Financial, Cost and Management Accounting

8/8/2019 Financial, Cost and Management Accounting

http://slidepdf.com/reader/full/financial-cost-and-management-accounting 1/82

Financial and ManagementAccounting

MAHENDRA K PATIDAR

PGDMBIFInstitute of Public Enterprise, Hyderabad



Course outline

Fundamentals of Accounting

Financial Statement Analysis

Introduction to Cost and ManagementAccounting

Cost Volume profit analysis

Budgetary Control, Standard costing andVariance analysis



DEFINITIONS

Accounting is the art of recording, classifying and summarising insignificant manner and in terms of money, transactions and eventswhich are, in part, at least of a financial character and interpretingthe results thereof.

The function of accounting is to provide Quantitative information,primarily of financial nature, about economic entities, that isneeded to be useful in making economic decisions.

Accounting is the process of identifying, measuring andcommunicating economic information to permit informed

judgementsand decisions by users of the information.



FUNCTIONS OF A

CCOUNTING

Recording:- This is the basic function of accounting.It is essentially concerned with not only ensuring thatall business transactions of financial character are infact recorded but also that they are recorded in anorderly manner. Recording is done in the book ³journal´.

Classifying:- This is concerned with the systematicanalysis of the recorded data, with a view to grouptransactions or entries of one nature at one place.Classification is done in the book termed as ³Ledger´.

Summarising:- This involves presenting the classifieddata in a manner which is understandable and useful.This process leads to preparation of the followingstatements. Namely Trial Balance, Income Statementand Balance sheet.



Functions Dealing with financial transactions.

Analysing and Interpreting:- This is final function of

accounting. The recorded financial data is analysedand Interpreted in a manner that the end-users canmake a meaningful judgement about the financialcondition and profitability of the business operations.

Communicating:- The accounting information after

beingmeaningfully analysed and interpreted has to becommunicated in a proper form and manner to theproper person.



Importance & ObjectivesImportance 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.



ACC

OUNTING PRINCIPL

ES

They are a body of doctrines commonly associatedwith the theory and procedures of accounting, servingas an explanation of current practices and as a guidefor selection of conventions or procedures wherealternatives exist.

It is defined as those rules of action or conduct whichare adopted by the accountants universally whilerecording accounting transaction. It is also termed asAccounting Standards.

Accounting principles are classified into twocategories. Namely Accounting concepts andAccounting conventions.



ACC

OUNTINGCON

CEPTS

The term concepts include those basic assumptions uponwhich accounting is based.

Separate Entity Concept

Money Measurement Concept

Cost Concept

Going Concern Concept

Dual Aspect Concept

Realisation Concept

Accrual Concept



ACC

OUNTINGCONV

ENTIONS

Customs and traditions which guide theaccountants while preparing theaccounting statements.

Consistency

Full Disclosure

Conservatism

Materiality



ACC

OUNTING POLICIES

Accounting policies refer to specificaccounting principles and the methods of applying those principles adopted in the

preparation and presentation of financialstatements. The choice of appropriateaccounting principles in the specificcircumstances of each enterprise calls forconsiderable judgment by the management

of the enterprise

example:-Methods of depreciation



AccountingCycle

A complete sequence beginning with therecording of the transactions and endingwith the preparation of the final accounts.

Jounalising

Posting

Balancing

Trial BalanceIncome Statement

Balance Sheet



Accounting Process & Equation

An overview of the steps of cycle,beginning with a transaction and

ending with the closing of the booksand reversing entries.

Equation

Assets= Capital+Liabilities orShareholders equity= Assets ±Liabilities



GAAPGenerally Accepted Accounting Principles :

Standard framework of guidelines forfinancial accounting. It includes thestandards, conventions , and rulesaccountants follow in recording andsummarising transactions, and in thepreparation of financial statements.

The following are the Seven principles.



7P¶s

Principle of regularity: Regularity can be defined asconformity to enforced rules and laws. This principle isalso known as the Principle of Consistency.

Principle of sincerity: According to this principle,

the accounting unit should reflect in good faith thereality of the company's financial status. Principle of the permanence of methods: This

principle aims at allowing the coherence andcomparison of the financial information published bythe company.

Principle of non-compensation: One should showthe full details of the financial information and notseek to compensate a debt with an asset, a revenuewith an expense, etc.



7P¶s

Principle of prudence: This principle aims atshowing the reality "as is" : one should not try tomake things look prettier than they are. Typically, arevenue should be recorded only when it is certain

and a provision should be entered for an expensewhich is probable.

Principle of continuity: When stating financialinformation, one should assume that the business willnot be interrupted. This principle mitigates theprinciple of prudence: assets do not have to beaccounted at their disposable value, but it is acceptedthat they are at their historical value.



7P¶s

Principle of periodicity: Eachaccounting entry should be allocated

to a given period, and splitaccordingly if it covers severalperiods. If a client pre-pays asubscription (or lease, etc.), the given

revenue should be split to the entiretime-span and not counted forentirely on the date of the transaction



IFRSInternational Financial Reporting Standards are standards

and interpretation adopted by the InternationalAccounting 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 otherevents are recognised when they occur, not as cash isreceived or paid.

Going concern: The financial statements are preparedon the basis that an entity will continue in operationfor the foreseeable future.



Mechanics of AccountingTransaction of a business refers to an event therecognition of which gives rise to an entry in accountrecords.

Account is a summary of the relevant transactions atone place relating to a particular head. It records notonly the amount of transaction but also their effectand direction.

Accounts can be broadly classified into Personal

Accounts and Impersonal Accounts.

Impersonal Accounts are further classified into RealAccounts and Nominal Accounts.



Classification

Personal Accounts:- These are the accounts of persons with whom thebusiness deals. Ex: Sold goods to kumar, paid cash to ravi.

DEBIT THE RECEIVERCREDIT THE GIVER

Real Accounts :- These are the accounts of tangible objects ie. Assetsowned 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 LOSSESCREDIT ALL GAINS AND INCOMES



Meaning and Rules of Debit & CreditDebit means to enter an amount of atransaction 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 eitherincrease or decrease depending upon thenature of an account.



JournalJournal:- The book in which the business transactions are recorded in a

chronological order, after analysing them and classifying the benefitsaccording 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 LiabilityAn increase in Expense or Loss, a decrease in Income or GainAn increase in Drawings, a decrease in Capital

Credit is that aspect of transaction that causes:A decrease in Asset, an increase in LiabilityA decrease in Expense or Loss, an increase in Income or GainA 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 pasttransactions, 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 threecategories:

Transactions relating to persons, properties andassets and to incomes and expenses.



PROFORMA OF JOURNALDate particulars L.F Debit Rs. Credit Rs.

Date:- The date on which the transaction was entered is recordedhere.

Particulars:- The two aspect of the transaction are is recorded in

the column i.e., the details regarding accounts which have tobe debited and credited. L.F:- It means ledger folio .the transactions entered in the journal

are lateron 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.



Problems1) 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.



April 15 Bought furniture for proprietor's residence and paid cashRs.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.



4) Journalise the following transactions and post theminto 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 & PostingLedger :- A book containing different accounts

of an entity and facilitates recording of alltypes of transactions related to Personal,

Real and Nominal accounts separately inrelated accounts.

Posting :- Transferring the debit and credit

items from the journal to the respectiveaccounts in the ledger



PROFORMA OF LEDGER

Date particulars AmountRs

Date Particulars AmountRs

Dr Cr Account

Notes:1) It is customary to use words ³To´ and ³By´ while making posting in the

Ledger.2) The word ³To´ is used with the accounts which appear on Debit side

of a Ledger Account.

3) Similarly, the word ³By´ is used with accounts appear on the Credit side

of a Ledger Account.



Trail balanceTrial balance :- It is a statement containing the variousledger balances on a particular date, arranged in theform of debit and credit columnsplaced side by side and prepared the object of checking the arithmetical accuracy of the ledgerpostings.

Objects of preparing trail balance:- Checking of the arithmetical accuracy of the

accounting entries. Basis for financial statements. Summarised ledger



Trial balanceE

rrors Error of original entry

Error of omission

Error of reversal

Error of commission

Error of principle

Compensating errors

Transposition error



Trading AccountThis is the first step in preparation of final accounts. It is prepared atthe end of each accounting period to asses the Gross Profit or GrossLoss.

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

Particulars Amount

Rs

Particulars Amount

Rs

To Opening stock

To Purchases

Less Returns

To DirectExpenses

TO Gross Profitc\d

By Sales

Less Returns

By Closing Stock

By Gross Loss c\d

Dr Cr

Trading Account of

for the year ended



PROBLEMS

From the following ledger balances as on 31-12-2006, prepare Trading Account.

RsStock as on 1-1-2006 2,000

Purchases 38,000Sales 56,000

Returns Inward 2,000Returns Outward 3,000

Closing Stock 12,000



You are requested to prepare Trading Account from the followinginformation.

Rs

Stock(1-1-2006) 1,000Purchases 25,000Sales 35,000Returns Inward 1,500

Returns Outward 1,000Direct Wages 2,000Carriage Inward 3,000Carriage Outward 1,800Factory Rent 1,000Office Rent 800

Customs Duty 200Electricity (motive power) 500Office Lighting and repairs 700Closing Stock 5,000



PROFORMA OF P&L ACCOUNT

ParticularsAmount

Rs

ParticularsAmount

Rs

To Gross Loss b/d

To Salaries

To Rent

To Commission

To AdvertisementTo Bad Debts

To Discount

TO Net ProfitTransferred to Capital

a/c

By Gross Profit b/d

By DiscountReceived

By Interest on

Drawings

By Profit on Sale of

Assets

By Net Loss

Transferred to

Capital a/c

for the year of ending«

Profit and Loss Account of «

Cr Dr



From the following particulars prepare Profit and Loss Account.Rs

Gross Profit 2,56,250Rent 6,500Commission Paid 3,250Salaries 9,750

Taxes 9,750Trade Expenses 1,625Bank Charges 1,950Printing & Stationery 8,125Packing Charges 1,625Carriage Outward 6,500

Discount Received 3,250Discount Allowed 2,112Bad Debts 2,438Depreciation on Plant 4,875



From the following Ledger balances of X Ltd, prepare Trading & Profit and Loss

Account for the year ended 31st

Dec,2006.Rs

Opening Stock 1,87,500Purchases 2,71,875Sales Returns 15,000Furniture 52,500Machinery 2,43,750Carriage Outward 5,625Wages 37,500Sales 6,90,000Purchase Returns 9,375Carriage Inward 7,500General Expenses 7,500Salaries 7,500Commission Received 1,875

Discount Allowed 2,750Bad Debts 1,000Commission to Agent 1,875Bank Charges 563Interest Received 1,125Rent Received 16,875Investments 3,75,000

Insurance 3,750Closing Stock 3,75,000



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 earliestopportunity.

Fixed:- these are not meant to be sold but are

meant to be utilized in the firm¶s Business.

Tangible

Which can be seen

and felt

Intangible

Which cannot be seen

Fictitious

Assets of which no

value





PROFORMA OF BALANCE SHEETBalance sheet of ±

as on-

Liabilities AmountRs

Assets AmountRs

Capital

Add: Net Profit,

Additional

capital,

Intereston

capital.

Less:Drawings, Inton drawings,Net Loss.

Long term

debts

***

***

Fixed Assets :

Good will, Patents,

copy right, trademarks, Land&Buildings, Plant& Machinery,Furniture & Fittings etc.

Investments

Current Assets:

Debtors, closingstock, cash in

hand& at Bank

***

***

Permanency Order



Li idit O d



PROFORMA OF BALANCE SHEET

Liabilities Amount Rs Assets Amount Rs

Current Liabilities:

Outstanding Expenses

Income Received in

Advance

Bills PayableBank Overdraft

Creditors

Loans:

Long Term Loans

Short Term Loans

Capital:

CapitalADD: Additional capital

Interest on capital

Net Profit

Less: Drawings

Interest on drawings

Net Loss

***

***

***

Current Assets :

Prepaid Expenses

Accrued Income

Cash in Hands

C

ash at BankBills Payable

Debtors

Investments

Loose Tools

Fixed Assets:

Furniture & Fittings

VehiclesLeasehold Property

Plant & Machinery

Land & Buildings

Patents

Trade Marks

Copy rights

Goodwill

***

***

Liquidity Order



10)From the following Trial Balance as on 31 Dec 2006, Prepare a Trading anda Profit and Loss Account, Balance Sheet.

Trail Balance on 31 Dec 2006

Debit Amount

Rs

Credit Amount

Rs

Cash

Purchases

Traveling Expenses

Carriage

Discount Allowed

Audit fees

Debtors

FurnitureTrade Expenses

General Expenses

Legal Expenses

Penalties

Salaries

Opening Stock

Carriage Outward

Postage

Telephone

Goodwill

Commission

Wages

Drawings

Loose Tools

Interest on Overdraft

1,740

2,69,320

10,510

86,580

1,800

2,746

68,440

2,1803,250

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

Profit on sales of Assets

Recovery of Bad Debts

Bank Overdraft

Creditors

Commission

Bills Payable

Capital

Purchase ReturnsSales

Interest Received

2,130

1,440

24,420

52,290

3,450

17,780

40,656

1,3204,72,290

1,310

6,17,086 6,17,086

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



Adjustment Entries

1. Closing Stock.2. Expenses Outstanding.3. Prepaid Expenses.4. Accrued Incomes.

5. Incomes Received in Advance.6. Depreciation on Assets.7. Bad Debts.8. Reserve for Doubtful debts.9. Reserve for discount on debtors.10. Reserve for discount for creditors.

11. Interest on Capital.12. Interest on Drawings.13. Stock lost in Accident.



1. Closing StockClosing Stock A/c ..........Dr

To Trading A/ca) Given in the adjustmentb) Appearing in the Trial balance

2. Expenses OutstandingRent A/c ««««««.Dr

To Out Rent A/ca) Given in the adjustmentb) Appearing in the Trial balance

3. Prepaid ExpensesPrepaid Expens A/c. Dr

To Expense A/ca) Given in the adjustmentb) Appearing in the Trial balance





6)DepreciationDepreciation A/c ««««««.Dr

To Fixed Asset A/ca) Given in the adjustmentb) Appearing in the Trial balance

7)Bad DebtsBad Debts A/c««««««««Dr

To Debtors A/ca) Given in the adjustment

Bad Debts should be debited to P&L A/cand Should be deducted from Debtors in the assets side of the Balance Sheet.

b) Appearing in the Trial balanceTo be shown in the Debit side of the P&L A/c

C) Bad debts were given in the Trial Balanceand

Adjustment.



8. Provision for Bad and Doubtful debtsProfit and Loss A/c «««Dr

To Prov for Bad debts A/ca) Given in the adjustmentb) Appearing in the Trial balance

9. Provision for Discount on Debtors

Profit & Loss A/c««««..DrTo Dis on Debtors A/c

10. Provision for Discount on CreditorsProv for Dis on Creditors..Dr

To Profit & Loss A/c11.Interest on Capital

Int on Capital A/c««««DrTo capital A/c

12. Interest on DrawingsDrawings A/c «««««..Dr

To Int 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 CompanyCash 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, Preparethe Trading Profit & Loss A/c and Balance Sheet.

Trail Balance

Debit Balance Amount

Rs

CreditBalance

Amount

Rs

Salaries

PurchasesTradeExpenses

Wages

Carriage

OfficeExpenses

Commission

Bad Debts

6,000

26,0001,000

7,800

400

500

600

1,200

Capital

SalesDiscount

Creditors

Bills Payable

25,000

47,000200

21,000

6,800

(1) (2) (3)



(1) (2) (3)(4)

Debtors

FurnitureMachinery

Insurance

Bills Receivables

Opening Stock

Cash in Hands

Cash in Bank

30,000

3,00010,000

400

2,000

7,000

500

3,600

1,00000.

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 debtsBills 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

3,00012,000

800

6,210

15,000

1,400

10,700

1,050

3,700

5,000

8,400

3,200

20,000

2,09,360

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

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 Adjustments:

1. Closing Stock Rs. 16,800.

2. Outstanding SalariesRs 400: Prepaid rent Rs. 201.

3. Provide 5% to Bad and Doubtful debts on debtors.

4. Depreciation on machinery is 10%.

5. Interest on capital is 5%.



14.Prepare a Trading and Profit &Loss a/c and Balance Sheet.

Trail Balance as on 31-12-2008

Debit Amount Rs Credit Amount Rs

Drawings

Stock

Bills Receivables

Sales Returns

PurchasesWages

Salaries

Fixed Deposits

Insurance

Buildings

FurnitureDebtors

Cash in Hand

750

6,920

1,000

300

4,50070

200

3,000

120

3,000

7006,000

470

27,030

Capital

Purchase Returns

Bills Payables

Sales

DiscountCreditors

Bank overdraft

15,000

320

1,180

8,300

301,300

900

27,030



Adjustments:

1 Calculate 12% interest on Capital.

2 Insurance Premium Rs 120 was paid for the half year endedwith 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 provisionfor 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 Rs

Credit Rs

Cash in Hand

Good Will

Purchases

Cash at Bank

Direct Wages

Opening stock

Interest on LoanInsurance

Carriage on Sale

Carriage on Purchases

Commission

Fittings

Bad Debts

BuildingsPlant & Machinery

Postage

Debtors

Salaries

800

40,000

68,000

1,200

2,000

35,000

2,500900

900

400

500

5,000

200

25,00010,000

500

.25,000

3,000

220900

Sales

10% Loan(1-1-2009)

Reserve for Bad Debts

Creditors

Capital

Bills Payable

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 forwhich Insurance company agreed to reimburse Rs 2,000.





Liabilities Assets

SECURED LOANS

DebenturesLoans and Advances from Banks

Loans and Advances fromSubsidiaries

Other Loans and Advances

UNSECURED LOANS

Fixed DepositsLoans and Advances fromsubsidiaries

Short Term Loans and Advances

From Banks

From others.

Other Loans and Advances

From Banks

From others

Sundry Debtors

Debts outstanding for aperiod

exceeding six months

Other debts-

Less provision

Prepaid expenses

Cash Balance

Bank Balance-

With scheduled banks and

With othersB. Loans and Advances

Advances and Loans to:

Subsidiaries

Partnership firms

Bills of exchange



Liabilities Assets

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 andsimilar staff benefit schemes

MISCELLANEOUS EXPENDITURE

(to the extent not written off oradjusted).

Preliminary expenses

Expenses including commissionor brokerage or underwriting or

subscription of shares ordebentures.

Discount allowed on the issue of shares or debentures.

Interest paid out of capital during

construction.Development expenditure notadjusted





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 oradjusted.

b) Profit and Loss Account.

Total





Analysis of Financial Statements

Meaning of Financial Analysis

refers to the process of determining financialstrengths and weaknesses of the firm by

establishing strategic relationship between theitems of the balance sheet, Profit & Loss accountand other operative data.

is a process of evaluating the relationship

between component parts of a financial statementto obtain a better understanding of a firm¶s positionand performance.



Financial Statements

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 periodicalreview 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.





Sh t t l ti ¶ th ti hi h th h t t



Short term solvency ratio¶s are the ratios which measure the short termsolvency or financial position of a firm. It indicates the ability to payits current obligation in time.

Current ratio or Working capital ratio = Current assets/ Current liabilitiesNote :

1) Current assets include1.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 include1. 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 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 ratio¶s or Leverage ratios or capital structureratios convey firms ability to meet the interest costs andrepayment schedules of its long term obligations. It helps inassessing 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, loansfrom finance corporation.

2 Shareholders funds include Equity share capital +Preferenceshare capital + Reserves and surplus + profit and

loss account+ share premium ±preliminary expenses ± Discounton issue of debentures.

3 It is a ratio to measure the relative claims of outsiders.





Profitability ratios

related to sales.(%)

1. Gross profit ratio

Gross profit/Sales

2. Net profit ratio

Net profit/Sales

3. Expenses ratio

Respective particular expense/Sales

Ratios related to Investment

1. Earnings per share

Profit after preference dividend/Number of Equity shares

2 Price earning ratio

Market price per Equity share/EPS



Problems

Calculate short term solvency ratios from the following.

Rs

Stock 60,000

Sundry debtors 70,000

Cash balances 20,000

Bills receivables 30,000

Pre-paid expenses 10,000

Land and Buildings 1,00,000

Goodwill 50,000

Sundry creditors 20,000

Bills payable 15,000

Tax payable 18,000

Outstanding expn 7,000

Bank overdraft 25,000

Debentures 75,000

2



2.

Liabilities Rs Assets Rs

2,000 Equity shares of Rs 100each

1,000 9% pref Shares of Rs100 each

1,000 10% Debentures of Rs

100 eachReserves :General Reserve

Reserves forcontingencies

Current liabilities

2,00,0001,00,000

1,00,000

50,000

50,000

1,00,000

6,00,000

Fixed assets

Currentassets

4,00,000

2,00,000

6,00,000

Calculate Debt ±Equity Ratio





Calculate the following for two years.

1 Current Ratio

2 Acid test Ratio

3 Inventory Turnover Ratio4 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.InventoryCurrent 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 followsGP 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 EPS2 P-E Ratio.

The current market price of equity share is Rs 200.

Documents

Financial, Cost and Management Accounting