Financial Accounting

Investment Decisions and Financial Statements

Class Discussion

Refer: Chapter 11 of E-book and Chapter 8 of Investment Decision o Within the business o Outside the business Asset Accounting Accounting at the time of acquisition Accounting at the time of use Accounting at the time of sale Accounting at the time of revaluation Accounting at the time of impairment Assets: Fixed Assets (Capital Goods) Current Assets o Inventory of revenue goods o Debtors o Cash Fixed Assets:
At the time of Acquisition of fixed assets Cash purchase Credit purchase Lease Cost of Acquisition

Purchase Price Incidental Expense Process of including IE in the cost is called Capitalisation of expenses
Depreciation of fixed assets Charge for using the capital assets Loss due to the wear and tear Provision for replacement of asset Allocation of cost over the life of the asset Matching Concept Conservative Concept Going Concern Concept

Financial Accounting

Class Discussion

How is depreciation shown in the balance sheet? Gross Asset(block): Rs. 10000 Less Depreciation: Rs. 2000 Net Asset (block): Rs.8000 How is depreciation calculated? Depreciation is calculated on the cost of the asset. Cost of the asset is the purchase price and capitalised expenses. Depreciation is calculated using one of the following methods: Straight line method Depreciation is calculated on the original cost of the asset The amount of depreciation is same over the life of the asset Depreciation = Cost Residual Value /Life, or = Rate * Cost of the of asset Reducing balance method First year depreciation is calculated on the cost

Cost price Written down value

Subsequent years depreciation is calculated on the WDV (Cost less Depreciation).

So the amount of depreciation reduces over the years Some Issues

Example

Purchase of assets in consideration of other assets. Change of depreciation method Revaluation of assets

Started business with cash Rs. 100000. Purchased plant on 1.04.02 for Rs. 100000. Following expenses were incurred to install the plant: Transportation expenses: 10000 Installation expenses: Rs. 15000 Training expenses: Rs. 5000 Sales per year are Rs.50000. COGS is 10% of sales. Rate of depreciation: 10% for SLM and 25% for RBM. Show the accounting equation.
Change in the method of depreciation

Financial Accounting A company can change the method of depreciation.

Class Discussion

Sale of fixed assets

If the fixed assets are sold, the cash increases, value of the plant is written off from the books and profit or loss is also shown separately. For example, if the above plant is sold at 90000 after four years. Profit on sale of the asset will be Rs. 30000. Revaluation of fixed assets The fixed assets can be revalued. Revaluation of assets is allowed under the accounting standard . However, the standard requires that a corresponding reserve to be created on the source side of the balance sheet.
Assets and Financial Statements

1. Following are the financial assets and liabilities of A ltd. as on 1st April 2004. Capital : Rs.50000, Loan: Rs.80000, Plant: Rs 25000, Stock100000, Cash 5000 The company plans to revalue the assets to Rs. 45000. Show the FS 2. Depreciation: Started business with cash Rs. 100000. Purchased plant on 1.04.06 for Rs.
100000 on credit from Mr. X. Following expenses were incurred: Transportation expenses: 10000 Installation expenses: Rs. 15000 Training expenses: Rs. 5000 Other transactions: Purchased goods on credit: 50000. Sold 50% goods for cash = 50,000. Depreciation rate = 10% using Straight line method and 25% using Reducing balance method . Show the financial statements for the first two years.

3. Revaluation: As on 1st April 2005, Altd had the following assets and the corresponding
sources Stock of goods : 1000 @ 5 = 5000 Plant = 50,000 (accumulated Depreciation of 45,000) Debtors = 25,000 12% Long Term Debt = 20%; Capital = 20% and balance reserves Company decides to revalue the plant to 40,000. Required:

Financial Accounting
Show the new balance sheet as on 1st April 2005

Class Discussion

4. Impairment: Following are the financial items of XY ltd. as on 1st April 2007 : Cash in
hand = 100,000; Debtors = 120,000; Plant = 50000 (Original Cost) Accumulated Depreciation on the plant =30,000; Land = 100000; Stock (1000 units) = 30,000; 12% loans = 80,000, Accumulated Profit (Retained Profit) = 50,000. Transactions during the year are as follows: Sold 50% of total stock at 100 per unit for cash Paid Rent for three years = 90,000 Salary due but not paid = 10,000 Depreciation per year = 3000 Market value of the plant as on 31st March 2008 =12,000 Required: Financial Statements

5. Depreciation and Amortization: Following are the financial items of XY ltd. as on 1st
April 2007 : Cash in hand = 100,000; Debtors (X) = 20,000; Plant (3 years old)= 50000 (Original Cost); Accumulated depreciation on plant= 30,000 ; Land = 100000; Stock (1000 units) = 30,000; 12% loans = 80,000, Accumulated Profit (Retained Profit) = 30,000. Transactions during the year are as follows: Sold 50% of total stock at 150 per unit for cash Expenses = 25,000 Research and Development Expenses = 50,000. Benefits to accrue over a period of 5 year Mr. X declared insolvent. He could pay 60% of the money due and balance becomes bad debt.

Required: Financial Statements