Financial Accounting & Analysis

1. Karagiri is a Pune based startup that works with 800 families across India.
The startup is in the business of handloom saris. They converted the
pandemic period in to an opportunity. The business owners realized that
accounting is essential to permit informed judgements and decisions by the
user of accounts. In the light of given definition of accounting, discuss about
users and uses of accounting information (10 Marks) 700 Words

INTRODUCTION:

The process through which the financial transactions are summarized, analysed, and
reported into the books of accounts, is called accounting. Accounting is the first step
towards the preparation of financial statements, and also it is useful for many external as
well as internal users. There are some principles of accounting that have to be taken into
consideration while preparing the financial statements and recording the transactions.
Accounting is done so that a company can get to know its profit or loss for the year and its
financial position in the industry during a particular period of time.

CONCEPT AND APPLICATION:

Now that we have understood the meaning of accounting, let us now see who the users are
and the uses of accounting. Accounting is useful for both external as well as internal users.

INTERNAL USERS:

Owners: The owner uses the accounting information to get to know how well the company
is performing and whether the firm is into profit or losses. Also, accounting information is
used by the owners to know the future of the business and its performances. The stability
of the business can also be determined with the help of accounting information.

Employees: The employees working in the finance department uses accounting

information to prepare future accounting reports. Also, it helps them to know the health of
the business, and so it secures them of their future.

Managers: Managers uses the information to plan for the future by understanding the past
performance of the company. Many decisions are made based on the information
provided in the financial statement.
EXTERNAL USERS:

Investors: Investors are the major user of financial statements. They use the accounting
information to know how well their money is being used by the owners of the company
and the gains or losses they have made. New investors use financial information to decide
on making any investments in the company.

Lenders: Lenders use accounting information to know about the performances of the
company, and also, they analyse the borrowers of the company to know the
creditworthiness of the company. Lenders use the information to approve if they can lend
the company or not.

Suppliers: Suppliers also needs to know the creditworthiness of the company or the
customers before supplying any raw materials on credit. Also, they analyse business
health before starting any business with the companies as it is useful for business
sustainability.

Tax Authorities: Tax Authorities uses the financial statement to find out the correct tax
liabilities of the companies and also see if they have filled the correct amount of tax return
or not. Also, when a tax audit is conducted by the authorities, the financial information is
of great help to them. The accounting information helps in finding the tax evaders.

Governments: Government ensures whether the companies are making the full disclosure
of the accounting information as per the principles or not. They also use accounting
information to safeguard small investors. If any government bodies plan to give some
business activities to any firm, they go through the financial statements to make a
decision.

Auditors: External auditors use the accounting information to audit the financial
statements of the company and then form an opinion on it. Stakeholders are dependent
upon the auditor for the true and fair image of the company.

Customers: Customers use the accounting information to know the performance of the
company, and they also look if the supplier has enough raw material to supply in the
future. Customers turned into investors, use the accounting information more.

Public: The general public uses accounting information when any initial public offering is
made to them, and they wish to invest in the companies. Also, some general public like a
journalist, reporters, etc., use the accounting information with interest in economic
development.
Competitors: Competitors of the company also uses the accounting information so that
they can know how their competitors are performing in the market with respect to the
industry or sector.

CONCLUSION:

Above are some of the major key accounting information users. Both the external, as well
as internal users play an important role in the company. Hence, the companies must
disclose all the relevant information as per the guidelines provided.

2. Mr. Kohli is planning to invest in the share market. He wants to study the
Balance Sheet of Amul Industries. He wants your guidance in finding the
various elements of the Balance Sheet of Amul Industries. Kindly discuss the
same 700 Words

INTRODUCTION:
The balance sheet is a part of the financial statement, and it shows the company's financial
position for a particular period. It is one of the most important financial statement. Before
starting to invest into, any investor looks for the balance sheet of the company to
determine the health of the company. In the above case, Mr. Kohli is planning to invest in
the share market, and for the same, he wants to look into the balance sheet of Amul
Industries. 
CONCEPT AND APPLICATION:
The company's balance sheet shows the company's assets and liabilities from the day of
incorporation till the day of preparation of the balance sheet for the period. Let's look at
each element of the balance sheet of Amul Industries separately and in details:
ASSET SIDE OF BALANCE SHEET
Assets are what the company owns, and the balance sheet shows all the assets owned by a
company on a particular day.
FIXED ASSETS:
Fixed assets are those who are not meant to be sold within a year. These fixed assets
include land, machinery, equipment, furniture, etc. The company does not sell these, but
depreciation is charged on a yearly or quarterly basis.
1. Gross Block: When a company shows its all the assets in the balance sheet without
deducting the depreciation, it is called a gross block. When depreciation is charged
and deducted from the asset value, it is called netblock. For the year ending March
2020, Amul industries had 205.98 crores of the gross block of assets.
 2. Depreciation: Depreciation is charged on the fixed asset to drive the net asset value.
Amul industries have shown an accumulated depreciation of 23.41 crores. After the
depreciation has been deducted, the net worth of Amul industries for the year
ending March 2020 stood at 182.57 crores.
CURRENT ASSETS:
Current assets have a lifetime of one year or less than one year, or those assets that can be
converted into cash within a year. 
The balance sheet of Amul industries shows the following current assets:
1. Cash and Bank: These are the cash that the company is holding with them or their
bank account. For the year ending March 2020, Amul industries had 3.55 crores
cash with them.
2. Sundry Debtors: Debtors are those whom the company sold on credit, and the
amount has to be received from them within a year. For the year ending March
2020, Amul industries had 32.86 crores of sundry debtors.
3. Inventories: These are the core products or the raw materials that the company
uses to produce its product. For the year ending March 2020, Amul industries had
58.57 crores of inventories.
4. Capital work in progress: Those work that has been started by the company but not
yet been completed during the financial year. These works can be the
manufacturing of products, etc.; Amul Industries had 3.93 crores of work in
progress for the year ending March 2020.

LIABILITIES SIDE OF BALANCE SHEET

Liabilities are what the company has to pay to others or what amount the company owes
to others.
1. Share Capital: Share capital is the amount of investment made by the owners and
the investors into the company. Amul industries had a share capital worth 4.89
crores as of 31st March 2020. These are the money of the shareholders, and the
company is liable to pay them back and so this is a liability for the company.
2. Reserve & Surplus: Reserve & Surplus are the profit that has been retained by the
company for further usage. These reserves and surplus are the owners' money, so
that is why it is called liability for the company. Also, the dividend is provided to
the shareholders through retained earnings. For the year ending March 2020,
Amul industries had 111.80 crores of reserve and surplus with them.
3. Secured Loans: Loans are borrowed from the banks or through any investments or
from the issue of the debenture. For the year ending March 2020, Amul industries
had a secured loan of 60.50 crores and an unsecured loan of 1.76 crores.
CONCLUSION:
Hence, the above discussion consists of all the key elements of the balance sheet of Amul
Industries. Now, Mr. Kohli can make an investment as per his requirement.

3. Discuss for question (a) and (b)

Define and identify the type of Income / Expenses

Treatment of the Income / Expenses in the Profit and Loss account, Impact of
the Income / Expenses in the Balance Sheet

a. You purchased 10 shares of L& T Company last year. On 5th March 2019,
the company has declared a dividend Rs 50 per share. The income is earned
but not yet collected in your account during this financial year. (5 Marks) 350
Words

INTRODUCTION:
Income is the money that the business takes in or earns it, whereas expense is what the
company spends it for its operation. The net income is calculated by deducting all the
expenses from the income.
CONCEPT AND APPLICATION:
The dividend expense is not shown in the income statement of the company as it is an
outflow of cash and reduced from the retained earnings and so the dividend paid will not
affect the income statement. It will decrease the shareholder’s equity balance on the
liability side of the balance sheet.
In the given case, I purchased 10 shares of L& T Company last year. L& T Company has
declared a dividend of Rs. 50 per share on 5th of march 2019. The amount of dividend
shall be Rs.50 * 10 = Rs. 500. The dividend so declared are the accrued income for me as I
have earned it and not yet received it. When the dividend is declared, it is not recorded in
the books of accounts. It shall be recorded only when it is paid to the shareholders.
A dividend of Rs. 50 per share is paid to the shareholders, and also it is said that the
income is earned and not yet collected. So, for the company, these dividends of Rs. 500
shall be shown on the liability side of the balance sheet as the outstanding payment or
income payable, and for me, it shall be shown on the asset side as income receivables. 
This dividend will reduce the reserve and surplus of the company as the dividend is paid
from the reserve and surplus of the company. The current situation will lead to an increase
in the liability side of the balance sheet, and when the dividend is collected by me, the
liability side will reduce.
CONCLUSION:
Hence, the above is the treatment of dividends declared and paid into the books of
accounts and the person who will receive the dividend. Also, it is clear that dividend is not
an expense for the company as it is paid out of reserve and surplus, which is a part of
shareholder’s earnings.

b. On 5th March 2019, Mehta Brothers received 100% advance for goods, to
be supplied in the next month. The Cost of the goods was Rs50000. They
usually sell the goods at 10% mark up. (5 Marks) 350 Words

INTRODUCTION:
If any company receives any advance from the customers before the actual transfer of the
product, it is called an advance payment made to the company by the customer. This is
shown on the liability side of the balance sheet of the company until the goods are
transferred to the customers. The same advance money paid to the company shall be
shown as the asset for the customer until it receives the goods.
CONCEPT AND APPLICATION:
The cost of goods sold are expenses for the company, as it is the direct cost that the
company has incurred in the production of goods. The mark-up of 10% is the profit that
the company wants to earn on the sale of goods, and it is not an expense but revenue.
In the given case, Mehta Brothers received 100% advance on 5th March 2019 for the
goods to be supplied in the next month. These 100% advance received shall be shown on
the liability side of the balance sheet of Mehta Brothers, under the current liabilities.
The cost of the goods that have to be sold next month is Rs. 50,000. This shall be shown in
the income statement at the expense of the cost of goods sold. As Mehta Brothers sell the
goods at 10% mark up, so the revenue that will be recorded on the income side of the
balance sheet will be amounting to Rs. 55,000. Here the profit will be made of Rs. 5000
that shall be recorded next month into the books of accounts when the goods are delivered
to the customers. Also, this profit of Rs. 5000 will be shown into the balance sheet on the
liabilities side for the year ending 31st March 2020.
CONCLUSION
So, we can conclude that Mehta Brothers have received an advance for that goods to be
sold next month and so the advance received will affect the liability side of the balance
sheet and when the goods are sold, it will be affecting the income statement as well as the
balance sheet of the company. Hence, the treatment of the same has been discussed above.