Course: Financial Accounting and Analysis

Internal Assignment Applicable for June 2022 Examination

Answer 1

Introduction
The situation of any organization financially, big or little is determined by two fundamental
statements of financial components; assets and liabilities. Company’s treasured resources are
high value assets, whereas liabilities imply organization's obligations to pay. The third
component of the financial statements is owners' equity, also known as shareholders' equity
or owner’s capital.
Every transaction in accounting is analyzed based on the relationship between assets,
liabilities and owners’ capital. This is the reason for maintaining double- entry accounting
system. Accounting equations provide mathematical relationship between assets, liabilities
and owners’ capital. Accounting equation always balances out and every equation has dual
effect. Therefore the standard accounting equation is
Assets = Liabilities + Owner’s capital
The accounting transactions can be examined using by studying the accounting equations
which shows the way the assets are financed through debts, the liabilities, and if they are
financed through owner’s capital, which will further lead to a change in the owner’s capital.
As part of accounting system, there are three rules to maintain double entry book keeping
They are:-
 Debit what comes in, Credit what goes out.
 Debit the receiver, Credit the giver.
 Debit all expenses Credit all income

They are used as the fundamental basis for all transactions in the accounting system and are
used as part of journal entries to maintain business records and preparations of financial
statements. Journal entries are done in case of day to day transactions where total debits have
to be equal to the total credits as a result of double-entry accounting system.
Procedure / Steps
1. Introduced Rs 5,00,000 through a cheque by the Owner as the Initial capital in the
business- The business received Rs. 500,000; it is an asset to the business. The
business is liable to pay this amount to the Owner, and therefore, it also represents the
capital of the business. Capital of Rs. 500,000 is equal to assets of Rs. 500,000.

2. Purchased goods on credit from Ms. Ritu at Rs 40000- Purchase of goods on credit
increases goods (an asset) and simultaneously increases creditors (a liability) by Rs
40,000. The sum of liabilities and capital is Rs. 5,40,000 now, matched by assets of
Rs. 5,40,000.

3. Paid Rs 10000 as salary to the employees- Payment of salary of Rs. 10,000 decreases
asset (cash) by Rs. 10,000 and also decreases capital by Rs. 10,000. After this
transaction, the liabilities remain Rs. 40,000, capital is Rs. 4,90,000 and assets are Rs.
5,30,000.
 4. Invested Rs2,00,000 in a fixed deposit account- Deposit of cash in the bank account
increases one asset (balance in the bank account) and reduces another asset (cash).
The accounting equation remains the same as there is no change in the overall asset
value.

5. Paid school fees of the kid Rs 25,000, from the business’s bank account - Payment of
Rs. 25,000 from the bank account towards school fees which is a private expense
decreases one asset (bank balance) and also reduces capital by Rs. 25,000.

Assets Liabilitie Capital

No. Transaction = +
(Rs.) s (Rs.) (Rs.)

5,00,000.0 5,00,000.0
1 Started business with cash Rs. 5,00,000 -
0 0
5,40,000.0 5,00,000.0
2 Purchased goods on credit Rs. 40,000 40,000.00
0 0
5,30,000.0 4,90,000.0
3 Paid salaries Rs. 10,000 40,000.00
0 0
5,30,000.0 4,90,000.0
4 Invested Rs. 2,00,000 in fixed deposit 40,000.00
0 0
Paid school fees of Rs 25000 from company 5,05,000.0 4,65,000.0
5 40,000.00
bank account 0 0

Conclusion
Hence, the conclusion is drawn from the accounting equations where all transactions are
documented in sequential order and is depicted as double entry book keeping. This is further
depicted through credits and debits in the respective company accounts maintained as part of
book keeping and in journals. Although many companies, these days use accounting software
to document journal entries, earlier, diaries were used to pass such accounting entries.
 Answer 2
Introduction:
Accounting is the framework of recording a company’s financial transactions. Accounting,
which includes documenting, analyzing, and communicating financial transactions, aids the
company as well as investors, authorities, regulators and people to understand financial
situations. Accounting is a regular process by which accountants/auditors record purchases,
revenues, profits, and losses and for creating financial statements during a time period also
known as accounting period. Balance sheets, Income Statements and cashflow statements
together contribute towards good accounting practice. There are many accounting terms used
in the finance industry, some of which are given below.
Concepts and Application
i. Accounting Period-
An accounting period, in book keeping, is the period in which management accounts and
financial statements are prepared. In other words, an accounting period is defined as the
length of time covered by a financial statement or operation.
In financial accounting the accounting period as determined by regulation is usually for a
period of 12 months. The timeline of the accounting period differs according to
accounting standards relevant in each geographical location of particular jurisdiction. For
example, one entity may follow the calendar year, while another may follow fiscal year as
the accounting period.
Each accounting period constitutes of one complete accounting cycle. Examples of
commonly used accounting periods are
a. fiscal years (April 1 through March 31)
b. calendar years (January 1 through December 31) , and
c. three-month calendar quarters (January 1 through March 31, April 1
through June 30, July 1 through September 30, October 1 through
December 31)

ii. Income Statement-

An income statement or a profit and loss statement is one of three standard financial
statements issued by businesses. The other two include the cash flow statement and
balance sheet.
The profit and loss statement provides the result of business operations during the
particular accounting period. It matches the expenses with the revenues earned during the
accounting period, and reports the resulting net income (profit or loss). The income
statement is largely referred to, by investors, creditors and lenders. The past net income
and expense in the profit and loss statements are used as the base, in forecasting the future
net income, basis which investors make their investment decisions. Lenders of the
company or the business utilize this information as given in the income statement to
understand credit worthiness and execute credit monitoring financials for the future and to
establish the ability of the business in repaying the loan and also to pay interest on time.
Creditors use income statements to understand the quality of the operations of the and
how efficiently the operations are performed along with payment of dues in time.

iii. Balance sheet-

A balance sheet (or "statement of financial position") is one of the most important
standard financial statements. It depicts the financial strength of the company as on a
particular date, usually the last day of the accounting period. The balance sheet provides
 the assets and liabilities of the company and provides the current state regarding its assets,
liabilities, and owners' equity. There are multiple formats that can be used to create a
balance sheet, such as, classified, common size, comparative, and vertical balance sheets.
Each format provides a snapshot of the company's financial state. As the business cannot
buy assets which are more expensive than the resources it has, the below relationship
(also known as accounting equation) always remains.
Assets = Owners’ Capital + Liabilities

Assets are resources of an entity which provides for future cash flows to the entity. These
assets can be in the form of investments, receivables, cash balances, plant and machinery,
land and building, furniture and fixtures, inventories,; etc.

Liabilities are the amount of money provided to the entity for acquisition of assets or the
claims of people on these assets. This does not include claims of owners on those assets.
Further, Owners’ Capital denotes owners’ claim on the assets and/or the amount of
money invested by the owners/stakeholders to acquire the assets. The proportion of
owners’ capital relative to outside liabilities can also be gauged as an indicator of the
financial strength of the company.

iv. Cost of goods sold-

Cost of Goods Sold (COGS) is the cost of doing business and is considered as a business
expense in the profit and loss statement. COGS define the total costs that a company
incurs to create a product or render a service. It may include ancillary products purchased,
packaging, raw materials, and direct labor related to producing or selling the good. In
case of products, the associated costs fall into three broad categories: materials, overhead
and labor. In case of services, costs include expenses related materials, equipment and
employee compensation.

COGS does not include indirect expenses, such as distribution costs and sales force costs
and are deducted from total revenues in order to calculate gross profit and gross margin.
Higher COGS may lead to lower profit margins.

Sometimes COGS can be alternatively termed as "cost of sales." The below basic formula
is used for calculating COGS over the relevant accounting period:
Initial Inventory + Purchases - Ending Inventory

COGS changes in value, depending on the accounting standards that are used and the
method of inventory valuation. Three methods of inventory valuation has been adopted
during each accounting period, which are:-
1. FIFO- First in First out for valuing purchases of raw materials and other ancillary
products
2. LIFO Last in First out for valuing purchases of raw materials and other ancillary
products.
3. Average Cost Method- Average cost incurred on raw materials and other ancillary
products.

v. Current assets-
Assets that are held by company for less than a year and that which can easily be sold or
consumed and also easily converted into liquid cash is called current assets. In a
company, current assets are tremendously important as they provide the company,
 flexibility and space for using the revenue on a day-to-day basis and clear the current
business expenses. Current Assets are mostly in liquid form, in cash or are meant to be
converted into cash or other current assets or utilized for the operating cycle of the
business. The operating cycle consists of the time period during which payment by an
entity for purchase of raw materials and the realization of cash from customers for sale of
finished goods that were converted from those raw materials.

Current assets=Cash + Cash Equivalents + Inventory + Accounts Receivable + Market

Securities + Prepaid Expenses + Other Liquid Assets
Uses of Current Assets:
 Current Assets may be utilized towards clearing regular payments and bills.
 It provides insights into company’s liquid and cash position
 Investors and Creditors analyze current assets of the company closely to gauge risk
and benefits involved during operation.

Conclusion:
Consequently, the conclusion from above can be drawn that there are the five key accounting
phrases to recognize the economic declaration of any company. Many different vital jargons
are also available in the field of accounting, which needs to be understood as a way to
recognize the accounting statements completely.
Answer 3 a.

Amount in Lakhs
cost of goods sold 580
opening stock 40
closing stock 70
creditors at the beginning of the year 60
creditors at the end of the year 100
cash purchases 45
Original cost of equipment sold 400
Gain on the equipment sold 50
Accumulated depreciation on the equipment 80

Introduction:
The term 'credit' in accounting is used to describe the purchase or sale of a product wherein
the payment will be done at a later point of time. The company which purchases products on
credit is called the Debtor and the company which sells the commodity and agrees to receive
payment later is called the Creditor. The role of credit purchases and sales and such inventory
held in the company forms a very important aspect of accounting.

Procedure/ Steps
Calculation of Purchases, credit purchases and payment to creditors are provided below:-

Total Purchases = (Closing Stock – Opening Stock) + Cost of goods sold

Total Purchases = (Rs 70 Lakhs – Rs 40 Lakhs) + Rs 580 Lakhs
Therefore, Total Purchases = Rs 610 Lakhs

Now, let us calculate the Credit Purchases:

Total Purchases = Cash Purchases + Credit Purchases
Rs 610 Lakhs = Rs 45 Lakhs + Credit Purchases
Credit Purchases = Rs 610 Lakhs – Rs 45 Lakhs
Therefore, Credit Purchases = Rs 565 Lakhs

Payment to Creditors = Opening Creditors at the beginning of the year + Credit

Purchase – creditors at the end of the year
Payment to Creditors= Rs 60 Lakhs + Rs 565 Lakhs – Rs 100 Lakhs
Therefore, Payment to Creditors= Rs 525 Lakhs

Conclusion:
For this reason, the conclusion can be drawn that the entire purchase includes both cash and
credit purchases.
Answer 3.b
Introduction:
Net Book Value: The historical value at which a company registers an asset in its financial
statements. It is the asset’s original cost of acquisition provided after adjustment or
subtraction of depreciation, accumulated depletion, accrued impairment and collected
amortization,.

The net book value used for assessment and valuation of a company, is one of the most
important financial measures. The net book value can be used to determined both a particular
asset, or an entire company.

It is to be noted that the net book value can never be equal to the market value due to the
following reasons:-

 The assets are listed on the balance sheet at cost of acquisition or historical cost. In other
words, in the balance sheet, value of assets does not contain market values. A company
holding a larger proportion of assets on its balance sheet may have a net book value far
lesser than its market value. While price appreciation or inflation has led to the change in
market value of the asset, the net book value of those assets remain unchanged, which
further leads to net book value of the assets to be generally lesser than its corresponding
market value.
 Different companies follow different calculations towards accounting depreciation of
assets in its books. There are different methods to record depreciation in the financial
statements of a company. If the company uses accelerated depreciation, then the market
value of asset will exceed the asset’s book value in the beginning years of the asset’s
useful life. In other words, the carrying value of an asset is derived by reducing the
purchase cost from the accumulated depreciation.

Accumulated Depreciation: To understand accumulated depreciation, we first need to

introduce Depreciation. Depreciation is an accounting method that allocates cost towards an
asset’s degradation or quality over its commercial or useful life. Year on year, depreciation
expense is treated as an expense in the income statement relating to the decrease in the asset
value. Thus the value of an asset keeps decreasing with the number of years it operates. The
difference in the current value of the asset and the original cost of the asset as provided in
the balance sheet is termed as the accumulated depreciation amount. In other words, the total
depreciation expense over the years that accumulate for the given asset is called
Accumulated Depreciation. Accumulated depreciation is shown in the balance sheet as a
reduction from the gross amount of fixed assets. Accumulated depreciation is levied on
constructed assets such as buildings, vehicles, office equipment, machinery, furniture,
fixtures, Deducting accumulated depreciation from an asset's cost leads to the asset's book
value or carrying value. With time, the amount of accumulated depreciation of an asset will
keep increasing as depreciation continues to be levied against the asset. It is also important
to mention that the asset's book value may not indicate the asset’s market value as
depreciation is only a book entry and an accounting entry in the financial statement. The
depreciation is calculated as percentage of the asset value as prescribed by the sections of the
Company’s Act or Income Tax Act.

Procedure / Steps
Calculation of Net book value

Given,
Original cost of equipment sold = Rs 400 Lakhs
Accumulated depreciation on the equipment = Rs 80 Lakhs
Gain on Sale of the Equipment= Rs 50 Lakhs

Net Book Value = Original Purchases Cost – Accumulated Depreciation

Net Book Value = Rs 400 Lakhs – Rs 80 Lakhs
Therefore, Net Book Value = Rs 320 lakhs

Calculation of Cash Proceed

Cash Proceeds from Sale of Equipment = (Original Cost of the Equipment – Accumulated
Depreciation) + Gain on Sale of the Equipment
Cash Proceeds from Sale of Equipment= Net Book Value + Gain on Sale of the Equipment
Cash Proceeds from Sale of Equipment= Rs 320 Lakhs+ Rs 50 Lakhs
Therefore, Cash Proceeds from Sale of Equipment= Rs 370 Lakhs

Conclusion:

Hence, the conclusion drawn from the calculation is that the net book value of the gadget is
320 lakhs and the coin obtained on the sale of the system is 370 lakhs. This indicates there
are earnings of 50 lakhs on the equal.