FINANCIAL ACCOUNTING & ANALYSIS

DECEMBER-2021
Answer 1.
CASH FLOW STATEMENT
As per Accounting standard 3 “Cash Flow Statement”
Cash flow statement states that cash flows should be exclude the movements between
item which forms part of cash or cash equivalents as these are the part of an enterprise
cash management rather than its operating, financing and investing activities.
Companies must prepare and present cash flows from operating, financing, and
investing activities in such manner that is apt to their business. Grouping the activities
provide information which enables the user in assessing the impact of such activities
on the overall financial position of an enterprise and also assess the value of the cash
and cash equivalents.
Classification of cash flow statement
Operating activities
Cash flow from operating activities predominantly result from the main revenue
generating activities of an enterprise
Cash flows from operating activities are primarily derived from the main activities of
the enterprise. They generally result from the transactions and other events that enter
into the determination of net profit or loss.
Example
• Cash received from the sale of goods and services
• Cash received in form of fees, royalties, commission and various other revenue
forms
• Cash paid to suppliers of goods and services
Investing activities
Cash flows from investing activities represent outflows are made for resources
intended for generating cash flows and future income.
As per AS-3, investing activities are the acquisition and disposal of long-term assets
and other investments not included in cash equivalents. Investing activities relate to
purchase and sale of long-term assets or fixed assets such as machinery, furniture,
land and building, etc. Transactions related to long-term investment are also investing
activities. Separate disclosure of cash flows from investing activities is important
because they represent the extent to which expenditures have been made for
resources intended to generate future income and cash flows.
Examples
• Cash paid for acquiring fixed assets
• Cash received from disposal of fixed assets
• Cash paid for acquiring shares, warrants or debts instruments of other
companies

1|Page
 Financing activities
Financing activities are those which bring changes in composition and size of
owner capital and borrowing of an enterprise
financing activities relate to long-term funds or capital of an enterprise, e.g., cash
proceeds from issue of equity shares, debentures, raising long-term bank loans,
repayment of bank loan, etc. As per AS-3, financing activities are activities that
result in changes in the size and composition of the owners’ capital (including
preference share capital in case of a company) and borrowings of the enterprise.
Separate disclosure of cash flows arising from financing activities is important
because it is useful in predicting claims on future cash flows by providers of funds
( both capital and borrowings ) to the enterprise.
Example
• Cash received from issuing shares or other similar securities
• Cash received from issuing loans, debenture, bonds, notes and other short term
or long term borrowings
• Cash repaid on borrowings
Cash flow from operating activities
A company must report its cash flow from operating activities using
• Direct method
• Indirect method

• Direct method

Where all the major classes of cash receipts and cash payments are presented

• Indirect method

Where the net profit or net loss is adjusted for:

o Effects of transactions that are non cash in nature such as depreciation,
provisions etc
o Accruals or deferral of future or past operating cash proceeds or
payments
o Any expense or income related to financing or investing cash flows
Cash flow from investing and financing activities
A company must separately record all the major classes or cash receipts and cash
payments arise from the financing and investing activities, barring the ones which need
to be reported on basis.

2|Page
Non cash items
A non cash item is an entry on an income statement or cash flow statement
correlating to expenses that are essentially just accounting entries rather than actual
moments of cash

Non operating items

Non operating cash flow is comprised of cash. A company takes in and pays out that
comes from source other than its day to day operations
Example
• Taking out a loan
• Issuing new stock
• Self tender defence

Cash flow statement

For the year ended 31st march 20xx
Cash flow from operations

Cash flow from operating activities ₹

Net profit before tax 2,69,244
Adjustments for:
Loss on sale of assets 95,780
Finance cost paid on debenture 12,000
Depreciation on fixed assets 85,000
Amortization expenses 1,10,000
Gain on sales of investment (45,000)
Interest income (35,000)
Dividend income (26,000)
Cash flow from operating activities 4,66,024

3|Page
Items classification with logical reasoning
Particulars Type of activity Reason
Loss on sale of Operating It is a Non operating income
asset activity
Dividend income Investing activity Dividend income arising due to
investment in shares. It is a Non
operating income
Interest income Investing activity interest income arising due to advances .
It is a Non operating income
Finance cost paid Financing Cost occur during issuance to
on debenture activity redemption of debenture. It is a non
operating expenses
Gain on sale of Investing activity Gain arising from sale of investment
investment which is not part of operating activity. It is
a Non operating income
Depreciation on Operating Non cash item
fixed assets activity
Amortization Operating Non cash item
expenses activity

Answer 2
Trend analysis
These are useful for making a comparative study of the financing statements over a
number of years the earliest year is used for comparison is treated as the base year
the base year figure for each item if the financial statement is taken as 100 the figure
of the subsequent year are expressed as percentage of the base year figure
Comparative financial statement
Figures of two or more period side by side comparison of absolute as well as
percentage change in figure over the periods is made to derive meaningful conclusions
percentage change analysis is a type of horizontal analysis

Trend analysis is typically used in two ways, which are as follows:

• Revenue and Cost Analysis, Revenue and Cost information from a

company's income statement can be arranged on a trend line for multiple
reporting periods and examined for trends and inconsistencies. For
example, a sudden spike in expenses in one period followed by a sharp
decline in the next period can indicate that an expense was booked twice
in the first month. Thus, trend analysis is quite useful for examining

4|Page
 preliminary financial statements for inaccuracies, to see if adjustments
should be made before the statements are released for general use.

• Investment Analysis: An investor can create a trend line of historical share

prices and use this information to predict future changes in the price of a
stock. The trend line can be associated with other information for which a
cause-and-effect relationship may exist, to see if the causal relationship
can be used as a predictor of future stock prices. Trend analysis can also
be used for the entire stock market, to detect signs of an impending
change from a bull to a bear market, or the reverse. The logic behind this
analysis is that moving with a trend is more likely to generate profits for an
investor.

Comparative balance sheet

Particulars 2020 2021 Differnce %Change
(base
year
2020)
Equity share capital 45.10 45.10 0 0
Other equity 1971.51 2548.79 577.28 29.28
Total equity 2016.61 2593.89 577.28 28.63
Liabilities
Non current liabilities
Financial liabilities
Borrowings 2644.07 1320.15 (1323.92) (50.07)
Lease liabilities 89.04 87.25 (1.79) (2.01)
Provisions 70.20 35.63 (34.57) (49.25)
Deferred tax liabilities 44.53 44.53
Total non current liabilities 2803.31 1487.56 (1315.75) (46.94)
Current liabilities
Financial liabilities
Lease liabilities 21.84 16.82 (5.02) (22.99)
Derivate liabilities 5.46 5.46
Trade payables 811.56 1229.24 417.68 51.47
Other financial liabilities 150.72 147.74 (2.98) (1.98)
Provisions 217.04 80.88 (136.16) (62.73)
Other current liabilities 101.44 292.98 191.54 188.82
Current tax liabilities 53.90 53.90
Total current liabilities 1356.50 1827.02 470.52 34.69
Total liabilities 4159.81 3314.58 (845.23) (20.32)
Total Equity and liabilities 6179.42 5908.47 (270.95) (4.38)

Assets

5|Page
 Non current assets
Property plant equipment 4071.46 3822.62 (248.84) (6.11)
Right of use assets 239.52 233.90 (5.62) (2.35)
Capital work in progress 36.69 23.89 (12.8) (34.89)
Goodwill 5.66 5.66
Other intangible assets 298.21 289.37 (8.84) (2.96)
Financial assets
Investments 17.46 20.66 3.20 18.33
Loans 0.99 1.28 0.29 29.29
Other financial assets 0.94 1.01 0.07 7.45
Income tax assets 36.70 43.15 6.45 17.57
Other non current assets 195.38 20.46 (174.92) (89.53)
Total non current assets 4903.01 4452.00 (451.01) (9.20)
Current assets
Inventories 796.97 812.71 15.74 1.97
Financial assets 155.88 75.15 (80.73) (51.79)
Trade receivables 58.03 279.37 221.34 381.42
Cash and cash equivalents 109.19 5.08 (104.11) (95.35)
Loans 8.20 0.51 (7.69) (93.78)
Derivative assets 14.93 182.42 167.49 1121.84
Other financial assets 121.82 81.96 (39.86) (32.72)
Total current assets 1265.02 1437.20 172.18 13.61
Assets classified as held for sale 8.39 19.27 10.88 129.68
Total assets 6176.42 5908.47 (267.95) (4.34)

From this Trend Analysis, we can see with base year of 2020, percentage change in
Total Non Current Liabilities is (46.94), Total Equity and liabilities is (4.38), Total Non
Current Assets is (9.20), and Total Assets is (4.34).

6|Page
Answer 3. (A)
Accounting
Accounting is “the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at least, of
a financial character and interpreting the results thereof
Types of accounts
To understand the Golden Rules of Accounting we must first understand the types of
accounts. The account classification applies to all the types of general ledgers. In
other words, every account will fall in one of the broad classifications given below.
There are three types of accounts
• Real account
• Personal account
• Nominal account
Real account
A Real Account is a general ledger account relating to Assets and Liabilities other
than people accounts. These are accounts that don’t close at year-end and are
carried forward. An example of a Real Account is a Bank Account.
Rule of debit and credit – debit what comes in, credit what goes out
Personal account
A Personal account is a General ledger account connected to all persons like
individuals, firms and associations. An example of a Personal Account is a Creditor
Account.
Rule of debit and credit – Debit the receiver, credit the giver.
Nominal account
A Nominal account is a General ledger account pertaining to all income, expenses,
losses and gains. An example of a Nominal Account is an Interest Account.
Rules of debit and credit – debit all expenses and losses, credit all incomes and
gains.

7|Page
Particulars Affected accounts Types of account
Started business with Cash account Real account
cash
Proprietor capital account Personal account

Purchase goods for cash Purchases account Nominal account

Cash account Real account

Sold goods to C on credit C’s account Personal account

Sales account Nominal account

Paid salary for cash Cash account Real account

Salary account Nominal account

Deposit cash in bank Bank account Personal account

account
Cash account Real account

8|Page
Answer 3. (B)

Accounting golden rules

Based on these two aspects, double entry system or debit and credit rules are
formed in each business transaction. There are two approaches to deciding when
to write to the debit side and when to write to the credit side of an account. In other
words, which account is debited and which account is credited with the rules
underlying this decision is called debit. And credit rules
Personal account - Rule of debit and credit – Debit the receiver, credit the giver.
Real account - Rule of debit and credit – debit what comes in, credit what goes out
Nominal account - Rules of debit and credit – debit all expenses and losses, credit all
incomes and gains.

Date Particulars L. Dr. Cr.

F
1 Cash A/c Dr. 1,50,000
To Akbar capital A/c 1,50,000
(cash introduced Rs 150000 )
2 Purchase A/c Dr. 25,000
To Cash A/c 25,000
(purchase goods for cash 25000)
3 C’s A/c Dr. 20,000
To sales A/c 20,000
(sales goods to debtor on 20000)
4 Salary A/c Dr. 15,000
To Cash A/c 15,000
(salary paid 15000 )
5 Bank A/c Dr. c 1,00,000
To cash A/c 1,00,000
(cash deposited 100000)

From the above journal entries,

- Cash A/c debited and Akbar capital A/c credited by Rs.1,50,000, as cash is an
asset for a business hence it is Real Account in nature and every asset
comes in business goes debit, Akbar’s capital a/c is a personal a/c and it is
liability for a business and shows capital of owner.

- Purchase A/c debited and Cash A/c credited by Rs. 25,000, as purchase A/c
is considered as an expense comes under nominal account, all expenses
goes debited according to Nominal Account Rule.

9|Page
 - C’s A/c debited and Sales A/c credited by Rs. 20,000, as C’s is a debtor of a
business which indicate C’s owe 20,000 to business which means it a
personal account and we should debit the receiver according to Personal
Account Rule also Sales a/c considered as income and comes under nominal
account, according to Nominal Account Rule, Income are credited.

- Salary A/c debited to Cash A/c by Rs. 15,000 , salary considered as expenses
and comes under nominal account, all expenses goes debited according to
Nominal Account Rule.

- Bank A/c debited and Cash A/c by Rs. 1,00,000 , it is a Contra Entry, “A
Contra entry is an entry that is recorded when both the debit and credit affect
the same account and which results in a net-zero effect on the account”.

So, that it is the complete summary for all Journal Entries and Golden Rules
mentioned above as per the Financial Accounting Standards.

10 | P a g e