You are on page 1of 85

Financial, Cost and Management Accounting

Click to edit Master subtitle style

Course outline
o

Fundamentals of Accounting Mechanics of Accounting Financial Statement Analysis Introduction to Cost and Management Accounting Cost Volume profit analysis

Budgetary Control, Standard costing and Variance analysis

Important Terminology Unit I


Accounting and Book - Keeping Accountancy Assets Liabilities Accounting principles and policies Accounting cycle and process Accounting Equation Generally Accepted Accounting Principles ( GAAP) International Financial Reporting Standards ( IFRS)

Introduction
Accounting is a term as the language of the business and is a part of accountancy . The basic function of a language is to serve as a means of communication. It communicates the results of business operations to various parties who have some stake in the business. Need for accounting : A person who is running business must know What he owns? What he owes? Whether he has earned a profit or loss of running a business? What is his financial position?

i. ii. iii.

iv.

Accountancy & Book- keeping


refers to a systematic knowledge of accounting. It tells us why and how to prepare the books of accounts and how to summarise the accounting information and communicate it to the interested parties. Book keeping is a part of accounting and is concerned with record keeping and clerical in nature. The basic objective is to maintain systematic record of all financial transactions.

DEFINITIONS

Accounting is the art of recording, classifying and summarizing in significant manner and in terms of money, transactions and events which are, in part, at least of a financial character and interpreting the results thereof. The function of accounting is to provide Quantitative information, primarily of financial nature, about economic entities, that is needed to be useful in making economic decisions. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.

FUNCTIONS OF ACCOUNTING

Recording:- This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an orderly manner. Recording is done in the book journal. Classifying:- This is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place. Classification is done in the book termed as Ledger. Summarising:- This involves presenting the classified data in a manner which is understandable and useful. This process leads to preparation of the following statements. Namely Trial Balance, Income Statement and Balance sheet.

Functions

Dealing with financial transactions.

Analysing and Interpreting:- This is final function of accounting. The recorded financial data is analysed and Interpreted in a manner that the end-users can make a meaningful judgement about the financial condition and profitability of the business operations.

Communicating:- The accounting information after being meaningfully analysed and interpreted has to be communicated in a proper form and manner to the proper person.

Importance & Objectives


Importance of Accounting Information. Proprietors. Managers. Creditors. Prospective Investors. Government. Employees. Citizen. Objectives of Accounting. To keep systematic records. To protect business properties. To ascertain the operational profit or loss. To ascertain the financial position of business. To facilitate rational decision making.

ACCOUNTING PRINCIPLES
They are a body of doctrines commonly associated with the theory and procedures of accounting, serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternatives exist. It is defined as those rules of action or conduct which are adopted by the accountants universally while recording accounting transaction. It is also termed as Accounting Standards. Accounting principles are classified into two categories. Namely Accounting concepts and Accounting conventions.

ACCOUNTING CONCEPTS
The term concepts include those basic assumptions upon which accounting is based.

Separate Entity Concept Money Measurement Concept Cost Concept Going Concern Concept Dual Aspect Concept Realisation Concept Accrual Concept

ACCOUNTING CONVENTIONS
Customs and traditions which guide the accountants while preparing the accounting statements.

Consistency Full Disclosure Conservatism Materiality

ACCOUNTING POLICIES
Accounting policies refer to specific accounting principles and the methods of applying those principles adopted in the preparation and presentation of financial statements. The choice of appropriate accounting principles in the specific circumstances of each enterprise calls for considerable judgment by the management of the enterprise example:-Methods of depreciation

Accounting Cycle
A complete sequence beginning with the recording of the transactions and ending with the preparation of the final accounts. Jounalising Posting Balancing Trial Balance Income Statement Balance Sheet

Accounting Process & Equation


An overview of the steps of cycle, beginning with a transaction and ending with the closing of the books and reversing entries. o Equation Assets= Capital+Liabilities or Shareholders equity= Assets Liabilities
o

GAAP
Generally Accepted Accounting Principles : Standard framework of guidelines for financial accounting. It includes the standards, conventions , and rules accountants follow in recording and summarising transactions, and in the preparation of financial statements.

7 Ps
o

Principle of regularity: Regularity can be defined as conformity to enforced rules and laws. This principle is also known as the Principle of Consistency. Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status. Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company. Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, a revenue with an expense, etc.

7 Ps
o

Principle of prudence: This principle aims at showing the reality "as is" : one should not try to make things look prettier than they are. Typically, a revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable. Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value.

7 Ps
o

Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction

IFRS
International Financial Reporting Standards are standards and interpretation adopted by the International Accounting Standards Board (IASB). In April 2001, the IASB adopted all IAS and continued their development, calling the new standards IFRS. Assumptions Accrual basis: The effect of transactions and other events are recognised when they occur, not as cash is received or paid. Going concern: The financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future.

Mechanics of Accounting
Transaction of a business refers to an event the recognition of which gives rise to an entry in account records. Account is a summary of the relevant transactions at one place relating to a particular head. It records not only the amount of transaction but also their effect and direction. Accounts can be broadly classified into Personal Accounts and Impersonal Accounts. Impersonal Accounts are further classified into Real Accounts and Nominal Accounts.

Classification
Personal Accounts:- These are the accounts of persons with whom the business deals. Ex: Sold goods to kumar, paid cash to ravi. DEBIT THE RECEIVER CREDIT THE GIVER Real Accounts :- These are the accounts of tangible objects ie. Assets owned by an enterprise and carrying probable future benefits. Ex: cash received from ravi. DEBIT WHAT COMES IN CREDIT WHAT GOES OUT Nominal Accounts :- These accounts are opened to explain the nature of transactions. Nominal accounts include accounts of all expenses, losses, incomes and gains. Ex: Paid wages, commission received. DEBIT ALL EXPENSES AND LOSSES CREDIT ALL GAINS AND INCOMES

Meaning and Rules of Debit & Credit


Debit means to enter an amount of a transaction on the left side of an account, Credit means to enter an amount of a transaction the right side on an account. Dr. and Cr. are the abbreviated form of debit and credit. Both debit and credit may represent either increase or decrease depending upon the nature of an account.

Journal
Journal:- The book in which the business transactions are recorded in a chronological order, after analysing them and classifying the benefits according to the principles of debit and credit is called journal. The transactions in the journal are recorded on the basis of the rules of debit and credit. Debit is that aspect of transaction that causes: An increase in an Asset, a decrease in Liability An increase in Expense or Loss, a decrease in Income or Gain An increase in Drawings, a decrease in Capital Credit is that aspect of transaction that causes: A decrease in Asset, an increase in Liability A decrease in Expense or Loss, an increase in Income or Gain A decrease in Drawing, an increase in Capital

Advantages of journal entries


A businessman can find out the information when required, quickly and easily. When any difference arises with regard to past transactions, the trader can satisfy by explaining the dates and the circumstances of the differences. It helps in the preparation of final accounts at the end of the year. Business transactions have been classified into three categories: Transactions relating to persons, properties and assets and to incomes and expenses.

PROFORMA OF JOURNAL
Date particulars
o

L.F

Debit Rs.

Credit Rs.

Date:- The date on which the transaction was entered is recorded here. Particulars:- The two aspect of the transaction are is recorded in the column i.e., the details regarding accounts which have to be debited and credited. L.F:- It means ledger folio .the transactions entered in the journal are later on posted to the ledger procedure regarding posting the transactions in the ledger Debit:- In this column, the amount to be debited is entered. Credit:- In this column, the amount to be credited is shown.

o o

Problems
1)

From the following transactions journalise. a) Rent paid. b) Salaries paid. c) Interest received. d) Dividends received. e) Furniture purchased for cash. f) Machinery sold. g) Outstanding for salaries. h) Paid to Suresh. i) Received from Mohan (the proprietor). j) Lighting.

2) Pass journal entries from the following 1.Jul.1,2007,Ajit started business with cash Rs 40,000. 2.Jul.3,he paid into the Bank Rs 2,000. 3.Jul.5,he purchased goods for cash Rs 15,000. 4.Jul.8,he sold goods for cash Rs 6,000. 5.Jul.10,he purchased furniture and paid by cheque Rs 5,000. 6.Jul.12,sold goods to Arvind Rs 4,000. 7.Jul.14,he purchased goods from Amrit Rs10,000. .

8.Jul.15,he return goods to Amrit Rs 5,000. 9.Jul.16,he received from Arvind Rs3,960 in full settlement 10.Jul18,he withdraw goods for personal use Rs1,000. 11.Jul.20,he withdraw cash from business for personal use Rs 2,000. 12.Jul.24,he paid telephone charges Rs 1,000. 13.Jul.26,cash paid to Amrit in full settlement Rs4,900. 14.Jul.31, Paid for stationery Rs 200, rent Rs 500 and salaries to staff Rs 2,000. 15.Jul..31, goods distributed by way of free samples Rs 1,000.

3) Journalise the transactions given below in the books of Prasad. April 1 Prasad commenced business with a cash of Rs.30,000. April 3 Cash sales Rs.4,000. April 4 Bought Machinery Rs.15,000. April 7 Sold goods to Raju Rs. 10,000. April 9 Purchased goods from Ramana Rs.8,000. April 10 Sold goods to Gupta Rs.5,000. April 12 Paid for stationery Rs.1,000. April 14 Carriage expenses Rs.500.

Bought furniture for proprietor's residence and paid cash Rs.7,000. April 17 Sold goods to Krishna for cash Rs.3,000. April 22 Received Discount Rs. 800. April 24 Paid for wages Rs.1,200. April 26 Sales Rs.15,000. April 27 Deposited cash with Bank Rs.10,000. April 28 Received cash from Mahesh Rs.1,500. April 29 Received Interest on loan from Viswanath Rs.600.

April 15

4) Journalise the following transactions and post them into Ledger 1. Ram started business with a capital of Rs 10,000. 2. He purchased furniture for cash Rs 4,000. 3. He purchased goods from Mohan on credit Rs2,000. 4. He paid cash to Mohan Rs 1,000. 5. He received cash from Suresh Rs 1,000.

Ledger & Posting


Ledger :- A book containing different accounts of an entity and facilitates recording of all types of transactions related to Personal, Real and Nominal accounts separately in related accounts. Posting :- Transferring the debit and credit items from the journal to the respective accounts in the ledger

PROFORMA OF LEDGER
Dr Date Accoun t particulars Amount Rs Date Cr Particulars Amount Rs

Notes:1) It is customary to use words To and By while making posting in the Ledger. 2) The word To is used with the accounts which appear on Debit side of a Ledger Account. 3) Similarly, the word By is used with accounts appear on the Credit side of a Ledger Account.

Trail balance
Trial balance :- It is a statement containing the various ledger balances on a particular date, arranged in the form of debit and credit columns placed side by side and prepared the object of checking the arithmetical accuracy of the ledger postings.

Objects of preparing trail balance: Checking of the arithmetical accuracy of the accounting entries. Basis for financial statements. Summarised ledger

Trial balance Errors


Error of original entry Error of omission Error of reversal Error of commission Error of principle Compensating errors Transposition error

Trading Account
This is the first step in preparation of final accounts. It is prepared at the end of each accounting period to asses the Gross Profit or Gross Loss. Advantages:

We can ascertain Gross Profit/Gross Loss. We can observe the changes in direct expenses. We can calculate the cost of production. We can establish the relation between the costs and revenues. We can analyse the trend in sales. We can decide the earning capacity of the firm

PROFORMA OF TRADING ACCOUNT


Trading Account of for the year ended Amount Particulars Rs By Sales Less Returns By Closing Stock By Gross Loss c\d Cr Amount Rs

Dr Particulars

To Opening stock To Purchases Less Returns

To Direct Expenses TO Gross Profit c\d

PROBLEMS
From the following ledger balances as on 3112-2006, prepare Trading Account. Rs 2,000 38,000 Sales 2,000 3,000 12,000

Stock as on 1-1-2006 Purchases 56,000 Returns Inward Returns Outward Closing Stock

You are requested to prepare Trading Account from the following information. Rs

Stock(1-1-2006) Purchases Sales Returns Inward Returns Outward Direct Wages Carriage Inward Carriage Outward Factory Rent Office Rent Customs Duty Electricity (motive power) Office Lighting and repairs

1,000 25,000 35,000 1,500 1,000 2,000 3,000 1,800 1,000 800 200 500 700

PROFORMA OF P&L ACCOUNT


Profit and Loss Account of

Dr

for the year of ending

Particulars

Amount Rs

Particulars

Cr Amount Rs

To Gross Loss b/d To Salaries To Rent To Commission To Advertisement To Bad Debts To Discount TO Net Profit Transferred to Capital a/c

By Gross Profit b/d By Discount Received By Interest on Drawings By Profit on Sale of Assets By Net Loss Transferred to Capital a/c

From the following particulars prepare Profit and Loss Account. Rs

Gross Profit Rent 6,500 Commission Paid Salaries 9,750 Taxes Trade Expenses Bank Charges Printing & Stationery Packing Charges Carriage Outward Discount Received Discount Allowed

2,56,250 3,250 9,750 1,625 1,950 8,125 1,625 6,500 3,250 2,112

From the following Ledger balances of X Ltd, prepare Trading & Profit and Loss Account for the year ended 31st Dec,2006. Rs Opening Stock 1,87,500 Purchases 2,71,875 Sales Returns 15,000 Furniture 52,500 Machinery 2,43,750 Carriage Outward 5,625 Wages 37,500 Sales 6,90,000 Purchase Returns 9,375 Carriage Inward 7,500 General Expenses 7,500 Salaries 7,500 Commission Received 1,875 Discount Allowed 2,750 Bad Debts 1,000 Commission to Agent 1,875 Bank Charges 563 Interest Received 1,125 Rent Received 16,875

Assets-

Resources acquired

Circulating/Floating Assets constantly change in value through transactions that are entered into. These are meant to be converted in to cash at the earliest opportunity.

Fixed:- these are not meant to be sold but are meant to be utilized in the firms Business.

Tangible Which can be seen and felt Fictitious Assets of which no value Intangible Which cannot be seen

Liabilities are claims of the creditors against the enterprise arising out of past activities that are to be satisfied by the disbursement or utilisation of corporate resources. Liabilities

Current Repayment obligation Payable within one year from the date of Balance sheet.

Fixed Other than current

Contigent Which may arise in future depending on happening of an uncertain event.

PROFORMA OF BALANCE SHEET


Permanency Order Balance sheet of as on-

Liabilities

Amount Rs

Assets

Amount Rs

Capital Add: Net Profit, Additional capital, Interest on capital. Less: Drawings, Int on drawings, Net Loss. Long term debts Short term debts ***

Fixed Assets : Good will, Patents, copy right, trade marks, Land &Buildings, Plant & Machinery, Furniture & Fittings etc. Investments Current Assets: Debtors, closing stock, cash in hand& at Bank

***

***

Liabilities

Amount Rs

Assets

Amount Rs

Current Liabilities: Creditors, Bills *** payable, Bank Overdraft, Outstanding Expenses, Income received *** in advance.

Prepaid Expenses Accrued Incomes Bills Receivable

*** ***

****

Liquidity Order

PROFORMA OF BALANCE SHEET

Liabilities

Amount Rs

Assets

Amount Rs

Current Liabilities: Outstanding Expenses Income Received in Advance Bills Payable Bank Overdraft Creditors Loans: Long Term Loans Short Term Loans Capital: Capital ADD: Additional capital Interest on capital Net Profit Less: Drawings Interest on drawings

*** *** ***

Current Assets : Prepaid Expenses Accrued Income Cash in Hands Cash at Bank Bills Payable Debtors Investments Loose Tools Fixed Assets: Furniture & Fittings Vehicles Leasehold Property Plant & Machinery Land & Buildings Patents Trade Marks

***

***

10)From the following Trial Balance as on 31 Dec 2006, Prepare a Profit and Loss Account, Balance Sheet. Trail Balance on 31 Dec 2006 Debit
Cash Purchases Traveling Expenses Carriage Discount Allowed Audit fees Debtors Furniture Trade Expenses General Expenses Legal Expenses Penalties Salaries Opening Stock Carriage Outward Postage Telephone Goodwill Commission Wages Drawings Loose Tools Interest on Overdraft

Trading and a

Amount Rs
1,740 2,69,320 10,510 86,580 1,800 2,746 68,440 2,180 3,250 9,950 2,540 4,300 25,200 5,200 43,810 2,790 1,930 21,270 3,370 13,230 20,340 14,870 1,720 6,17,086

Credit
Profit on sales of Assets Recovery of Bad Debts Bank Overdraft Creditors Commission Bills Payable Capital Purchase Returns Sales Interest Received

Amount Rs
2,130 1,440 24,420 52,290 3,450 17,780 40,656 1,320 4,72,290 1,310

6,17,086

Closing Stock as on 31-12-2006 Rs 10,580.

Adjustment Entries
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Closing Stock. Expenses Outstanding. Prepaid Expenses. Accrued Incomes. Incomes Received in Advance. Depreciation on Assets. Bad Debts. Reserve for Doubtful debts. Reserve for discount on debtors. Reserve for discount for creditors. Interest on Capital. Interest on Drawings. Stock lost in Accident.

1.

Closing Stock

Closing Stock A/c ..........Dr To Trading A/c a) Given in the adjustment b) Appearing in the Trial balance 2. Expenses Outstanding Rent A/c .Dr To Out Rent A/c a) Given in the adjustment b) Appearing in the Trial balance 3. Prepaid Expenses Prepaid Expens A/c. Dr To Expense A/c a) Given in the adjustment

4) Accrued Income- Income which has been earned during the accounting year but which has not yet become due and therefore has not been received Accrued Income A/c.Dr To Income A/c a) Given in the adjustment b) Appearing in the Trial balance 5) Income Received in Advance. Income A/c ..Dr To Income Received in Advance Adjustment 1.Should be deducted from the relevant A/c in the Profit and Loss A/c 2. Shown in the Liabilities side of the Balance sheet.

6)Depreciation Depreciation A/c .Dr To Fixed Asset A/c a) Given in the adjustment b) Appearing in the Trial balance 7)Bad Debts Bad Debts A/cDr To Debtors A/c a) Given in the adjustment Bad Debts should be debited to P&L A/c and Should be deducted from Debtors in the assets side of the Balance Sheet. b) Appearing in the Trial balance To be shown in the Debit side of the P&L A/c C) Bad debts were given in the Trial Balance and

8. Provision for Bad and Doubtful debts Profit and Loss A/c Dr To Prov for Bad debts A/c a) Given in the adjustment b) Appearing in the Trial balance 9. Provision for Discount on Debtors Profit & Loss A/c..Dr To Dis on Debtors A/c 10. Provision for Discount on Creditors Prov for Dis on Creditors..Dr To Profit & Loss A/c 11.Interest on Capital Int on Capital A/cDr To capital A/c 12. Interest on Drawings

13. Stock Lost in Accident Adjustment entries:

1.For the Loss sustained by fire accident Loss on fire accident A/c .Dr To Trading A/c 2.Claim received from Insurance Company Cash A/c Dr To Loss A/c 3.Loss On fire Transferred to P&L A/c P&L A/c .Dr To Loss A/c

11. From the following Trail Balance As on 31-3-2007, Prepare the Trading Profit & Loss A/c and Balance Sheet. Trail Balance

Debit Balance

Amount Credit Balance Amount Rs Rs 6,000Capital 26,000Sales 1,000Discount 7,800Creditors 400Bills Payable 500 600 1,200 25,000 47,000 200 21,000 6,800

Salaries Purchases Trade Expenses Wages Carriage Office Expenses Commission Bad Debts

(1)
Debtors Furniture Machinery Insurance Bills Receivables Opening Stock Cash in Hands Cash in Bank

(2)
30,000 3,000 10,000 400 2,000 7,000 500 3,600 1,00000.

(3)

(4)

1,00,000

Adjustments: 1.Closing Stock Rs. 11,000. 2.Outstanding Wages Rs.2,000. 3.Prepaid InsuranceRs.50. 4.Provide Bad Debts Reserve at 5% 5.Depreciation on machinery and furniture by 5%.

12. Prepare Final Accounts of Mr X Trial Balance as on 31-12-2006


Particulars Debit Rs Credit Rs

Capital Drawings Purchases and Sales Returns Debtors, Creditors Stock (1-1-2006) Bad debts Bills Receivable Bills Payable Cash in Hand Office expenses Sales Van Expenses of Sales van Discount Rent Telephone Charges Postal Charges Furniture Commission Carriage inward Salaries & Wages 7,500 72,100 1,300 18,200 19,800 3,000 12,000 800 6,210 15,000 1,400 10,700 1,050 3,700 5,000 8,400 3,200 20,000

50,000 95,000 2,700 35,750

23,000

2,910

2,09,360

Adjustments : 1.Closing Stock Rs61,700. 2.Depreciate Furniture by 10%, Sales van by 20%. 3.Rent Outstanding Rs 900. 4.Bad Debts Rs 200. 5.Provide 5% for Bad and Doubtful Debts. 6.!/4 Of salaries and wages belongs to factory.

13. Prepare final accounts.


Debit Balances Amount Rs Credit Balances Amount Rs

Purchases Furniture Wages Machinery Opening Stock Sales Returns Debtors Carriage Inward Salaries Carriage outward Rent& Taxes Cash at bank

Adjustments:
1.

25,200 1,600 3,500 20,000 17,525 1,200 10,400 200 10,600 503 2,001 8,000 1,00,729

Sales Capital Creditors Purchase Returns

61,604 35,000 3,903 222

1,00,729

Closing Stock Rs. 16,800. Outstanding Salaries Rs 400: Prepaid rent Rs. 201. Provide 5% to Bad and Doubtful debts on debtors. Depreciation on machinery is 10%. Interest on capital is 5%.

2.

3.

4.

5.

14.Prepare a Trading and Profit &Loss a/c and Balance Sheet. Trail Balance as on 31-12-2008
Debit Drawings Stock Bills Receivables Sales Returns Purchases Wages Salaries Fixed Deposits Insurance Buildings Furniture Debtors Cash in Hand Amount Rs 750 6,920 1,000 300 4,500 70 200 3,000 120 3,000 700 6,000 470 27,030 Credit Capital Purchase Returns Bills Payables Sales Discount Creditors Bank overdraft Amount Rs 15,000 320 1,180 8,300 30 1,300 900

27,030

Adjustments: 1 Calculate 12% interest on Capital. 2 Insurance Premium Rs 120 was paid for the half year ended with 31-3-2009. 3 Depreciate buildings and furniture by 10%. 4 Outstanding wages Rs 40. 5 Create provision for bad debts at 10%.also create a provision for discount on debtors as well as creditors at 5%. 6 Closing stock as on 31-12-2008,Rs 8,000.

15.Prepare the final accounts of Mr X. Trial Balance as on 31-3-2009

Debit
Cash in Hand Good Will Purchases Cash at Bank Direct Wages Opening stock Interest on Loan Insurance Carriage on Sale Carriage on Purchases Commission Fittings Bad Debts Buildings Plant & Machinery Postage Debtors Salaries

Rs
800 40,000 68,000 1,200 2,000 35,000 2,500 900 900 400 500 5,000 200 25,000 10,000 500 .25,000 3,000 220900

Credit
Sales 10% Loan(1-1-2009) Reserve for Bad Debts Creditors Capital Bills Payable

Rs
69,400 51,000 500 8,000 90,000 2,000

220900

Adjustments: 1 Stock as on 31-3-2009 Rs 75,000. 2 Provide 5% for doubtful debts. 3 Provide depreciation 10% on fittings and on Plant & Machinery, 5% on Buildings. 4 Mr X has taken Rs 500 worth of stock for his Domestic use. 5 Stock worth Rs 10,000 was destroyed in a fire accident for which Insurance company agreed to reimburse Rs 2,000.

SCHEDULE Vl (sec 211) Form of Balance Sheet Balance Sheet of As at

Liabilities
SHARE CAPITAL Authorised Subscribed Called up Less Calls unpaid Add Forfeited Shares RESERVES AND SURPLUS Capital Reserves Capital Redemption reserve Share premium Other Reserves Surplus Proposed additions to reserves

Assets FIXED ASSETS INVESTMENTS In Govt. Securities In Shares, Debentures or Bonds Immovable Properties In the capital of Partnership firms CURRENT ASSETS,LOANS AND ADVANCES A. Current Assets Stores and spare parts Stock-in-trade Work in progress

Liabilities
SECURED LOANS Debentures Loans and Advances from Banks Loans and Advances from Subsidiaries Other Loans and Advances UNSECURED LOANS Fixed Deposits Loans and Advances from subsidiaries Short Term Loans and Advances From Banks From others. Other Loans and Advances From Banks From others

Assets Sundry Debtors Debts outstanding for a period exceeding six months Other debtsLess provision Prepaid expenses Cash Balance Bank BalanceWith scheduled banks and With others Loans and Advances Advances and Loans to: Subsidiaries Partnership firms Bills of exchange

B.

Liabilities
CURRENT LIABILITIES AND PROVISIONS A Current Liabilities Sundry creditors Unclaimed dividends Interest accrued but not due B Provisions Provision for Taxation Proposed Dividends For pf, Insurance, pension and similar staff benefit schemes

Assets MISCELLANEOUS EXPENDITURE (to the extent not written off or adjusted). Preliminary expenses Expenses including commission or brokerage or underwriting or subscription of shares or debentures. Discount allowed on the issue of shares or debentures. Interest paid out of capital during construction. Development expenditure not adjusted

Vertical form of Balance Sheet


l Sources of funds 1. Shareholders Funds a) Capital b) Reserves and surplus 2. Loan funds a) Secured loans b) Unsecured loans Total ll Applications of Funds 1 Fixed assets a) Gross Block b) Less: Depreciation c) Net Block d) Work in Progress

2. Investments 3. Current Assets, Loans and Advances a) Inventories b) Sundry Debtors c) Cash and Bank balances d) Other Current Assets e) Loans and Advances Less: Current liabilities and Provisions a) Liabilities b) Provisions Net Current Assets 4. a) Miscellaneous Expenditure to the extent not written off or

Provision and Reserve


o

A provision is an amount set apart for meeting possible losses and it is a charge against profit. It should be debited to P&L account irrespective of the fact whether there is a profit or not. Reserve is an appropriation of profit. If there is no profit, then no reserve can be made. The purpose is to strengthen the financial position of the business.

Analysis of Financial Statements


Meaning of Financial Analysis refers to the process of determining financial strengths and weaknesses of the firm by establishing strategic relationship between the items of the balance sheet, Profit & Loss account and other operative data. q is a process of evaluating the relationship between component parts of a financial statement to obtain a better understanding of a firms position and performance.
o

Financial Statements
o

FS are the sources of information on the basis of which conclusions are drawn about the profitability and financial position of a concern. Prepared for the purpose of presenting a periodical review of report on progress by the management and deal with the status of investment in the business and the results achieved during the period under review. They reflect a combination of recorded facts, accounting principles and personal judgments.

Comparative and common size analysis


Statements summarize and present related data for a number of years, incorporating therein changes in individual items of financial statements. They help in making inter-period and inter firm comparisons, and also highlight the trends in performance efficiency, and financial position. Common-size balance sheet Balance sheet items are expressed as the ratio of each asset to total assets and the ratio of each liability is expressed as a ratio of total liabilities is called common size balance sheet.

RATIO ANALYSIS
A ratio is a simple arithmetical expression of the relationship of one number to another. A ratio is an expression of the quantitative relationship between two numbers. Ratios are classified as Short term solvency ratios. Long term solvency ratios. Turnover ratios. Profitability ratios.

Short term solvency ratios are the ratios which measure the short term solvency or financial position of a firm. It indicates the ability to pay its current obligation in time. Current ratio or Working capital ratio = Current assets/ Current liabilities Note : 1) Current assets include 1.Cash in hand & at Bank. 2.Short term investments. 3.Bills receivable. 4.Sundry debtors. 5.Stocks/ inventories. 6. Prepaid expenses. 7.Work in process. 2) Current liabilities include 1. Outstanding expenses/ accrued expenses. 2. Bills payable. 3.Sundry creditors. 4.Short term advances. 5.Income tax , Dividends payable. 6.Bank overdraft. 3) Ratio of 2:1 is considered satisfactory

Quick ratio or Liquid ratio or Acid test ratio

Quick ratio =Quick assets /Quick liabilities. Note:1 Quick assets =current assets prepaid expenses. 2 Quick liabilities =current liabilities bank over draft. 3 Ratio of 1:1 is considered as satisfactory. Long term solvency ratios or Leverage ratios or capital structure ratios convey firms ability to meet the interest costs and repayment schedules of its long term obligations. It helps in assessing the risk arising from use of Debt capital. Debt equity ratio= long term debt / share holders fund. Note:1 Long term debt includes mortgage loans , debentures, loans from finance corporation. 2 Shareholders funds include Equity share capital +Preference share capital + Reserves and surplus + profit and loss account+ share premium preliminary expenses Discount on issue

Fixed assets ratio Fixed assets / Long term funds Notes: 1 This ratio indicates the extent to which the total of fixed assets are financed by long term funds of the firm. 2 Long term funds include long term loans and share holder funds. Turnover ratios or Efficiency ratios or activity ratios 1 Stock turnover ratio stock Cost of goods sold / average

Note: Cost of goods sold is sales- gross profit. 2 Debtors turnover ratio trade debtors Net credit annual sales /average

Note: Trade Debtors include sundry debtors and bills receivable. No provision for bad and doubtful debts be deducted. 3 Creditors turnover ratio trade creditors Net annual purchases / average

Profitability ratios

related to sales.(%) 1. 2. 3. Gross profit ratio Gross profit/Sales Net profit ratio Net profit/Sales Expenses ratio Respective particular expense/Sales Ratios related to Investment Earnings per share Profit after preference dividend/Number of Equity shares Price earning ratio Market price per Equity share/EPS

1.

Problems

Calculate short term solvency ratios from the following. Rs Stock Sundry debtors Cash balances Bills receivables Pre-paid expenses Land and Buildings Goodwill Sundry creditors Bills payable Tax payable Outstanding expn 60,000 70,000 20,000 30,000 10,000 1,00,000 50,000 20,000 15,000 18,000 7,000

2.

Liabilities

Rs

Assets

Rs
4,00,000 2,00,000

2,000 Equity shares of Rs 100 2,00,000 Fixed assets 1,00,000 each 1,00,000 1,000 9% pref Shares of Rs 100 Current assets 50,000 each 50,000 1,000 10% Debentures of Rs 100 each 1,00,000 Reserves :General Reserve Reserves for contingencies Current liabilities
6,00,000

6,00,000

Calculate Debt Equity Ratio

3. The comparative balance sheets of a Ltd. Company are given for the years ending December31,2005 and 2006.
2005 Equity Share Capital Reserve Fund 8% Debentures Mortgage Loan Sundry creditors Bills payable Bank overdraft Outstanding expenses Tax liabilities
3,00,000 1,50,000 2,00,000 4,00,000 50,000 25,000 40,000 10,000 15,000

2006
4,00,000 2,80,000 3,00,000 2,58,000 70,000 35,000 60,000 15,000

2005
2,00,000 3,00,000 2,50,000 50,000 1,50,000 1,00,000 80,000 18,000 40,000 2,000

2006
2,00,000 4,00,000 3,50,000 50,000 2,00,000 80,000 90,000 20,000 45,000 3,000

Goodwill Land& Building Plant& machinery Patents Stock Sundry debtors Bills receivable Marketable securities 20,000 Cash Prepaid expenses

11,90,000 14,38,000

11,90,000 14,38,000 5,00,000 3,00,000 6,00,000 4,05,000

Sales Purchases

Calculate the following for two years. 1 Current Ratio 2 Acid test Ratio 3 Inventory Turnover Ratio 4 Debtors Turnover Ratio 5 Creditors Turnover Ratio Notes: a) Trade debtors include debtors and bills receivables. b) Trade creditors include creditors and bills payable.

Following information is given to you. Find out 1.Current assets 2. Current liabilities. i. Current ratio 2.5 ii. Working capital Rs.90000 Following information is given to you. Find out 1.Current assets 2. Liquid Assets.3.Inventory Current ratio 2.5; Acid test ratio 1.5; Current liabilities Rs.50000

Given Current ratio 2.8; Acid test ratio 1.5; Working capital Rs162000. Find out CA; CL; LA The ratios relating to Osmos Ltd are given as follows GP ratio 15percent Stock velocity 6months Debtors velocity 3months Creditors velocity 3months Gross profit for the year Dec31st,2008 amounts to Rs.60000. Closing stock is equal to opening stock. Find out Sales, Closing stock, Sundry Debtors, Sundry Creditors.

Your company had the following earnings last year: Profit before tax Rs 24.46 lakhs. Tax rate 60% Proposed dividend 20% Capital of the company is 9% Preference shares Rs 10 lakhs Equity Shares 30,000 Shares of Rs 100 each Rs 30 lakhs Reserve in the beginning of the year Rs 22 lakhs. From the above compute 1 EPS 2 P-E Ratio. The current market price of equity share is Rs 200.