Answer Financial Accounting

7/24/2019 Answer Financial Accounting

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Financial accounting

SECTION A

1.,i) financial information;ii) Differentiii) Balance Sheetiv) Accountingv) Income

2., i) (a) Net profit after taxe an! interet "Total aet x #$$ii) (%) #tapril&iii) (%) 'rofit centreiv) (%) ASv) (a) CA * C+

,-& i) T./Eii) 0A+SEiii) 0A+SEiv) T./Ev) T./E

SECTION B,-&The following are the different users of accounting information and their specific information needs.

O1ner an! invetor: Stockholders of corporations need financial information to help them make decisions on what to do withtheir investments (shares of stock), i.e. hold, sell, or u! more."rospective investors need information to assess the compan!#spotential for success and profitailit!. $n the same wa!, small usiness owners need financial information to determine if theusiness is profitale and whether to continue, improve or drop it.

2anagement 3$n small usinesses, management ma! include the owners. $n huge organi%ations, however, management is

usuall! made up of hired professionals who are entrusted with the responsiilit! of operating the usiness or a part of theusiness. The! act as agents of the owners. The managers, whether owners or hired, regularl! face economic decisions & 'owmuch supplies will we purchase o we have enough cash 'ow much did we make last !ear id we meet our targets *llthose, and man! other +uestions and usiness decisions, re+uire anal!sis of accounting information.

+en!er 3enders of funds such as anks and other financial institutions are interested in the compan!-s ailit! to pa! liailities

upon maturit! (solvency).

Tra!e cre!itor or upplier: ike lenders, trade creditors or suppliers are interested in the compan!-s ailit! to pa! oligations

when the! ecome due. The! are nonetheless especiall! interested in the compan!#s liquidity& its ailit! to pa! short-

termoligations. 4overnment : overning odies of the state, especiall! the ta/ authorities, are interested in an entit!#s financial information for

ta/ation and regulator! purposes. Ta/es are computed ased on the results of operations and other ta/ ases. $n general, thestate would like to know how much the ta/pa!er makes to determine the ta/ due thereon.

Emplo5ee:0mplo!ees are interested in the compan!-s profitailit! and stailit!. The! are after the ailit! of the compan! to pa!

salaries and provide emplo!ee enefits. The! ma! also e interested in its financial position and performance to assesscompan! e/pansion possiilities and career development opportunities.

Cutomer 3hen there is a longterm involvement or contract etween the compan! and its customers, the customers ecome

interested in the compan!-s ailit! to continue its e/istence and maintain stailit! of operations. This need is also heightened incases where the customers depend upon the entit!.For e/ample, a distriutor (reseller), the customer in this case, is dependentupon the manufacturing compan! from which it purchases the items it resells.

4eneral 'u%lic:*n!one outside the compan! such as researchers, students, anal!sts and others are interested in the financial

statements of a compan! for some valid reason.6-&A!vantage an! Benefit of 2arginal Coting

Cot control33arginal costing makes it easier to determine and control costs of production. 4! avoiding the aritrar! allocationof fi/ed overhead costs, management can concentrate on achieving and maintaining a uniform and consistent marginal cost.

Simplicit533arginal costing is simple to understand and operate and it can e comined with other forms of costing (e.g.udgetar! costing and standard costing) without much difficult!.

Elimination of cot variance per unit3Since fi/ed overheads are not charged to the cost of production in marginal costing,units have a standard cost.

Shortterm profit planning33arginal costing can help in shortterm profit planning and is easil! demonstrated with reakevencharts and profit graphs. 5omparative profitailit! can e easil! assessed and rought to the notice of the management fordecisionmaking.

Accurate overhea! recover5 rate3This method of costing eliminates large alances left in overhead control accounts, which

makes it easier to ascertain an accurate overhead recover! rate. 2aximum return to the %uine3ith marginal costing, the effects of alternative sales or production policies are more readil!

appreciated and assessed, ensuring that the decisions taken will !ield the ma/imum return to the usiness.

Dia!vantage an! +imitation of 2arginal Coting

Claif5ing cot3$t is ver! difficult to separate all costs into fi/ed and variale costs clearl!, since all costs are variale in the

long run. 'ence such classification sometimes ma! give misleading results. Furthermore, in a firm with man! different kinds ofproducts, marginal costing can prove less useful.


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Accuratel5 repreenting profit3Since the closing stock consists onl! of variale costs and ignores fi/ed costs (which could e

considerale), this gives a distorted picture of profits to shareholders.

Semivaria%le cot3 Semivariale costs are either e/cluded or incorrectl! anal!%ed, leading to distortions.

.ecover5 of overhea!3ith marginal costing, there is often the prolem of under or overrecover! of overheads, since

variale costs are apportioned on an estimated asis and not on actual value.

External reporting33arginal costing cannote used in e/ternal reports, which must have a complete view of all indirect and

overhead costs.

Increaing cot3Since it is ased on historical data, marginal costing can give an inaccurate picture in the presence of

increasing costs or increasing production.

7-& 0inancial accounting is a speciali%ed ranch of accounting that keeps track of a compan!#s financial transactions. 6singstandardi%ed guidelines, the transactions are recorded, summari%ed, and presented in a financial report or financial statement suchas an income statement or a alance sheet. 5ompanies issue financial statements on a routine schedule. The statements areconsideredexternalecause the! are given to people outside of the compan!, with the primar! recipients eingowners7stockholders, as well as certain lenders. $f a corporation#s stock is pulicl! traded, however, its financial statements (andother financial reportings) tend to e widel! circulated, and information will likel! reach secondar! recipients such as competitors,customers, emplo!ees, laor organi%ations, and investment anal!sts.$t#s important to point out that the purpose of financialaccounting is not to report the value of a compan!. 8ather, its purpose is to provide enough information for others to assess thevalue of a compan! for themselves.0inancial accounting(or financial accountanc5) is the field of accountingconcerned with thesummar!, anal!sis and reporting of financial transactions pertaining to a usiness. 91This involves the preparation offinancialstatementsavailale for pulic consumption.Stockholders,suppliers,anks, emplo!ees,government agencies, usiness owners,and other stakeholders are e/amples of people interested in receiving such information for decision making purposes. Financialaccountanc! is governed ! oth local and international accounting standards.enerall! *ccepted *ccounting "rinciples(**")

is the standard framework of guidelines for financial accounting used in an! given ;urisdiction. $t includes the standards,conventions and rules that accountants follow in recording and summarising and in the preparation of financial statements.

2. *ccording to the 0uropean *ccounting *ssociation:5apital maintenance is a competing o;ective of financial reporting

9-& 4OIN4 CONCE.N CONCE'TThis concept states that a usiness firm will continue to carr! on its activities for an indefiniteperiod of time. Simpl! stated, it means that ever! usiness entit! has continuit! of life. Thus, it will not e dissolved in the nearfuture. This is an important assumption of accounting, as it provides a asis for showing the value of assets in the alance sheet?For e/ample, a compan! purchases a plant and machiner! of 8s.1@@@@@ and its life span is 1@ !ears. *ccording to this conceptever! !ear some amount will e shown as e/penses and the alance amount as an asset. Thus, if an amount is spent on an itemwhich will e used in usiness for man! !ears, it will not e proper to charge the amount from the revenues of the !ear in which theitem is ac+uired.


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indefinite life of usiness is divided into parts. These parts are known as *ccounting "eriod. $t ma! e of one !ear, si/ months,three months, one month, etc. 4ut usuall! one !ear is taken as one accounting period which ma! e a calender !ear or a financial!ear. Cear that egins from 1st of Danuar! and ends on =1st of ecemer, is known as 5alendar Cear. The !ear that egins from1st of *pril and ends on =1st of 3arch of the following !ear, is known as financial !ear. *s per accounting period concept, all thetransactions are recorded in the ooks of accounts for a specified period of time. 'ence, goods purchased and sold during theperiod, rent, salaries etc. paid for the period are accounted for and against that period onl!.

SECTION C-&Cah 0lo1 Statement 0ormat'ere#s the format of the cash flow statement itself:

5ash can flow in two directions & either coming in to !our usiness or going out. 5ash coming in to !our usiness is shown aspositive amounts, whereas cash going out from !our usiness are shown as negative amounts(in parentheses).Dividendsare cashpa!outs to people who have ought shares in a compan!. $t is similar to drawingsin a small usiness in that the owner is getting apa!out (drawingsis the owner withdrawing some of the cash that he first put in the usiness). Proceedsmeans cash received.ike the rest of the financial statements, the cash flow statement is usuall! drawn up annuall!, ut can e drawn up more often.

*lso note that it covers the flows of cash over a period of time (unlike the alance sheetthat provides a snapshot of the usiness ata particular date).

#$-& Concept of Brea


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>hen total ale an! total cot ?1ithout %rea< up for fixe! an! varia%le component@ are given for t1o perio! of activit5&the follo1ing formula ma5 %e ue! to calculate the '"= .atio3

here, Sales & Total 5osts G "rofits

6ses of "7E 8atio:A fe1 ue of '"= .atio are a follo13(a) etermination of marginal costs for an! volume of sales: educting "7E 8atio from 1@@ can arrive at 3arginal cost percentage.For e/ample, if "7E 8atio is 2HB, then the marginal cost percentage would e IHB (1@@2H).() $t ma! e used for the calculation of the desired volume of output, profit or other essential facts(c) 5omparisons can e made ! calculating the "7E 8atio for each of the factors to e compared, vi%.(i) ine of product,(ii) Sales area,(iii) 3ethod of sales (e.g., sales through wholesalers or retailers),(iv) $ndividual factories,(v) Separate companies, etc.

11., 0actor for 'reparing a Bu!getSome people make the decision to prepare a personal udget to meet a ver! specific goal while others choose to create one inresponse to a new ;o situation. hatever !our reason, it#s a smart financial move. hen !ou finall! start creating !our personal

udget, focus on a few important factors to ensure that it#s complete.

Income: The first important factor in preparing a udget is !our income. hen preparing a udget !ou need to focus on !our net

income, not gross. The amount of mone! !ou take home each month is what !ou use to pa! !our oligations. Cou could stillchoose to list amounts that get deducted from !our income on a preta/ asis, such as retirement contriutions, in a separatearea of !our udget worksheet.

Cot3Think of !our personal finances as a usiness, and with an! usiness !ou have costs re+uired to sta! in operation. hen

preparing !our udget !ou must take ever! e/pense into account. *n!thing that !ou spend over the course of the month must getrecorded in !our udget, and that can prove difficult in some cases. Cou must include even the small purchases !ou make at theneighorhood convenience store to get an accurate total for !our udget.

Balance3The ne/t important factor in preparing a udget is achieving alance. The side of !our udget worksheet that lists

income must e+ual the side for e/penses. 3ore income than e/penses is a nice prolem to have J ;ust assign the e/cess to asavings account or other initiative. $f after !ou record !our udget details !ou have more e/penses than income, that#s a more

serious prolem that re+uires !ou to reduce e/penses and possil! identif! new wa!s of making mone!. 4oal: *nother ke! component !ou need to address when preparing a udget is how to reach certain financial goals. Take time

to mull over the short (less than a !ear) and longterm (one or more !ears into the future) goals !ou want to achieve with !ourmone!. 8ecord this information in !our udget worksheet and monitor !our progress toward those goals regularl!.
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Answer Financial Accounting