Financial Accounting & Analysis

April 2023 Examination

Ans 1.

Introduction

A diary is a detailed record of an organization's internal activities. It provides a

comprehensive perspective of all business activities and can be used to compile financial
statements. In this instance, Ms. Vinita started a business, and the following transpired
between December 3 and December 10: These transactions will be documented in the journal
so the financial activity of the organization may be monitored. This report's objective is to
provide an accurate portrayal of the company's financial status by detailing all of its financial
activities.

As events occur, the diary will record the procurement of products for sale, the sale of the
complete product inventory, and the payment of employee salaries. Also, the diary will
document the transfer of monies from Mrs. Vinita's savings account to the business's
checking account. These transactions are necessary for the company to maintain normal
operations and progress toward its goals. If these transactions were recorded in a journal, the
financial activities of the organization would be accurate and transparent. This would allow
the company to make decisions based on reliable information and support the efficient
management of its operations. In addition, it will provide an all-encompassing perspective of
the company's present financial position, allowing it to detect problem areas and make the
required modifications.

Concepts and applications

Journal account
Date Particulars Ref Debit Credit
(₹ ) (₹ )
3-Dec Cash a/c DR 500000
TO 500000
Capital a/c
(Being cash introduced to the business)

5-Dec Purchases a/c DR 100000

TO 100000
Cash a/c
(Being goods purchased)

7-Dec Purchases a/c DR 300000

TO 300000
Cash a/c
(Being goods purchased)

8-Dec Debtors' a/c DR 500000

TO 500000
Sales a/c
(Goods sold on credit)

10Dec Salaries a/c DR 20000

TO 20000
Bank a/c
(Being salaries paid)

A business's financial transactions can be recorded in a journal account. It is used to monitor

a company's financial activity and provides a chronological listing of all transactions. Journal
accounts, a core component of financial accounting, can be utilized to notify stakeholders of a
company's past and present financial troubles. This account is utilized to precisely construct
the income statement, balance sheet, and cash flow statement. The proposals demonstrated
considerable consideration.

The above table contains the complete of Mrs. Vinita's journal entries. In addition to the
transaction date, the journal account stores the transaction information, transaction reference,
debit amount, and credit amount. The debit and credit numbers indicate the amount removed
from and deposited into the account, respectively.

At the beginning of the journal, the date December 3 is written. The savings account of Mrs.
Vinita will be transferred to the company's checking account. The amount of the transfer has
been set at 500,000 rupees. In addition to a debit to the cash account, a credit to the capital
account was also recorded. This section details all contributions made to the organization
financially.

This entry provides information about purchases made on December 5. The purchase of
100,000 rupees worth of goods needed entries in the cash account and the purchasing
account. This transaction exemplifies the variety of purchases undertaken by the company.
On December 7, more purchases pushed the total to Rs 300,000. Unlike the debit column,
which revealed actual expenditures, the credit column indicated available cash. This
transaction exemplifies the variety of purchases undertaken by the company.

On December 8, Vinita made a profit of Rs. 500,000 from credit-paying clients' purchases of
all products. The item with a positive balance was deposited into the sales account while the
one with a negative balance was deposited into the creditors account. This transaction
involves the sale of items to consumers with approved credit applications.

On December 10, Ms. Vinita transferred a total of 20,000 rupees into the bank accounts of
the employees. The employee's bank account and salary account have both been credited, so
both are now available. This transaction is analogous to the monthly payment of a worker's
salary.

Conclusion
Journal accounts are important to any accounting system's operation. It permits the
chronological recording and monitoring of a company's financial transactions. This account is
included on the balance sheet, income statement, and cash flow statement. A journal account
enables a business to record its financial transactions and use the resulting data to influence
future action decisions.
Ans 2.

Introduction

As recompense for their investments, shareholders receive a dividend equivalent to their

proportional share of the company's profits. Infrequently, dividends may be distributed in the
form of freshly issued shares of stock, but this is not the norm; dividends are often distributed
in cash. In recent decades, corporations have adopted the practice of paying dividends, which
not only compensates shareholders but also demonstrates a company's financial health and
stability. The manner in which dividends are reflected in a company's financial statements is
crucial for determining the appropriate allocation of earnings to shareholders. Given the
effect of dividends on the company's total cash flow, dividend cash flow looks to be a major
worry in this circumstance. This article explores the term "dividend" and its definitions, along
with its accounting treatment and the recording of dividend payments in a corporation's cash
flow statement.

Concepts and applications

Dividends are payments provided to shareholders out of a company's profits or reserves.

Traditionally, companies have utilized them to highlight their accomplishments to
prospective investors. The two most typical types of distributions are cash dividends and
stock dividends. Dividends can be dispersed in numerous ways.

Cash dividends are the most prevalent form of payout. These are monetary distributions that
shareholders may receive as either a lump amount or a series of recurring payments.
Generally paid from a company's profits and subject to shareholder taxation. Investors seek a
consistent income source, like as dividends, that may be reinvested or utilized to fund
expenses.

Stock dividends are monetary payments paid to shareholders in the form of new equity
shares. These dividends are delivered in the form of additional equity shares to shareholders.
To create cash, stock dividends require longer time than cash dividends. Instead, they
enhance the shareholder's share ownership, which could lead to an increase in the
investment's value. Several individuals believe that corporations may show their appreciation
for long-term shareholders by expanding their dividend stock holdings.

The accounting records must contain dividend information. This sum is recognized as a
liability on the balance sheet and an expense on the income statement when a company
distributes cash dividends to its shareholders. The dividend will decrease both the company's
liabilities and cash on hand.

When a firm elects to pay dividends in the form of newly issued shares as opposed to cash, its
equity is modified to reflect the newly issued shares in lieu of the cash obligation.

The dividend payment may have a substantial effect on cash flow. Cash dividends can
impede a firm's ability to repay debt and reinvest. So, the distribution of extra shares to
shareholders via stock dividends has no effect on the cash flow of the company.

The practice of paying dividends

The "accounting treatment of a dividend" relates to how dividend payments are reported in
the financial records of a corporation. The accounting treatment of dividends influences the
balance sheet, income statement, and cash flow statement of a company.

The following accounting principles regulate dividend declarations:

● Dividend declaration: The board of directors establishes both the dividend amount
and distribution timetable. The incident is recorded in the minutes of the meeting.
● The dividend impact on retained earnings When retained earnings are used to pay
dividends, retained earnings fall. Here, on the balance sheet, is the drop in retained
earnings.
● Raising the obligations' balances: On the balance sheet, dividend payment can be
represented as a liability. This liability statement describes the company's
commitment to distribute dividends to shareholders.
● Raising the obligations' balances: The dividend payment amount is transferred from
the cash account to the liabilities account on the day dividends are distributed. This
transaction involves the payment of dividends in cash to shareholders.

On a company's cash flow statement, dividend payments are categorized as financing

transactions. This is the entire amount of cash lost as a result of dividends.
Date General ledger Debit Credit
account
01-Mar Retained earnings 100000
100000

Conclusion

Not only can dividends affect a company's bottom line, but they also affect the relationship
between the company and each shareholder. In addition to the financial impact dividends
have, this also occurs. A committee of oversight is responsible for determining and validating
the divisional organizational structure. The explanation provides investors with explicit
guidelines for the distribution of dividends. In order to make informed decisions, dividend
computations are an imperative necessity.

Ans 3a.

Introduction

To determine a company's financial health, one must examine its total assets, total liabilities
(excluding stock), and total shareholder ownership. These data could help us determine the
company's solvency, debt-repayment capability, and proportion of shareholder ownership. In
this instance, Z and X, LLP will produce an estimate based on the information provided.
Total assets are distinguished by their value.

Concepts and applications

The three main components of a balance sheet are total assets, total liabilities, and total
shareholders' equity. The balance sheet of a firm accurately shows the company's actual
assets, liabilities, and shareholders' equity. Balance sheet formula is Assets minus Liabilities
+ Shareholders' Equity.

The amount of a company's assets that are anticipated to generate future profits determines
total assets. Long-term assets consist of real estate, machinery, and other equipment. In
addition to cash and accounts receivable, current assets also include accounts receivable.
The corporation's anticipated future obligations and debts are reflected in its total liabilities,
which are calculated after shareholder ownership is subtracted. This area comprises loans,
bonds, account payments, and salary payables, among other items.

Difference between outstanding assets and liabilities equals equity. It establishes the
proportion of ownership each stakeholder holds. The gap between total assets and total
liabilities.

Example:

A balance of assets, liabilities, and sum of assets and liabilities conforming to X and Y is
imperative

Total assets = Retained Earnings + Accounts Receivable + Supplies + Equipment + Unearned

Revenue + Cash + Prepaid Insurance + Common Stock = 668 + 240 + 500 + 1000 + 475 +
1170 + 100 + 1500 = 5743

Total liabilities excluding stockholder equity = Accounts Payable + Salaries Payable = 200 +
167 = 367

Total stockholders' equity = Total assets - Total liabilities excluding stockholder equity =
5743 - 367 = 5375

The LLP has a $5,743 capitalization, a $5,000 liability, and a $52,375 ceiling.

Conclusion

A comprehensive understanding of a company's balance sheet is essential for financial

analysis. A balance sheet describes a company's assets, liabilities, and shareholders' equity, as
well as its financial health and future prognosis. Each of the firm's numerous assets has the
potential to generate future profits. Financing and equity are necessary for the acquisition of
assets. When all liabilities and commitments are subtracted from a portfolio of assets, the
remaining component is known as equity. One can analyze a company's financial
performance, debt-repayment capabilities, and future prospects based on its balance sheet.

Ans 3b.

Introduction
Current assets, current liabilities, and equity comprise the balance sheet's three components.
The balance sheet of a financial statement contains three sections: assets, liabilities, and
equity. Also, it can assess a company's ability to repay loans. A company's balance sheet can
also be used to evaluate its liquidity, solvency, and financial stability. In addition, the
liquidity, solvency, and financial stability of the company are described. In addition, it is
essential to recognize risk and make cautious financial decisions based on reliable data. We
will investigate the significance of maintaining a balance sheet.

Concepts and applications

The following are some benefits of balancing papers:

Several bank accounts provide an immediate snapshot of a company. This report highlights
the company's economic and financial losses. This report explains in detail the company's
assets, liabilities, and equity. It is simple to build a company's balance sheet. This section
elaborates on the advantages of the system.

It encourages rational decision-making. Without a comprehensive understanding of the

balance sheet, it is difficult to make decisions in one's best interest. With this data, managers
may determine whether they have the finances to launch new initiatives, develop the
business, or repay debt.

Contributes to the financial and strategic planning process in the following ways: The
financial statement can serve as the basis for future budgeting and growth initiatives. This
framework can be used to anticipate future cash flows, revenues, and expenditures, which are
fundamental budget components.

Using a balance sheet to develop an efficient performance evaluation could prove beneficial.
This graph illustrates the rise of cleanliness. Comparing the current financial status of the
organization to that of previous years enables management to identify areas for improvement.

A lender, investor, or creditor cannot determine funding or conduct a credit investigation

without a balance sheet. It serves as the foundation for credit analysis and assists the lender in
determining the creditworthiness of the potential business.

In a few jurisdictions, it is required by law or regulation that an organization's annual

financial statements include a balance sheet. This ensures that businesses create accurate
financial data and adhere to accounting standards.
Conclusion

Budgeting, planning, performance evaluation, and credit analysis all involve the use of
balance sheets. In addition, all applicable rules and regulations are followed, and a thorough
assessment of the organization's financial health is provided.