Financial Accounting and Analysis | TU Model Question Solutions | Set B

 

  

 

Financial Accounting and Analysis

Complete Solution Set B

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)

 

Q: 1. What is financial accounting?

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.

 

Q: 2. What is accrual concept of accounting?

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).

 

 

Q: 3. Write about the perpetual system of inventory.

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.

 

 

Q: 4. Write any two differences between stock dividend and stock split.

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.

 

 

Q: 5. What is matching concept of accounting?

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 1^st April 2020. The face value of the notes payable of $100,000 must be repaid on 31^st 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 31^st 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 31^st December

(iii) Bank balance on 31^st 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.

 

(b) Cost of goods sold, ending inventory and gross profit under LIFO method

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

 

 

 

Cost of goods sold under LIFO

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

 

 

Ending inventories value under LIFO

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 31^st 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

 

 

Q: 13 b. Differentiate between accounting and accountancy. [5]

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

 

 

Q: 14 b. Differentiate between capital and revenue expenditure. [5]

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.

 

 

Contents of a lease agreement

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.

 

 

 

Q: 16. Explain the meaning of the source of documents. Also, write down the importance of source of documents. [5+5=10]

 

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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Journal Entries	http://tiny.cc/8aakkz
Journal Entry and Ledger	http://tiny.cc/caakkz
Ledger	http://tiny.cc/haakkz
Subsidiary Book	http://tiny.cc/399jkz
Cashbook	http://tiny.cc/889jkz
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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 31^st 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:

Journal Entries for Adjustments

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%)

 

Ten Columns Worksheet

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

 

 

Profit or Loss Statement under NFRS

ABC Company

As on 31^st 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

 

Statement of Financial Position as per NFRS

ABC Company

As on 31^st 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)

 

 

Statement of Cash Flow under NFRS

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)

 

Users of Accounting Information

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 of Accounting Information

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]

 

Value added statement

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.

 

 

Advantage of a value added

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

 ***

Credit: Srijana Bhandari

Butwal Kalika Campus, Butwal, Rupandehi

***** #EPOnlineStudy *****

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