Financial Accounting & Analysis

December 2021 Examination

Q1. The net profit before taxes as per the profit and loss account of Gaman Ltd is Rs
269244. With the given set of information, classify the delivered items as (operating /
investing / financing), share the correct classification with logical reasoning, and calculate
the cash flow from operating activities
TABLE BELOW

Loss on sale of an asset 95780

dividend income 26000

interest income 35000

finance cost paid on debentures 12000

gain on sale of investment 45000

Depreciation on fixed assets 85000

Amortization Expenses 110000

(10 Marks)

Ans 1.
Introduction
The cash flow declaration is one of the three crucial financial rundowns required in standard
money related declaring in any case the compensation enunciation and resource report. The cash
flow declaration is isolated into three regions—cash flow from operating activities, cash flow
from operating activities, and cash flow from financing works out. With everything taken into
account, every one of the three regions give a picture of where the association's cash comes from,
how it is spent, and the net change in genuine cash coming about in light of the organization's
activities during a given accounting period.

The cash flow from taking care of fragment shows the cash used to purchase fixed and long
stretch assets, similar to plant, property, and equipment (PPE), similarly as any profits from the
proposal of these assets. The cash flow from financing region shows the wellspring of an
association's financing and capital similarly as its updating and portions on the credits. For
example, proceeds from the issuance of stocks and securities, benefit portions, and interest
portions will be joined under financing works out.

Thought and application:

Cash flow from operating activities: Operating cash flow (OCF) is an extent of the proportion of
cash delivered by an association's customary business undertakings. Operating cash flow shows
whether an association can make satisfactory positive cash flow to stay aware of and foster its
exercises, some other way, it may require external financing for capital expansion.

KEY TAKEAWAYS
• Operating cash flow is a critical benchmark to choose the financial achievement of an
association's middle business works out.

• Operating cash flow is the main part portrayed on a compensation declaration, which also
melds cash from contributing and financing works out.

• There are two frameworks for portraying operating compensation on a compensation

explanation—the circuitous strategy and the brief procedure.

• The variation strategy starts with net increment from the cash flow order then, at that
point, adds back non-cash things to show up at a money premise figure.

• The direct technique tracks all exchanges a period on a money reason and uses credible
money inflows and outpourings on the compensation clarification.

• Cash stream from contributing games: Cash streams from dealing with exercises are cash
deals identified with a monetary issues' in extended length resources. They can overall be seen
from changes in the Fixed Assets piece of the to some degree long resources section of the
accounting report. A few instances of dealing with profit are segments for the getting of land,
developments, hardware, and other theory resources and money receipts from the proposition of
land, plans, gear, and other undertaking resources.

• Cash stream from financing works out: Cash streams from financing rehearses are cash
exchanges identified with the business raising help from responsibility or stock, or reimbursing
that responsibility. They can be seen from changes in extended length liabilities and worth.
Events of financing compensations join cash continues from issuance of responsibility
instruments, for example, notes or insurances cash flowable, cash continues from issuance of
capital stock, cash segments income driven scatterings, head reimbursement or recovery of notes
or securities cash flowable, or acquirement of vault stock. Wages identified with changes in
worth can be perceived on the Statement of Stockholder's Equity, and livelihoods related to long
stretch liabilities can be recognized by changes in long stretch liabilities on the bookkeeping
report.

The accompanying exercises can be grouped sensibly:

Particular Amount Logical Reasoning

Loss on sale of 95780 Investing activities will reflect the changes in that area. The
an asset difference between the amount obtained at the time of sale or
disposal, and the book value, is what is known as a loss.

Dividend 26000 In your cash flow statement, it is listed under "Cash flow from
income financing activities". This segment of the cash flow statement
summarizes all of your organization's financing operations,
consisting of inventory, debt, and dividends transactions.

Interest income 35000 The interest profits made from investments belong to the
investment activities. Due to their connection to the entity's
investments, and because assets are declared under-investing
interest, any investment return should also be disclosed below-
investing activity.
 Finance cost 12000 Cash flow statement components include bond-issuance charges
paid on as part of the income announcement and alterations to coins
debentures. assets as part of the balance sheet. The proceeds from debt
issuances are reported within the financing activities section on
the cash flow statement, while the issuance fees are written inside
the running activities section.

Gain on sale of 45000 The investment activities part of a cash flow statement indicates
investment proceeds from the income of the long-term property, whereas the
operating sports segment shows a discount from internet profits.

Depreciation on 85000 In the cash flow statement inside the operational activities
fixed assets segment and other expenses consisting of amortization and
depletion, depreciation is a non-cash item.

Amortization 110000 There is no cash expense associated with depreciation. The

Expenses indirect cash flow assertion includes it as a non-cash expenditure;
consequently, it is covered in the net earnings. Other non-cash
fees encompass increases in cash flowables and cumulative
interest costs.

Calculation of cash flow from operating activities:

Particulars Amount

Net Income 2,69,244

(+) Depreciation on fixed assets 85,000

 (+) Amortization Expenses 1,10,000

Net Cash provided by operating activities 4.64,244

Conclusion

 Cash from operating activities can be compared to the company’s net income to
determine the quality of earnings. If cash from operating activities is higher than net
income, earnings are said to be of “high quality.”
 This statement is useful to investors because, under the notion that cash is king, it allows
investors to get an overall sense of the company’s cash inflows and outflows and obtain a
general understanding of its overall performance.
 If a company is funding losses from operations or financing investments by raising
money (debt or equity) it will quickly become clear on the statement of cash flows

Q2. Discuss the steps of performing trend analysis on the financial statements of any
company.
Download the Balance sheet of any company of your interest from the open sources.
Perform the comparative analysis of that Balance sheet and discuss your findings.
Hint to attempt: to choose a company from open-source- type the company's name on the
web page.
Download the annual report as available, latest. Identify the relevant data, and then
perform a comparative analysis of the Balance Sheet of the company (10 Marks) –

Ans 2.
Introduction
Trend Analysis is a factual method that attempts to decide future developments of a given
variable by dissecting chronicled Trends. All in all, it is a technique that intends to foresee future
practices by analyzing past ones.
Example examination is a system used by particular specialist in the money related business to
anticipate the future improvements of a given asset. They use certain data to choose the course of
the example. The target of this system is to recognize engaging theory openings that are at this
point showing an upward example; and clearly, to perceive downtrends too, so monetary
benefactors can get out preceding losing cash.

Thought and application:

Steps to Developing an Effective Analysis of Financial Statements: There are all around six
phases to cultivating a feasible Financial Statements and Analysis; They are:

1. Recognize the Industry Economic Characteristics: First, choose a value chain assessment for
the business—the chain of activities drew in with the creation, collecting and dispersal of the
organization's things just as organizations. Methodology, for instance, Porter's Five Forces or
assessment of monetary characteristics are commonly used in this movement.

2. Recognize Company Strategies: Next, look at the possibility of the thing/organization being
introduced by the firm, including the uniqueness of thing, level of net incomes, creation of brand
trustworthiness and control of costs. Besides, factors, for instance, stock organization blend,
geographic widening and industry development should be considered.Evaluate the Quality of the
Firm's Financial Statements: Review the vital fiscal summaries inside the setting of the
applicable bookkeeping principles. In inspecting monetary record accounts, issues like
acknowledgment, valuation and grouping are keys to appropriate assessment. The primary
inquiry ought to be whether this accounting report is a finished portrayal of the association's
monetary position. While assessing the cash flow proclamation, the central matter is to
appropriately survey the nature of income as a total portrayal of the association's monetary
presentation. Assessment of the assertion of incomes helps in understanding the effect of the
association's liquidity position from its tasks, speculations and monetary exercises over the
period—generally, where assets came from, where they went, and how the general liquidity of
the firm was influenced.
4. Examine Current Profitability and Risk: This is the progression where monetary experts can
truly add esteem in the assessment of the firm and its fiscal summaries. The most widely
recognized investigation instruments are key budget report proportions identifying with liquidity,
resource the board, productivity, obligation the executives/inclusion and hazard/market
valuation. Regarding productivity, there are two wide inquiries to be posed: how beneficial are
the activities of the firm comparative with its resources—free of how the firm funds those
resources—and how productive is the firm according to the point of view of the value investors.
Figure out how to disaggregate return measures into essential effect factors. Finally, it is basic to
break down any fiscal report proportions in a similar way, checking out the current proportions
according to those from prior periods or comparative with different firms or industry midpoints.

5. Plan Forecasted Financial Statements: Although regularly testing, monetary experts should
make sensible suppositions about the eventual fate of the firm (and its industry) and decide how
these presumptions will affect both the incomes and the subsidizing. This regularly appears as
supportive of forma budget reports, in light of procedures, for example, the percent of deals
approach.

6. Worth the Firm: While there are numerous valuation draws near, the most widely recognized
is a kind of limited income system. These incomes could be as projected profits, or more point
by point strategies, for example, free incomes to either the value holders or on big business
premise. Different methodologies might incorporate utilizing relative valuation or bookkeeping
based measures, for example, monetary worth added.

Here is the comparative analysis of ICICI Bank:

Particulars March - 2020 March - 2021 Absolute Percentage

Value Change
Interest Earned 747983166 791182710.00 43199544.00 6%

Other Income 164486220 189685274.00 25199054.00 15%

 Total Income 912469386.00 980867984.00 68398598.00 7%

Interest Expended 415312517.00 401288374.00 -14024143.00 -3%

Operating Expenses 216144109.00 215608340.00 -535769.00 0%

Provision and contingencies 201704636.00 202044429.00 339793.00 0%

Total Expenditure 833161262.00 818941143.00 -14220119.00 -2%

Net profit for the year 79308124.00 161926841.00 82618717.00 104%

Profit brought forward 178795703.00 213274679.00 34478976.00 19%

Total Profit 258103827.00 375201520.00 117097693.00 45%

Conclusion

It will be essential to survey the center abilities and decide extra assets and capacities expected to
accomplish the monetary arrangement. You really wanted to obviously have an arrangement for
sourcing extra assets, cooperating, or rethinking. Your monetary arrangement is an approach to
obviously show the monetary expenses of that execution system. Guarantee you have considered
all that needed to accomplish your objectives, and got ready for their expenses in your
arrangements.
Q3. Mr. Akbar provides you with the following information-(all the transactions are
separate and independent of each other)
Started business with cash Rs15
Purchased goods for cash Rs 25
Sold goods to C on credit Rs 2
Paid salary for cash Rs15
Deposited cash into the bank account Rs1

a. Identify the accounts being affected in the monetary transaction and Identify the type of
accounts identified - real, personal, or nominal (5 Marks)

Ans 3a.
Introduction:

A trade is a business event that monetarily influences a substance's spending plan reports,
and is recorded as an entry in its accounting records. Occasions of trades are according to
the accompanying:

• Cash flowing a supplier for organizations conveyed or items passed on.

• Cash flowing a seller with cash and a note to gain liability regarding property once
moved by the dealer.

• Cash flowing a delegate for a significant long time worked.

• Receiving portion from a customer as a trade-off for work and items passed on.
Thought and application

There are basically three sorts of records in accounting: Real, Personal and Nominal,
individual records are masterminded into three subcategories: Artificial, Natural, and
Representative.

If you disregard to separate a record precisely as either a certifiable, individual or apparent

record, a large part of the time, you will get end up recording incorrectly journal entries.

Kinds of records:

1. Certifiable Accounts

All assets of a firm, which are indisputable or hypothetical, fall under the class of 'Real
Accounts'.

Unquestionable certified records are related to things that can be reached and felt really.
Scarcely any cases of generous certified records are building, equipment, stock, land, etc
Slippery authentic records are related to things that can't be reached and felt really. Barely
any occurrences of such certifiable records are philanthropy, licenses, brand names, etc

2. Individual Accounts

Second among three sorts of records are close to home records which are identified with
people, firms, organizations, and so forth Scarcely any models are borrowers, loan bosses,
banks, ou accounts, records of clients, records of products

Normal individual records: This sort of close to home records is the least complex to
comprehend out of all and incorporates every one of God's manifestations who can bargain,
who, as a rule, are individuals. For example Kumar's A/C, Adam's A/C, and so forth

Counterfeit individual records: Personal records which are made falsely by law, like
corporate bodies and establishments, are called Artificial individual records. For example
privately owned businesses, LLCs, LLPs, clubs, schools, and so forth

Delegate individual records: Accounts which address someone in particular or a gathering

straightforwardly or by implication. For example Suppose that wages are paid ahead of time
to a representative – a compensation prepaid record will be opened in the books of records.
This wages prepaid record is a delegate individual record by implication connected to the
individual.

3. Ostensible Accounts
Records which are identified with costs, misfortunes, livelihoods or gains are called
Nominal records. The word reference significance of the word 'ostensible' is "existing in
name as it were" and the importance remains totally evident in bookkeeping sense as well,
moreover ostensible records don't actually exist in actual structure, yet behind each
ostensible record cash is involved.

Model – Purchase A/C, Salary A/C, Sales A/C, Commission got A/C, Bad Debt A/C, and so
on The eventual outcome of all ostensible records is either benefit or misfortune which is
then moved to the capital record.

Particulars Type of Account

Started business with cash Rs150000
Purchased goods for cash Rs 25000
Sold goods to C on credit Rs 20000
Paid salary for cash Rs15000
Deposited Cash into the bank account Rs100000
A cash account is a Real Account, and Capital
Account is a Personal Account, so both of these
accounts could be affected.
Purchases account is Nominal Account, and
cash account is actual Account, so both of these
accounts might be affected.
Sales accounts are Nominal Account, and
subsequently, they will be affected.
A cash account is a real account, and an
earnings account is a Nominal account, and as a
result, each of the variations will get affected.
Cash and bank bills are real bills, and as a
result, the actual Account could be affected.

Conclusion
normal budget summaries that contain significant data that gives contributions to valuation of
venture projects. The main test is the manner by which to appropriately extricate them.
Bookkeeping and money are without a doubt interwoven. Here and there individuals that are not
knowledgeable about the space even stir them up. Yet, regularly accentuation in bookkeeping is
on numbers. All things considered, the profound comprehension of key bookkeeping ideas
uncovers the interests and activities of individuals behind these numbers.

b. Discuss the rule of passing the journal entry applicable here and give the journal entry
(Golden rule or transaction analysis, any of these rule/s can be taken as a base to justify the
answer) (5 Marks)

Ans 3b.
Introduction

In case there is something that runs the universe of bookkeeping, it is the principles charge and
credit. Without these standards, the universe of accounting would be an imprudent wreck. It is huge
that the records should be stayed aware of fittingly on these rules, to ensure the accuracy of results
displayed by such books of records. Permit us to focus on what a charge and credit are and how it
capacities in accounts.

Thought and application:

Each arrangement which can be assessed in cash related terms finds a spot in the accounting trades of
a firm. To record such trades, a game plan of charge and credit has been thought up, which records
such events through two particular records.
The net effect of these accounting sections is something practically the same to the extent sum.
Regardless, by charging and crediting two particular records, the right and capable accounting
treatment can be depicted. In a record account, commonly the charge segment is on the left and the
credit section is on the right.

• A charge is an accounting section that either extends an asset or business record. Of course
lessens an obligation or worth record. It is arranged on the left in an accounting entry.

• A credit is an accounting section that increases either a danger or worth record. Then again
reduces an asset or business record. It is arranged on the unequivocally in an accounting section.

• Whenever an accounting trade happens, somewhere around two records is continually

influenced, with a charge segment being recorded against one record and a credit section being
recorded against another record. There could be no greatest cutoff to the amount of records drew in
with a trade anyway the base can't be under two records.

• The amounts of the charges and credits for any trade ought to reliably ascend to each other so
an accounting trade is continually expected to be in balance. Thusly, the use of charges and credits in
a two area trade recording configuration is the most crucial of all controls over accounting accuracy.
This is the means by which charge and credit find their usage.A charge and credit passage
comprehensively affect various records. For instance, in

• Asset accounts, a charge expands the equilibrium and a credit diminishes the equilibrium.
• Liability accounts, a charge diminishes the equilibrium and a credit expands the equilibrium.

• Equity accounts, a charge diminishes the equilibrium and a credit builds the equilibrium.

• Revenue accounts, a charge diminishes the equilibrium and a credit builds the equilibrium
Journal Entries:

1. Started business with cash Rs150000:

Cash A/c ---- Dr 1, 50,000
To Capital A/c 1, 50,000
2. Purchased goods for cash Rs 25000:
Purchases A/c ---- Dr 25,000
To Cash A/c 25,000
3. Sold goods to C on credit Rs 20000:
C’s A/c ---- Dr 20,000
To Sales A/c 20,000
4. Paid salary for Cash Rs15000:
Salary A/c ---- Dr 15,000
To Cash A/c 15,000
5. Deposited Cash into the bank account Rs100000:
Bank A/c ---- Dr 1, 00,000
To Cash A/c 1, 00,000

Conclusion

To keep up with the uprightness of the entirety of a substance's exchanges, it is fundamental that
it keep a record of them. In case there is a section of that kind, the substance has a record of
those exchanges and it ought to be held as a record. There are rule of thumbs in Accounting that
cover the situation where a diary section is skipped. This aide can be embraced to a record,
however prior to doing as such is essential to decide the kind of record.