceptable current ratios vary from
industry to industry.In many cases, a creditor would consider a high current ratio to be better
than a low current ratio, because a high current ratio indicates that the company is more likely
to pay the creditor back. Large current ratios are not always a good sign for investors. If the
company's current ratio is too high it may indicate that the company is not efficiently using
its current assets or its short-term financing facilities.

If current liabilities exceed current assets the current ratio will be less than 1. A current ratio
of less than 1 indicates that the company may have problems meeting its short-term
obligations.Some types of businesses can operate with a current ratio of less than one,
however. If inventory turns into cash much more rapidly than the accounts payable become
due, then the firm's current ratio can comfortably remain less than one. Inventory is valued at
the cost of acquiring it and the firm intends to sell the inventory for more than this cost. The
sale will therefore generate substantially more cash than the value of inventory on the balance
sheet.Low current ratios can also be justified for businesses that can collect cash from
customers long before they need to pay their suppliers.

The current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations or those due within one year. It tells investors and analysts how a company can
maximize the current assets on its balance sheet to satisfy its current debt and other payables
The current ratio compares all of a company’s current assets to its current liabilities.

The current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations or those due within one year. It tells investors and analysts how a company can
maximize the current assets on its balance sheet to satisfy its current debt and other payables

KEY TAKEAWAYS

The quick ratio measures a company's capacity to pay its current liabilities without needing to
sell its inventory or obtain additional financing.

The quick ratio is considered a more conservative measure than the current ratio, which
includes all current assets as coverage for current liabilities.
Question 3(b):

Return on Investment (ROI): - Return on investment (ROI) is a performance measure used

to evaluate the efficiency or profitability of an investment or compare the efficiency of a
number of different investments. ROI tries to directly measure the amount of return on a
particular investment, relative to the investment's cos

 Return on Investment (ROI) is a popular profitability metric used to evaluate how

well an investment has performed.
 ROI is expressed as a percentage and is calculated by dividing an investment's net
profit (or loss) by its initial cost or outlay.

Return on Investment = Net Income / Investment

In their Aman Ltd is Better than Roger Ltd because ROI is greater than Roger Ltd

Debt Equity Ratio: - The debt-to-equity (D/E) ratio is used to evaluate a company's financial
leverage and is calculated by dividing a company's total liabilities by its shareholder equity.
The debt-to-equity ratio is a particular type of gearing ratio.

This financial tool gives an idea of how much borrowed capital (debt) can be fulfilled in the
event of liquidation using shareholder contributions. It is used for the assessment of financial
leverage and soundness of a firm and is typically calculated using previous fiscal year's data.
A low debt-equity ratio is favorable from investment viewpoint as it is less risky in times of
increasing interest rates. It therefore attracts additional capital for further investment and
expansion of the business.

Debt to Equity Ratio = Total Debt / Equity

A Lower Debt to Equity Ratio Means Risk is also Lower Because There using lower debt
compared to equity thus Roger Ltd. has less risk than Aman Ltd.