1

DECISION ACCOUNTING
ASSIGNMENT

SUBMITTED TO,
DR. P. NATARAJAN

SUBMITTED BY,
KUMARAGURU. P
22351039
MCOM (BF)
 2

ASSIGNMENT 1
INDEX

SERIAL NO. TITLE PAGE

3
Format of financial statements
1)
analysis
 Trading a/c
 Profit and loss a/c
 Cash flow statement

2) 14
Foot note of financial statements
analysis

3) 16
Disclosure of financial statements
analysis
 3

FORMATS OF FINANCIAL STATEMENTS ANALYSIS

TRADING A/C

Trading account is the first part of this account, and it is used to determine the
gross profit that is earned by the business while the profit and loss account is the
second part of the account, which is used to determine the net profit of the
business.

Trading account is used to determine the gross profit or gross loss of a business
which results from trading activities. Trading activities are mostly related to the
buying and selling activities involved in a business. Trading account is useful for
businesses that are dealing in the trading business. This account helps them to
easily determine the overall gross profit or gross loss of the business. The amount
thus determined is an indicator of the efficiency of the business in buying and
selling.

The formulae for calculating gross profit is as follows:

Gross profit = Net sales – Cost of goods sold

Where,

Net sales = Gross sales of the business minus sales returns, discounts and
allowances.

The trading account considers only the direct expenses and direct revenues while
calculating gross profit. This account is mainly prepared to understand the profit
earned by the business on the purchase of goods.
4
 PROFIT AND LOSS A/C

Profit and loss account shows the net profit and net loss of the business for the
accounting period. This account is prepared in order to determine the net profit
or net loss that occurs during an accounting period for a business concern.

Profit and loss account get initiated by entering the gross loss on the debit side or
gross profit on the credit side. This value is obtained from the balance which is
carried down from the Trading account.

A business will incur many other expenses in addition to the direct expenses.
These expenses are deducted from the profit or are added to gross loss and the
resulting value thus obtained will be net profit or net loss.

The examples of expenses that can be included in a Profit and Loss Account are:

1. Sales Tax
2. Maintenance
3. Depreciation
4. Administrative Expense
5. Selling and Distribution Expense
6. Provisions
7. Freight and carriage on sales
8. Wages and Salaries

These appear in the debit side of Profit and Loss Account while Commission
received, Discount received, profit obtained on sale of assets appear on the credit
side.

Net profit can be determined by deducting business expenses from the gross
profit and adding other incomes obtained

Net profit = Gross profit – Expenses + Other income

Closing Entries for Net Loss or Net Profit:

I. In case of Net Loss Capital A/c – Dr.

To Profit and Loss A/c

II. In case of Net Profit and Loss A/c –

Dr. To Capital A/c
 BALANCESHEET

The Balance Sheet is a statement that shows the financial position of the
business. It records the assets and liabilities of the business at the end of the
accounting period after the preparation of trading and profit and loss accounts

‘Not-for-Profit’ Organisations design Balance Sheet for determining the financial

position of the establishment. The preparation of the balance sheet is on the same
pattern as of the trade entities. It depicts liabilities and assets as during the end of
the year. Assets are depicted on the right-hand side, whereas the liabilities are
depicted on the left-hand side.

However, there will be a General Fund or Capital Fund in place of the Capital
and the surfeit or deficit as per Income and Expenditure A/c which is either
deducted from or added to the capital fund, as the scenario may be. It is a
common practice to add some of the subsidised items like entrance fees, legacies
and life membership fees precisely in the capital fund.

The main purpose of the balance sheet is to show a company’s financial status.
This sheet shows a company’s assets and liabilities, along with the money
invested in the business. This statement is required to analyse the financial status
information for several consecutive periods.

Generally, investors and creditors look at the balance sheet of the company to
understand how effectively a company will use its resources and how much it can
give in return. Though the balance sheet can be prepared at any time, it is mostly
prepared at the end of the accounting period. The balance sheet can be created at
any time. However, it is often prepared at the end of the financial year.
 CASH FLOW STATEMENT

A cash flow statement (CFS) is one of a business’s most important financial

reports. Unlike the income statement and balance sheet, which concentrate on
accounting profits, a CFS deals with the cash component of a business. Since
cash provides liquidity, it is decisive for the survival of a business.

A CFS records a firm’s all cash-based transactions during a particular accounting

period. In other words, it mirrors the availability and usage of business funds to
reveal its current state of liquidity. Thus, it explains how well a corporate unit
manages its resources (cash and cash equivalents) to ensure uninterrupted
business functioning and generate profits.

Further, it is essential for corporate planning in the short run as it gauges a

company’s capacity to meet its short-term obligations. Besides, it is also crucial
for business forecasting, determining liquidity status, dividend decision-making,
borrowing in case of monetary shortage, and wisely allocating surplus funds.
Besides, it discloses vital information regarding the solvency of a business. As
opposed to other financial statements, it is more difficult to manipulate and,
therefore, more reliable. Hence it is widely sought after by the stakeholders of a
business.

The cash flows in a business from three significant activities: operating,

investing, and financing. Thus, a cash statement presents the cash generated and
spent on all these activities individually and collectively.

Preparing Cash Flow Statement

There are two methods for calculating cash flows: direct and indirect. Note that
the difference between the two methods lies in computing cash flows from
operating activities. In contrast, the cash flows from investing and financing
activities are treated similarly in direct and indirect methods.

• Direct method

• In direct method
DIRECT METHOD

Only the cash operating items are recorded under the direct method of preparing
CFS. This method is relatively easy to understand as it considers the actual cash
transactions.

The cash from operating activities can be straightaway computed by adding all
the cash receipts and deducting all the cash payments. Later the cash from all the
three activities, i.e., operating, investing, and financing, can be summed up to get
the closing balance of cash and cash equivalents.

Cash Flow Statement – Direct Method

Particulars Amount Total

amount

Opening Cash Balance XXXX

Cash flow from operating activities:

Receipts from sale of goods and services, XXXX

royalties, etc.

Payment to employees, taxes, suppliers, etc. (XXXX)

Net cash from operating activities (A) XXXX

Cash flow from investing activities:

Sale of investments, vehicles, property, etc. XXXX

Purchase of machinery, plant, equipment, (XXXX)

etc.

Net cash from investing activities (B) (XXXX)

Cash flow from financing activities:

Proceeds from issuing shares, borrowings XXXXX

from banks, etc.

Repayment of loan (XXXX)

Payment of dividends to shareholders (XXX)

Net cash from financing activities (C) XXXX

Add: Net cash flow during the year (A + XXXX

B+C)

Ending Cash Balance XXXXX

INDIRECT METHOD

The CFS prepared through an

indirect method requires adjustment
of the noncash items which are
earned but not yet received. These
changes are made to the net profit or
loss of the company in the particular
accounting year. The non-cash and
non-operating expenses are added
back to the net profit/loss, while all
the non-operating and accrued
incomes are subtracted. Thus, it is
the reverse treatment of the income
statement and provides the operating
profit before the working capital
changes.
FOOTNOTE OF FINANCIAL STATEMENT
ANALSIS

Footnotes to the financial statements refer to additional information that helps

explain how a company arrived at its financial statement figures. They also help
to explain any irregularities or perceived inconsistencies in year-to-year account
methodologies. It functions as a supplement, providing clarity to those who
require it without having the information placed in the body of the statement.
Nevertheless, the information included in the footnotes is often important, and it
may reveal underlying issues with a company's financial health.

Types of Footnotes to the Financial Statements

Footnotes may provide additional information used to clarify various points. This
can include further details about items used as a reference, clarification of any
applicable policies, a variety of required disclosures, or adjustments made to
certain figures. While much of the information may be considered required in
nature, providing all the information within the body of the statement may
overwhelm the document, making it more difficult to read and interpret by those
who receive them.

Importantly, a company will state the accounting methodology used, if it has

changed in any meaningful way from past practice, and whether any items should
be interpreted in any way other than what is conventional. For example,
footnotes will explain how a company calculated its earnings per share (EPS),
how it counted diluted shares, and how it counted shares outstanding.

Often, the footnotes will be used to explain how a particular value was assessed
on a specific line item. This can include issues such as depreciation or any
incident where an estimate of future financial outcomes had to be determined.

Footnotes may also include information regarding future activities that are
anticipated to have a notable impact on the business or its activities. Often, these
will refer to large-scale events, both positive and negative. For example,
descriptions of upcoming new product releases may be included, as well as issues
about a potential product recall.
DISCLOSURE OF FINANCIAL STATEMENT
ANALYSIS

Financial statement disclosures are additional information included at the end of

a financial statement. These addendums provide insight to governing bodies,
investors, employees, and the general public. But which types of disclosures in
financial statements are you required by law to include? Which ones might you
consider including even if they are not required? And how can disclosure
management best practices help you create the best possible financial statements
and annual reports? Before we dig into these questions, let’s take a look at what
makes financial disclosures and statements so important for businesses.

Disclosures come at the end of a financial statement, sharing non-financial

information to provide context for the financials. This information helps
investors, lenders, and others make the best possible decisions. Sometimes
disclosures in a financial statement are additional data, but in many cases,
financial statement disclosure examples are narrative. These might describe
changes in operations or strategy, share good news or bad news, or provide
insight into the company structure and chain of command.