NMIMS Global Access School

for Continuing Education (NGA-SCE)

Course: Financial Accounting & Analysis

Internal Assignment Applicable for June 2020 Examination

1. Ms. Sandipa is the accounts executive for a company called SS

Enterprises. Her job description requires her to supervise the
process of recording of the transactions of business and to
ensure that all accounting assumptions are taken care of.
However, her junior executive is confused about the concepts
of the accounting period assumption and the Separate entity
assumption.
Elaborate how Sandipa can explain the concepts to her junior
with the help of suitable example.

Accounting Assumptions: - Accounting assumption are the basic

accounting assumptions which are followed by all the business
entity to facilitate financial measurement, reporting and
forecasting. For e.g.:-separate entity concept, going concern
concept, accounting period concept etc. It becomes necessary
that preparing of financial statement should be complied with
basic assumption, principle, concept and convention to maintain
uniformity and standardisation in financial statement.
In above case M/s Sandipa is accounting executive of SS
enterprise and she supervises recording of business transactions
so it’s her duty to ensure whether all the assumption and concept
are duly complied or not here since her junior executive is facing
problem regarding separate entity and accounting period
assumption M/s Sandipa shall guide her the meaning and concept
of basic accounting assumption and their application so her
executive can better understand and make proper compliance of
all accounting assumption and concept including separate entity
and accounting period assumption about which her executive is
confused.

As M/s Sandipa is well known and aware about her job as account
executive she should explain her junior about the definition
importance of assumption with relevant examples given below to
make it easy & understandable for her junior executive.

Separate entity concept:-This concept states that a business or an

organisation is separate entity distinct from its owners,
shareholders and stakeholder having its own separate identity in
eye of law. The businesses are treated as separate economic unit
distinct from its owners so it is necessary to record the business
transactions separately from non business transaction to maintain
distinction.
Importance of entity concept
a) This concept is necessary to separately measure the
performance of a business in terms of profitability and cash
flows.
b) It ensures the levy of tax on business separately.
c) It will not be feasible to audit business transaction if they
mixed up with non business transaction.
d) To compare the actual financial position of different
business entity.

Let us understand separate entity concept with some

Examples :-

Example 1 Mr ram a sole owner of his business has rented a

3 floor building for Rs. 30,000 in which he use 2 floor for his
business purpose & 1 for his personal stay.
 According to separate entity concept only rent of 2 floors
that is Rs. 20,000 will be treated as business expense other
will be his personal expense.

Example 2 Capital introduction by owner to his business is

liability to business while money withdrawn for personal is
treated as drawing which is reduction in capital (liability) of
business.
Accounting period assumption:-It states that life of business
should be divided in equal time period for which financial
statement (profit and loss a/c, balance sheet) of organisation can
be presented. For e.g. Quarterly, half yearly, annually...

Importance of accounting period assumption:-

a) The accounting period assumption enables the business to
analysis periodically how successful they are in achieving
their objective and where is need for improvement.
b) Fulfil the aspiration of stakeholder & interested parties.
These stakeholders demand the periodically presentation of
financial reports of business so they can make their decision
whether to deal with business or not if their funds are safe
or not etc.
c) It is useful in comparison of financial data for different
period.
d) It enables government to impose tax after a period of end of
financial year.

Let us take some example for accounting period assumption

Example 1
1) A company record it transaction for period 1st april to
31st march.
2) Presentment of financial result by the company after
end of every quarter.
3) The ABC. Company sold some good to XYZ. Company
during first quarter of year and XYZ. Company pay the
cash for these good in next quarter according to
accounting period concept ABC. Company should record it
as revenue in first quarter of the year.

Following of accounting assumption & concept are very

important as they provide framework for recording of
financial transaction. It will help in maintaining uniformity
& consistency in the financial report making them easy to
understand & compare.
There are other accounting assumptions also which are
equally important & necessary to be followed like going
concern, consistency, monetary unit assumption etc.
Its duty of top the management & accounts manager to
ensure the compliance of all the accounting assumption in
financial reporting.
So here we can conclude that accounting assumption and
concept play a vital role in financial recording and
reporting of every business enterprise.

Q 2) Marry Kom is planning to invest in the share market.

She has a profile of risk seeker investor but she believes that
before investing it’s important to understand market ratios
effectively. Discuss any five market ratios with their
importance that Marry Kom should look into before
undertaking any investment decision.

Market Ratio: - The market value ratios are analytical tool

used to evaluate the stock in share market. This ratio
helps investor to decide whether the share is overpriced
or underpriced, if they should invest in stock or not this
market ratio are important aspects for investor decision
making.
As in the above case Mary Kom who is willing to invest in
stock market shall go through market ratio for her better
and effective decision making. Some market ratio are
discussed as under.
1) Price earning or P/E ratio: - P/E ratio is useful tool to
measure current share price of company with its
earnings per share. It shows what market is willing to
pay as compare to its earning. This is also known as
price multiple or earning multiple ratio. P/E ratio is
calculated as ratio of market price of share to earnings
per share [EPS]. It is calculated as.

P/E RATIO = Market price of share

Earning per share

Importance
1) It helps the potential investor to decide if market
price of share is overvalued or undervalued.
2) It helps investor to identify real worth of their
investment and help in making decision.

2) Dividend yield Ratio: - Dividend yield ratio is a financial

ratio that present how much dividend is paid by
company every year respect to the price of share. It is
calculate as amount of dividend company pay divided
by current market price of share.
Dividend yield = Dividend paid per share
Market price per share
Importance
1) It is crucial for this investor who wishes to earn a
continuous income from investment.
2) If a company is paying regular divided then it
means company has stable profit.
 3) Earning per share [EPS]: -Earning per share is
obtained by company net profit divided by the
number of share outstanding.
EPS = Net income – preferred dividend
Outstanding share
Importance
1) Earning per share is important as it breaks down
company profit on each share basis which helps to
know company performance. Earning per share is also
used in calculation of other market ratio that is price to
earning ratio.

4) Book value per share: - This ratio shows the

relation between book value of the company and
the outstanding share in market.

Book value per share = Shareholder Equity-Preference Stock

Outstanding share in market
Importance
1) Book value is a useful indicator for investor to
know the equity of company as compared to its
market value.
2) Comparison between book value and market
price reflects the future growth forecast of the
company.

5) Dividend payout ratio: - The dividend payout

ratio is total amount of dividend paid to
shareholder relative to earning of the company. It
can also be referred to as earning paid out to
shareholder in the form of dividend.
 Dividend payout ratio = Dividend paid
Net Income
Per share basis = Dividend per Share
Earning Per Share

Importance
1) A dividend payout ratio shows how much share of
profit a Company return back to its shareholders.
2) It helps investor to analysis how much of return in
form of dividend they can generate.

Market value ratios play an important role in making

Investor’s decision. These ratios are analytic tools which
help investor to identify company performance,
profitability, price value of their share which and many
aspects by which investor can take final decision whether
to invest or not invest.
Market value ratio includes P/E ratio, Earning per share
ratio, earning yield, dividend per share, dividend yield
ratio etc. This shows company position on different basis
and guide investor decision.
In the above case Mary Kom should carefully analysis all
market ratio for different company she is willing to invest
to make better investment decision.
Q3) The following information is available in relation to
Britannia Baby Company. The Company has profit before
taxes of Rs 50 lacs.
a. Classify and give reasons for the cash flows falling under
the operating activities
b. Classify and give reasons for the cash flows falling under
the investing activities.
Particulars Amount Rs in (Lacs)
1. Tangible assets purchased during the year 75
2. Depreciation charged on these tangible assets for the year @ 10% ?
3. Stock sold for the year 95
4. Loan given to Big Boy Company 150
5. Interest received from Big Boy company for the said loan @11.5% ?
6. Shares purchased of a company called as Arvind Mills 10
7. Dividend Received from Arvind Mills 1
8. Taxes paid for the year @ 30% ?

Cash flow statement: - Cash flow statement is a financial

statement that provides data about inflow and outflow of
cash and cash equivalent in an organisation for a given
period it is further divided into operating, financing and
investing activity.
Answer Part A
Cash flow operating activity:- Cash flow from operating
activity refer to cash inflow and outflow from the
company’s day to day business activity or operational
activity or core business activity.
For example cash sale, cash receipts of fees, commission,
cash payment of income tax, office expense, salary etc

Process of calculation of cash flows from operating

activity in steps.
1) Start with the net profit before taxation and extra
ordinary item.
2) By adding non cash and non operating item charge to
profit and loss account adjustment shall be made. This
item includes depreciation, amortisation, interest paid,
loss on investment etc.
3) Subtraction of non current and non operating item
credited to profit and loss account. For example:
Interest earned, Dividend earn, Profit on sale of
investment etc.
4) Now adjustment for working capital shall be made in
following manners.
a) Add increase in current liabilities and decrease in
current assets.
b) Less decrease in current liabilities and increase in
current assets.
5) Now adjustment for tax paid and extraordinary item
shall be made.

Calculation of cash flows from operating activity.

Cash flow from operating activity

PARTICULARS Amount
(In Lakhs)
Net profit before tax 50
(+) Adjustment of Non Cash and
Non Operating items charged to
7.5
P&L
Depriciation@10% of 75lakh
(-) Adjustment of Non current
and Non Operating Item
credited to P&L
(17.25)
Interest Received@ 11.5% of
150 lakh
Dividend Received (1)
Cash Generated From 39.25
Operations
(-) Income Tax Paid (15)
(30% of 50 lakh)
Net Cash Flow From Operating 24.25
 Activity

INTERPRETATION
Here in calculation of cash flow from operating activity.....
1) First we started from profit before tax which is 50 lakhs.
2) Then adjustment of depreciation on tangible assets.
Which is non cash and non operating item is made by adding
it in cash flow statement.

Depreciation= value of tangible asset × Rate of depreciation

75, 00,000 × 10 % = 7,50,000

3) Now adjustment for interest and dividend received which is
Non current and non operating income shall be made by
subtracting them.
Interest received = Loan given to big boy co × rate
of loan
150 lakh × 11.5% = 17.25 lakh
Dividend received = 1 lakh
4) Now income tax paid shall be deducted to reach net cash
flow from operating activity.
Income tax = Profit before tax × rate of return
50 lakh × 30% = 15 lakh

Answer Part B
Cash flow from Investing Activity: - Cash flow from investing
activity means the cash inflow and cash outflow generated from
various investment related activity. For e.g. Investment in assets,
securities or sale of Investment property, securities etc.
Process of calculation of cash flow from investing activity
Add Cash inflow from investing activity :-
Cash inflow from sale of asset like property, plant, equipment,
building etc.
Sale of equity, preference shares, debentures, bonds etc.
Cash inflow from interest earned, dividend earned.

LESS Cash outflow from investing activity: -

Purchase of asset, property, plant, equipment.
Purchase of equity, preference shares, Debt given to other party.

Calculation of Cash Flow From Investing Activity

Cash Flow From Investing Activity
PARTICULARS AMOUNT( In Lakhs)
Proceed from stock sold 95
Proceed from interest 17.25
received on loan given to
big boy co.
1
Dividend received
LESS: (75)
Tangible asset
purchased
Loan given to big boy co. (150)
Share purchased in Arvind (10)
mills
Net Cash Flow From (121.75)
Investing Activity

INTERPRETATION
Cash Inflow: -
Interest received in form of cash is inflow of cash.
Dividend received is again cash inflow.
Stock sold is assumed to be stock of share hence it is an
inflow for investing activity
Cash outflow: -
Cash being paid for the purchase of tangible asset is
outflow under investing activity.
Loan given to big boy co. is outflow.
Cash paid to purchase share is also outflow under
investing activity.

ASSUMPTION: - HERE IN THE GIVEN QUESTION IT IS

ASSUMED THAT STOCK SOLD IS SALE OF INVESTMENT IN
SHARES. HENCE TREATED AS PART OF INVESTMENT
ACTIVITY.

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