Answer -1

Below table is prepared and analysis done as per the transaction made

No. Transaction Asset = Liabilities + Equity/Capital

Purchased Furniture for
1 Rs675000
Capital Introduced by
the business Owner by
depositing 12 Lakhs in
2 the bank account 1200000 1200000
Goods purchased on
credit from Aman
Enterprises for
3 Rs105000 1305000 105000 1200000
Goods sold on credit for
Rs 400000. The cost of
the goods sold was Rs
4 300000 1405000 105000 1300000
Purchased goods from
Sneha Enterprises for
Rs 600000 and made
the payment from the
5 business's bank account 1405000 105000 1300000

Analysis :
1. As there is no change in the asset and capital when the furniture is bought since the
money spent is same as the value of asset i.e. furniture procured.

2. Rs 1200000 deposited in the bank as a capital which increases the asset as well as capital.

3. Goods which are purchased on credit, so it is a liability as the amount will have to be paid
in future. It increases the asset as the goods are added but capital will remain same.

4. Goods which are sold on credit means and the profit is Rs 100,000 therefore the Asset
and Capital both increases by Rs 100,000.

5. Goods purchased and the amount also paid from bank means the asset i.e. goods are
added in exchange of money so there should not be any change in the Asset and Capital.
 Answer- 2

Introduction
When the revenue increases via transactions it is considered an inflow. Gross profit is the
difference of the sales revenue and the cost of goods. While the Operating profit is the difference
of the Gross profit and operating expenses. Operating expenses include the normal operating
activities such as administrative, selling, and general expenses.

Gross Profit = Sales Revenue – Cost of Goods

Operating Profit = Gross profit – Operating expenses

Here Ms. Dorati having the inflows due to sale of gift hampers and from bank interest dividend
receipt

Particular Amount Description

Sale of Gift hampers 505000 This is the income via operative transaction
Bank Interest
4200 This is the income via Financial transaction
dividend receipt

Revenue from Operating activities includes the profit generated by operation and not from
financial or investing activities. Few of the examples are as below
• Profit from rendering the services or sale of goods
• Profit or cash flow from fees, commission and other revenues
• Cash payment for goods and services to suppliers
• Cash receipts and cash payments of an insurance entity for premium and claims and other
policy benefits
• Cash payment of Refund of income taxes
• Cash receipts and payments from contracts held for dealing/trading purpose

Below are few examples of the revenues generated from Investing activities
• Cash Payments to purchase property, equipment, intangibles and other long term assets.
• Cash receipts from sale of property, plant/equipment and other assets
• Cash payments to acquire equity or debt instruments of other entities
 • Cash receipts from sale of equity or debt instruments
• Cash advances and loans made to other parties
• Cash receipts from the repayment of advances and loan made to other parties
• Cash receipts/payments for future contracts, forward contracts
Below are the examples of the revenue from Financing activities
• Cash payments from issuing shares or other equity instruments
• Cash repayments of the amounts borrowed
• Cash payments to the owners to acquire or redeem the entity’s share
• Cash payments from issuing debentures, loans, bonds, mortgages and other borrowings
• Cash receipts obtained from a lease or contract

For example, below is a sample of the operating income details in an organization

Cash Flows from Operating Activities Amount

Cash paid to employees and contractors 400000
Cash receipts from clients 500000
Revenue generated from operations 800000
Income tax paid 100000
Cash payment for extraordinary items 50000
Other goods 50000
Net profit from operating activities 700000

continue
 Answer 3

Below table is given for two companies comparing the ratio factors

Aman Ltd Roger Ltd

Current Ratio 2:01 1.60:1
Quick Ratio 1.35:1 1:01
Return on
15% 13%
Investment
Debt Equity Ratio 2.5:1 1:01

3 (a)
Current Ratio:
Current ratio defines the relation of a company’s current assets to its current liabilities which is
applicable for the short-term business and therefore its important for short term creditors.
Current asset is the cash and other assets which can be converted into cash. This include the cash
in hand, bank balance, inventory, prepaid expenses, accrued income, short term capital employed
etc. Current liability is a short-term loan, deposits and bank overdraft for which payment to be
done before 12 months.
Current assets
Current ratio = ---------------------------------
Current liabilities

A low current ratio (which is less than 1) means company is facing difficulty in bill payments
and some unused and long-term assets are due to sell.
Interpretation and reasoning:

In the given table Current ratio is good i.e. more than 1 for both the companies Aman Ltd and
Roger Ltd. However, its value is more for Aman Ltd as the ratio is 2:01 which means that Aman
Ltd has blocked and tied up its money in inventory, receivables and unproductive cash balances
more compare to Roger Ltd. While for Roger Ltd the ratio is little balanced which indicates that
the assets and liabilities are being managed more wisely than Aman Ltd. Moreover, its advisable
to compare the current ratio with the average ratio and to observe the trend for number of years
to analyze it properly.
Quick ratio:
Quick ratio is the other measure of the liquidity which is more precise and significant. This ratio
is also known as Liquid ratio or Acid test ratio. Quick assets are those assets which can be
converted to the cash quickly such as cash, marketable securities, debtors and bills receivables.
While inventory is not considered as the quick asset as it can not be converted to the cash
immediately.
Quick ratio is the relation of quick current assets (Current assets - inventories) to quick liabilities.

Current assets - Inventories

Quick ratio = -----------------------------------------------------
Current liabilities

Interpretation and reasoning:

If we talk about the Quick ratio in the table, this value is more for Aman Ltd. i.e. 1.35:1 while its
1:01 for Roger Ltd. Higher ratio for Aman Ltd indicates that the company has surplus amount of
liquidity and quick convertible cash which is a good sign although company should utilize the
available cash more wisely to better utilize the money for more revenue. On the other hand,
Quick ratio for Roger Ltd is 1:01 which is satisfactory, and company has utilized its cash
intelligently and have maintained the bill payment very well.

3(b)

Return on Investment:
Return on investment is measured by the returns generated by a business on the invested amount
in that business. Return on investment refers to total of owner’s funds and non-current liabilities.
This ratio is calculated as

Profit before interest and tax

Current ratio = ---------------------------------------------------------------------- x 100
Average (Long term liabilities + Owner’s equity)
Interpretation and reasoning:

When we compare the Rate of investment of Aman Ltd and Roger Ltd, this is more for Aman
Ltd therefore its obvious that Aman Ltd is having more return on the investment done and hence
in more profit. However, it depends on the total capital too, in case if the total capital is low the
profits are volatile and not much significant. Moreover, if the new capital has been earned during
the current year so will be used only for the part of the year therefore the real assets are different
to the original one and the true value may differ.

Debt Equity Ratio:

The debt-equity ratio is the relation of the debt to equity or owners’ capital/funds. Debt here
means the long-term liabilities and long-term loans from banks, public deposits, and debentures.
Equity refers to owners’ funds, share capital, general/capital reserves and share reserves. The
debt-equity ratio is calculated by the below formula

Debt
Debt-Equity ratio = ----------------
Equity

Interpretation and reasoning:

For the given debt-equity ratio for Aman Ltd is 2.5:1 which is a higher side means the debt are
huge compare to the equity. Debt-Equity ratio 2.5:1 is not good and alarming. It should not cross
2:1 which is acceptable for capital-intensive industries such as ship-building, power units,
cement units where the business work on the post payment of the delivery but requires a regular
monitoring to control the debts so that it should not cross the limit. Few industries like mining or
manufacturing are exception and ratio higher than 2 is acceptable.
While for the Rogers Ltd the debt-equity ratio is 1:01 which is acceptable and satisfactory for
most of the companies as the debt is manageable and in control.