Financial Accounting & Analysis

December 2021 Examination

Answer 1

Introduction

A cash flow statement is a summary of cash transaction in the business. In cash flow
statement we can see all inward/receipt of transaction and all outward/payment of transaction
in cash flow statement. A cash flow statement is a part of financial statement along with a
income statement and balance sheet are three most important part of the financial statement
of your business. The cash flow statement measures how well a organisation manages its cash
position i.e. how well its generate cash. The cash flows statement allows the investors to
understand that how the company is running, from where the money is coming and where
they are spending all this can be understanding by analysing a cash flow statement. The cash
flow statement helps the investors to analyse the financial position of the company. The cash
flow statements also help to creditors to see that how much fund is left for operating expense
and pay of its debts. The cash flows statement as to prepared by as per Accounting Standard -
3 (AS-3). There are two methods to prepare cash flow statement they are a) Direct method
and b) Indirect method. There are three main components of cash flow statement are
operating, investing and financing. The cash flow shows financial position of company.

Concept and application

 Cash flow from operating activities: - Operating activities in cash flow statement
includes any sources which are related to daily or a routine activity in the business is
called an operating activities. In simple words how much cash is generated from sales of
services or goods. The operating activities is differs from organisation to organisation. But
some activities are same they are sale of goods and services, interest payment, income tax,
purchase of goods and services used in organisation, salary or wages to employees of the
organisation, any other operating expense depends upon a organisation. In case of
investment company and portfolio company receipt from sale of loan, debt, equity are also
consider as a cash flow from operating activities because this are the business activity of
the organisation.
 Cash flow from investing activities: - Investing activities in cash flow statement includes
from any sources where the company has made investment. Purchases of land, sale of
land, purchase of fixed asset, sale of fixed assets, merger or acquisition are included in
cash flow from statement. In other words, change in investment, assets related to cash.
 Cash flow from financing activities: -Financing activities in cash flow statement
includes any sources of cash from investors or bank, or cash paid to shareholders, payment
of dividends, repayment of loans are include in cash flow from financing activities. When
capital raise cash will come in and where there is and payment of dividend or loan in cash
then cash goes out and hence cash reduces.

The following activities can be classified

Particulars Amount Classify Reason
Loss on sale of 95780 Investing activities There is change in fixed
assets assets and which are related
to investing activities. The
difference between purchase
of assets and sale of assets is
called an loss.
Dividend income 26000 Finance activities In cash flow statement the
dividend income is shown
under finance activities.
Because the dividend is
given to shareholders.
Interest Income 35000 Investing activities The assets are related to
investment and any income
earned on this is classified in
to investing activities
Finance cost paid to 12000 Finance activities Because its raise the fund
debentures from debentures and any
cost related to this is an
financing activities
Gain on sale of 45000 Investing activities The profit is gained is
Investment and Operating recorded in operating
 activities activities. And sale of assets
is recorded on investing
activities
Depreciation on 85000 Operating activities It is an non-cash expenditure
fixed assets and hence it is recorded in
operating activities
Amortisation 110000 Operating activities It is an non-cash expenditure
expense and hence it is recorded in
operating activities

Calculation of cash flow from operating income

Particulars Amount
Net income 2,69,244
Add: Depreciation on fixed assets 85,000
Add: Amortization on Expense 1,10,000
Less: Interest income (35,000)
Less: Dividend Income (26,000)
Add: Loss on sale of assets 95,780
Add: finance cost paid to debentures 12,000
Less: Gain on sale of investment (45,000)
Cash flow from operating activities 4,66,024

Conclusion

The cash flow statement is a part of general purpose financial statement including income
statement and balance sheet. Through cash flow statement we can know actual cash and cash
equivalents in hand at the year ended. The cash flow statement help the organisation that
where the fund a use i.e. in operating, financing and investing.
Answer 2

Trend analysis of financial statement helps to compare percentage change over period of
time. Period of time may be month, quarters, or years depending upon the organisation and
also depending upon a situation in some times. It helps the users to see that percentage
change in operating profit, or any fluctuation over a period. The horizontal analysis is also
called a trend analysis. The trend analysis helps us to where we should cut the cost, how to
increase the revenue, how to increase capital opportunities. By comparison we have to keep
in a mind that comparison should be of same company or close competitor of the
organisation.

Concept and application

The trend analysis helps to know there financial weakness and the strength of the
organisation. So organisation can give more focus on weakness and improve the strength.
The trend analysis is use for outsiders like owners, trade creditors, debtors, lenders, investor,
labours unions, analysts and others. The nature of analysing is differs from person to person

The tools of trend analysis are as follows.

 Identify Economy of the industries: - The main aim of the trend analysis is to know
what activities the company is involved in the organisation. What they are
making/manufacture and sell the product. We should know the picture/face of company.
 Identify company strategies: - What unique they are selling in market from there
competitor. What is the level of profit margin, cost control, brand image etc.
 Assess the quality of the firm financial statement: - The accounting standard is
followed or not, all accounting concept and principal is followed or not. The valuation
and classification of items is done properly or not. The cash flow statements help to
know the liquidity position from its operation.
 Analyse current risk and profitability: - This step where we analyse the statement and
understand the statement that the company is in risk making company or profitable
company. If it’s a risk making company than the investor is planning to withdraw their
money because they will not get proper returns on investment. If the company is
profitable then the investor is getting a higher returns and investor will invest more
company to get a return.
  Forecasted Financial statement: - The trend analysis helps to make or prepare future
forecasted balance sheet by taking a reasonable assumption. It is helps the bank to give
loan to the customer by projected financial statement.
 Goodwill of the firm: - Once the financial statement and analysis of the financial
statement is over than the investor see return on equity, net operating income and
financial position of firm i.e. If there is a healthy balance sheet then the firm will earn
goodwill.

Here is a comparative statement of Savita Oil Technologies:

Balance sheet as on 31st March 2021
Rs. In lacs

As at As at Absolute %
Particulars 31.03.2021 31.3.2020 value value
A. Assets
1. Non-current Assets
a) Property, Plant and equipment 17,511.00 17,876.57 -365.57 -2.045
b) Capital Work- in- progress 104.78 785.95 -681.17 -86.668
c) Investment Property 879.1 924.07 -44.97 -4.867
d) Other Intangible Assets 73.08 94.29 -21.21 -22.494
e) Financial Assets
(i) Investment 3,931.96 969.69 2,962.27 305.486
(ii) Loans 10.29 20.96 -10.67 -50.906
(iii) Others 55.29 15.53 39.76 256.021
f) Other Non-current Assets 426.5 594.4 -167.90 -28.247
2. Current Assets
a) Inventories 59,093.50 44,876.14 14,217.36 31.681
b) Financial Assets
(i) Investment 23,175.70 16,722.46 6,453.24 38.590
(ii) Trade Receivables 54,504.50 50,933.21 3,571.29 7.012
(iii) Cash & cash equivalents 4,511.85 2,458.86 2,052.99 83.494
(iv) Bank balance other than (iii) above 1,178.82 267.46 911.36 340.746
(v) Loans 20.12 38.65 -18.53 -47.943
(vi) Others 604.80 781.20 -176.40 -22.581
c) Current Tax Assets (Net) 1,480.62 1,391 89.65 6.445
d) Other Current Assets 5,773.64 4,379.87 1,393.77 31.822
Total Assets 1,73,335.55 1,43,130.28 30,205.27 21.103

B. EQUITY AND LIABILITIES

Equity
a) Equity Share Capital 1,407.11 1,407.11 0.00 0.000
b) Other Equity 1,07,779.51 85,451.37 22,328.14 26.130
1,09,186.62 86,858.48 22,328.14 25.706
Liabilities
1) Non-Current Liabilities
a) Financial Liabilities
(i) Borrowings 9.95 40.7 -30.75 -75.553
(ii) Other financial liabilities (other than those -
specified in (b) below 0 31.81 -31.81 100.000
b) Provision 549.13 464.43 84.70 18.237
c) Deferred Tax (liabilities) 395.36 378.64 16.72 4.416
d) Other Non-current liabilities 0.33 10.36 -10.03 -96.815
2) Current Liabilities
a) Financial Liabilities
Total outstanding dues of micro enterprises and small
enterprises 1,495.45 0 1,495.45
Total outstanding dues of creditors other than micro
enterprises and small enterprises 54,563.83 50,379.22 4,184.61 8.306
(iii) Other Financial liabilities (other than those
specified in ( c) below 1,852.27 1,170.04 682.23 58.308
b) Other Current Liabilities 4,484.60 3,333.52 1,151.08 34.530
c) Provision 395.03 346.91 48.12 13.871
d) Current Tax liabilities 403.08 116.17 286.91 246.974
Total Equity and Liabilities 1,73,335.65 1,43,130.28 30,205.37 21.103

Conclusion:

The comparative balance sheet is given of same company for one or more periods. From the
above analysis the company has earned 134.15% profit more than the last year. The balance
sheet is given is a combined report of investing and financing and after merging all details as
combined and make a balance and it is easy to understand the balance sheet. The price earnings
ratio of company as at 31st march 2021 was 6.03 and 9.47 as at 31st march 2020. The inventory
ratio is low as compared to previous ratio. The company has borrow the fund and invest and it
increase the non-current liabilities from last year.
Answer 3.a

Introduction

Every accounting transaction as dual effect i.e. double-entry system. An account requires an
opposite entry one on debit side and other on credit side on different account with the same
account. The double side entry comprises two equal and corresponding sides, one on debit side
and other on credit side. It must ensure that total of debits and credits should be equal.

Concept and Application

There are three main accounts in any transaction they are personal account, real account and
nominal account.

Types of accounts:

Personal accounts: - As the name suggests, personal account are related to individuals,
companies, etc. In personal account there also three types 1) Natural person, 2) Artificial
person and 3) Representative person.

1) Natural person: These are relate to natural people for example, A’s a/c , X’s a/c etc.
2) Artificial person: These are related to companies and institution for example, A ltd a/c, Y
ltd a/c etc.
3) Representative person: Some person is representative person. These include prepaid
income, outstanding wages, etc.
Real Accounts: - These accounts related with assets, properties or possessions. It can be in
both physically existing as well as non-physical in nature. There are two types’ intangible real
account and tangible real account.
a) Tangible real assets: - It means it has an physical existence i.e. it can be touched, feel and
seen. For example motor car, land and building, plant and machinery etc.
b) Intangible real assets: - It means it has no physical existence i.e. it cannot be touched, feel
and seen. For example goodwill, copy right, trade mark etc.
Nominal Account: - These account related to income and expense, loss and gains. Its includes
salary, rent, dividend, interest etc.
 Particulars Type of Account

Started business with cash Rs.150000 A cash account is a Real Account, and Capital
Account is a Personal Account, so both of these
accounts must be affected.

Purchased goods for cash Rs.25000 Purchases account is Nominal Account, and cash
account is real Account, so both of these accounts
must be affected.

Sold goods to C on credit Rs.20000 Sales accounts are Nominal Account, and
subsequently, a debtor is a personal Account, so
both of these accounts must be affected.

Paid salary for cash Rs.15000 A cash account is a real account, and a salary is
expense account and a expense account is a
Nominal account, and as a result, each of the
account must be affected.

Deposited Cash into the bank account Cash and bank are real account, and as a result,
Rs.100000 the actual Account could be affected.

Conclusion

From above we concluded that every transaction is based on golden rules of an accounting.
And entry of that transaction should be passed by applying a golden rules and principles of an
accounting.
Answer 3.b

Introduction

Any transaction in the business is an economics items so it is record in the books of accounts
to maintain such transaction. Every transaction has two effect one on debit side and other on
credit side. A debit increases the value of the assets or decreases liability. And credit increase
the value of the liability side and decrease the value of an assets.

Concept and application

A debit side of balance sheet is an Assets and credit side of balance sheet is a liability. There
three types of account and their golden rules this are follows:

Personal accounts: - The debit the receiver and credit the giver. This includes bills receivable,
debtors etc.

Real account: - Debit what comes in and credit what goes out. This includes cash, bank, land
and building etc.

Nominal account: - Debits all expenses and losses and credit all income and loss. This include
salary, rent, interest received etc.

Journal entries

Sr no Particulars l.f Debit Credit

1 Cash A/c Dr 1,50,000

To Capital A/c 1,50,000
(Being business started with Cash)

2 Purchases A/c Dr 25,000

To Cash A/c 25,000
(Being Goods purchased for cash)
 3 C’s A/c Dr 20,000
To Sales A/c 20,000
(Being goods sold on credit)
4 Salary A/c Dr 15,000
To Cash A/c 15,000
(Being Salary paid in cash)
5 Bank A/c Dr 1,00,000
To Cash A/c 1,00,000
(Being Cash Deposited into bank)

Conclusion

Every journal entries should have one debit effect and other credit effect. After every
transaction the narration should be mentioned it describe the entries. Journal entry is called a
first book or prime book in an accounting.