1) Classifying the given items in the question as operating /investing /

financing.

 Loss on sale of asset: It is an Investing Activity. Purchase of asset is an

investment in asset. The asset is used for running the business activities. Thus, any
transaction related to assets is an investing activity.

 Dividend Income: It is an Investing Activity. Dividends are received from investing

in shares. Shares are a form of investment a company makes. Incomes earned from a
company’s investments are all classified as investing activity.

 Interest Income: It is an Investing Activity. Interest comes from investments.

Incomes earned from a company’s investments are all classified as investing activity.

 Finance Cost Paid On Debentures: It is a Financing Activity. Debentures are

issued by an entity to raise finance. Thus, any cost incurred on such sources of
finance is a financing activity.

 Gain on sale of investment: It is an Investing Activity. Making or selling an

investment is for the company’s future and assets. The asset is used for running the
business activities. Thus, any transaction related to assets is an investing activity.

 Depreciation on fixed assets: It is an Investing Activity. Assets are used for

running the business activities. Thus, any transaction related to assets is an investing
activity.

 Amortization Expenses: It is an Investing Activity. Amortization expenses

account for the cost of long-term assets over the lifetime of their use. Assets are
used for running the business activities. Thus, any transaction related to assets is an
investing activity.
Gaman Ltd
Cashflow Statement
for the year ended 31st December 2020,

Cash Flows from Operating Activities. Amount

Net profit before taxes 2,69,244. 00

Depreciation on fixed assets 85,000. 00

Amortization expenses 1,10,000. 00

Loss on sale of asset 95,780. 00

Finance cost paid on debentures 12,000. 00

Dividend Income (26,000. 00)

Interest Income (35,000. 00)

Gain on sale of investment (45,000. 00)

Net Cash Flow from Operating Activities 4,66,024. 00

2) Steps of performing trend analysis on the financial statements of a
company
There are 6 steps to develop an effective analysis of financial statements
1. IDENTIFY THE INDUSTRY ECONOMIC CHARACTERISTICS.
First, determine a value chain analysis for the industry—the chain of activities involved in the
creation, manufacture and distribution of the firm’s products and/or services. Techniques
such as Porter’s Five Forces or analysis of economic attributes are typically used in this step.

2. IDENTIFY COMPANY STRATEGIES.

Next, look at the nature of the product/service being offered by the firm, including the
uniqueness of product, level of profit margins, creation of brand loyalty and control of costs.
Additionally, factors such as supply chain integration, geographic diversification and industry
diversification should be considered.

3. ASSESS THE QUALITY OF THE FIRM’S FINANCIAL STATEMENTS.

Review the key financial statements within the context of the relevant accounting standards.
In examining balance sheet accounts, issues such as recognition, valuation and classification
are keys to proper evaluation. The main question should be whether this balance sheet is a
complete representation of the firm’s economic position. When evaluating the income
statement, the main point is to properly assess the quality of earnings as a complete
representation of the firm’s economic performance. Evaluation of the statement of cash
flows helps in understanding the impact of the firm’s liquidity position from its operations,
investments and financial activities over the period—in essence, where funds came from,
where they went, and how the overall liquidity of the firm was affected.

4. ANALYZE CURRENT PROFITABILITY AND RISK.

This is the step where financial professionals can really add value in the evaluation of the
firm and its financial statements. The most common analysis tools are key financial
statement ratios relating to liquidity, asset management, profitability, debt
management/coverage and risk/market valuation. With respect to profitability, there are
two broad questions to be asked: how profitable are the operations of the firm relative to its
assets—independent of how the firm finances those assets—and how profitable is the firm
from the perspective of the equity shareholders. Lastly, it is critical to analyze any financial
statement ratios in a comparative manner, looking at the current ratios in relation to those
from earlier periods or relative to other firms or industry averages.
5. PREPARE FORECASTED FINANCIAL STATEMENTS.
Although often challenging, financial professionals must make reasonable assumptions
about the future of the firm (and its industry) and determine how these assumptions will
impact both the cash flows and the funding. This often takes the form of pro-forma financial
statements, based on techniques such as the percent of sales approach.

6. VALUE THE FIRM.

While there are many valuation approaches, the most common is a type of discounted cash
flow methodology. These cash flows could be in the form of projected dividends, or more
detailed techniques such as free cash flows to either the equity holders or on enterprise
basis. Other approaches may include using relative valuation or accounting-based measures
such as economic value added.

NESTLÉ INDIA LIMITED

The above present is the balance sheet of NESTLÉ INDIA LIMITED as of 31st December 2020.
Nestle India Ltd, one of the biggest players in FMCG segment, is a subsidiary of Nestle S.A. The
company has presence across India with 7 manufacturing facilities and four branch offices spread
across the region. The four branch offices in the country help facilitate the sales and marketing of its
products. They are in Delhi, Mumbai, Chennai and Kolkata. It has a presence in milk & nutrition,
beverages, prepared dishes & cooking aids & chocolate & confectionery segments. The company is
engaged in the food business. The food business incorporates product groups, such as milk products
and nutrition, beverages, prepared dishes and cooking aids, chocolates and confectionery.

The brands and products of the company are focus of continuous innovation so that they meet and
exceed consumers’ expectations. The company seeks a clear-cut advantage over competitors’
products and to ensure its products are available wherever, whenever and however the customers
want them. Although profitability may be considered the governing factor of a business, nevertheless
the management of working capital can effectively bring to a halt, or to its ultimate downfall, what
might otherwise be a successful and profitable company.

Balance Sheet gives us details only at a point of time, the details mentioned in the balance sheet helps
creditors to understand how solvent the company is, for rating companies like Crisil, it helps them to
determine the asset backing strength of the company to rate it accordingly.
Shareholder’s Equity carries the worth of the shareholders from one time period to the next and
shows them the growth of the firm. Annual balance sheet along with other financial statements are
audited and the audit firm must conclude if the company is presenting the statements according to
the relevant GAAP.
As we can see that the Current Assets of Nestle India had fallen and then rose with a good amount in
the last fiscal year. On the other hand, the Current Liabilities also fell by 3.8%. This shows a very good
positive impact about the company that they are paying off their creditors, the current assets have
risen mostly by an increase in the accounts receivable and with inventory levels also.
There is a growth in the company’s cash and cash equivalents for the past 3 financial years showing
that even with rising receivables and inventory the company is able to convert them to cash at a
higher rate. Long term debt has been rising with the company’s shareholder’s equity falling at the
same time showing a negative impact that now the company is highly leveraged with most of it’s
earnings going to pay off the debt-holders.
The property plant and equipment has been falling, meaning they aren’t acquiring new assets for
higher production with deprecation being charged at a higher rate or they have impaired their assets.
There is no goodwill found on the balance sheet showing a good strong asset backing for bond
holders.

Analysing Liquidity ratios of the company

31st December 31st December

2020 2019 1st January 2019

Working Capital1 ₹16,925.30 ₹ 16,266.20 ₹ 28,649.10

Current Ratio 2 1.67903553 1.74256237 2.50860961

Quick Ratio3 1.11075004 1.15683276 2.00016851

Working capital of the firm had fallen with a huge percentage around 43% in the past to a slight rise by
4% compared to the previous year. The current ratio is falling at an increasing rate for the past all
financial year showing that they have rising inventory levels and a lot of accounts payable lined up also
with an increase in its lease structure.
Quick ratio gives us a clear picture by removing the inventory while calculating it. We get to see that
the company has a falling quick ratio, showing that the accounts payable are rising at an increasing
rate compared to the cash the company is collecting and the outstanding accounts receivable.

3
 3.a.) Identify the type of accounts identified - real, personal or nominal.

ANSWER.

 Started business with cash 150,000.

Accounts involved:
Capital A/C = Personal Account
Cash A/C = Real Account
Capital Account is a personal Account as it is related to a person, and Cash Account is
real Account as it is related to Assets.

 Purchased goods for cash 25,000

Accounts involved:
Purchase A/C = Nominal Account.
Cash A/C= Real Account.

Cash is an asset therefore real Account. Purchase is an expense so, Nominal A/C.

 Sold goods to C on credit 20,000.

Accounts involved:
Sales A/C = Nominal Account.
Debtor (that is C) A/C = Personal Account.

Sales is an Income therefore nominal Account and debtor (that is C) is related to

person therefore, personal A/C.

 Paid salary for cash 15,000.

 Accounts involved:
Salary A/C = Nominal Account.
Cash A/C = Real Account.

Salary is an expense therefore Nominal A/C & Cash is an Asset therefore real account

 Deposited cash into Bank A/C. 115.000

Accounts involved:
Cash A/C = Real Account
Bank A/C=Personal account.

Real Account as its asset and Bank account is personal Account as it relates to a
person or organisation.

3.b.) Rules of passing the journal entry applicable and pass the journal
entry.

Answer.

Rule for passing the Journal Entry as per golden Rule.

 Personal Account:
Debit – Receiver
Credit – Giver

 Real Account:
Debit - What comes in.
Credit - What goes out.

 Nominal Account:
Debit - All Expenses & losses
Credit - All Income & profit.
Journal Entries

Started business with cash 15,000.

Cash A/C(Debit) – 15000

To capital A/C (Credit) - 15,000

Purchased goods for cash Rs. 25,000

Purchase A/C - Debit 25,000

TO cash A/C (credit)- 25,000

Sold goods to C on credit RS 20,000

Debtor A/C or C's A/C (Debit) - 20,000

To sales A/C(credit) - 20,000

Paid salary for cash. Rs 15,000.

Salary A/C (debit) 15,000

To cash A/C (credit) 15,000

Deposited cash into Bank 1,00,000

Bank A/C (Debit) 1,00,000

To cash A/C (Credit) 1,00,000