Allama Iqbal Open University, Islamabad.

Academic Year 2022 -2024

(Semester: Spring, 2022)

Department: (Department of Commerce)

Assignment # 01

Full Name: Sadia Bashir

Roll No: 0000261963

Programme: M.COM

Subject: Advanced Financial Accounting (8553)

Date of Submission: 14-08-2022

Submitted to: Dr.Ghulam Hussain Khan Zaigham

Q. 1 (a) Explain merchandising organization and its major characteristic’s?

ANSWER:

Merchandise is a broader concept than a product. It include various features with which a
product is offered at the store. Merchandising is the process and function of designing and
delivering the product to ensure customers satisfaction and meet the objective of profit making to
the organization. There are different opinions and definitions on merchandising.
AMA – American Marketing Association has defined merchandising as “Planning involved in
marketing right merchandise, at right place at right time in the right quantities at the right price”.
E.g. – Amazon (dot) com, promises to deliver around 1 crore products within 24 hours and
payment after delivery.
Quicker (dot) com promises to sell anytime for a right price quickly. Similarly Big Bazar Easy
day, ‘More’ etc. Make ‘attractive’ offer of wide variety of the product that are categorised and
displayed in their store. They are offered with attractive price and other benefits that all can be
summarized as merchandising.
Merchandising can be defined as “Planning, Buying, Assorting, Promoting Placing, Setting and
Replenishing the Goods”. Goods bought must be sold or replenished the unsold stock will be a
burden on finance. So planning need to be made what kind of product is to be brought and how it
should be priced, promoted and placed so that customer is attracted towards the product.
Grace Kunz has defined it as the planning developing and presenting of product lines for
identified target markets with regard to pricing, assorting, styling and timing. Identify the
customers, understand their need, buy those goods, categorise and place them in a style that
appeals to visiting customer.
It is said a customer makes his final decision of buying or going for alternative when he visits the
shop. If the “offer” at the counter pleases he may decide to buy, that is what is merchandising
such ‘offer’ is a bundle of expectations that a customer expects to be delivered to him.
It is basically product itself that should be of customers liking. Along with this display of
product, it price, discount, service and other features are taken as ‘offer’ that must appeal and
attract a customer.
What you buy must be sold the offer or the package i.e., product, price, place and promotion
must appeal the visitor, to ensure sale.
Merchandising is planning and control of merchandise inventory of the retail form in a manner
which balances between expectation of target customer and strategy of the firm.
Merchandising has two broad objectives:
1. Buy and store the inventory or product that is expected or needed by the people.
2. Achieve the objective of the business i.e., Growth, profit etc., that is possible when inventory
is sold. It means store or buy that product that be sold is the basic philosophy of merchandising,
which benefits both the customer and also the businessmen. That is customer is pleased as he
gets product of his desire and retailer gets profit as merchandise is sold.
 Types of Merchandise:
Merchandise can be broadly classified under following heads:
 Staple:
These are necessaries of life that are used every day. E.g. – Food, Clothing, Stationery,
Cosmetics, toiletries etc.
They have regular and stable demand. Fluctuation in demand supply and price is minimum.
 Fashion:
Consumption of these goods is dependent on current fashion. Demand lasts until its fashion.
Depending on nature of goods, fashion may be for seasons or years. Retailer has to stocks the
product until the fashion lasts. If the stock remains unsold as goods become out of fashion, has
he has to adopt marketing strategy like discount, ‘buy one get one offer’ to clear stock.
 Fads:
Goods that are in demand for a very short period of time. It can be said as fashion which lasts for
a very short period of time. It is risky to store such goods in bulk quantity as there is no
guarantee regarding duration of demand.
 Seasonal:
Goods that are demand in particular seasons. Based on weather features, we can classify seasons
as Monsoon, Summer, Winter accordingly specific products like, Umbrella, Sweaters, Cool
Goggles, soft drinks, Ice creams etc., are demanded accordingly the product is to be stored.
Similarly season of festivals, marriage have its own demand for sweets, Jewellery, Clothing, etc.
 Principles of Merchandising:
Merchandising is delivery of right product at right place and right time to the targeted customer.
Successful operation of merchandising is dependent on following principles.
 Offer What Customer Wants:
Retailer must offer in his store what the customer wants or desires. He must select the segment of
customer to whom he has to serve (like rich, middle class, Youngsters, kids, ladies) assemble the
goods that they expect, assort and Offer them at a price, style and content etc., that is liked by
them.
 Prepare Merchandise Plan:
Merchandiser has to finalize the merchandise plan. Such plan must be based on demands and
specialty of each store and department. Micro details like types of products, brands, price
category etc., have to be planned.
Such planning must be based on past records, consider the likely changes in fashion,
consumption habits. Merchandise has to consult store manager in finalizing merchandise plan.
He has also to analyses financial implication of investment on merchandise to meet the profit
targets.

 Selection of Sources of Supply:

It is said goods well bought are half sold. Merchandiser has to select vendors or suppliers who
meet his requirements in terms price, quality, delivery and reliability. He has to search the list of
suppliers available locally or at regional or international level depending on his need and select
the supplies who meets his demands. Merchandiser has to negotiate with the vendor the terms of
buying price, terms of delivery, payment base.
 Consistency and Change:
There should be consistency in merchandise assortment. Regular customers are habituated to
particular lifestyle, products, price etc. Retailers should be capable of offering regularly as to
what his customer’s desire. Along with this he has to introduce an element of novelty, bringing
the gradual change in product, style of operation etc. to match the changing trend and demand of
his customers.
 Present Right Assortment:
Retailers has to present right assortments of merchandise, i.e., types of product, brand, price
range, and other features that the regular customers expects. Products must be presented category
wise offering convenience and comfort to the customer in selection of product.
 CRM:
Sale to a customer is not a once day affair or a single transaction. A customer who visits a store
must repeatedly visit the store. Retailer has to develop relationship with the customers.1

Q. 1 : (b) Discuss the following term in detail:

(I) Sales returns

(II) Allowance

(III) Discounts

ANSWER:

(I) Sales returns

1
https://www.businessmanagementideas.com/retail-marketing/merchandising/merchandising-definitions-types-
principles-and-functions-retail-marketing/17534
A sales return is merchandise sent back by a buyer to the seller. The return is usually
because an excess quantity was either ordered or shipped, or due to defective goods. A
return may also be triggered by goods having been shipped too late, or the wrong items were
shipped, or because the product specifications were incorrect.The seller records this return
as a debit to a Sales Returns account and a credit to the Accounts Receivable account; the
total amount of sales returns in this account is a deduction from the reported amount of
gross sales in a period, which yields a net sales figure. The credit to the Accounts
Receivable account reduces the amount of accounts receivable outstanding. The Sales
Returns account is a contra account.

 Profit Impact of Sales Returns

It is possible that a sales return will not be authorized until a later period than the one in
which the original sale transaction was completed. If so, there will be an excessive amount of
revenue recognized in the original reporting period, with the offsetting sales reduction
appearing in a later reporting period. This overstates profits in the first period and
understates profits in the later period. A seller can more closely control the amount of sales
returns by requiring a sales return authorization number before its receiving department will
accept a return. Otherwise, some customers will return goods with impunity, some of which
may be damaged and which can therefore not be re-sold.2

(II) Allowance

An allowance is an amount of money given or allotted usually at regular intervals for a specific
purpose. In the context of children, parents may provide an allowance (British English: pocket
money) to their child for their miscellaneous personal spending. In the construction industry, an
allowance may be an amount allocated to a specific item of work as part of an overall contract.
The person providing the allowance usually tries to control how or when money is spent by the
recipient so that it meets the aims of the person providing the money. For example, an allowance
by a parent may be motivated to teach the child money management and be either unconditional
or tied to the completion of chores or the achievement of specific grades.[1]
The person supplying the allowance usually specifies the purpose and may put controls in place
to make sure that the money is spent only for that purpose. For example, company employees
may be given an allowance or per diem to provide for meals and travel when they work away
from home and then be required to provide receipts as proof, or they are provided with specific

2
https://www.accountingtools.com/articles/sales-return
non-money tokens or vouchers such as a meal voucher that can be used only for a specific
purpose.3

III) Discounts

Discounts and allowances are reductions to a basic price of goods or services. They can occur
anywhere in the distribution channel, modifying either the manufacturer's list price (determined
by the manufacturer and often printed on the package), the retail price (set by the retailer and
often attached to the product with a sticker), or the list price (which is quoted to a potential
buyer, usually in written form).

There are many purposes for discounting, including to increase short-term sales, to move out-of-
date stock, to reward valuable customers, to encourage distribution channel members to perform
a function, or to otherwise reward behaviors that benefit the discount issuer. Some discounts and
allowances are forms of sales promotion. Many are price discrimination methods that allow the
seller to capture some of the consumer surplus. 4

Q. 1:(C) How are earning per share computed for business combination?

ANSWER:

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares
of its common stock. The resulting number serves as an indicator of a company's
profitability. It is common for a company to report EPS that is adjusted for extraordinary
items and potential share dilution.

 Earnings per share (EPS) is a company's net profit divided by the number of common
shares it has outstanding.
 EPS indicates how much money a company makes for each share of its stock and is a
widely used metric for estimating corporate value.
 A higher EPS indicates greater value because investors will pay more for a company's
shares if they think the company has higher profits relative to its share price.1
 EPS can be arrived at in several forms, such as excluding extraordinary items or
discontinued operations, or on a diluted basis.

https://en.wikipedia.org/wiki/Allowance_(money)#:~:text=An%20allowance%20is%20an%20amount,for%20their
%20miscellaneous%20personal%20spending.
4
https://en.wikipedia.org/wiki/Discounts_and_allowances
  Like other financial metrics, earnings per share is most valuable when compared against
competitor metrics, companies of the same industry, or across a period of time.

Earnings per share value is calculated as net income (also known as profits or earnings) divided
by available shares. A more refined calculation adjusts the numerator and denominator for
shares that could be created through options, convertible debt, or warrants. The numerator
of the equation is also more relevant if it is adjusted for continuing operations.1

Earnings per Share=

To calculate a company's EPS, the balance sheet and income statement are used to find the
period-end number of common shares, dividends paid on preferred stock (if any), and the net
income or earnings. It is more accurate to use a weighted average number of common shares
over the reporting term because the number of shares can change over time.

Any stock dividends or splits that occur must be reflected in the calculation of the weighted
average number of shares outstanding. Some data sources simplify the calculation by using the
number of shares outstanding at the end of a period.5

Q. 2 Date of inspection of lease 30/06/2021 (20)

Fair value (Rs) 36,000

12 Quarterly rentals, in arrears (Rs) 5,000

Lease term 3 years

The year-end of lessee is December 31

5
By JASON FERNANDO (Updated June 19, 2022 )

Reviewed by DAVID KINDNESS

Fact checked by MELODY KAZEL

https://www.investopedia.com/terms/e/eps.asp#:~:text=Earnings%20per%20share%20(EPS)%20is,indicator%20of%20a%20comp
any%27s%20profitability.
 Required:

(a) Total interest

(b) Year-wise interest allocation using sum of the digits method
(c) Lease amortization schedule
(d) Extract from financial statements for 2021, books of lessee.

ANSWER:

(a) Total interest

Start principal Start balance Interest End Balance End Principal

1 $36,000.00 $36,000.00 $2,159.99 $43,160.00 $41,000.00

2 $41,000.00 $43,160.00 $2,589.60 $50,749.60 $46,000.00

3 $46,000.00 $50,749.60 $3,044.99 $58,794.58 $51,000.00

(b)Year-wise interest allocation using sum of the digits method

Start Start Interest Tax End Balance End

Principal balance Principal

1 $41,000.00 $41,000.00 $199.57 $0.00 $41,199.57 $41,000.00

2 $46,000.00 $46,199.57 $224.88 $0.00 $46,424.45 $46,000.00

3 $51,000.00 $51,424.45 $250.31 $0.00 $51,674.76 $51,000.00

4 $56,000.00 $56,674.76 $275.87 $0.00 $56,950.63 $56,000.00

5 $61,000.00 $61,950.63 $301.55 $0.00 $62,252.17 $61,000.00

6 $66,000.00 $67,252.17 $327.35 $0.00 $67,579.53 $66,000.00

7 $71,000.00 $72,579.53 $353.28 $0.00 $72,932.81 $71,000 00

8 $76,000.00 $77,932.8 l $379.34 $0.00 $78,312.15 $76,000.00

9 $81,000.00 $83,312. 15 $405.53 $0.00 $8 ,717.68 $81,000.00

10 $86,000.00 $88,717.68 $431.84 $0.00 $89,149.52 $86,000.00

11 $91,000.00 $94,149.52 $458.28 $0.00 $94,607.80 $91,000.00

12 $96,000.00 $99,607.80 $484.85 $0.00 $100,092.64 $96,000.00

Year 1 End:

13 $101,000.00 $105,092.64 $511.54 $0.00 $105,604.19 $101,000 00

14 $106,000.00 $110,604.19 $538.37 $0.00 $111,142.56 $106,000.00

15 $111,000.00 $116,142.56 $565.33 $0.00 $116,707.89 $111,000.00

16 $116,000.00 $121,707.89 $592.42 $0.00 $122,300.31 $116,000.00

17 $121,000.00 $127,300.31 $619.64 $0.00 $127,919.95 $121,000.00

18 $126,000.00 $132,919.95 $646.99 $0.00 $133,566.94 $126,000.00

19 $131,000.00 $138,566.94 $674.48 $0.00 $139,241.42 $131,000.00

20 $1 6,000.00 $144,241.42 $702.10 $0.00 $144,943.53 $ 136,000.00

21 $141,000.00 $149,943.53 $729.86 $0.00 $150,673.8 $141,000.00

22 $146,000.00 $155,673.38 $757.75 $0.00 $156,431.13 $146,000.00

23 $151,000.00 $161,431.13 $785.77 $0.00 $162,216.91 $151,000.00

24 $156,000,00 $167,216.91 $813.94 $0.00 $168,030.84 $156,000.00

Year 2 End:

25 $161,000,00 $173,030.84 $842.24 $0.00 $l73,873.08 $161,000.00

26 $166,000.00 $178,873.08 $870.67 $0.00 $l79,743.75 $166,000.00

27 $171,000.00 $184,743.75 $899.25 $0.00 $185,643.00 $171,000.00

28 $176,000.00 $190,643. 00 $927.96 $0.00 $191,570.97 $176,000.00

29 $181,000.00 $196,570.97 $956.82 $0.00 $197,527.79 $181,000.00

30 $l 86,000.00 $202,527.79 $985.81 $0.00 $203,513.60 $186,000.00

31 $191,000.00 $208,513.60 $1,014.95 $0.00 $209,528.55 $191,000.00

32 $196,000.00 $214,528.55 $1,044.23 $0.00 $215,572.78 $196,000.00

33 $201,000.00 $220,572.78 $1,073.65 $0.00 $221,646.43 $201,000.00

34 $206,000.00 $226,646.43 $1,103.21 $0.00 $227,749.64 $206,000.00

35 $211,000.00 $232,749.64 $ l ,132.92 $0.00 $233,882.56 $211,000.00

36 $2 l 6,000.00 $2 8,882.56 $ l ,162.77 $0.00 $240,045.33 $2 l 6,000.00

Year 3 End:

37 $221,000.00 $245,045,oo $1,192.77 $0.00 $246,238.10 $221,000.00

38 $226,000.00 $251,238.10 $1,222.91 $0.00 $252,461.02 $226,000.00

39 $2 1,000.00 $257,46 1.02 $1,253.20 $0.00 $258,714.22 $231,000.00

40 $2 6,000.00 $263,714.22 $1,283.64 $0.00 $264,997.87 $236,000.00

41 $241,000.00 $269,997.87 $1,314.23 $0.00 $271,312.09 $241,000 00

42 $246,000.00 $276,312.09 $1,44.96 $0.00 $277,657. 06 $246 000 00

43 $251,000.00 $282,657.06 $1,375.85 $0.00 $284,032.90 $251,000 00

44 5256,000.00 $289,032.90 $1,406.88 $0.00 $290,439.79 $256,000.00

45 $261,000.00 $295,439.79 $1,438.07 $0.00 $296,877.85 $261,000.00

46 $266,000.00 $301,877.85 $1,469.41 $0.00 $303,347.26 8266,000.00

47 $271,000.00 $308,347.26 $1,500,90 $0.00 $305,848.16 $271,000.00

48 $276,000.00 $314,848.16 $1,532.54 $0.00 $316,380.70 $276,000.00

(c) Lease amortization schedule

Start Start Balance Interest Tax End Balance End Principal

Principal

1 $41,000.00 $41,000.00 $4,092.65 $0.00 $100,092.64 $96,000.00

2 $101,000.00 $105,092.64 $7,938.19. $0.00 $168,030.84 $156,000.00

3 $161,000.00 $173,030.84 $12,014.48 $0.00 $240,045,33 $216,000,00

(d)Extract from Financial statements for 2021, books of lessee.

Start Start Balance Interest Tax End Balance End Principal

Principal

1 $46,000.00 $46,000.00 $4,392.64 $0.00 $105,392.64 $101,000.00

2 $111,000.00 $115,392.64 $8,556.18 $0.00 $178,948.84 $166,000.00

3 $176,000.00 $188,948.84 $12,969.58 $0.00 $256,918.41 $231,000.00

Q 3. Orser Furniture purchases and sells dining room furniture. Its management uses the
perpetual method of inventory accounting. Journalize the following transactions that
occurred during October 2021: (20)

Oct. 2 Purchased on account Rs. 27,000 of inventory with payment terms 2/10, n/30,
and paid Rs. 650 in cash to have it shipped from the vendor’s warehouse to the
Orser showroom.

5 Sold inventory costing Rs. 4,900 for Rs. 8,250 on account.

10 Paid Rs. 13,950 of accounts payable (from October 2 purchase) and received the
cash discount.

14 Returned two damaged tables purchased on October 2 (costing Rs. 550 each) to
the vendor.

19 Received payment of Rs. 4,560 from customers.

20 Paid the balance of the account from October 2 purchase.

22 Sold inventory costing Rs. 3,800 for Rs. 5,200 on account.

24 A customer returned a dining room set that she decided didn’t match her home.
She paid Rs. 3,250 for it, and its cost to Order was Rs. 1,800.
 Assuming the balance in the inventory account is Rs. 12,000 on October 1, and no
other transactions relating to inventory occurred during the month, what is the
inventory balance at the end of October?

ANSWER:

Perpetual inventory system

Amount $ Amount $
Particulars Debit Credit

Inventory $27,000
Accounts payable $27,000
(to record the purchases made)

Inventory $650
Cash $650
(to record the transportation charges paid)

Accounts Receivable $8,250

Sales $8,250
( To record the sales made)

Cost of Goods Sold $4,900

Inventory $4,900
( To record the Cost of Goods sold Recognized)
 Accounts Payable ($13,950/.98) $14,235
Inventory $285
Cash $13,950
( To record the payment made after discount)

Accounts Payable $1,100

Inventory ($550x2) $1,100
( To record the damaged goods returned)

Cash $4,560
Accounts Receivables $4,560s
(To record the payment received)

Accounts Payable $11,665

Cash ($27,000-$14,235-$1,100) $11,665
(To record the payment made)

Accounts Receivable $5,200

Sales $5,200
( To record the sales made)

Cost of Goods Sold $3,800

Inventory $3,800
( To record the Cost of Goods sold Recognized)

Sales Return $3,250

Accounts Receivable $3,250
( To record the sales return made)
 Inventory $1,800
Cost of Goods Sold $1,800
( To record the Cost of Goods sold Recognized)

Calculation of Ending Inventory Balance:

Date Particulars Amount ($) Date Particulars Amount()

Oct 1 Opening Balance 12,000 Oct 5 Cost of Goods Sold 4,900

Oct 2 Accounts Payable 27,000 Oct 10 Accounts Payable 285

Oct 2 Cash 650 Oct 14 Accounts Payable 1,100

Oct Cost of Goods Sold 1,800 Oct 22 Cost of Goods Sold 3,800

Oct 31 Closing Balance 31,365

41,450 41,450

Inventory A/C

Hence, th e inventory balance at the end of October is $31,365

Q. 4
The income statements for Unique Co. and Creative Co. for the year ended 31st
December 2021 are shown below. Unique Co. Acquired 60% of the ordinary share capital
of Creative Co several years ago. (20)

Unique Creative

Rs '000' Rs '000'

Sales 3,000 1,500

 cost of sales and expenses (900)
(1,800)

Gross profit 1,200 600

Distribution Cost (60) (35)

Admin cost (25) (20)

Investment income:

Dividend received from

Creative 5

profit before tax 1,120 545

Tax (115) (15)

Profit after tax 1,005 530

Goods were sold by Unique to Creative Rs 10,000 at a margin of 30% (All goods were
unsold by Creative at the yearend) You are required to prepare Consolidated Income
Statement for the year 2021.

ANSWER:
Consolidated statement of comprehensive income

For the year ended 31 December, 2021

Rs.

Sale (1) 000

Cost of Sale (2) 3000
(1800)
 Gross Profit 1200
Distribution Cost (60)
Admin Cost (25)

Profit Before Tax 1120

Tax (115)

Profit After Tax 1005

Group Balancing fig (total – NCI) 965

NCI PAT(S)*NCI SHARE (3)1325

TOTAL CONSOLIDATED PAT 1,210

1: Sales (3000+1500-10) = 4490

2: CS (3000+1500 – 5*) = 4275

*PURP Adjustment from P to S 10*30%

Q. 5 (a) XYZ Corporation reported earnings per share of Rs. 2.00 in 2021. In 2022, XYZ
Corporation reported earnings per share of Rs. 1.50. On July 1, 2022, and
December 31, 2022, 2-for-1 stock splits were declared. You are required to present
the earnings per share for a two-year comparative income statement that includes
2022 and 2021. (20)

(b) Blue Company has the following pattern of financial data for Years 1 and 2:

Year 1 Year 2

Net income Rs. 40,000 Rs. 42,000

Preferred stock (5%) Rs. 450,000 Rs. 550,000

Weighted average number of

Common shares outstanding 38,000 38,000

Required: Calculate earnings per share and comment on the trend.

ANSWER:
et ncome Preferred ividends
EPS = eig ted verage ares utstanding

EPS = (40000 - 38000) / 450000

EPS = 0.0044

Earnings per share Year 2:

et ncome Preferred ividends
EPS = eig ted verage ares utstanding

EPS = (42000 - 38000) / 550000

EPS = 0.0072
Bibliography
1
https://www.businessmanagementideas.com/retail-marketing/merchandising/merchandising-definitions-types-
principles-and-functions-retail-marketing/17534
2
https://www.accountingtools.com/articles/sales-return
3
https://en.wikipedia.org/wiki/Allowance_(money)#:~:text=An%20allowance%20is%20an%20amount,for%20their
%20miscellaneous%20personal%20spending.
4
https://en.wikipedia.org/wiki/Discounts_and_allowances
5
By JASON FERNANDO (Updated June 19, 2022 )

Reviewed by DAVID KINDNESS

Fact checked by MELODY KAZEL

https://www.investopedia.com/terms/e/eps.asp#:~:text=Earnings%20per%20share%20(EPS)%20is,indic
ator%20of%20a%20company%27s%20profitability.