Ans1: - First we need to understand the Accounting Concept of Assets, Liabilities and Equity.

First, we will
start with Assets. In financial accounting, an assets is any resources owned or controlled by a business or an
economic entity. It is anything that can be used to produce positive economic value. Assets represent value of
ownership that can be converted into cash. An asset can be thought of as something that, in the future, can
generate cash flow, reduce expenses or improve sales, regardless of whether it's manufacturing equipment or
a patent. Assets are classified as Current assets: - are those assets which can be consumed, Sold or
Converted into cash with in a same Accounting/Fiscal year. These assets include Cash or Cash Equivalent,
Account Receivable and Inventories. Fixed assets: - are those assets which are also considered as Long-Term
assets that companies has purchased and using for production of its goods and service’s. these are non-
current assets whose useful life is more than one year. These includes assets like property, plant and
machinery/equipment’s. Financial assets: - Financial assets is a liquid asset that gets its value from a
contractual right or Ownership claim. Their values reflects factors of supply and demand in market place in
which they trade, as well they carry risk with them too. Stocks, Bonds, Mutual Funds are the examples of
Financial assets. Intangible assets: - These are those assets which have no physical substance these can
neither be touched. For example Goodwill, Trademarks, Trade name, Patent As well as Software. Liabilities:
- A liability is something a person or company owes, usually a sum of money. Liabilities are settled over time
through the transfer of economic benefits including money, goods, or services. Liabilities are Classified as
Current liabilities: - Current liabilities are those that are due within a year. These primarily occur as part of
regular business operations. Due to the short-term nature of these financial obligations, they should be
managed with consideration of the company’s liquidity/Funds. The example of current liabilities are Accounts
payable, Interest Payable, taxes payable, Bank OD. Long-term Liabilities: - Long-term (non-current) liabilities
are those that are due after more than one year. It is important that the long-term liabilities exclude the
amounts that are due in the short-term, such as interest payable. Long-term liabilities can be a source of
financing, as well as refer to amounts that arise from business operations. For example, bonds or mortgages
can be used to finance the company’s projects that require a large amount of financing. Liabilities are critical
to understanding the overall liquidity and capital structure of a company. Contingent Liabilities: - Contingent
liabilities are a special category of liabilities. They are probable liabilities that may or may not arise, depending
on the outcome of an uncertain future event. Examples of Contingent liabilities are product warranties or any
Law suits expense that came all of sudden.
Equity: - Capital (owners’ equity) generally refers to the amount invested in an enterprise by the owners. It is
also used to refer to the claim of owners to the assets of an enterprise. The claims of owners to assets are
secondary to those of creditors and lenders. Changes in owners’ equity occurs when: (i) owners either invest
in or withdraw cash or other assets from the business and (ii) the business either earns income from
profitable operations or incurs losses from unprofitable operations.
The Accounting Equation that always holds is Assets = Equity + Liabilities that’s what we show it in Balance
sheet. Balance sheet is a report that shows the Financial position of the Particular point of the time or period,
generally at the end of the Accounting year. It shows the amount of assets owned by the business as well as
the Liabilities on the businesses.
Analysing the Following Transaction of Surprise Ltd. Each Transaction can be analysed in the following
Manner:
1. Commenced business with cash of ₹ 5,00,000.
Transaction 1 Refers that Business has received Rs 500000, Its an asset to the business. The business
Owes that money to the Owner’s of Surprise Ltd. This money is also known as Capital to the Business
which is equal to Asset of the Company.
2. Purchased equipment for cash ₹ 2,00,000.
This Transaction refers that Company has purchased an equipment for Rs 200000 for Cash. which
increase Equipment (Asset) and reduced the Cash that is also an assets.
3. Purchased furniture worth ₹50,000 on credit from Indi Mart.
In this Transaction Company has bought Furniture worth Rs 50000 will increase the Assets but they
have bought it on credit so this will Increase the Liabilities of Rs 50000.
4. Purchased raw materials for ₹25,000 against cash from XYZ Suppliers.
In this transaction the Raw material (assets) will increased by Rs 25000 and the other Asset will
reduced by Rs 25000.

5. Deposited cash of ₹ 1,25,000 in the current account.

In this transaction the Bank (assets) will increased by Rs 125000 and the Cash other Asset will reduced
by Rs 125000.
6. Sold goods for ₹75,000 and received a cheque against the same.
 In this transaction the Bank (assets) will increased by Rs 75000 and the goods other Asset will reduced
by Rs 75000.

Sr.No Transaction Assets = Liabilities + Capital

Commenced business with cash of ₹

1 5,00,000. 500000 = 0 + 500000

Purchased equipment for cash ₹

2 2,00,000. 500000 = 0 + 500000

Purchased furniture worth ₹50,000 on

3 credit from Indi Mart. 550000 = 50000 + 500000

Purchased raw materials for ₹25,000

4 against cash from XYZ Suppliers. 550000 = 50000 + 500000

Deposited cash of ₹ 1,25,000 in the

5 current account. 550000 = 50000 + 500000

Sold goods for ₹75,000 and received a

6 cheque against the same. 575000 = 50000 + 575000

Ans2: - Income Statement: - An income statement or profit and loss account is one of the financial statements
of a company and shows the company's revenues and expenses during a particular period. It indicates how
the revenues are transformed into the net income or net profit. It also shows the Whether the company is
making the Profit or Loss for the given period of Time. The Income statement along with Balance sheet and
Cash flow statement, helps Investor to understand the financial health of business. The Basic Formula of
Income statement is Revenues – Expenses = Net Income.
Cash Flow statement: - In financial accounting, a cash flow statement, also known as statement of cash flows,
is a financial statement that provides aggregate data regarding all cash inflows a company receives from its
ongoing operations and external investment sources. is a financial statement that shows how changes in
balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to
operating, investing, and financing activities. There are two methods of calculating cash flow: the direct
method and the indirect method.
Direct Cash Flow Method: - The direct method is one of two accounting treatments used to generate a cash
flow statement. The statement of cash flows direct method uses actual cash inflows and outflows from the
company's operations, instead of modifying the operating section from accrual accounting to a cash basis.
Cash receipts include cash sales, receipts from debtors, commission and fee received and interest. Cash
payments include payments for purchases, payments to and for employees, operating expenses, interest
payments and direct tax payments. The direct method provides information which may be useful in estimating
future cash flows and which is not available under the indirect method. Under the direct method, information
about major classes of gross cash receipts and gross cash payments may be obtained either:

Format of Direct Cash Flow: -

FORMAT OF CASH FLOW STATEMENT (INDIRECT METHOD)

 A Cash flows from operating activities Amount
Cash receipts from customers ----
Cash paid to suppliers and employees (----)
Cash generated from operations ----
Income taxes paid (----)
Cash flows before extraordinary items ----
Extraordinary items ----
Net cash flows from operating activities ----
B Cash flows from investing activities
Purchase of fixed assets (---)
Purchase of investments (---)
Sale of fixed assets ----
Sale of investments ----
Interest received ----
Dividend received ----
Net cash flows from investing activities ----
C Cash flows from financing activities
Proceeds from issue of share capital ----
Proceeds from long-term borrowings ----
Repayment of long-term borrowings (---)
Dividend paid (---)
Net cash flows from financing activities ----
Net increase (or decrease) in cash and cash equivalents (A + B + C) ----
Cash and cash equivalents as at ------ (opening) ----
Cash and cash equivalents as at ------ (closing) ----

Indirect Cash Flow Method: - The indirect method of the cash flow statement attempts to revert the record to
the cash method to depict actual cash inflows and outflows during the period. Under the indirect method, the
net profit or loss disclosed by the income statement is adjusted for:
1. Non-cash items such as depreciation, provisions and unrealized foreign exchange gains or losses.
2. change in current assets and current liabilities.
3. Any deferrals or accruals of past or future operating cash receipts or payments.
4. All other items that affect investing or financing cash flows.

FORMAT OF CASH FLOW STATEMENT (INDIRECT METHOD)

A Cash flows from operating activities Amount

Net profit before tax and extraordinary items ----
Adjustment for: Depreciation
Non-cash items ----
Non-operating items (dividend, Interest income) (----)
Operating profit before working Capital changes ----
 Working capital adjustment ----
Cash generated from operations ----
income tax paid
Cash flow before extraordinary Items (---)
Extraordinary Items (---)
Net cash flows from operating activities ----
B Cash flows from investing activities
Purchased of Fixed assets ----
Purchased of Investment ----
Sale of Fixed assets ----
Sale of Investment
Interest received ----
Dividend received ----
Net cash flows from Investing activates (---)
C Cash flows from financing activities
Proceeds from issue of share capital ----
Proceeds from long-term borrowings ----
Repayment of long-term borrowings ----
Dividend Paid ----
Net cash flows from financing activities ----
Net increase (or decrease) in cash and cash equivalents (A + B + C) ----

Cash and cash equivalents as at ------ (opening) ----

Cash and cash equivalents as at ------ (closing) ----

The direct method and the indirect method are alternative ways to present information in an
organization’s statement of cash flows. The difference between these methods lies in the presentation of
information within the cash flows from operating activities section of the statement. There are no
presentation differences between the methods in the other two sections of the statement, which are the
cash flows from investing activities and cash flows from financing activities.

Ans3A: - Debt Equity Ratio: - The debt-equity ratio is a measure of the relative contribution of the
creditors and shareholders or owners in the capital employed in business. Simply stated, ratio of the
total long-term debt and equity capital in the business is called the debt -equity ratio. The debt–equity
ratio relates debt to equity or owners’ funds. Debt here means long -term liabilities that mature after 1
year and include long-term loans from financial institutions and banks, public deposits and debentures.
Equity means owners’ funds and includes equity share capital, preference share capital, general
reserves, capital reserves, share premium and other reserves available to equity shareholders.
Accumulated losses and fictitious assets such as preliminary expenses, discount on issue o f shares or
debentures, which are yet to be written off, should be deducted from the equity. The debt –equity ratio is
calculated as follows:

DEBT EQUITY RATIO = Debt

Equity

So, Debt equity ratio of Ace & Pace ltd.

Debt Equity Ratio for, Ace Ltd is, Debt Equity = 625 = 0.29
 2100

Debt Equity Ratio for, Pace Ltd is, Debt Equity = 700 = 0.24
2850

Current Ratio: - Current ratio is the relation of a company’s current assets to its current liabilities. It 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. Current assets are “cash and other assets that are
expected to be converted into cash or consumed in the production of goods or rendering of services in
the normal course of business.” These include cash in hand, cash at bank, sundry debtors, bills
receivables, loans and advances, inventory, prepaid expenses, accrued income and short -term
investments in the form of marketable securities. current liability is a “liability including loans, deposits
and bank over-draft which fall due for payment in a relatively short period, normally not more than 12
months.” Current liabilities include bank overdraft, short -term loans, bills payable, sundry creditors,
provision for taxation, proposed dividend and outstanding expenses.

Current Ratio = Current assets

Current Liabilities
Current Ratio for Ace Ltd & Pace Ltd.

Current Ratio for Ace Ltd, Current Ratio = 450 = 1.5

300

Current Ratio for Ace Ltd, Current Ratio = 550 = 1.46

375

Ans3B: - Earning Per Share: - 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. Earnings per share (EPS) of equity
share capital is an important accounting statistic widely used by existing and prospective equity
shareholders of the company. Companies are required by accounting standards to present the EPS on
the face of the statement of profit and loss to improve performance comparisons between different
entities in the same reporting period and between Different reporting periods for the same entity.

Diluted EPS is a calculation used to gauge the quality of a company's earnings per share (EPS) if all
convertible securities were exercised. Convertible securities are all outstanding convertible preferred
shares, convertible debentures, stock options, and warrants.

Formula for Earning Per Share.

Earnings Per Share for Ace Ltd, EPS = 115 = 11.5

10

Earnings Per Share for Pace Ltd, EPS = 178 = 17.8

10
As per the Earning Per Share calculation the higher the EPS the more Profitable the company is in his
field, if company is earning more so they can expense more for their growth. As far if we have to invest
our money, we should definitely invest in the company whose Earning Per Share is higher than the other
competitor’s in the market. As per the given data of Ace & Pace Ltd. Pace Ltd. Has higher EPS so, we
have to invest in the Pace Ltd.