Financial Accounting & Analysis

Assignment for December-2022

1.
Journal of Mrs. Veena
Date Particulars L. Dr. Cr.
F. Amount(Rs) Amount(Rs)
3/12 Cash A/c Dr. 5,000
Bank A/c Dr. 5,00,000
To Capital A/c 5,05,000
(Being the amount invested by Mrs.
Veena in her business.)
5/12 Furniture A/c Dr. 60,000
To Bank A/c 30,000
To Cash A/c 30,000
(Being furniture purchase and 50%
payment made through bank,
remaining is paid through cash.)
7/12 Purchase A/c Dr. 3,15,000
To Bank A/c 3,15,000
(Being goods purchased.)

8/12 Bank A/c Dr. 5,00,000

To Sales A/c 5,00,000
(Being goods sold. )

10/12 Rent A/c Dr. 10.000

Electricity A/c Dr. 10.000
Salary A/c Dr. 10.000
To Bank A/c
30,000
(Expenses payment done through
bank.)

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2.
Introduction:-

Every firm exists just to make a profit. Every business choice is made with the impact on the
bottom line and the company's future growth potential in mind. To understand the business's
profitability and ability to improve it further, it is critical to keep a complete record of all its
income and expenses. A company's profit and loss statement is also required as part of the
financial statements.

In its most basic form, a profit and loss account is a record of all the business's income and
expenses during a specific time period. This time can be the complete fiscal year, an interim
period such as half of the fiscal year, or a quarter. Every firm, from a sole proprietorship to a
corporation, must keep a profit and loss account to determine their true financial status at the
conclusion of the needed period. The profit and loss account records all of the company's cash
and non-monetary income and expenses. Profit and loss statements are created using
fundamental accounting principles. These principles include the accrual accounting principle, the
matching principle, and revenue recognition. It displays several stages of profits earned by the
business organisation, such as gross profit or loss, operating margin, or net profit or loss.

There are 8 main components required to prepare the Profit and Loss Account. They are:-
1. Gross Profit
2. Sales Revenue
3. Sales Return and Allowances
4. Goods and Services Tax
5. Cost of Goods Sold
6. Operating Profit
7. Net Profit
8. Income Tax

Concept:-

The Profit and Loss Account statement of an enterprise is essential for representing the state of
business activities in an organization. Following are the key components required for the
preparation of a Profit And Loss Account.

• Sales Revenue: - Revenue is the sum of a company's revenue from operating

activities and other non-operating income. For example, a manufacturing unit's operating
income could represent the selling of finished goods. Non-operating income might
include interest collected on financial investments. The timing at which a company
acknowledges sales revenue is governed by revenue recognition principles. The entire
sales revenue for an accounting period is collected from the sales account, which is where
day-to-day sales transactions are recorded on the basis of sales invoices.

• Cost of Goods Sold: - The cost of goods sold represents the total cost of producing
goods and services. It comprises the costs of raw materials, direct labor, and production.
This is the entire price paid by the company to assure the sale of its products. This can
include various prices for raw materials, direct labor, packaging, and other costs
associated with selling the items.
The following are the part to calculate the Cost of Goods Sold:-
 1. Beginning Inventory: - The closing inventory of the previous accounting period is the
commencing inventory of the current accounting period. This number is derived from
the trial balance.

2. Purchases: - The total purchases amount for the accounting period is derived from the
purchases account, where day-to-day purchase transactions are recorded using buy
invoices. Purchases are shown at net value after deducting any trade discount granted
by the supplier for purchasing a quantity of merchandise in excess of a specified
amount. Suppliers may also provide allowances in the form of a reduction in the
invoice price for goods that do not meet the purchaser's quality standards. These
allowances are taken from the purchasing price as well.

3. Purchases Return: - The cost of acquired items returned to sellers is accumulated in

the purchases returns account and is reported in the profit and loss account as a
deduction from the purchases figure.

4. Freight on Purchases: - Freight on inventory purchases is a portion of the buy cost

and is added to the purchase price of the products in order to calculate the cost of
goods sold.

5. Wages: - Wages paid to store and warehouse employees are also included in the cost
of products sold. Wages paid in relation to a fixed asset, on the other hand, are added
to the cost of that asset.

6. Ending Inventory: - The ending inventory is made up of unsold products at the end of
an accounting period. There is no account that provides the value of the ending
inventory.

• Operating Profit: - Operating expenses comprise all expenses associated with the
normal course of business, such as rent, salaries, insurance, and upkeep. SG&A (Selling,
General, and Administrative) expenses are the third essential component. It focused on
the numerous operating expenses incurred by the organisation in the course of conducting
business. This comprises marketing, accounting, sales, and administration expenses. The
operating profit is computed as the difference between the gross profit and the operating
expenses. Administrative, selling, and general expenses are all examples of operating
expenses. Administrative expenses include office personnel pay, office building rent,
lighting costs, legal costs, mail and telephone rates, audit fees, and so on. Salesmen's
salaries and commissions, advertisement expenses, packaging expenses, warehousing
expenses, freight and carriage on sales, export duties, expenses for running and
maintaining delivery vehicles, insurance expenses, bad debts, and so on are all part of
selling and distribution expenses. Maintenance and security charges are examples of
general expenses.
 • Net Profit: - Net profit is computed by deducting non-operating revenues, expenses,
gains, and losses from operational profit. Non-operating components include interest
income, dividend income, interest expense, profit or loss on sale of fixed assets, and so
on. This is because every business must pay taxes on its profits. This is based on the legal
regulations that govern the company's operations. As a result, the corporation must
account for this while preparing their profit and loss statement. Depreciation is charged as
a reduction in the value of fixed assets due to wear and tear or obsolescence. Similarly,
financial costs such as loan interest are a charge on profits paid to the company's debtors.

• Income Tax: - To calculate the Net Profit, first subtract the expenses (3) and (4) from
the Gross Profit, then subtract the relevant tax. The net income is another essential
component for creating profit and loss statements for a business. This focuses on the
amount left over after taxes, allowances, and costs have been deducted. This assists the
company in determining what it has earned after all expenses have been tallied and paid.
Income tax is a separate business expense for corporations. Income tax is handled as a
personal expense in the case of a sole proprietorship and is deducted from the owners'
capital account.

Conclusion:-

The split of the profit and loss statement into multiple sections provides more information to help
us make better decisions. The effectiveness of a firm's purchasing and pricing policies is revealed
by comparing the present gross profit rate to prior sales and that of comparable firms in the
industry. Similarly, non-operating revenue may account for a sizable share of total income.
External readers of financial statements are more concerned with operating income because they
believe it will be sustainable in the future, whereas non-operating income is non-recurring.

It is critical to compare income statements from multiple accounting years since the change in
operational costs, research & development expenses, revenues, and net profitability over time is
more relevant than examining and analysing single year statistics. Profit and loss accounting is
regarded as one of the most significant techniques for assessing an organization's financial
health. It is defined as summing all revenue nature transactions incurred throughout an
accounting period and determining the net profit/loss earned during that period. This is a
significant section of the financial statement and is often used by various stakeholders for
independent analysis. This statement includes positives and cons that must be weighed when
analysing it.

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3. (A)
Balance Sheet of Z and X, LLP
Assets Amount Liabilities Amount
(Rs.) (Rs.)
 Current Asset:- Current Liabilities:-
Cash 550 Account Payable 540
Accounts Receivable 250 Salaries Payable 150
Prepaid Insurance 300 Unearned Revenue 200
Supplies 150
1250 890
Total:- Total:-

Non-current Assets:- Shareholder’s equity

Equipment 1500 Common Stock 1000
Retained Earnings 860
Total:- 1500 Total:- 1860

Total Assets:- 2750 Total Liabilities:- 2750

3. (B)
Definition:-

The current ratio is the ratio of a company's current assets to its current liabilities. A liquidity
ratio, also known as a current ratio, evaluates a company's ability to settle short-term loans or
those due within a year.
It demonstrates to investors and analysts how a company can use its current assets to pay down
its current liabilities and other payables to the greatest extent practicable.

Calculation:-

Current Ratio = Current Assets / Current Liabilities

=1250 / 890
=1.40

Significance:-

Over here, current assets exceed current liabilities, resulting in a current ratio greater than one,
indicating that the organisation would still have some assets after paying off all short-term debts,
which is a desirable position.

The Current Ratio is used to determine a company's capacity to pay down its short-term
liabilities with current assets. It is assumed that all current assets will be converted to cash in
order to pay off the firm's short-term commitments. In other words, this ratio is used to
determine a company's short-term solvency. A current ratio of 2:1 is regarded as optimal. That
means the firm's current assets should be twice as large as its current liabilities. However, if the
current ratio is too high, it is assumed that funds are idle and the firm has poor inventory control
or debtor turnover is delayed.

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