Course No.: MGT 211
Nature of the Course: Core
Full Marks: 100
Pass Marks: 35
Candidates are required to give their answer in their own words as far as practicable. The figures in the margin indicate full marks.
Group A: Brief Answer Questions
Attempt ALL questions (10 x 2 marks = 20 marks)
Financial accounting is a branch of accounting specialized in company’s financial transactions.
This branch records financial transactions by using standardized guidelines.
Then summarized and presented in a financial statement.
It includes income statement, retained earnings, balance sheet and cash flow statement.
According to old concept, there are two bases; cash basis and accrual basis.
Under accrual basis of accounting, business records revenue when the earning process is complete, NOT necessarily when cash is received.
Expenses are recorded when expenditures are consumed or complete.
Large business organization widely uses accrual basis.
Small business organizations also use accrual basis who have inventories (closing stock, merchandise).
Perpetual inventory means continuous checking and supply of materials or inventories.
This continuous checking is done with the help of store ledger and storekeeper.
It helps to regular supply of materials to production department.
It is possible that the balance of stock shown by bin card may be differ from actual balance.
This different may be due to avoidable and unavoidable causes.
Stock Dividends vs Stock Splits
Stock Dividends |
Stock Splits |
In stock dividend, the par value of a stock does not change. |
In stock splits, the par value of a stock decreases. |
Total stockholders’ equity does not change; here, retained earnings decrease but stocks increase. |
Total stockholders’ equity does not change; retained earnings and stocks are same. |
According to matching concept, we should compare incomes or expenses for an accounting period.
Suppose: current accounting year is 2020.
· Firm has received advance Rs 200,000 to supply goods for 2021.
· Firm has paid prepaid insurance Rs 12,000 for the year 2021.
In above examples, advance Rs 200,000 is not income for current year.
Rs 12,000 is not expenses of current year.
Q: 6. An enterprise has total assets of $500,000 and liabilities of $300,000 at the beginning of the year. During the year, the company earned $200,000 and distributed $50,000 dividend.
Required: Equity at the end of the year
[Answer: $350,000]
SOLUTION
Given and working note:
Equity at the beginning of the year
= Total assets – Total liabilities
= $500,000 – $300,000
= $200,000
Equity at the end of the year
= Equity at the beginning + Net income – Dividend paid
= $200,000 + $200,000 – $50,000
= $350,000
Q: 7. The following transactions of the company are given below:
March 2 Acceptance was given to Hari for 3 months for $30,000
April 9 Received from Rajendra an acceptance for 1 month for $8,000
April 27 Discounted Rajendra’s acceptance for $7,900
May 25 Acceptance was given to Ram for 2 months for $22,000
Required: Bills payable book
[Answer: Total = $52,000]
SOLUTION
Bills Payable Book
SN |
Acceptance date |
Acceptance given (Drawer) |
Term |
Due date |
LF |
Amount |
Remark |
1 |
2 March |
Hari |
3m |
5 Jun |
|
30,000 |
|
2 |
9 April |
Rajendra |
1m |
12 April |
|
8,000 |
Discounted |
3 |
25 May |
Ram |
2m |
28 July |
|
22,000 |
|
|
Total |
|
|
|
|
52,000 |
|
Keep in Mind
Due date = acceptance date + term + 3 grace days |
Discounted bill is NOT included in the total |
Q: 8. ABC Company receives a one year loan from Nepal Bank Ltd on 1st April 2020. The face value of the notes payable of $100,000 must be repaid on 31st March 2021 along with 12% interest.
Required: Journal entries to record the loan and its repayment
[Answer: Interest = $12,000]
SOLUTION
Journal Entries
In the book of ABC Company
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
2020 |
Loan taken |
|
|
|
|
Apr 1 |
Bank account |
Dr |
|
100,000 |
|
|
To 12% Notes payable account |
|
|
|
100,000 |
|
(Being: short-term loan took from Nabil Bank) |
|
|
|
|
|
|
|
|
|
|
2021 |
Loan repaid with interest |
|
|
|
|
Mar 31 |
12% Notes payable account |
Dr |
|
100,000 |
|
|
Interest on loan account |
Dr |
|
12,000 |
|
|
To Bank account |
|
|
|
112,000 |
|
(Being: loan repaid with interest viz 100,000 x 12%) |
|
|
|
|
|
|
|
|
|
|
Q: 9. Pashupati Company redeemed bond value of $100,000 face value $100 at par issued at premium $10,000. The unamortized premium was $6,000 and the bond contains a call provision of $103.
Required: Gain or loss on early redemption of bond
[Answer: Gain = $3,000]
SOLUTION
Given and working note:
Carrying value
= Face value + Unamortized premium
= $100,000 + $6,000
= $106,000
Redemption value of bonds
= Value x Call provision ÷ Face value
= $100,000 x $103 ÷ $100
= $103,000
Gain or loss on early redemption of bond
= Carrying value – Redemption value of bonds
= $106,000 – $103,000
= $3,000
Q: 10. Following extracted information are given to you XYZ Traders:
Insurance expenses |
$10,000 |
|
Salary expenses |
$12,000 |
|
Commission received |
$5,000 |
|
Interest (Cr) |
$7,000 |
|
Utilities expenses |
$8,000 |
|
Depreciation |
$10,000 |
|
Supplies expenses |
$4,000 |
|
|
|
|
Required: Closing entries
[Answer: Retained earnings Dr (Loss) = $32,000]
SOLUTION
Closing Journal Entries
In the book of XYZ Traders
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
Income recorded |
|
|
|
|
|
Commission received |
Dr |
|
5,000 |
|
|
Interest received |
Dr |
|
7,000 |
|
|
To Income summary |
|
|
|
12,000 |
|
(Being: incomes recorded) |
|
|
|
|
|
|
|
|
|
|
|
Expenses recorded |
|
|
|
|
|
Income summary |
Dr |
|
44,000 |
|
|
To Insurance expenses |
|
|
|
10,000 |
|
To Salary expenses |
|
|
|
12,000 |
|
To Utilities expenses |
|
|
|
8,000 |
|
To Depreciation |
|
|
|
10,000 |
|
To Supplies expenses |
|
|
|
4,000 |
|
(Being: expenses recorded as income summary) |
|
|
|
|
|
|
|
|
|
|
|
Loss on summary |
|
|
|
|
|
Retained earnings |
Dr |
|
32,000 |
|
|
To Income summary |
|
|
|
32,000 |
|
(Being: loss transferred to retained earnings viz |
|
|
|
|
|
$44,000 – $12,000) |
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Section B: Short Answer Questions
Attempt any FIVE Questions [5×10 marks = 50 marks]
Q: 11. On 31st December 2020 Bank Statement of City College disclosed a balance of $12,400 and Cash Book showed the balance of $12,500. Other financial data are:
a. |
Numbers of cheques were deposited in the bank but on 31st December, a cheque for $2,000 was not credited in the bank statement. |
b. |
Cheques issued of $6,000 but only $2,000 presented before 31st December. |
c. |
Notes receivable collected by the bank $1,500 |
d. |
Cash of $4,800 deposited by the college in December was recorded by the bank as $4,200. |
e. |
A cheque for $3,000 received from a student was returned by the bank due to insufficient fund with the bank. |
Required: (i) Journal entries; (ii) Bank reconciliation statement as on 31st December
(iii) Bank balance on 31st December balance sheet. [4+5+1=10]
[Answer: $11,000]
SOLUTION
Bank Reconciliation Statement
For the month of December
|
Amount $ |
Amount $ |
||
Balance as per bank statement December end 2020 |
|
12,400 |
||
Add: |
Deposit in transit |
2,000 |
|
|
|
Errors (error in recording $4,200 instead of $4,800) |
600 |
2,600 |
|
Less: |
Outstanding cheques (checks): |
($6,000 – $2,000) |
|
(4,000) |
|
Adjusted statement balance |
|
11,000 |
|
|
|
|
|
|
Balance as per depositor’s book (DB) |
|
12,500 |
||
Add: |
Notes receivables collected by bank but not recorded in DB |
|
1,500 |
|
Less: |
Dishonoured cheques (NFS Check) |
|
(3,000) |
|
|
Adjusted cash balance |
|
11,000 |
|
Adjusting Journal Entries
In the book of City College
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
Collected by bank |
|
|
|
|
|
Bank account |
Dr |
|
1,500 |
|
|
To Notes receivables |
|
|
|
1,500 |
|
(Being: notes receivables collected by bank) |
|
|
|
|
|
|
|
|
|
|
|
NSF cheque (cheque dishonoured) |
|
|
|
|
|
Account receivable |
Dr |
|
3,000 |
|
|
To Bank account |
|
|
|
3,000 |
|
(Being: dishonoured cheque returned by bank) |
|
|
|
|
|
|
|
|
|
|
Keep in Mind
Adjusting journal entries are recorded only of depositor’s book viz as per cashbook. |
Q: 12. Alpha Enterprises provides you the following information related to the inventories for April 2019. Alpha makes counting and recording of inventories items only at end of each month.
April 1, Beginning inventory 600 units @ $10 each
April 5, Purchased 800 units @ $11 each
April 12, Purchased 1,200 units @ $12 each
April 19, Sold 1,000 units @ $18 each
April 23, Purchased 600 units @ $12 each
April 26, Purchased 220 units @ $15 each
April 30, Sold 1,200 units @ $20 each
Required: (a) What inventory system the Alpha is adopting? [2]
(b) Ending inventory and cost of goods sold under the LIFO method assuming a periodic inventory system. [6]
(c) Income statement showing net income, assume depreciation expenses $8,000 and other operating expenses $12,000. [2]
[Answer: (b) Cost of goods sold = $26,880;
Ending inventories (620 + 600) = 1,220 units; $12,820;
(c) Net loss = $4,880; * Cost of goods available for sales = $39,700
SOLUTION
(a) What inventory system the Alpha is adopting?
In the question inventories data are given for the month of April only.
It means the firm checks its inventories at the end of every month.
Therefore, Alpha Enterprises is adopting perpetual inventory system.
Perpetual inventory means continuous checking and supply of the inventory.
This continuous checking is done with the help of store ledger and storekeeper.
It helps to regular supply of materials to production department.
In periodic inventory system, inventory in hand is determined at the end of accounting period.
Given and working note:
Cost of goods available for sales
Months |
|
Units |
Rate |
Amount |
|
Beginning inventory |
Apr 1 |
600 |
10 |
6,000 |
|
Purchased: |
Apr 5 |
800 |
11 |
8,800 |
|
|
Apr 12 |
1,200 |
12 |
14,400 |
|
|
Apr 23 |
600 |
12 |
7,200 |
|
|
Apr 26 |
220 |
15 |
3,300 |
|
Total |
3,420 |
|
$39,700 |
|
In LIFO, units are sold from ending purchase viz April 26
Date |
|
Units |
Rate $ |
Amount |
|
April 26 |
|
220 |
15 |
3,300 |
|
April 23 |
|
600 |
12 |
7,200 |
|
April 12 |
|
1,200 |
12 |
14,400 |
|
April 5 |
|
180 |
11 |
1,980 |
|
Total |
2,200 |
|
$26,880 |
|
Out of 3,420 units, 2,200 units were sold;
Remaining for LIFO 620 units from April 5 [∵ April 5 = 800 units]
600 units from April 1
Date |
|
Units |
Rate $ |
Amount |
|
April 5 |
Remaining unsold |
620 |
11 |
6,820 |
|
April 1 |
Unsold |
600 |
10 |
6,000 |
|
|
Total |
1,220 |
|
$12,820 |
|
(c) Income statement showing net income, assume depreciation expenses $8,000 and other operating expenses $12,000.
Income Statement under LIFO
Particulars |
Amount |
Amount |
|
Sales revenue [(1,000 x $18) + (1,200 x $20)] |
|
42,000 |
|
Less: |
Cost of goods sold |
|
(26,880) |
|
Gross profit |
|
15,120 |
Less: |
Depreciation expenses |
8,000 |
|
|
Other operating expenses |
12,000 |
(20,000) |
|
Income (loss) before tax |
|
($4,880) |
Q: 13 a. ABC Company bought a machine, expected to render 72,000 hours of service for $380,000. Its transportation and installation cost are $10,000 each with salvage value of $40,000. It has been estimated that the time requires for manufacturing a finished product is 2 machine hour per unit. During first 3 years, the company manufactured the goods as under:
Years |
1 |
2 |
3 |
Output in units |
9,000 |
10,000 |
11,000 |
Required: Machinery account for 3 years [5]
[Answer: Depn per hour = $5
Depn: Y1 = $90,000; Y2 = $100,000; Y3 = $110,000
SOLUTION
Given and working note:
Depreciation per machine hour
= (Purchase value + transportation + Installation – Salvage value) ÷ Total machine hours
= ($380,000 + $10,000 + $10,000 – $40,000) ÷ 72,000 MH
= $360,000 ÷ 72,000 hours
= $5
Again,
Depreciation per year |
= Output x 2 MH x $5 per hour |
|
Y1 |
= 9,000 x 2 x $5 |
= $90,000 |
Y2 |
= 10,000 x 2 x $5 |
= $100,000 |
Y3 |
= 11,000 x 2 x $5 |
= $110,000 |
Machinery Account
In the book of ABC Company
As on 31st December
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
Year 1 |
|
|
Year 1 |
|
|
Jan 1 |
To Bank account |
400,000 |
Dec 31 |
By Depreciation account |
90,000 |
|
|
|
Dec 31 |
By Balance c/d |
310,000 |
|
|
400,000 |
|
|
400,000 |
Year 2 |
|
|
Year 2 |
|
|
Jan 1 |
To Balance b/d |
310,000 |
Dec 31 |
By Depreciation account |
100,000 |
|
|
|
Dec 31 |
By Balance c/d |
210,000 |
|
|
310,000 |
|
|
310,000 |
Year 3 |
|
|
Year 3 |
|
|
Jan 1 |
To Balance b/d |
210,000 |
Dec 31 |
By Depreciation account |
110,000 |
|
|
|
Dec 31 |
By Balance c/d |
100,000 |
|
|
210,000 |
|
|
210,000 |
Accounting is the process or work to keep recording financial transactions.
It is broader than bookkeeping; it starts when bookkeeping ends.
Accountancy is the interpretation of financial accounting.
It is broader than accounting; it starts when accounting ends.
Differentiate between Accounting and Accountancy
Bases |
Accounting |
Accountancy |
Working |
Accounting works as a process or activity. |
Accountancy works as a profession or practice. |
Scope |
Accounting in narrow than accountancy. |
Accountancy is wider than accounting. |
Dependency |
It does NOT depend on accountancy. |
It depends on accounting. |
Objective |
The main objective is to record every financial transaction. |
The main objective is to provide details to its shareholders and users. |
Decision |
It does not help in decision making. |
It helps in decision making. |
Example |
|
|
Q: 14 a. During the year of 2020, XYZ Company made total sales of $12,00,000 of which 70% are on credit.
Company collected cash of $768,000 from the open account in that year.
In the year 2020 it has also wrote off $20,000 as an uncollectible account.
The following are balance of accounts at the end of 2019.
Account receivables $200,000
Allowance for doubtful debt $18,000 (Cr)
Company’s past performance shows that 5% of its ending balance of account receivable is expected to be doubtful debt account.
Required: (a) Journal entries for sales, collection and write-off of uncollectible accounts
(b) Estimated bad debt for 2075 based on the percentage on account receivable. Also, journalize it. [3+2=5]
[Answer: (a) A/R balance = $252,000;
(b) Bad debts (P&L account) = $14,600]
SOLUTION
Journal Entries
In the book of XYZ Company
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
Goods sold |
|
|
|
|
|
Cash account (30%) |
Dr |
|
3,60,000 |
|
|
Account receivable account (70%) |
Dr |
|
8,40,000 |
|
|
To Sales account |
|
|
|
12,00,000 |
|
(Being: goods sold in cash and credit or on account) |
|
|
|
|
|
|
|
|
|
|
|
Cash received |
|
|
|
|
|
Cash account |
Dr |
|
768,000 |
|
|
To Account receivable |
|
|
|
7,68,000 |
|
(Being: cash collected from account receivable) |
|
|
|
|
|
|
|
|
|
|
|
Doubtful debts |
|
|
|
|
|
Allowance for doubtful debt account |
Dr |
|
20,000 |
|
|
To Account receivable account |
|
|
|
20,000 |
|
(Being: wrote off as an uncollectible account) |
|
|
|
|
|
|
|
|
|
|
Account Receivable Account
Particulars |
Amount |
Particulars |
Amount |
To Balance b/d |
2,00,000 |
By Cash |
7,68,000 |
To Sales |
8,40,000 |
By Allowance for doubtful debt |
20,000 |
|
|
By Balance c/d |
2,52,000 |
|
10,40,000 |
|
10,40,000 |
Allowance for Doubtful Debt Account
Particulars |
Amount |
Particulars |
Amount |
To Account receivable |
20,000 |
By Balance b/d |
18,000 |
To Balance c/d |
12,600 |
By Bad debts or P&L account (b/f) |
14,600 |
(252,000 x 5%) |
|
|
|
|
32,600 |
|
32,600 |
Journal Entries
In the book of XYZ Company
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
Doubtful Debt transferred to P&L account |
|
|
|
|
|
P&L account |
Dr |
|
14,600 |
|
|
To Allowance for doubtful debt account |
|
|
|
14,600 |
|
(Being: allowance for doubtful debt transferred to |
|
|
|
|
|
Profit and loss account |
|
|
|
|
|
|
|
|
|
|
When an organization purchases permanent assets or improves their life, it is known capital expenditures.
It is based on long-term; it is non-recurring in nature.
When an organization incurs expenses for operation activities of the business, it is known revenue expenditures.
It is based on short-term; it is recurring in nature.
Differences between Capital and Revenue Expenditures
Bases |
Capital expenditures |
Revenue expenditures |
Nature |
It is non-recurring in nature |
It is recurring in nature |
Purpose |
It is incurred to purchase fixed assets or improve their life. |
It is incurred to manage day-to-day business activities. |
Term |
It is for long-term; more than one year. |
It is for short-term; less than one year. |
Earning |
It helps to increase earning capacity of the business. |
It helps to maintain earning capacity of the business. |
Show |
It is shown in assets side of balance sheet. |
It is shown in debit side of trading, profit and loss account. |
Q: 15. “A lease is a legal contract under which one party agrees to pay rent properly owned by other party”, discuss. [10]
The lease agreement is an arrangement between two parties; they are lessor and lessee.
Lessor is the owner of the asset.
Lessee is the user of asset as a renter.
Lessor gives permission to use the asset but does NOT transfer ownership.
Sometimes, lessee can be the lessor for sublet the assets.
Sublet is the rent of rented asset.
Lessor charges rent for the lease asset.
Time period is prefixed on lease asset.
Generally, lease agreement is done for long-term basis.
The agreement does not provide ownership rights to the lessee.
However, the lessor may grant permission to the lessee to modify or change the property to suit his needs.
The lessee is responsible for the condition of the property during the lease period.
Lease agreements may be used for the properties, vehicles, household appliances, construction equipment etc.
The major contents of lease agreement are as follows:
Duration
Here, duration means period of time for the lease agreement.
Generally, lease duration is long-term; sometime it may be 30 years.
Rent or payment
Here, rent means payment made by the lessee to the lessor in exchange for the property leased out.
Generally, rent is for monthly, annual basis or lump sum basis.
Mode of payment must be cleared on lease agreement.
Deposit or security
Lessor or owner may demand deposit amount.
The deposit amount depends on the nature, value and lease time of the asset.
Deposit amount may be adjusted with rent or returnable after lease duration or as a premium (pagdi).
Terms of use
It includes the terms and conditions regarding use of the property.
It shows the renew terms of the property.
Lease asset may be self-renew.
Utilities
Here, utilities mean using of electricity, gas, water, cable, telephone, internet etc.
Who will be responsible for utilities bill either lessor or lessee?
In lease agreement, it must be cleared about use of utilities.
Facilities
Amenities or facilities on the premises are entitled to use such as swimming pool, laundry or security systems.
Insurance
For the commercial use, insurance is necessary for the assets.
The lessee is required to ensure the property.
In lease agreement, it must be cleared about the insurance expenses.
Repairs and maintenance
Repair and maintenance need large amount.
Generally, lessee or tenant is responsible to keep lease property neat and clean.
In lease agreement, it must be cleared about the repair and maintenance expenses.
Restrictions
Lessee or tenant should NOT involve in illegal activity.
Rules and regulations such as pet rules, noise rules and penalty for violation must be mentioned on lease agreement.
Source Documents
Company makes a financial transaction at the time of business.
It generates some paper work.
Accountants call this paper work a source document.
When business firm writes a cheque from cheque books for office supplies, cheque and office supplies receipt become the source documents.
Source documents serve as evidence of the terms and conditions.
Both parties receive source of documents.
For example, at the time of goods sold, seller records this transaction in cash book and buyer receives purchase invoice and the business keeps a running tape of all transactions in the register.
It is necessary to standardize the forms and procedures for processing and recording all normal, repetitive transactions, the generation and handling of these source documents should be controlled.
All recognizable events are not supported by a standard source of document.
For certain events like insurance claim, source documents are essential otherwise organization cannot receive insurance claim or compensation.
From the bookkeeping point of view, source documents provide information needed for recording transactions in the accounts of business.
Importance of source of documents | Role of Source Documents
The major importance of source documents are:
The source documents serve as the bases of recording the transactions.
They validate the business transactions.
They serve as a evidence in the court.
They act as the bases for taxation.
They act as the bases for the adjustment information.
They work as a future references etc.
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Click on the link for YouTube videos |
|
Accounting Equation |
|
Journal Entries in Nepali |
|
Journal Entries |
|
Journal Entry and Ledger |
|
Ledger |
|
Subsidiary Book |
|
Cashbook |
|
Trial Balance and Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
|
|
Click on the link for YouTube videos chapter wise |
|
Financial Accounting and Analysis (All videos) |
|
Accounting Process |
|
Accounting for Long Lived Assets |
|
Analysis of Financial Statement |
###########
Section C: Long Answer Questions
Attempt any TWO questions (2 x 15marks = 30 marks)
Q: 17. The ABC Company’s statement of profit and loss account and statement of financial position for two years have been given below:
Statement of Profit and Loss for the year 2020
Particulars |
Amount |
Amount |
|
Sales revenue (including $800,000 credit sales) |
|
15,00,000 |
|
Less: |
Cost of goods sold |
|
(900,000) |
|
Gross profit |
|
600,000 |
Less: |
Operating expenses: |
|
|
|
Depreciation |
300,000 |
|
|
Debenture premium |
20,000 |
|
|
Interest paid |
10,000 |
|
|
Other operating expenses |
150,000 |
(480,000) |
|
Net income before other income |
|
120,000 |
Add: |
Profit from sales of fixed assets (book value $40,000) |
|
20,000 |
|
Net profit |
|
140,000 |
Balance Sheet
Capital and liabilities |
Year 2019 |
Year 2020 |
Share capital of $100 at par |
12,00,000 |
15,00,000 |
Share premium |
1,20,000 |
1,50,000 |
General reserve |
40,000 |
60,000 |
10% Debenture |
2,00,000 |
1,00,000 |
Account payable |
1,60,000 |
2,40,000 |
Bank overdraft |
2,30,000 |
1,60,000 |
Retained earnings |
1,50,000 |
2,90,000 |
Total |
21,00,000 |
25,00,000 |
Assets |
|
|
Fixed assets |
15,00,000 |
20,00,000 |
Investment |
1,00,000 |
2,00,000 |
Inventories |
50,000 |
1,00,000 |
Account receivable |
2,35,000 |
90,000 |
Cash |
2,00,000 |
1,00,000 |
Preliminary expenses |
15,000 |
10,000 |
|
21,00,000 |
25,00,000 |
Required for 2020: (a) Current ratio; (b) Quick ratio; (c) Debt to total capital ratio;
(d) Inventory turnover ratio; (e) Total assets turnover ratio; (f) Net profit ratio; (g) Return on equity
(h) Return on investment; (i) Interest coverage ratio; (j) Account receivable turnover ratio (10×1.5 = 15)
[Answer: (a) CR = 0.725: 1; (b) QR = 0.475: 1; (c) DTCR = 4.78%;
(d) ITR = 12 times; (e) TATR = 0.6 time; (f) NPR = 9.33%; (g) ROE = 7.04%;
(h) ROI = 5.6%; (i) ICR = 15 times; (j) ARTR = 4.92 times]
*SHE = $19,90,000; Tangible assets = $24,90,000
SOLUTION
Given and working note:
Current assets |
Current liabilities |
|
= Inventories + A/R + Cash |
= A/P + Bank overdraft |
|
= 100,000 + 90,000 + 100,000 |
= 240,000 + 160,000 |
|
= $290,000 |
= $400,000 |
|
|
||
Quick assets |
|
|
= Current assets – Inventories – Prepaid expenses |
|
|
= 290,000 – 100,000 |
|
|
= $190,000 |
|
|
|
|
|
Shareholders’ equity |
||
= Share capital + Share premium + General reserve + Retained earnings – Preliminary expenses |
||
= 15,00,000 + 1,50,000 + 60,000 + 2,90,000 – 10,000 |
||
= $19,90,000 |
||
|
||
Total capital |
Total tangible assets |
|
= Shareholders’ equity + long-term debt |
= Total assets – Preliminary expenses |
|
= 19,90,000 + 1,00,000 |
= 25,00,000 – 10,000 |
|
= $20,90,000 |
= $24,90,000 |
|
|
|
|
|
||
Average inventory [∵ Closing inventory of 2019 = Opening inventory of 2020] |
||
= (Opening inventory + Closing inventory) ÷ 2 |
||
= ($50,000 + $100,000) ÷ 2 |
||
= $75,000 |
||
|
||
Net profit before interest and tax (EBIT) |
||
= Net profit after + interest paid + Tax |
||
= $140,000 + $10,000 + Nil |
||
= $150,000 |
||
|
||
Average receivables [∵ Closing A/R of 2019 = Opening A/R of 2020] |
||
= (Opening account receivable + Closing account receivable) ÷ 2 |
||
= ($235,000 + $90,000) ÷ 2 |
||
= $162,500 |
||
(a) Current ratio
= Current assets ÷ Current Liabilities
= $290,000 ÷ 400,000
= 0.725:1
(b) Quick ratio
= Quick assets ÷ Current liabilities
= $190,000 ÷ $400,000
= 0.475:1
(c) Debt to total capital ratio (DTCR)
= (Long-term debt ÷ Total capital) x 100
= ($100,000 ÷ $20,90,000) x 100
= 0.0478 x 100
= 4.78%
(d) Inventories turnover ratio (ITR)
= Cost of goods sold ÷ Average inventories
= $9,00,000 ÷ $75,000
= 12 times
(e) Total assets turnover ratio (TATR)
= Sales revenue ÷ Total tangible assets
= $15,00,000 ÷ $24,90,000
= 0.6 time
(f) Net profit ratio (NPR)
= (Net profit after tax ÷ Sales revenue) x 100
= ($1,40,000 ÷ $15,00,000) x 100
= 0.0933 x 100
= 9.33%
(g) Return on equity (ROE)
= (Net profit after tax ÷ Shareholders’ equity) ÷ 100
= ($1,40,000 ÷ $19,90,000) x 100
= 0.07 x 100
= 7.04%
(h) Return on investment (ROI)
= (Net profit after tax ÷ Total tangible assets) x 100
= ($1,40,000 ÷ $24,90,000) x 100
= 0.056 x 100
= 5.6%
Alternatively,
Return on investment (ROI)
= [(Net profit after tax + Interest) ÷ Total assets] x 100
= [($1,40,000 + $10,000)] ÷ $25,00,000) x 100
= [$150,000 ÷ $25,00,000] x 100
= 0.06 x 100
= 6%
(i) Interest coverage ratio (ICR)
= Net profit before interest and tax (EBIT) ÷ Interest paid
= $1,50,000 ÷ $10,000
= 15 times
(j) Account receivable turnover ratio
= Credit sales ÷ Average receivable
= $800,000 ÷ $162,500
= 4.92 times
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country
Q: 18. An unadjusted trial balance of ABC Company as on 31st March 2021 is given below:
Particulars |
Amount Dr |
Particulars |
Amount Cr |
Cash |
3,00,000 |
Capital |
600,000 |
Bank |
3,50,000 |
Creditors |
45,000 |
Furniture and equipment |
2,00,000 |
Discount received |
10,000 |
Debtors |
80,000 |
Sales |
500,000 |
Purchase |
2,00,000 |
12% Bank loan |
100,000 |
Discount allowed |
6,000 |
|
|
Interest on loan |
7,000 |
|
|
Salary |
60,000 |
|
|
Rent |
52,000 |
|
|
|
12,55,000 |
|
12,55,000 |
Additional information:
(a) Closing stock valued $50,000
(b) Prepaid rent was $4,000
(c) Outstanding interest on bank loan was $5,000.
(d) Depreciation on furniture at 25% per annum
Required: (i) Adjusted trial balance; (ii) Statement of P&L as per NFRS;
(iii) Statement of Financial Position as per NFRS; (iv) Statement of Cash Flow Statement as per NFRS
[Answer: ATB = $13,10,000; NIAT = 184,000; B/S = $934,000
*TNCA = $150,000; TCA = $784,000;
TE = $784,000; TNCL = $100,000; TCL = $50,000
CFS: NCOA = $150,000; NCIA = ($200,000); NCFA = $700,000
*Dividend paid = Nil
SOLUTION:
Date |
Particulars |
|
LF |
Amount $ |
Amount $ |
a. |
Closing stock account |
Dr |
|
50,000 |
|
|
To Statement of P&L |
|
|
|
50,000 |
|
(Being: closing stock recorded) |
|
|
|
|
|
|
|
|
|
|
b. |
Prepaid rent account |
Dr |
|
4,000 |
|
|
To Rent account |
|
|
|
4,000 |
|
(Being: prepaid rend adjusted) |
|
|
|
|
|
|
|
|
|
|
c. |
Interest account |
Dr |
|
5,000 |
|
|
To Outstanding account |
|
|
|
5,000 |
|
(Being: interest payable on loan) |
|
|
|
|
|
|
|
|
|
|
d. |
Depreciation account |
Dr |
|
50,000 |
|
|
To Furniture and equipment |
|
|
|
50,000 |
|
(Being: depreciation charged on 200,000 x 25%) |
|
|
|
|
|
|
|
|
|
|
Particulars |
Part 1 |
Part 2 |
Part 3 |
Part 4 |
Part 5 |
|||||
|
Trial balance |
Adjustments |
Adjusted TB |
Statement of P&L |
Financial Position |
|||||
|
Dr |
Cr |
Dr |
Cr |
Dr |
Cr |
Dr |
Cr |
A |
L |
Cash |
3,00,000 |
|
|
|
3,00,000 |
|
|
|
300,000 |
|
Bank |
3,50,000 |
|
|
|
3,50,000 |
|
|
|
350,000 |
|
Furniture and equip. |
2,00,000 |
|
|
50,000d |
1,50,000 |
|
|
|
150,000 |
|
Debtors |
80,000 |
|
|
|
80,000 |
|
|
|
80,000 |
|
Purchase |
2,00,000 |
|
|
|
2,00,000 |
|
200,000 |
|
|
|
Discount allowed |
6,000 |
|
|
|
6,000 |
|
6,000 |
|
|
|
Interest on loan |
7,000 |
|
5,000 |
|
12,000 |
|
12,000 |
|
|
|
Salary |
60,000 |
|
|
|
60,000 |
|
60,000 |
|
|
|
Rent |
52,000 |
|
|
4,000 |
48,000 |
|
48,000 |
|
|
|
Capital |
|
600,000 |
|
|
|
600,000 |
|
|
|
600,000 |
Creditors |
|
45,000 |
|
|
|
45,000 |
|
|
|
45,000 |
Discount received |
|
10,000 |
|
|
|
10,000 |
|
10,000 |
|
|
Sales |
|
500,000 |
|
|
|
500,000 |
|
5,00,000 |
|
|
12% Loan |
|
100,000 |
|
|
|
100,000 |
|
|
|
100,000 |
|
12,55,000 |
12,55,000 |
|
|
|
|
|
|
|
|
Closing stock |
|
|
50,000 |
50,000 |
50,000 |
50,000 |
|
50,000 |
50,000 |
|
Prepaid rent |
|
|
4,000 |
|
4,000 |
|
|
|
4,000 |
|
Outstanding interest |
|
|
|
5,000 |
|
5,000 |
|
|
|
5,000 |
Depn on furniture |
|
|
50,000 |
|
50,000 |
|
50,000 |
|
|
|
Net profit (b/f) |
|
|
|
|
|
|
184,000 |
|
|
184,000 |
Total |
|
|
109,000 |
109,000 |
13,10,000 |
13,10,000 |
560,000 |
560,000 |
934,00 |
934,000 |
ABC Company
As on 31st March 2021
Particulars |
Notes |
Amount $ |
Amount $ |
|
Net sales revenue |
|
|
500,000 |
|
Less: |
Cost of goods sold* |
|
|
(150,000) |
|
Gross profit |
|
|
350,000 |
Add: |
Other income (discount received) |
|
|
10,000 |
Less: |
Operating expenses: |
|
|
|
|
Discount allowed |
|
6,000 |
|
|
Salaries |
|
60,000 |
|
|
Rent expenses |
|
48,000 |
|
|
Depreciation expenses |
|
50,000 |
(164,000) |
|
Profit from operation |
|
|
196,000 |
Less: |
Financial expenses: |
|
|
|
|
Interest expenses |
|
|
(12,000) |
|
Profit before tax |
|
|
184,000 |
Less: |
Income tax expenses |
|
|
Nil |
|
Profit from continuing operations |
|
|
184,000 |
Add: |
Profit from discontinued operation after tax |
|
|
Nil |
|
Net profit after tax |
|
|
184,000 |
Cost of goods sold
= Opening stock + Purchase – Closing stock
= Nil + 200,000 – 50,000
= 150,000
ABC Company
As on 31st March 2021
Particulars |
Notes |
Year 2021 |
|
ASSETS |
|
|
|
Non-Current Assets: |
|
|
|
|
Furniture and equipment |
|
150,000 |
|
Less: Accumulated depreciation |
|
Nil |
|
Intangible assets |
|
Nil |
|
Total non-current assets (A) |
|
150,000 |
Current Assets: |
|
|
|
|
Cash |
|
300,000 |
|
Bank |
|
350,000 |
|
Debtors |
|
80,000 |
|
Closing stock |
|
50,000 |
|
Prepaid rent |
|
4,000 |
|
Other current assets |
|
Nil |
|
Total current assets (B) |
|
784,000 |
|
TOTAL ASSETS (A+B) |
|
934,000 |
EQUITY |
|
|
|
|
Capital |
|
6,00,000 |
|
Additional paid in capital |
|
Nil |
|
Retained earnings (net profit) |
|
184,000 |
|
Total Equity |
|
784,000 |
LIABILITIES |
|
|
|
Non-Current Liabilities: |
|
|
|
|
12% Loan |
|
100,000 |
|
Other non-current liabilities |
|
Nil |
|
Total non-current liabilities (a) |
|
100,000 |
Current Liabilities: |
|
|
|
|
Creditors |
|
45,000 |
|
Interest payable |
|
5,000 |
|
Other current liabilities |
|
Nil |
|
Total current liabilities (b) |
|
50,000 |
|
Total Liabilities (a+b) |
|
1,50,000 |
|
TOTAL EQUITY AND LIABILITIES |
|
934,000 |
Keep in Mind
For cash flow statement from ONE year’s financial data: |
If financial data are given only for one year; it means all assets and liabilities are increased |
Increase in assets means cash outflow; write them in negative viz (12345) |
Increase in liabilities means cash inflow; write them in positive viz 12345 |
|
Write original value of fixed assets and investment (Do NOT deduct depreciation) |
Write the value of intangible asset also. |
Write retained earnings, general reserve and capital reserve of trial balance. |
Given and working note:
A. |
Operating Activities: |
|
3. |
Cash paid to operating expenses |
|
1. |
Cash collection form sales and customers |
|
Salaries |
(60,000) |
|
|
Sales revenue |
500,000 |
|
Rent |
(48,000) |
|
Less: Increase in debtors |
(80,000) |
|
Add: Increase in prepaid rent |
(4,000) |
|
Less: Discount allowed |
(6,000) |
|
|
(112,000) |
|
|
414,000 |
|
|
|
|
|
|
4. |
Interest and insurance |
|
2. |
Cash paid to suppliers |
|
Interest on loan |
(12,000) |
|
|
Cost of goods sold (COGS) |
(150,000) |
|
Less: Increase in O/s interest |
5,000 |
|
Add: Increase in stock |
(50,000) |
|
|
(7,000) |
|
Less: increase in creditors |
45,000 |
|
|
|
|
Less: Discount received |
10,000 |
5. |
Tax paid |
Nil |
|
|
(145,000) |
|
|
|
ABC Company Ltd
Particulars |
Notes |
Amount |
|
Cash from operating activities: |
|
|
|
|
Cash collection from sales and customers |
1 |
414,000 |
|
Cash paid to suppliers |
2 |
(145,000) |
|
Cash paid for operating expenses |
3 |
(112,000) |
|
Interest and insurance paid |
4 |
(7,000) |
|
Income tax paid |
5 |
Nil |
|
Net cash from operating activities [A] |
|
150,000 |
Cash from investing activities: |
|
|
|
|
Proceeds from sales of property, plant and equipment |
|
Nil |
|
Interest received |
|
Nil |
|
Dividend received |
|
Nil |
|
Acquisition of furniture and equipment |
|
(200,000) |
|
Acquisition of investment |
|
Nil |
|
Net cash from investing activities [B] |
|
(200,000) |
Cash from financing activities: |
|
|
|
|
Proceeds from issue of common stocks (capital) |
|
600,000 |
|
Proceeds from non-current borrowing (loan) |
|
100,000 |
|
Increase in additional paid in capital (share premium) |
|
Nil |
|
Dividend paid |
|
Nil |
|
Net cash from financing activities [C] |
|
700,000 |
Net change in cash and cash equivalent (cash + bank) [A+B+C] |
|
650,000 |
|
Add: Beginning cash and cash equivalent |
|
Nil |
|
Exchange gain or loss |
|
Nil |
|
Ending cash and cash equivalent |
|
650,000 |
Q: 19. a. Who are the external users of accounting information? Why do they need such information? (8)
b. Explain about the value added statement with its advantages. (7)
The main purposes of financial statements are to provide accounting information to its users.
There are mainly two types of users; internal users and external users.
They use accounting information according to their need.
External users are the persons or organizations who are outside the organisation. They are as following:
Investors
Investors are the person or organizations who invest in our company.
They invest their money for better return of interest.
They also want to know the financial health of the organisation and how safe the investment.
To know the financial health, they need accounting information and financial accounting helps them in evaluating the past performance and future prospects of the organisation.
Creditors
There are two types of creditors; they are goods or materials suppliers and money lenders.
Goods, materials or merchandise suppliers provide goods on credit and they want to know the financial position of the organization.
Money lenders are financial institution; they are banks, finance companies, investment banks and they also want to know the financial position of the organization.
Creditors want to be sure whether liquid position of the concern is satisfactory.
To know the liquid position, creditors need accounting information relating to current assets, quick assets and current liabilities.
Members
Members of non-profit organisations contribute membership free on regular basis.
They need accounting information to know how their contributed funds are being utilized properly.
Non-profit organisations are schools, colleges, hospitals, clubs, charitable institutions etc.
Financial accounting helps them to know whether funds are utilized properly.
Government
State and central governments are interested in sales taxes, VAT and GST etc.
Government charges taxes on sales or profit on each accounting year.
Taxes are calculated on the basis of financial accounting.
Governments also need accounting information for compiling statistics.
From accounting data, government prepares different statistical data.
Consumers
Customers and consumers are the ultimate users of finished goods or services.
Sometimes, prices of some goods are fixed by the Government.
These goods need accounting information to fix reasonable prices so that consumers and manufacturers are not exploited.
Customers need accounting information for price of goods and services.
Many customers analyze accounting information to be investor of that company.
Research scholars
Most of the post graduate students have to research to make thesis.
These research scholars want to make a study to the financial operations of a particular firm.
For this purpose they need detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long term liabilities and shareholders’ funds etc maintained by the firm.
b. Explain about the value added statement with its advantages. [7]
The main object of production is to convert raw materials into work in progress and finished goods.
The cost of work in progress and finished goods are higher than raw materials always.
Value added is the difference between sales revenue and cost price of raw materials.
Value added statement is prepared after preparing financial statement.
It is summarized statement.
There are two methods for preparing value added statement.
They are subtractive method and additive method.
Subtractive method
Under this method, value added is found out by subtracting cost of materials from sales revenue.
Additive method
Under this method, applies as follow items are adjusted with subtractive method.
The main advantage of a value added is to find out how much of the total net value was added and how it was distributed to the factors of production employed.
Other advantages of value added are:
It is better method of communicating among enterprises, employees, shareholders and the government.
It shows various claimant/applicants such a enterprises, employees, shareholders and the government.
Value added amount of current year can compared last year for better performance
The moral of employees can be increase by showing value added statement that they are getting good wages, salary and other benefits
***
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