Financial Accounting & Analysis

December 2022 Examination

Q.1.

Answer:
Introduction:

Double-Entry Bookkeeping: What Is It?

Each transaction is recorded in two or more accounts in double-entry bookkeeping, with
corresponding debits and credits. That's a standard procedure in the accounting field. One set of
accounts gets a credit while another set of accounts gets a debit. Any and all credits must be repaid
in full (equal each other).

If a copywriter wants to get ahead in her field, she should consider spending $1,000 on a brand
new laptop. In order to make purchases and payments, she deposits $1,000, the majority of her
liquid assets, into a bank account. Since the increase in the value of her investment assets by $1,000
more than compensated for the drop in her cash on hand, she is in a better financial position.

Who Makes Use of the Double-Entry Method?

The work of the Financial Accounting Standards Board (FASB) may be useful to American firms
(FASB). Keeping an accurate ledger of monetary dealings is governed by GAAP, or generally
recognized accounting principles.

Global accounting procedures are coordinated by the International Accounting Standards Board
(IASB), a commercial, non-governmental organization (IFRS). This method of accounting is often
used in international laws.
All publicly traded companies are required by law to use double-entry accounting and to comply
with GAAP and IFRS (the differences between the two standards are outlined in this article).

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Double-entry accounting is essential for larger businesses or those looking to secure finance. This
approach provides a more reliable and thorough means of monitoring a business's financial health.

Concept and application:

CPAs keep accounting journals to track and study metrics including revenue, expenses, and more.
The corporation could do without these journals, but the owner can utilize them anyway he or she
pleases. Your company's sales transactions on credit are recorded in a notebook. Cash diaries allow
businesses to keep tabs on their financial situation. It is possible to put a monetary value on goods
and services through their purchase and sale. In some monetary transactions, receipts may be made
available.

For the same reason, some monetary transactions may be recorded in more than one diary. There
may be a requirement for a third-party agency to handle the avalanche of paperwork created by
publications with extensive financial records. Even if they are no longer needed, most companies
will keep the registrations for their diaries. An computerized accounting system keeps track of
these diaries. When this technology is implemented, it helps to keep private information safe.

But everyone in the company keeps a record of their daily activities in the official diary. For
historical purposes, every dollar of the agreement has been documented. Thus, the following
events will occur:
Time limit set for completing the deal.

Comprehensive thinking about the issue from all sides.

Given that the monetary value of each component may affect the company's bottom line, it is
essential that thorough records of all financial activities be maintained.

It is a journal that discusses a broad range of subjects.

The majority of business dealings in the banking sector a century ago were recorded manually.
Keeping a journal was an important part of archiving old financial documents. The "general
ledger" was the central register for all business financial dealings. In addition to keeping track of

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transactions and balances, modern financial accounting software also acts as a journal in which
key events in the company's financial history can be recorded.
Maintaining an accurate accounting log of one's financial transactions is a challenging endeavor
that needs for a lot of forethought and work. The diary entries are then sorted by the dates they
were written once all the information has been double-checked. Your orders, bills, or invoices may
already have all of the relevant information.
The accounting journal is kept secret and is an integral aspect of the double-entry accounting
system. Credits and debits are recorded separately for each deal. Just one flat rate regardless of
how many you buy. Journal entries are used to document the activities of a company.

Let's understand it by way of an example:

The exchange cannot take place unless money is exchanged. Two entries will be made in the
accounting journal to document the reflected adjustments to the ledger. Less money means there
will be more things people can buy and examine.

Steps for recording the Journal entries

• Monitor any potential financial transactions that may have an impact on the company.
• Review past financial statements to find out whether your bookkeeping methods have changed.
• Put in the required information to monitor progress (credits and debits). The account that
received the credit will often be listed first, followed by the account that was charged. To begin,
keep your diary entries as descriptive as possible and be sure to date them (often termed the
narrative of the transaction)
• Before entering a transaction into the journal, the bookkeeper must check that the debit and
credit amounts are equivalent. This is essential since the relationship between credits and debits
is the very heart of a journal entry. You can use this data to find out if the company's overall
sales or purchases have increased. So from now on, we'll only write two lines at the most in
our notes. A one-line notebook serves no purpose in the workplace.
• Anyone curious about the financial sector may now find a wealth of information online. At
first, it's a good idea to keep a detailed accounting journal where you can record all of these
transactions.

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The required entries to be passed in the Journal are:

Date Particulars Dr./Cr. Amount Amount

03.12 Cash a/c Dr. 5000
Bank a/c Dr. 500000
To capital a/c Cr. 505000
(Being capital introduced in the business)
05.12 Furniture a/c Dr. 60000
To bank a/c Cr. 30000
To sundry payable Cr. 30000
(Being furniture purchased for ₹60000, ₹30000 paid
through bank and the creditors created for the
balance amount)
07.12 Stock-in-trade a/c Dr. 315000
To bank a/c Cr. 315000
(Being goods bought and payment made through
bank account)
08.12 Bank a/c Dr. 500000
To stock-in-trade Cr. 315000
To profit on sale of goods Cr. 185000
(Being goods sold for cash and profit realized)
10.12 Rent a/c Dr. 10000
Salary a/c Dr. 10000
Electricity expense a/c Dr. 10000
To bank a/c 30000
(Being rent, electricity and salary expenses paid
through bank account)

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Conclusion:
An accountant's diary of all financial dealings is the industry standard. A journal may be the "book
of first entry" if it serves as the primary location for recording new monetary transactions.
Financial statements are produced following the entry of transactions into the general ledger. When
keeping a diary, the first thing to do is to begin writing. Given their depth of knowledge on the
topic, this is the case. Credit and debit are used in financial transactions.
It was mentioned that in an accounting book, each entry occupies two lines. Debits and credits in
double-entry accounting are equivalent.

Q.2.
Answer:
Introduction:

Accounting is a systematic method used in financial management. The books of a corporation

may shed some light on its activities, financial health, and bookkeeping practices. When
complete records are kept, it is much simpler to determine the value added by each division and
employee. This calculator can be used to approximate future profits from an investment. The
consensus of professionals in a given sector is that startups should always use their own names
and logos. In order to properly handle money, accurate bookkeeping and auditing practices are
required.
The Balance Sheet: The income statement (or profit and loss statement) is a financial statement
that provides a snapshot of a company's financial performance over a specified time frame. In
accounting, transactions involving money are recorded and categorized for a given time period.
Time is a major factor in the normal production procedure.
For this section of the exam, you will mostly be graded on your ability to calculate gross profit,
which is defined as sales income minus the cost of products sold. After deducting running costs
from gross profit, an organization can determine its operational profit. Since they are unrelated to
the day-to-day operations of the company, advertising and public relations expenses must be
tracked separately. To calculate net income, operating profit is deducted from other costs, such
as salaries and rent.

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Concept and Application:

There are a total of eight parts that go into making a Profit and Loss statement, and they
are as follows:

1. GROSS PROFIT
After subtracting direct selling expenses from total sales, you arrive at the gross profit. The
money spent by a wholesaler to fill its shelves is often referred to as the "cost of items sold."
To account for volatility in stock levels and unanticipated costs spent in bringing the items here.
Costs associated with transporting goods, as well as octroi and customs duties, are included here.
The cost of producing an item includes everything from the salary of the workers to the cost of
the machinery and gasoline utilized in production.

2 SALES REVENUE
The financial statements are the authoritative source for the rules governing revenue recognition.
After the end of the accounting period, after all daily sales transactions have been recorded on
sales invoices, any payments received from consumers are deposited into the sales account.

3. SALES RETURNS AND ALLOWANCES

The total value of sales returns is primarily based on the number of defective or damaged items
returned by customers. This could be interpreted as a percentage of overall revenue. A damaged,
defective, or wrongly described item may be kept and exchanged for store credit rather than a
full refund in some situations.
The income statement will show a decrease in sales of the corresponding amount due to sales
returns and allowances, which will be recorded in a counter-revenue account.

4. COST OF GOODS SOLD

There are a few things to keep in mind when trying to set a fair selling price:

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Initial inventory count: Inventory levels are the same at the beginning of a new accounting
period as they were at the end of the previous period. The accounting ledger's trial balance is the
source of this sum.

Within the sphere of acquisitions: The purchases account is reduced by the sum of all
purchases made during the accounting period. Use purchase invoices to keep track of your
regular purchases. The shown number may be lower than the actual cost of the goods purchased,
depending on the store's regulations regarding discounts for frequent or account customers.
Suppliers are sometimes willing to offer discounts in the form of lower invoice prices if their
products do not meet the quality requirements set by the buyer. As a result of these changes,
prices have dropped.

• Returns and exchanges of merchandise: The total amount of money spent on purchases is
decreased by the amount recorded in the purchases returns account, which appears on the income
statement.
Cost of goods sold does not account for freight costs paid during inventory purchases; instead,
these costs are incorporated into the purchase price.
In addition to covering the price of raw materials, a product's pricing also needs to account for
the salaries of the individuals who manage the store and warehouse. However, salaries spent on a
capital item is factored into the overall cost.
The Closing Stock: Here is a detailed account of everything that was remaining in stock at the
end of the fiscal year. When exactly the stockpile was used up is unknown.

5. Operating profit or loss

Operational profit is calculated by deducting gross profit from operating expenses.
In order to stay in business, a corporation must pay for certain operational costs. These totals
include the costs of administration, sales, and everything else.
Maintaining an office comes with expenses such as mortgage or rent, utilities, long-distance
calls, legal advice, and audits. The cost of sales and distribution includes things like salaries and
commissions for salespeople, advertising, packing, storage, freight, transportation, export taxes,

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fuel and maintenance for delivery vehicles, bad debts, and more. Payments for upkeep and
security deposits are typical costs.

Conclusion:

A company's financial statements are a crucial resource, so it's important to know how to read
them. The company must be financially secure. The income and expenditures of a business over
the course of a year are broken down in the profit and loss statement. Any business that takes its
financial health seriously will keep meticulous financial records, including ledgers, accounts,
trial balances, and profit and loss statements. The income statement and the balance sheet are the
two primary financial statements that reveal a company's financial health and progress over the
course of a fiscal year. Expenses are recorded on the left side of the ledger.
The Role of the Profit and Loss Statement
The financial health of a business can be gauged by analyzing its income and expenses over a
specified time period. Profit and loss statements are frequently referred to as "business costs." It
breaks down the company's income and expenditures.

Q.3.a
Answer:

3a.
Introduction:

A balance sheet is an accounting document that summarizes the assets, liabilities, and ownership
of a business or other entity as of a specific date. Monthly, quarterly, or annual intervals are
common for the compilation of a balance sheet. However, this is not an ironclad regulation. The
balance sheet is one of the three most important financial statements. Two others are the cash flow
statement and the income statement.

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It is calculated as follows:

Liability + equity equals assets.

When determining whether or not to lend money to a business, the balance sheet is typically the
first place that creditors and investors look.

Concept and application:

A balance sheet serves what purpose?

A balance sheet is required to swiftly evaluate a company's financial health in terms of solvency,
liquidity, and stability.

Financial statements, such as the balance sheet, detail a company's assets, liabilities, and
shareholders' equity.

There are two ways to make a balance sheet:

a. Horizontal or vertical display.

b. A horizontal or T-shaped presentation

Financial statements can be compiled with the use of the accounting equation.

It is: Equity + Liabilities + Assets.

Before creating a balance sheet, a trial balance needs to be established. This ratio demonstrates
that, at all times, a company's assets must be greater than its debts and shareholder interests or else
the business will go bankrupt. Today, it is taken as given that all monetary dealings have been
recorded.

This is why there are three distinct parts to a balance sheet. More specifically:

1. Assets: To put it simply, you need assets if you want to make money in the future.

2. Obligations: Second, liabilities are reflected in the cash flow area of the balance sheet and result
from the company's accumulated debts to outside parties (or lack thereof).

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3.Equity: Equity is made of the initial investment made in the business in addition to any retained
earnings. After a business has repaid all of its investor loans, the remaining balance is considered
equity.

The balance sheet allows for a quick analysis of a company's assets and cash flow.

Commonly used structure for balance sheets

Liabilities are recorded opposite assets on a balance sheet. Additionally, the financial statements
include a T-balance sheet.

What is the proper format for a balance sheet?

Following are the steps involved in developing a balance sheet:

Find a point of equilibrium to start from A trial balance report is an essential part of any accounting
system. Copy and paste the account balances from the general ledger into Excel to create a trial
balance.

The steps to making a trial balance are: Until these conditions are satisfied, a trial balance cannot
be prepared. It's crucial that the first trial balance is correct in order to produce a balance sheet that
follows GAAP. In order to provide an auditor with an explanation for each trial balance
adjustment, rigorous record keeping is required.

Don't keep any paper trail of your money dealings; Eliminate any and all references to money,
banking, deposits, withdrawals, losses, and gains from your records. Assets, liabilities, and equity
are the only allowable categories in a trial balance.

Clear up any past due bills or debts. Each account in the trial balance and the final balance sheet
is the same.

ASSETS
Figures for
Figures for
Current Year
Current Year
LIABILITIES (Rs.)
(Rs.)

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 CAPITAL FIXED ASSETS

Common stock 1000 Land and building

Retained earnings 860 Equipment 1500

LONG-TERM LIABILITIES CURRENT ASSETS

Loans 0 Cash-in-hand 550

Cash at bank

CURRENT LIABILITIES Account receivables 250

Account payables 540 Prepaid insurance 300

Outstanding salaries 150 Supplies 150

Unearned revenue 200

INVESTMENTS

PROVISIONS Fixed deposit 0

Provision for taxation 0

Provision for bad debts 0

TOTAL 2750 TOTAL 2750

Conclusion:

Include a balance sheet if you want your financials to be taken seriously by potential investors.
The balance sheet is the best indicator of a company's financial well-being. The stability of an
investment can be gauged with the help of the balance sheet.

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There's no need to be daunted by this sentence's length; the work at hand is very simple. The
balance sheet is one of the most fundamental financial statements and may be understood by those
with minimal accounting knowledge.

Q3.b.
Answer:
Introduction:

The current ratio compares current assets to current liabilities and indicates the company's capacity
to satisfy its short-term debt obligations. Existing listings of properties for sale may make use of
economic data from the past year. In order to be considered "current," payments must be made
within the next calendar year in advance of obligations and other commitments.

Concept and application:

The financial statements of a business provide the yardstick by which its performance may be
compared to that of its competitors. Due to the one-off nature of such deals, specialized accounting
methods are typically employed to compile the corresponding financial statements. One
application is in the field of ratio analysis. The purpose of this work is to illustrate the myriad ways
in which price might change for a given service.
The current ratio is calculated by dividing the company's current liabilities by its current assets as
of the same date as the annual report. Differentiating between the company's current assets and
current liabilities is shown graphically. The term "working capital ratio" can also be used to
describe this indicator.

It is calculated using the following formula:

Current ratio = Current assets/Current liabilities

Current assets will consist of:

• Cash flow right now

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 • The phrase "Tradable Securities" is one indicator of a country's fiscal health.
• Accounting for Accounts Receivable in a Business
• Taking Inventory into Account
Current liabilities will comprise the following:

• The risk of incurring overdraft fees is covered by an insurance policy offered by most
banks.
• Accounts Receivable in Business
• Measures for Safety
• For instance, short-repayment loans fit this illustration.
Calculation of current ratio of Z and X LLP

Particulars Calculations Amount (₹)

Current assets (a) 1250

Accounts receivable 250
Supplies 150
Cash 550
Prepaid insurance 300

Current liabilities (b) 890

Salaries payable 150
Unearned revenue 200
Accounts payable 540
Current ratio (a/b) 1.40

The calculations above show that the current ratio of Z and X LLP is 1.40:1

Significance of current ratio:

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The current ratio is an excellent indicator of a company's liquidity and capacity to meet its debts.
The ratio of current obligations to liquid assets is a metric used to assess an entity's liquidity.

If a business's current assets are twice as large as its current obligations, it is in excellent financial
position. In reality, though, the ratio is closer to one to one. If this number is less than 1, expansion
could be difficult for the company. Inadequate reinvestment of earnings into the purchase of new
assets is indicated by a high turnover ratio for present assets.

Conclusion:

A company's capacity to meet its short-term financial obligations can be gauged by looking at its
current ratio. A company's liquidity ratio can be used as a measure of its capacity to meet its short-
term financial obligations. They're the legal proof that cash-flow debt is correlated with present
assets.

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