Financial Accounting & Analysis

Qtn 1 Answer:
Introduction: A journal is a record of everyday happenings or of your ideas, or as a
periodical of a certain subject or business. A diary is a type of journal that allows you to
record your everyday events. The minimum number of line items for a journal entry is two,
and the total amount recorded in the debit column must match the total amount in the credit
column which is the basic requirement of a journal entry. The external auditors' year-end
review of a company's financial statements and associated systems may have access to this
data. The date, the credit and debit amount, a brief description of the transactions, and the
accounts involved are all listed in each journal entry along with other information relevant to
a single business transaction. Depending on the nature of the business, it could include a list
of the impacted subsidiaries, tax information, and other facts. Recurring journal entries can be
automated and templatised using accounting software, minimising the possibility of human
error.

Application:

Dr. Cr.
Date Particulars L.F. Amount Amount
(Rs.) (Rs.)
Cash A/c Dr. 5000
Bank A/c Dr. 50000
03-Dec
To Capital A/c 55000
(Being business commencement)
Furniture A/c Dr. 30000
To Bank A/c 30000
05-Dec To Account Payable A/c 60000
(Being furniture purchased partially by
cheque and on credit)
Purchases A/c Dr. 315000
07-Dec To Bank A/c 315000
(Being goods purchased through bank)
Bank A/c Dr. 500000
08-Dec To Sales A/c 500000
(Being goods sold)
Rent A/c Dr. 10000
Electricity A/c Dr. 10000
10-Dec Salary to employee’s A/c Dr. 10000
To Bank A/c 30000
(Being expenses paid through bank)
Conclusion:
This was in short, the journal entries. It is crucial to record them as it serves the purpose of
correctly & completely documenting every business transaction. These business transactions
can be done physically or online. The most important book of entry is the journal entry as it
organises your company's information and ensures that all other accounting processes are
correct.

Qtn 2 Answer:

Introduction: A financial statement known as a profit and loss (P&L) statement provides an
overview of the revenues, expenditures, and expenses incurred by a company for a given time
period, often a quarter or financial year. The P&L statement is calculated by subtracting the
total expenditures and expenses from the total income and revenue. These documents can tell
if a business yields a profit by raising sales, cutting expenses, or doing both. P&L statements
are often shown using the cash or accrual method. Investors and corporate management use
the P&L statements to assess a firm's financial condition. The consistent categories that are
included in the P&L statement are gross margin, selling and administration expense (or
operating expense), net profit, and net sales. The P&L statement will help you understand
how money moves in and out of the company since it showcases revenues and costs.

Concept & Application:

The eight components of the Profit and Loss (P&L) statements are:
1. Gross Profit
2. Sales Revenue
3. Sales Return and Allowances
4. Goods and Service Tax
5. Cost of Goods Sold
6. Operating Profit
7. Net Profit
8. Income Tax

Let’s discuss 5 components out of these 8.

1. Gross Profit: Gross profit is the difference between the sales revenue and the cost of
goods sold. Sales profit or gross income are other names for gross profit. This helps to
understand how well a business uses its workforce and resources to produce goods
and services.
2. Sales Revenue: Revenue is simply the income generated by multiplying the average
cost of the goods by the total units sold through business activity. Revenue appears at
the top of the income statement, and hence, is sometimes referred to as the top line.
The revenue figure represents the income that a business makes before deducting any
costs.
3. Cost of goods sold: The sum of money that a company spends on the expenses
directly associated with the selling of goods is known as the cost of goods sold.
 Depending on the nature of the firm, this might also include raw materials, packaging,
the labour involved in manufacturing or selling the product, and items bought for
resale.
4. Goods and Service Tax: Goods and Services Tax (GST) is shown as a deduction
from gross sales. This is an indirect tax that the seller imposes on the customer and
deposits with the government.
5. Income Tax: For an organisation, income tax is treated as a separate business
expense. In the case of a sole proprietorship, income tax is treated as a personal
expense and is adjusted in the owners’ capital account.

Conclusion:

We can conclude that the Profit and loss statement helps in understanding a company's net
income and helps the management team, especially the board of directors, in making
decisions. It provides a financial picture of how much profit and loss is the company
undergoing and allows you to estimate your company’s growth.

Qtn 3A Answer:

Introduction:
The balance sheet shows the overall assets of the business as well as how those assets are
financed—either via debt or equity. The balance sheet shows the financial position of the
business at a particular point in time, generally at the end of the accounting period. The
balance sheet is one of the three basic financial statements which is essential to accounting
and financial modelling. Financial ratios are calculated by the fundamental analyst using the
balance sheet.

The fundamental formula can be represented as: Assets = Liabilities + Equity

Concept and Application:

One of the three primary financial statements used to assess a company is the balance sheet.
It provides a brief overview of the assets and liabilities of a corporation as of the publishing
date. The assets on the balance sheet are equal to the total of the liabilities plus the
shareholders' equity.
 Amount
Amount (Rs
Liabilities Assets (Rs in
in ‘000)
‘000)
Shareholder's equity: Fixed Assets:
Retained earnings 860 Equipment 1500
Common stock 1000
Current Assets:
Current Liability: Accounts receivable 250
Accounts payable 540 Cash 550
Unearned revenue 200 Prepaid insurance 300
Salaries payable 150 supplies 150
Total Liabilities 2750 Total Assets 2750

Conclusion:
Therefore, we can conclude that balance sheets are important because it helps to assess risk.
A business will be able to determine in a timely manner whether it has taken on too much
debt, if the liquidity of its assets is inadequate, or whether it has enough cash on hand to
cover immediate needs. Balance sheets are also used to attract and keep talent, as well as to
get capital and a business loan.

Qtn 3B Answer:

Introduction: Accounting ratios are a range of measurements used to assess the productivity
and profitability of an organisation based on its financial reporting. They are a crucial subset
of financial ratios. A liquidity ratio called the Current Ratio assesses a company's capacity to
settle short-term debts or those that are due within a year. It explains to investors and analysts
how a business may use its present assets to the fullest extent possible to pay its current
liabilities and other payables. This can be represented as:
Current ratio = Current Assets/ Current Liabilities

Concept and Application:

Analysts analyse a company's current assets to its current liabilities to get the ratio. If the
ratio is less than 1, it means that the firm has more obligations due in the next year or less
than it does in cash or other short-term assets that are expected to be converted to cash in the
next year or less. Although several circumstances might negatively impact the current ratio of
a strong corporation, a current ratio of less than 1.00 may sound distressing.

Calculation of current ratio of Z and X LLP

 Particulars Calculations Amount (Rs)
Current assets (a) 2250
Accounts receivable 250
Supplies 150
Cash 550
Prepaid insurance 300
Common stock 1000
Current liabilities (b) 890
Salaries payable 150
Unearned revenue 200
Accounts payable 540
Current ratio (a/b) 2.52

The current ratio of Z and X LLP is 2.52:1

A ratio of 2:1 is considered an excellent ratio as it reveals that the company has doubled its
present properties compared to its current obligations. However, any ratio between 1:1 to 2:1
is considered significant. If the ratio is lower than 1:1, it suggests the lower monetary
liquidity of the business. If the ratio is too high, it shows that the firm still has current
properties and is shedding an opportunity to utilize them to produce revenue.

Conclusion:

Therefore, we can conclude that the company having a current ratio of 1.404 means can meet
its short-term responsibilities. The company's capacity increases as the ratio rises. The ideal
current ratio for a company is between 1.2 and 2, which indicates that it has two times as
many current assets as liabilities to service its debts.