NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Financial Accounting & Analysis
Internal Assignment Applicable for December 2022 Examination

A.1
Journal of Mrs. Veena

Date Particulars Leger Dr. Amount Rs. Cr. Amount Rs.

Folio
03-Dec Saving bank account Dr. 5,00,000
To Capital account Cr. 5,00,000
Saving bank account Dr. 5,000
To Capital account Cr. 5,000
05-Dec Purchase account Dr. 30,000
Cash paid to furniture supplier
Cash account Cr. 30,000
Cash account Dr. 30,000
Cash payable to furniture supplier
Purchase account Cr. 30,000
Cash payable to furniture supplier
07-Dec Bank account (Nominal type) Dr. 3,15,000
Goods purchase for sale
Purchase account (Nominal type) Cr. 3,15,000
Goods purchase for sale
08-Dec Cash account Dr. 5,00,000
Sales of goods
Sales account Cr. 5,00,000
Sales of goods
10-Dec Expenses account Dr. 30,000
Payment of salary, rent, electricity
Cash account Cr. 30,000
Payment of salary, rent, electricity

A.2
A profit and loss account is a record of all the income and expenses of the business during a particular
period of time. This time period can be the entire financial year, or time period like half yearly period,
or quarterly period. All firms, organisations whether they are a sole proprietorship to a company, need
to maintain a P&L account to get their correct financial position at the end of the required period. All
the cash and non-cash income and expenses of the business are recorded in the profit and loss
account.
A profit and loss statement is prepared based on certain basic principles of accounting. These
principles include the principle of accrual accounting, matching principle, and revenue recognition. It
shows various stages of profits earned by the business organization like gross profit or loss, the
operating margin, or the net profit or loss incurred by the business. In other words, profit and loss
account has 8 different sections or components which records useful information. These components
are,

1) Net sales
2) Cost of goods sold
3) Gross profit
4) Selling, general and administrative expenses
5) Operating profit
6) Interest expenses
7) Interest income
8) Net profit

Different components of profit and loss account statement provides vital information to users for
decision making. This statement is very important tool for investors, business owners, money landers
to review firm’s capability of repaying money.

These components are explained below.

1) Net sales: -
Generally, under this component, all primary income due to main operation are recorded. This
covers, sales of goods or services offered by firm. It is also referred as top line. In its simple
form net sales will be calculated as
Net sales = Price of product/service X amount of product/service sold
2) Cost of goods sold: -
This component includes expenditure like purchase of raw material, salaries of employees,
labour costs, cost of overheads, process costs etc. Cost of goods shall always be monitored
and controlled to keep profit margin intact. There are multiple factors affect costs of goods
sold like international geopolitical situation, demand, and supply situation etc.
Mathematical form of calculating cost of goods sold can be described as
Cost of goods sold = Beginning inventory + Purchase and related expenses – Ending Inventory.
In this Purchase related expenses covers cost of actual purchase of material, any purchase
returns, Freight charges on purchased items, Wages paid to workers in stores.
3) Gross profit: -
Gross profit is difference between net sales and cost of goods sold. For any business to be
stable or growing, it must ensure that gross profit must be positive. Many times, account
expert express gross profit as percentage of net sales. Gross profit helps to determine
operational efficiency of firm and in mathematical form gross profit can be represented as
below.
Gross profit = Net sales – Cost of goods sold.
4) Selling, general and administrative expenses: -
The selling, general and administrative expenses are commonly known as SG&A expenses.
SG&A include the salaries of employees, wages, rents, electricity bill, advertising, depreciation
of assets, insurance, and other expenses associated with the retailer's primary activities. The
expenses related to secondary activities (such as the interest expense associated with its
financing activities) are not part of SG&A.] Cost of goods sold and selling, general and
administrative expenses are operating expenses.
5) Operating profit: -
Operating profit is difference between net sales and operating expenses.
 Operating profit = Net sales – (Cost of goods sold + Selling general and administrative
expenses)
6) Interest expenses: -
Interest expenses are expenses which occur due to non-operating expenses such as interest
cost of loan from bank.
7) Interest income: -
For any firm or business, if it earns money by non-operational activities like interest from some
deposits, or dividend from other equity shares are termed as interest income.
8) Net profit: -
The net profit of a business is known as bottom line, or the net income generated by the
business after subtracting all the operating and non-operating expenses as well as taxes and
interest. This is final profit that is available for distribution to the shareholders. The earning
per share are also calculated based on the net profit. A good business will maintain positive
net profit consistently. If a firm has negative net profit, then investors will not invest their
money in that firm or business.

A profit and loss account, also known as an income and expenditure statement. It must be prepared
on a continuous basis like quarterly, half yearly or yearly basis and reviewed with caution to know the
true profitability of the business. The profit and loss account can also help the business organization
to figure out the money losing areas that affect the bottom line of the business and thereby help in
controlling the production and operation process.

A.3.a
For any economic activity of a firm, a separate record in form of financial statement is prepared for
each transaction. This record is called account. In its simple form has a title and 2 columns which
resemble English letter T. This type of account is called T account.

T form account of X&Z LLP, cash Rs. ‘000

Debit Side Credit Side
Retained earning 860 Supplies 150
Account receivable 250 Salaries payable 150
Unearned revenue 200 Equipment 1500
Cash 550 Account payable 540
Common stock 1000 Prepaid insurance 300
Total 2860 2640
Total new balance 220

After transections are posted in T account and ledger, a statement showing accounts with debit and
credit separately is prepared. This statement is called trial balance. It serves as summary of ledger.

A.3.b

Any company’s financial position can be judged with the help of short term and long term performance
review. In order to review short term performance of any company, it’s short term liquidity is checked.
“Current ratio” and “Quick ratio” are tools to check short term liquidity of any company. Among these
two, current ratio is described in detailed.
Current Ratio: -
Current ratio is a ratio of any company’s current assets to current liabilities. Current ratio establishes
the ability of a company to meet its short term obligations. This ratio is particularly important to short
term creditors.
 Current assets are assets those are expected to be converted into cash in short period
of time or consumed in production of goods or rendering of services during normal
course of business. Some examples of current assets are cash in hand, cash at bank,
bills receivables, advances, inventory, accrued income, prepaid expenses, short term
investments like marketable securities etc.
 A current liability is a liability which fall due for payment in a relatively shorter period
of time. Some examples of current liabilities are bank overdraft, short term loans,
sundry creditors, bills payables, proposed dividends, provision of taxes, outstanding
expenses etc.
Mathematically, current ratio is described as follows:

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

It is always good to have current ratio more than 1. Current ratio lower than 1 will indicate that
company will not be able to pay bills at due time without selling some long term assets. A very high
current ratio also may not be advisable as it may be indicating large inventory, receivables, and
unproductive cash balances. Too much money blocked in such items will result in poor efficiency of
cash utilisation. It is very difficult to specify a normal limit of current ratio for a business as it differs
for various industries. It is advisable to compare a company’s current ratio with similar industry’s
average current ratio and trend over number of years.