ASSIGNMENT

FINANCIAL ACCOUNTING

SUBJECT: FINANCIAL ACCOUNTING

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PART: A
Q1. IMPORTANCE OF THE FINANCIAL ACCOUNTING &
BOOKKEEPING
The recording of information regarding financial transactions and money is
referred to as financial accounting. A transaction is a monetary-impacting
business occurrence. This might entail selling products to customers or
purchasing items from vendors. such as selling merchandise to a consumer
or purchasing supplies from a vendor.
Financial accounting is the process of documenting information about
financial transactions and money. A transaction is a business event that
has a monetary consequence. This might include selling things to
customers or making purchases from vendors. example as acquiring goods
from a vendor or selling items to a customer
To guarantee that your company is incurring the appropriate costs, you
must keep a close check on the books. You may readily locate information
about your spending if you keep meticulous records of all transactions. This
helps you manage your expenses better while also keeping you informed
about important decisions. You can see which costs and debts are being
paid off in a visual, numerical, and graphical manner.
Finally, effective accounting and bookkeeping allow you to see which items
and services are paying off, allowing you to move spending to those that
are generating profit and returns. This will also help to cut down on
additional costs. Another crucial aspect of owning a business is tax
management. It's also one of those difficult activities that, if not completed
properly, may cause disaster. As a result, you should recognize the value
of bookkeeping in your organization because it aids in tax management.

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MAIN USERS OF FINANCIAL INFORMATION
The financial accounts provide a lot of data that is valuable to a variety of
financial data consumers.
Investors
In respect to their investments, investors are worried about risk and return.
They require data in order to determine whether or not they should
continue to invest in a company. They must also be able to determine if a
company will be able to pay dividends and gauge the overall success of the
company's management.
Lenders
Banks and other financial institutions that lend money to a company need
information to assess whether or not the loan and interest will be paid on
time.
Creditors
Suppliers and trade creditors require information to evaluate and appraise
a company's short-term liquidity. Is the company in a position to pay off
short-term debt as it becomes due?
Customers & Debtors
Customers and trade debtors want to know about the company's capacity
to survive and thrive. They have a long-term interest in the company's
variety of products and services since they are clients of the company's
products. They can even be reliant on the company for particular goods or
services.
Employees
Employees (and the organizations that represent them, such as trade
unions) want to know about the company's stability and profitability. They
are particularly interested in information concerning job possibilities as well
as the funding of pensions and retirement benefits. They're also likely to be
interested in senior management's salaries and benefits!
Government
Accounting information is of relevance to a number of government bodies
and departments. For example, in order to assess and collect Corporation
Tax, the government need statistics on firm profitability. Information is

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needed by several regulatory bodies (such as the Competition Commission
and the Environment Agency) to support decisions on takeovers and
grants, for example. Accounting information is of relevance to a number of
government bodies and departments. For example, in order to assess and
collect Corporation Tax, the government need statistics on firm profitability.
Information is needed by several regulatory bodies (such as the
Competition Commission and the Environment Agency) to support
decisions on takeovers and grants, for example.

Analysts
Investment analysts are an important user group, particularly for firms that
are publicly traded. They need a lot of financial and other information to
analyze a company's and its industry's competitive performance. The
London Stock Exchange requires extensive accounting disclosures, which
give a lot of this information. Analysts are frequently given more accounting
information through formal business briefings and interviews.
General public
Interest groups, which are made up of people who are interested in the
operations and performance of firms, will also need accounting information.

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Q2. LEDGERS USING T ACCOUNTS:

  Capital  
Date Particulars Debit   Date Particulars Credit
        01-Mar Cash at Bank 1,000.00
Carried to Balance
31-Mar Sheet 1,000.00        
             
    1,000.00       1,000.00

  Cash at Bank  
Date Particulars Debit   Date Particulars Credit
01-Mar Capital 1,000.00   05-Mar Cash in Hand 4,000.00
Account
03-Mar Long Term Loan 12,000.00   20-Mar Payable 2,000.00

26-Mar Account Receivable 950.00   30-Mar Drawings 200.00

             
Carried to
Balance
        31-Mar Sheet 7,750.00
             
    13,950.00       13,950.00

  Long Term Loan  

Date Particulars Debit   Date Particulars Credit
        03-Mar Cash at Bank 12,000.00
Carried to Balance
31-Mar Sheet 12,000.00        
             
    12,000.00       12,000.00

  Fixed Asset - VAN  

Date Particulars Debit   Date Particulars Credit
08-Mar Cash In Hand 4,000.00        
Carried to
Balance
        31-Mar Sheet 4,000.00
             
    4,000.00       4,000.00

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  Cash  
Date Particulars Debit   Date Particulars Credit
08-Mar Cash at Bank 4,000.00   08-Mar VAN 4,000.00
11-Mar Sale 1,000.00        
Carried to
Balance
14-Mar Sale 500.00   31-Mar Sheet 1,500.00
             
    5,500.00       5,500.00

  Purchases  
Date Particulars Debit   Date Particulars Credit
08-Mar Account Payable 8,000.00        
Carried
Forward to
Income
        31-Mar Summary 8,000.00
             
    8,000.00       8,000.00

  Account Payable  
Date Particulars Debit   Date Particulars Credit
20-Mar Cash at Bank 2,000.00   08-Mar Purchases 8,000.00
             
Carried to Balance
31-Mar Sheet 6,000.00        
    8,000.00       8,000.00

  Sales  
Date Particulars Debit   Date Particulars Credit
        11-Mar Cash 1,000.00
Account
        14-Mar Receivable 2,000.00

        14-Mar Cash 500.00

Account
        17-Mar Receivable 1,200.00
Carried Forward to
31-Mar Income Summary 4,700.00        
             
             
    4,700.00       4,700.00

  Account Receivable  

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Date Particulars Debit   Date Particulars Credit

14-Mar Sale 2,000.00   26-Mar Cash at Bank 950.00

17-Mar Sale 1,200.00        
Carried to
Balance
        31-Mar Sheet 2,250.00
             
             
    3,200.00       3,200.00

  Drawings  
Date Particulars Debit   Date Particulars Credit

30-Mar Cash at Bank 200.00        

Carried to
Balance
        31-Mar Sheet 200.00
             

    200.00       200.00

Trial Balance
Account Account Name Debit Credit
100001 Capital   1,000.00
100002 Cash at Bank 7,750.00  
100003 Long Term Loan   12,000.00
100004 Fixed Asset VAN 4,000.00  
100005 Cash in Hand 1,500.00  
100006 Purchases 8,000.00  
100007 Account Payable   6,000.00
100008 Sales   4,700.00
100009 Account Receivables 2,250.00  
100010 Drawings 200.00  
23700 23700

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Q3. 1. INCOME STATEMENT
Mr Silver
Income Statement
For the month ended 30th September

Sales 200000
Less Return Inwards -4000
Net Sales 196000

Less: Cost of Sales

Opening Stock 0
Purchases 80000
Less: Return Outwards -2000
Goods Available for Sale 78000
Less Closing Stock -12000

Cost of Sales -66000

Less : Carriage In -3000

Gross Profit 127000

Less: Expenses
Carriage Outwards 8000
Heat and Light 7000
Wages and Salaries 42000
Interest Paid 1500
Business Rates 9500
Total Expenses -68000

Net Profit 59000

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Q3. 2. STATEMENT OF FINANCIAL POSITION
Mr Silver
Statement of Financial Position
As on 30th September

Fixed Assets
Motor Vehicles 40000
Office Equipment 25000
Total Fixed Assets 65000

Current Assets
Receivables 24000
Closing Stock 12000
Bank 5000

Total Current Assets 41000

Total Assets 106000

Equity and Liabilities

Equity
Capital 15000
Add: Profit for the Month 59000

Total Equity 74000

Long Term Liabilities

Bank Loan 20000

Short Term Liabilities

Payables 12000

Total Equity and Liabilities 106000

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Q3. 3. COMMENTS ON FINANCIAL PERFORMANCE
Profitability:

- The GP Ratio is 64.7 % which shows a good GP %

- The NP Ratio is 30.1 % which shows that the admin expenses are a bit at higher side
which is almost 34.6 % of the Total Sales.
- The Return on Assets is 55.6% which shows that the Assets are being used in efficient
manner
- As compared to the prior year profits of 2018 and 2019, the profit showing the increasing
trend, which means that the profit is at the growth phase.

Liquidity:

- The Current Ratio of the business is 3.4:1 which shows that the business is able to meet
its liquidity requirements very well in 1 year.
- The Net Quick Ratio is 2.4:1 which also indicates that liquidity position of the business is
good

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PART B:
Q1. USEFULNESS OF FINANCIAL RATIOS

Some of the most important limitations of ratio analysis include:

Historical Information: The data utilized in the research is based on the

company's own published prior performance. As a result, ratio analysis
indicators are not always indicative of future firm performance.
Inflationary effects: Because financial statements are published on a
regular basis, there are time gaps between them. Real prices are not
represented in the financial accounts if inflation has occurred between
periods. As a result, unless the figures are corrected for inflation, they are
not comparable across time periods.
Changes in accounting policies: If the company's accounting standards
and practices have changed, this might have a substantial impact on
financial reporting. The major financial indicators used in ratio analysis are
changed in this scenario, and the financial outcomes reported after the
change are not comparable to those recorded before the change. It is the
analyst's responsibility to keep up with changes in accounting policies. The
notes to the financial statements section usually contains the changes
made.
Operational changes: Anything from a company's supply chain strategy to
the product it sells can drastically alter its operating structure. When a firm
undergoes substantial operational changes, comparing financial measures
before and after the change might lead to inaccurate inferences about the
company's success and prospects.
Seasonal effects: Seasonal influences should be considered by analysts
since they might lead to ratio analysis constraints. Due to the inability to
alter the ratio analysis for seasonality effects, the findings of the analysis
may be misinterpreted.
Manipulation of financial statements: The information given by the
corporation in its financial accounts is the basis for ratio analysis. This data
might be modified by the company's management to show a greater
performance than it actually has. As a result, ratio analysis may not

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adequately reflect the underlying nature of the firm, because information
deception is not detectable by basic analysis. It is critical for an analyst to
be aware of these potential manipulations and to do thorough due diligence
before drawing any conclusions.

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Q2. IMPORTANCE OF USING FINANCIAL RATIOS
The analysts still use the financial ratios mainly because of the following
factors:
- By doing trend analysis, it aids forecasting and planning.
- It assists in projecting the firm's budget by evaluating prior trends.
- It aids in measuring the efficiency with which a company or organization
operates.
- It gives consumers of accounting data with important information about
the company's performance.
- It aids in the comparison of two or more businesses.
- It aids in determining the firm's liquidity as well as its long-term solvency.

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Q3. DIFFERENCE BETWEEN LIQUID AND ILLIQUID ASSETS
A liquid asset is a type of asset that can be rapidly converted into cash
while keeping its market value. There are various elements that affect how
liquid assets are, such as:

- How well-established is the market?

- How simple it is to transfer ownership
- How long does it take to sell the assets? (liquidated)
The most liquid asset is cash, which is followed by monies that may be
withdrawn from bank accounts. There is no need for a conversion; if your
company need cash, you may get it immediately now.
The following are some examples:
- Cash (or currency): The money you have on hand.
- Bank accounts: These are the funds in your checking or savings account.
- Accounts receivable: The money that your customers owe to your
company.
- Mutual funds: An investment vehicle that combines money from a variety
of participants to create a varied portfolio.

Non-liquid assets, often known as illiquid assets, cannot be turned into

cash rapidly. To access the value of most non-liquid assets, you must sell
them and transfer ownership. Non-liquid assets might take months or years
to locate the proper buyer, and selling them rapidly has a negative impact
on value.
Equipment, real estate, automobiles, art, and collectibles are all examples
of non-liquid assets. Non-publicly traded company ownership can likewise
be deemed non-liquid. The time to cash conversion is difficult to anticipate
with these types of assets. Furthermore, they necessitate more work to
liquidate.

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