Financial Accounting & Analysis June 2024

Description

Financial Accounting & Analysis

June 2024 Examination

 

 

 

Q1. Two companies, Company A and Company B, operate in the same industry. Company A reports higher profits than Company B. Upon further analysis, it is discovered that Company A capitalizes a significant portion of its operating expenses, while Company B spends all operating expenses immediately. Analyze the implications of these accounting practices on the financial   statements   and   compare   the   financial   performance   of   both   companies. (10 marks)

 

Company A		Company B
Revenue	Rs 20,00,000	Revenue	Rs 18,00,000
Operating Expenses   (after capitalization)	Rs 12,00,000	Operating Expenses   (after capitalization)	Rs 15,00,000
Non-Operating   Expenses	Rs 1,00,000	Non-Operating   Expenses	Rs 80,000
Net Income	Rs 8,00,000	Net Income	Rs 2,20,000
Total Assets	Rs 50,00,000	Total Assets	Rs 45,00,000
Total Liabilities	Rs 20,00,000	Total Liabilities	Rs 18,00,000

 

Ans 1.

Introduction

In the financial landscape of any industry, the accounting practices adopted by companies can significantly influence their reported financial health and performance. This paper aims to delve into the accounting methodologies of two companies, Company A and Company B, which, despite operating in the same sector, report different profit margins due to their distinct treatment of operating expenses. Company A’s approach to capitalize a significant portion of its operating expenses, as opposed to Company B’s strategy to expense them immediately, sets a foundation for a nuanced analysis. By examining the implications of these practices on their financial statements, this study seeks to unravel the layers behind the numbers and provide insights into the real financial performance of both entities. Through this comparison, we aim to understand the broader implications of accounting choices and their impact on stakeholders’ perception of

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Q2. Company ABC is a manufacturing firm that produces electronic gadgets. During the fiscal year, it purchases raw materials, incurs manufacturing costs, sells its products, and manages its finances. The company follows accrual accounting principles and prepares financial statements annually. Explain the accounting process involved in recording the transactions and events of Company ABC throughout the fiscal year, from the initial purchase of raw materials to the preparation of financial statements.  (10 marks)

Ans 2.

Introduction

In the intricate world of financial accounting, the journey of recording a company’s transactions throughout a fiscal year forms the backbone of its financial health and strategic planning. For a manufacturing entity like Company ABC, which specializes in the production of electronic gadgets, this journey encompasses a myriad of activities starting from the acquisition of raw materials to the ultimate preparation of financial statements. This narrative unfolds within the framework of accrual accounting principles, a cornerstone of financial reporting that ensures revenues and expenses are recognized when they are earned or incurred, rather than when the cash is exchanged. This approach provides a more accurate reflection of the

 

 

Q3a. Following are incomplete Trading & Profit and Loss A/c. and Balance Sheet

Trading Account:

Particular	Rs. Debit	Particular	Rs. Credit
To Op. stock	350,000	By Sales	?
To Purchase	?	By Closing Stock	?
To Purchase Return	87,000
To Gross Profit	718,421
Total	1496710	Total	1496710

 

Profit & Loss Account:

Particular	Rs. Debit	Particular	Rs. Credit
To Office Exp.	370,000	By Gross Profit	718,421
To Int. on Deb.	30,000	By Commission	?
To Tax. Provision	18,421
To Net Profit	350000
Total	?	Total	?

 

Balance Sheet:

Particular	Rs. Liabilities	Particular	Rs. Assets
Paid Up Capital	5,000,000	Plant & machinery	700,000
General Reserve	?	Stock	?
P & L a/c.	?	Debtors	?
10% Debenture	?	Bank	62,500
Current Liabilities	6,000,000	Other Fixed Assets	?
	?		?

 

 

 

Find out missing items with the help of other details are as under:

1. Current ratio was 2:1.
2. Closing stock is 25% of sales.
3. Proposed dividend was 40% of paid up capital.
4. Gross profit ratio was 60%
5. Amount transfer to general reserve is same as proposed dividend.
6. Balance of P&L account is calculated 10% of proposed dividend.
7. Commission income is 1/7 of net profit.
8. Balance of general reserve is twice the current year transfer amount.

Ans 3a.

Introduction

In the realm of financial accounting, the preparation of Trading and Profit & Loss Accounts along with the Balance Sheet is a fundamental exercise to ascertain the financial performance and position of a business for a specific period. These statements are interconnected, with figures from one part affecting the others. In this analysis, we confront a scenario with missing figures in the financial statements, which we are tasked to deduce using provided ratios and additional details. This exercise not only tests our understanding of accounting principles but also our

 

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Q3b. Company XYZ, a retail company, provides the following financial information for the fiscal year ending December 31, 2023:

• Net Sales: ₹2,500,000
• Cost of Goods Sold: ₹1,200,000
• Gross Profit: ₹1,300,000
• Operating Expenses: ₹700,000
• Net Income: ₹500,000
• Total Assets: ₹3,000,000
• Total Liabilities: ₹1,200,000
• Shareholders’ Equity: ₹1,800,000

Identify the type of ratio that can be calculated using the provided financial information. Calculate the ratio and interpret its meaning in terms of Company XYZ’s financial performance. Additionally, discuss the limitations of ratio analysis and how these limitations may impact the interpretation of financial ratios.   (5 Marks)

Ans 3b.

Introduction

Ratio analysis is a fundamental tool in financial analysis, offering insights into a company’s operational efficiency, profitability, liquidity, and solvency. By examining specific ratios derived from financial statements, stakeholders can assess a company’s financial health and performance over time. In this analysis, we focus on Company XYZ’s fiscal year ending December 31, 2023, financial data. We will calculate a