Assignment – Financial Accounting and Analysis

April 2023 Examination

Q1. Prepare the journal by recording the following transactions

(10 Marks)
3-Dec Mrs. Vinita started business by transferring amount from her saving
account to the business bank account Rs500000
5-Dec She Purchased godown to stock goods worth Rs 100000
7-Dec She purchased goods for sale, costing her Rs 300000
8-Dec She sold off the entire goods at Rs 500000 credit sales
10-Dec She paid salary to employees Rs 20000 through bank account

Ans 1.
Introduction:
A financial journal is a record of financial transactions that occur within a business. It is used
to keep track of all financial activities, including purchases, sales, payments, and receipts.
Financial journals are typically used by accountants and bookkeepers to maintain accurate and
up-to-date financial records for the business. The journal entries are recorded in a chronological
order, with each transaction being assigned a unique identification number. This helps to
maintain the accuracy of financial information and makes it easier to prepare financial
statements, such as balance sheets and income statements. Financial journals are an important
tool for businesses to monitor their financial health and make informed financial decisions.

Date Account Titles Debit Credit

3-Dec Savings Account 500000

3-Dec Business Bank Account 500000
5-Dec Business Bank Account 100000
5-Dec Godown 100000
7-Dec Business Bank Account 300000
7-Dec Purchases 300000
8-Dec Accounts Receivable 500000
10-Dec Salaries Expense 20000

Q2. Company DreamHigh Pvt. limited wants to distribute dividend to its shareholders.
There are two types of dividend, which a shareholder can receive in any accounting
year. Discuss the term dividend, its types, accounting treatment of dividend in the books
of accounts and a brief towards how cash flow on account of dividend is reflected in the
cash flow of a company (10 Marks)

Ans 2.

Dividend is the distribution of a portion of a company’s earnings to its shareholders,

usually in the form of cash or additional shares of stock. The decision to pay dividends is
made by the company’s board of directors and is typically based on factors such as the
company’s profitability, cash flow, and financial position. Dividend payment can take different
forms, and there are two main types of dividend that a shareholder can receive: cash dividend
and stock dividend.
Cash Dividend: A cash dividend is a payment made to shareholders in cash. It is usually
expressed as a fixed amount per share, and shareholders receive cash directly into their bank
accounts. Cash dividends can be paid annually, quarterly, or monthly, depending on the
company’s policy. The amount of the dividend paid is based on the company’s earnings, and
the decision to pay a cash dividend is typically made by the board of directors. When a company
pays a cash dividend, it reduces the amount of cash on its balance sheet.
Stock Dividend: A stock dividend is a payment made to shareholders in the form of additional
shares of stock. It is expressed as a percentage, and shareholders receive additional shares of
stock in proportion to their existing holdings. For example, if a company announces a 10%
stock dividend, a shareholder who owns 100 shares will receive an additional 10 shares of
stock. Stock dividends do not increase the amount of cash on a company’s balance sheet, but
they do dilute the value of existing shares.
Accounting Treatment of Dividend in the Books of Accounts Dividend payment is recorded
in the books of accounts as a liability of the company, and it is not considered an expense.
When a company declares a dividend, it creates a liability on its balance sheet called “dividends
payable”. This liability is cleared when the dividend is paid to shareholders. The journal entry
for the declaration of a cash dividend is as follows:
Dr. Retained Earnings
Cr. Dividends Payable
The journal entry for the payment of a cash dividend is as follows:
Dr. Dividends Payable
Cr. Cash
When a company declares a stock dividend, it does not create a liability on its balance
sheet. Instead, it reduces the retained earnings account and increases the common stock
account. The journal entry for the declaration of a stock dividend is as follows:
Dr. Retained Earnings
Cr. Common Stock
Cash Flow on Account of Dividend Reflected in the Cash Flow of a Company Dividend
payment affects the cash flow of a company in two ways: it reduces the amount of cash on the
balance sheet and it reduces the cash flow from operating activities. When a company pays a
cash dividend, it reduces the amount of cash on its balance sheet, which is reflected in the cash
flow statement as a cash outflow from financing activities. The payment of a cash dividend
also reduces the cash flow from operating activities because it represents a distribution of
earnings to shareholders.
Conclusion:
In conclusion, dividend is a distribution of a portion of a company’s earnings to its
shareholders. There are two main types of dividend: cash dividend and stock dividend. The
decision to pay dividends is made by the company’s board of directors, and it is typically based
on factors such as the company’s profitability, cash flow, and financial position. The
accounting treatment of dividend in the books of accounts is as a liability of the company, and
it is not considered an expense. When a company pays a cash dividend, it reduces the amount
of cash on its balance sheet, which is reflected in the cash flow statement as a cash outflow
from financing activities.

3. Following are the particulars available for Z and X, LLP

retained earnings 668

accounts receivable 240
supplies 500
salaries payable 167
equipment 1000
unearned revenue 475
accounts payable 200
cash 1170
prepaid insurance 100
common stock 1500
a. Calculate the amount of – • total assets • total liabilities excluding stockholder equity
• total stockholders’ equity (5 Marks)

Ans 3a.
To calculate the required amounts, we can use the basic accounting equation:
Assets = Liabilities + Stockholders' Equity
a. Total assets: To calculate total assets, we need to add up all the assets of Z and X, LLP.
From the given information, we have:
Accounts receivable = 240
Supplies = 500
Equipment = 1000
Cash = 1170
Prepaid insurance = 100
Total assets = 240 + 500 + 1000 + 1170 + 100 = 3010
Therefore, the total assets of Z and X, LLP are 3010.
b. Total liabilities excluding stockholder equity: To calculate the total liabilities, we
need to add up all the liabilities of Z and X, LLP, excluding stockholder equity. From
the given information, we have:
Salaries payable = 167
Unearned revenue = 475
Accounts payable = 200
Total liabilities excluding stockholder equity = 167 + 475 + 200 = 842
Therefore, the total liabilities excluding stockholder equity of Z and X, LLP are
842.
c. Total stockholders' equity: To calculate the total stockholders' equity, we need to
subtract the total liabilities from the total assets. From the given information, we have:
Retained earnings = 668
Common stock = 1500
Total stockholders' equity = Total assets - Total liabilities excluding stockholder
equity = 3010 - 842 = 2168
Therefore, the total stockholders' equity of Z and X, LLP is 2168.
Q3b. Discuss the advantages of preparing the Balance Sheet.
(5 Marks)
Ans 3b.
The Balance Sheet is one of the three primary financial statements used to analyze a
company's financial health, alongside the Income Statement and Cash Flow Statement. It
is a snapshot of a company's financial position at a specific point in time, displaying the
company's assets, liabilities, and equity. There are several advantages to preparing a
balance sheet:

1. Assessment of financial health: One of the primary advantages of preparing a balance

sheet is that it provides a clear picture of a company's financial health. By looking at
the assets, liabilities, and equity, investors and stakeholders can evaluate a company's
ability to meet its financial obligations. They can also assess the company's liquidity,
solvency, and overall financial stability.

2. Comparative analysis: Preparing balance sheets at regular intervals, such as quarterly

or annually, allows for easy comparative analysis. By comparing the balance sheets
from different periods, stakeholders can track changes in the company's financial
position, identify trends, and evaluate the effectiveness of management decisions.

3. Decision-making: Balance sheets provide valuable information for decision-making.

Lenders use balance sheets to evaluate the creditworthiness of potential borrowers,
while investors use them to assess the potential returns and risks associated with
investing in a company. Management can also use balance sheets to make decisions
about capital investments, debt financing, and dividend payouts.

4. Compliance: Many businesses are required by law to prepare balance sheets for tax or
regulatory purposes. By keeping accurate balance sheets, businesses can ensure they
are complying with legal requirements and avoiding penalties.

5. Investor confidence: Preparing accurate and transparent balance sheets can increase
investor confidence in a company. Investors are more likely to invest in a company that
has a solid financial position and a transparent accounting process.

6. Internal controls: Preparing balance sheets involves a review of the company's

accounting records and internal controls. This process helps identify any weaknesses or
 errors in the accounting system, allowing management to take corrective action to
improve internal controls and prevent fraud or errors.

7. Strategic planning: Balance sheets provide valuable information for strategic

planning. By analyzing the company's financial position, management can identify
areas where they need to focus on improving, such as increasing profitability or
reducing debt. They can also use the information to set financial goals and develop
strategies to achieve them.

In conclusion, the balance sheet is an essential tool for evaluating a company's financial health,
making informed decisions, complying with legal requirements, and improving internal
controls. By preparing accurate and transparent balance sheets, businesses can build investor
confidence, improve strategic planning, and ultimately achieve long-term success.