Subject Financial Accounting & Analysis

Answer to question 1: Analyzing the following transaction of X ltd using concept of accounting
equation.
Asset = (Equity Liabilities)
Solution Analysis Asset Equity Liabilities
=
Cash Furniture stock
1. Purchased Increase in -6, 75, + 6, 75, 0 0
Furniture furniture 000 000
for 6, and less
75,000 cash
balance
2. Capital Amount 12, 00, 12, 00,
Introduced contributed 000 000
by in the
business business
own by 12, 00, 000
depositing
12 Lakh in
bank
account
3. Good Increase in 1,05, 000 1, 05, 000
purchased stock and
on credit creditors
from my
Aman 1,05,000
Enterprise
105,000
4. Sold 4,00,000 +4,00,000 -3,00,000 100,000
goods increased
costing in debtors
3,00,000 -3,00,000
for decrease in
4,00,00 on stock,
credit further
adding
100, 000 in
owners’
equity

5. Purchased Reduce
 goods 600,00 -600, 000 -600, 000
from from cash
Sneha balance
Enterprise and also –
. 600,000
for 6,00, form
0000 and owners
made payment capital
through bank equity
account

Total = 14,05,000 Total = 14,05,000

Answer to Question 2
Introduction- I certainly understand that, Ms. Dorati has started a new business named Loved
Doddle which is a gifting enterprises business, what it does it make customize gift for customers
loved one and it is a major source of revenue and cash flow. For the present financial fiscal year
Ms. Dorati revenue is Rs, Rs 505000 and from bank interest, dividend Rs4200. However, she
highly wants to understand the concept of Revenue from the operation and other income so that
she a draw a Profit and Loss statement which can help her in the business.
Concept: Concept of Revenue from the operation is often described as gross inflow of economic
benefits during the period arising during the ordinary activities of an entity when those inflows
result in increase in equity, other than increases relating to the contribution from equity
participants.
A company must disclose revenue from the operation under following head which are describes
as follows:
1) Sale of Products (including excise duty or goods and services tax
2) Sale off services.
3) Other operating revenues
Other operating revenue is the revenue arising from activities which incidental to the main
revenue earning activities of the company. Examples, revenue from the sale of good hampers in
Love Doodle enterprise or interest earn in form dividend from bank.
There are two interrelated issue associated with revenue which quantum of revenue and timing of
recognition. Revenue is recognized using the accrual principle.
Revenue from rendering of services which Love doddle enterprise provide is recognized by the
reference to the stage of completion of the transaction at the end of reporting period. The
recognition occurs only when the outcome of the transaction can be estimated reliably.
Other Income Sources
In addition to the income from its regular operating activities, a company can generate income
from other sources such as income from rent, dividend as in case of Ms. Dorati received 4, 200,
also interest, gain or loss of sale assets or investment. Interest income earned by a finance
company is part of its operative revenue.
Companies are required to report other income classified as:
1. Interest Income
2. Dividend Income
3. Other non-operating income (here net expenses are directly attributable to such income)
Example Profit and loss statement form of Love Doddle Enterprise
Particular Figures from Current Figures from
Fiscal year 20-21 previous reporting
year 2019-20
Revenue from the 505, 000 Xxxxx
operation

Other income as in 4, 200 xxxxx

Interest dividend

Total Revenue 509,200

Expenses

1. Cost of Xxxxx Xxxxx

material Xxxxx Xxxxx
2. Purchase of
stock in trade Xxxxx Xxxx
3. Change in Xxxxx Xxxx
inventories of
finished good. Xxxxx Xxxxx
4. Employee Xxxxx Xxxxx
benefits
expense.
5. Finance cost Xxxxx Xxxxx
6. Depreciation Xxxx xxxxx
and
amortization
expense xxxxxx xxxxxx
Total
Expenses

7. Profit/loss xxxxx xxxxx

before tax
exceptional
 items and tax

8. Exceptional Xxxxx Xxxxx

items
9. Tax expenses Xxxxx Xxxxx
10. Profit from Xxxxx Xxxxx
continuing
operation
11. Profit(loss) Xxxxx Xxxxx
from
discontinued
operation
12. Tax expense Xxxxx Xxxxx
of
discontinued
operation
13. Profit/loss Xxxxx Xxxxx
from period
2020-21
14. Other Xxxxxx Xxxxxx
comprehensiv
e Income

15. Total Tax

expenses

Net Profit 509,200

Answer to Question 3.
a) Understanding the concept of Current and Quick ratio also interpreting chart from data
provided on the Financial information of the company.

Current ratio: Current ratio is the relation of the company’s current assets to its current
Liabilities. This ration establishes the ability of the business to meet its short-term
obligations and is therefore of the of particular significance to short term creditors.
Current assets are “cash and other assets that are expected to be converted into cash or
consumed in the product of goods or rendering of services in the normal course of
business”. These includes cash in hand, cash in bank, sundry debtors, bill receivables,
 loan and advances, inventory, prepaid expenses, accrued income, and short-term
investment in terms of marketable securities.

Current liability is a liability including loans, deposit and bank overdraft which fall due
for payment in a relatively short period not more than 12 months.

Current ratio is calculated as follows:

Current ration = Current assets

Current Liabilities

In description of the chart provided Aman Ltd current ratio is 2:01 whereas Roger limited
1.60:1

Which means in this case Aman Ltd has a good current ratio 2 indicating he has twice as
much assets as compared to its liabilities.

In case of Roger Ltd, where current is 1.60, which means he has greater financial debts
difficulties has a inability to pay his debt.

Quick Ratio is a more precise measure of liquidity than the current ratio. This ration is
also known as “Acid Test Ration” or “Liquid Ratio”. Quick ratio relates quick current
assets to current liabilities. Quick current assets are those current assets, which are
convertible into cash rather early. They include debtors, bill receivable, short term
investment etc.

Quick ratio is calculated as follows: = Current assets – Inventories

Current Liabilities

In this Case current ratio of Aman ltd is 1.35:1, which means for every Rs 1 of liabilities
he has a asset of Rs. 1.35, which is an exceptionally good ratio.

In case of Roger Ltd, current ratio is 1: 01 which means for every 0.01 paise he has an
asset of Rs 1, thus having a better margin of assets.

Conclusion: In both case, Aman ltd is better than Roger ltd since both Current and Quick
Ration are higher than Roger Ltd.

b) Concept of Return of Investment: Return of Investment is performance measure used to

evaluate the efficiency or profitability of an investment or compare the efficiency of
number different investment. ROI tries directly measure the amount of return on a
particular investment, relative to the investment cost. To calculate ROI, investment is
divided by the cost of the investment and expressed in percentage % or ratio.
Formula to calculate the Return of Investment.

= Current value of Investment – Cost of Investment x 100

Cost of Investment

Second method:

= Profit after interest and tax – Preference dividend x 100

Average Equity

When comparing Aman Ltd ROI which is 15% and Roger Ltd RO1 which 13% it shows
that Aman Ltd has better return of investment that Roger Ltd. Thus, it mean Aman Ltd
made more profit than Roger Ltd

Concept of Debt Equity Ratio: The debt equity ratio relates to the equity or owner’s fund.
Debt here means long term liabilities that mature after 1 year and include long term loans
from financial institution and banks, public deposits, and debentures. Equity means
owners funds includes equity share capital, preference share capital, general reserves,
capital reserves, share premium and other reserves available to equity shareholders.
Accumulated losses and fictitious assets such as premilitary expenses, discount on issue
of shares or debentures, which are yet written off, should be deducted from equity.

The debt equity is calculated as follows.

Debt equity ratio = Debt

Equity

In the chart provide Aman Ltd debt-equity ratio has ratio of 2.5: 1, which means that the
company uses debt of Rs. 2.5 for every Rs 1 of debt. Which seems to be a riskier business
in the competitive environment.

In case of Roger Ltd debt equity ratio is 1:01 which means he has healthier business and
less risky, as he Rs. 1 of debt for every .01 equity

Conclusion: A lower debt-equity ratio means Risk is lower compared, means lower debt
utilized compared equity, this Roger Ltd has less risk in business than Aman Ltd.