Financial Accounting: Notes, assignment questions and answers

Financial accounting involves producing financial statements (Income Statement, Balance Sheet, Statement of Cash Flows) for external stakeholders such as investors, regulators, and creditors.

Accounting can be categorized as financial accounting and management accounting. These are two more common types of accounting. Other types of accounting may include tax accounting, cost accounting, and project accounting, among others.

Financial Ratios

Financial ratios are metrics that are used by investors, creditors, and business owners to assess the financial health of a company. These ratios are calculated from a company’s financial statements, such as the balance sheet, income statement, and cash flow statement.

Various types of financial ratios:

• Profitability ratios (such as gross profit margin and net profit margin)
• Liquidity ratios (such as current ratio and quick ratio)
• Solvency ratios (such as debt-to-equity ratio and interest coverage ratio).

Related: Financial Accounting & Management Accounting

Examples

Financial Ratio Analysis for Cement Companies

Ratio	UltraTech Cement	Shree Cements	Ambuja Cements	Analysis
P/E	37.14	50.84	16.21	Ambuja cement looks attractive looking at the lower P/E ratio.
Dividend Payout Ratio (%)	11.74	20.14	26.70	Those who wish to invest for dividends can consider Ambuja because of its higher dividend payout.
Debt/Equity	0.63	0.29	0.08	Ambuja doesn’t use a lot of debt to run its business, which is a good sign.
Gross Profit Margin(%)	19.58	24.72	11.82	This is the first level of profitability, indicates the management is good at generating revenue from the costs involved. Shree Cements leads here.
Operating Profit Margin(%)	13.95	12.85	16.65	Shree cements has a reduced operating margin indicating more overheads.
Net Profit Margin(%)	6.87	8.11	13.09	Ambuja Cement looks attractive because of the higher profits it generates.
Return on Capital Employed (%)	10.69	11.4	8.16	Shree cements is generating better profitability for the capital employed.
Current Ratio	0.97	2.01	1.72	Value of less than 1 is considered a good ratio, which UltraTech has.
Quick Ratio	0.69	1.21	1.41
Inventory Turnover Ratio	10.91	7.38	8.89	They all have fairly high inventory turnover ratio.

References

J. Dyson 2020 Accounting for non-accounting students. 10th Edition Pearson.

P. Atrill, E McLaney 2018 Management Accounting for Decision Makers. 9th Edition Pearson

P. Atrill E McLaney 2020 Financial Management for Decision makers 9th Edition Pearson

Question and Answers

Question: Washco Limited manufacture and distribute washing machines. The board of directors (BoD) have been concerned for some time that their share of the market has been in decline, mainly as a result of industry-wide competition. They are also aware that, to a certain extent, the industry has become the victim of its own success as washing machines have become more reliable and durable and therefore do not need replacing as regularly. Therefore, the BoD are considering making an investment in Meadow Limited.

Meadow Ltd manufactures dishwashers. The BoD believe that the synergistic gains will include advantages over competitors from shared technologies, a greater distribution network, an increase in skilled employees and management and a shared clerical and manufacturing headquarters. The accounts department of Washco Ltd has calculated the following financial ratios for both companies for the years 2021 and 2020.

a) The BoD of Washco Limited have asked you to analyse the position and performance of Meadow Limited in the area of profitability, liquidity, efficiency and long-term solvency.

b) As part of this analysis, the BoD have also asked that you use the information above to compare and contrast the position and performance of Washco Limited with Meadow Limited. They asked you to conclude your analysis by stating, with reasons, whether you feel Washco Limited should make a bid to acquire Meadow Limited.

Q) An investor wants to tests the financial position of Asian Paints Ltd. Thus, he wants to assess the short term liquidity as well as long term solvency. Discuss the four relevant ratio’s which he will definitely look into.

Q. Marry Kom is planning to invest in the share market. She has a profile of risk seeker investor but she believes that before investing it’s important to understand market ratios effectively. Discuss any five market ratios with their importance that Marry Kom should look into before undertaking any investment decision

Q. Look at the balance sheet and the income sheet for Air France-KLM and calculate Financial ratios. http://tools.morningstar.co.uk/uk/stockreport/default.aspx?tab=10&vw=bs&SecurityToken=0P00009WA3%5D3%5D0%5DE0WWE%24%24ALL&Id=0P00009WA3&ClientFund=0&CurrencyId=BAS

Question:

Definitions and Importance of Operating Profit Margin and Return on Capital Employed (Compulsorily from text books)

Operating Profit Margin Ratio. Explain for TESCO PLC and Sainsbury PLC

Return On Capital Employed (ROCE) Ratio: Explain for TESCO PLC and Sainsbury PLC)

Industry / Economic Analysis

TESCO PLC Strategy to beat competition

Annual Report of 2020 for both TESCO PLC and SAINSBURY PLC will be the primary source for information.

Analysis: Operating Profit Margin (OPM): Focus on the broad year on change in revenue and operating profit numbers. By what percentage the absolute revenue and profit numbers have increased or decreased. Financial review section in Tesco Annual Report 2020 (Page number 9) would be a good place to start. You can also read through the Chairman and the Chief Executive speeches. Then you go to the ratio and explain why OPM increased or decreased. Understand key segments which are contributing to revenue / operating profit (Product wise segments / geography wise segments). These details could be found on Tesco Annual Report.

Analysis: Return on Capital Employed (ROCE):

No need to talk about Operating Profit. Focus largely on changes in net debt and equity (Increase and decrease) as compared to last year. These details should be there on page 12 and 13 of the annual report. See if the company has any policy on debt reduction or are they planning to raise any significant debt in coming years.

Peer Company comparison: Same guidelines can be followed to analyze the OPM and ROCE ratios of Sainsbury PLC. But since it’s a peer company the content can be less as compared to detailing you may do for TESCO PLC ratios.

Incorporating the industry and economic analysis: This will require some additional reading beyond the annual report. You can find out if any major regulations are going to come which may impact the retail sector. Any changes that may impact the cost structure / revenue and ultimately the profitability. It would also be great if you could understand the economic situation of the major markets from where the company is generating the revenue. (UK / Central Europe / Asia etc.). This analysis when linked to the financial numbers of the companies will add a lot of quality to the report.

TESCO Strategy to Beat competition going forward: This will require additional reading (apart from the content given in annual report in the chairman / chief executive / finance head speeches). The thought is to highlight what strategic measures TESCO PLC is taking to beat the competition. These measures may involve decisions across marketing, operations and supply chain, distribution etc.

Question: 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 given items as (operating / investing / financing), share the correct classification with logical reasoning And calculate the cash flow from operating activities.

Loss on sale of 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
Amortisation Expenses, 110000

Question: 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 name of the company in the web page. Download the annual report as available, latest. Identify the relevant data, and then perform comparative analysis of Balance Sheet of the company.

Question: Mr. Akbar provides you with the following information-(all the transactions are separate and independent of each other)

• 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. Identify the accounts being affected in the monetary transaction and Identify the type of accounts identified – real, personal or nominal
b. Discuss the rule of passing the journal entry applicable here and pass the journal entry (Golden rule or transaction analysis, any of these rule/s can be taken as a base to justify the answer)

Q. Discuss and analyze the following transactions for X Ltd, using the concept of accounting equation (Assets, Liabilities and Equities).
1. Purchased Furniture for Rs675000
2. Capital Introduced by the business Owner by depositing 12 Lakhs in the bank account
3. Goods purchased on credit from Aman Enterprises for Rs105000
4. Goods sold on credit for Rs 400000. The cost of the goods sold was Rs 300000
5. Purchased goods from Sneha Enterprises for Rs 600000 and made the payment from the business’s bank account

Q. Love Doddle is a gifting enterprise of Ms. Dorati. The enterprise generates inflows by arranging gift hampers for the customer’s loved ones. The inflows arises from the sale of gift hampers Rs 505000 and from bank interest, dividend receipt Rs4200. Ms. Dorati is confused on how to record these inflows. She would like to understand from you about the concepts Revenue from operation and other income, so that she can record the information so as to prepare the profit and loss statement of the enterprise. Define, share examples, and elaborate on your understanding towards the terms Revenue from Operation and Other Income.

Q. The following information is given with respect to the ratio’s of two companies (Aman Ltd, Roger Ltd)
Current ratio, 2:01, 1.60:1
Quick Ratio, 1.35:1, 1:01
Return on investment, 15%, 13%
Debt Equity Ratio, 2.5:1, 1:01

a. Define the concepts of Current and Quick ratio’s and also, reflect on your understanding towards the financial performance of the companies by looking to the above information.

b. Define the terms- Return on Investment and Debt equity ratio and also, reflect on your understanding towards the financial performance of the companies.

Q. Finding financial information. You are required to find the appropriate financial information Hindustan Unilevers Limited financial statements and calculate the following ratios for the financial years 2018-19 and 2019-20: 1. Return on capital employed 2. Return on sales 3. Asset utilization ratio 4. Gross profit margin 5. Current ratio and quick ratio 6. Gearing 7. Interest cover 8. Stock days 9. Current trade receivables days* 10. Current trade payables days* 11. Return on equity. Show all steps needed to calculate your results, including ratio definition and input values.

Q. Further compute the above-mentioned ratios for Procter & Gamble, one of the key competitors of , Hindustan Unilever’s Limited. Conduct a financial analysis of Hindustan Unilevers Limited and P&G using the ratios calculated in Task 1 and describe what you observe about HUL’s performance as well as the performance of its competitor. Explain possible causes for differences in performance and discuss implications for Hindustan Unilevers Limited. In your analysis, you should also discuss whether, according to their financial performance, HUL should be concerned about P&G. Your analysis should not be longer than 2,000 words, excluding bibliography. If you use information that is not included in the financial statements but elsewhere in the company’s annual report (e.g., notes) or in external sources, please cite the exact location and source of this information.

In your answer, you should particularly refer to HUL’s (consolidated) financial statements for the financial year 2020. The notes to these statements will also be relevant. You should be able to answer this question relying on the financial information provided in HUL’s annual reports. This is a real company so you may want to look at the company’s website or those of its competitors, but this is not required. If you make any assumptions, explain them as briefly as you can. Your task is to analyze the financial information about the competitor (P&G.) and comment on it, not to speculate on that organization’s grand market strategy. Before answering this question, review the financial analysis and ratios studied in the module. If that information comes from sources other than HUL’s financial statements, you should provide details of these additional sources and your reasons for using them.

Note: it is suggested that you use current trade receivables and current trade payables to calculate trade receivables days and trade payables days ratios. This TMA is not just testing your ability to calculate the different ratios; it is also assessing your understanding of how to source relevant financial information and make considered decisions about whether and how to deploy it.

Q. Ms. Sandipa is the accounts executive for a company called SS Enterprises. Her job description requires her to supervise the process of recording of the transactions of business and to ensure that all accounting assumptions are taken care of. However, her junior executive is confused about the concepts of the accounting period assumption and the Separate entity assumption. Elaborate how Sandipa can explain the concepts to her junior with the help of suitable example.

Q. The following information is available in relation to Britannia Baby Company. The Company has profit before taxes of Rs 50 lacs.
a. Classify and give reasons for the cash flows falling under the operating activities
b. Classify and give reasons for the cash flows falling under the investing activities

Particulars Amount Rs in (Lacs)
1. Tangible assets purchased during the year 75
2. Depreciation charged on these tangible assets for the year @ 10% ?
3. Stock sold for the year 95
4. Loan given to Big Boy Company 150
5. Interest received from Big Boy company for the said loan @11.5% ?
6. Shares purchased of a company called as Arvind Mills 10
7. Dividend Received from Arvind Mills 1
8. Taxes paid for the year @ 30% ?

Q) A dealer of Mobile TV has the following items in inventory as on March 31,2018

Item Quantity Cost Price per unit Market price per unit
Nokia 50 100000 98000
Samsung 70 88000 90000
Sony 100 120000 115000
Motorola 80 75000 76000

Discuss the accounting standard which talks about inventory valuation. Also, find
out and define the overall value of inventories as per the applicable accounting
standard.

Q) Define and Discuss the concepts of prepaid expenses and outstanding expenses and
their impact on the income statement and Balance Sheet of an Entity? In case of firm
A which largely has the balance of prepaid expenses and another firm B which
largely has the balance of outstanding expenses, what does this reflects? Discuss

Q. a. A logistics company sold a car of Rs 2.5 lacs. The company had purchased the
car three years back for Rs 10 lacs and had depreciated the same using straight line
method of depreciation, assuming its useful life to be five years and a residual value
of Rs77760. Calculate the WDV after charging depreciation for third year,
accumulated depreciation for three years and profit on sale, if any.

b. Consider the following transaction pertaining Ammar’s business-

1. started business with cash Rs 3 lacs
2. Purchased goods for cash Rs 1.2 lacs
3. purchased goods on credit Rs 60000
4. purchased furniture for cash Rs 20000
5. deposited RS 50000 in the bank
Perform transaction analysis for each transaction undertaken and present accounting
equation for these transactions.

Q) Discuss the components of Other Income under the statement of Profit and Loss accounts of any Indian Corporate. How other income is different from revenue from normal operations under the vertical format.

Q) The following information is provided by a dealer in computer chips. The dealer follows FIFO method for valuing stock, calculate from the following figures –

Date particulars
April 1, 2019 – Opening stock 750 chips @Rs1550 per chip

Purchases
April 10, 2019 – 1000 chips @Rs1750 per chip
April 20, 2019 – 1650 chips @ Rs1875 per chip

Sales
April 15, 2019 – 900 chips @Rs3000 per chip
April 16, 2019 – 1950 chips @ Rs 3250 per chip

a) Cost of goods available for sale
b) Gross profit

Q)From the following information of A star Ltd. prepare the Cash Flow statement for the year ended 2018 as per AS – 3.

Liabilities 31-3-2017 31-3-2018 Assets 31-3-2017 31-3-2018

Equity share capital 2,20,000 2,50,000 machinery 2,00,000 2,30,000
9% Preference Share Capital 1,00,000 1,10,000 Building 1,50,000 1,76,000
Securities Premium 20,000 26,000 Land 18,000 18,000
Profit & Loss A/c 1,04,000 1,34,000 Stock 84,000 98,000
5% Debentures 70,000 64,000 Debtors 38,000 38,000
Creditors 38,000 46,000 Bills Receivable 42,000 62,000
Bills Payable 5,000 4,000 Cash 42,000 32,000
Provision for Tax 10,000 12,000
Dividends payable 7,000 8,000
5,74,000 6,54,000 5,74,000 6,54,000

Q) Balance Sheet for JK Ltd. for the year ended 31st March 2016 & 2017 (10 Marks)
Liabilities 2016 2017 Assets 2016 2017
Equity Share Capital 2,00,000 2,00,000 Land 50,000 50,000
9% Preference Share Capital 1,50,000 1,50,000 Building 1,50,000 1,35,000
Reserves 1,00,000 1,22,500 Plant & Machinery 1,50,000 1,35,000
17% Debentures 50,000 75,000 Furniture 50,000 70,000
Creditors 75,000 1,00,000 Stock 1,00,000 1,50,000
Bills Payable 25,000 37,500 Debtors 1,00,000 1,50,000
Tax payable 50,000 75,000 Cash 50,000 70,000
650000 760000 650000 760000

Profit & Loss Account for JK Ltd. for the year ended 31st March 2016 and 2017 Particulars 2016 2017 Particulars 2016 2017 To Cost of goods sold 3,00,000 3,75,000 By Sales 4,00,000 5,00,000
To Operating Expenses Administrative Selling 6,500 10,000 7,250 10,000
To Interest on Debentures 8,500 12,750
To Net Profit 75,000 95,000
4,00,000 5,00,000 4,00,000 5,00,000

Using the tool of commonsize financial statement analysis, comment about the improvement or decline of financial performance of the company.

Q) The following extracts are available from the financial statements of companies V ltd. and J Ltd. for the year ended 31st March 2017: (Rs. In Lakhs)

Particulars V Ltd. J Ltd.
Revenue from operations 1,500 6,000
Manufacturing cost 900 4,050
Interest paid 105 375
Depreciation 135 675
Selling expenses 135 225
Income Tax 90 225
Non-operating income 45 285
Dividend paid 120 600
Fixed Assets 1,500 7,350
Current Assets 525 2,250
Current Liabilities 375 2100
Debentures 600 3,300
Reserves 450 1,200
Share Capital 600 3,000

From the above information answer the following questions with the help of suitable ratios:

a)
Which company has better solvency using current ratio and share value using earning per share?
Which company would you recommend for investment? Justify.

b) Which company has efficiently employed capital using return on capital employed and better operational efficiency using operating profit ratio?
Which company would you recommend for investment? Justify.

Q) You visited Subway that’s the fast food restaurant to purchase a Combo worth Rs 499. The restaurant paid for the raw material and utilities amounting Rs105 for each sale. In addition to that, the restaurant also paid for certain expenses in cash in total Rs 50 per sale.

Discuss how these financial transactions will be recorded by way of journal entry, and also, discuss the various stages of the whole accounting process.

Q) The following information pertains to the Income statement of Beta Ltd.

revenue generated from sales 1258000
closing stock 102500
profit on sale of securities 25540
Opening stock 50000
purchase of raw material 500000
direct expenses 150000
manufacturing expenses 67550
administrative expenses 68420
depreciation 15840
preliminary expenses written off 4700
selling and distribution expenses 45000
loss on sale of machinery 15000
interest on loan 46510
Taxes paid 25500
Earnings Before Interest & Taxes (EBIT) ???

a) Redraft the information in the vertical form of Income statement and also, calculate Earnings After Taxes (EAT)
b. Calculate the gross profit ratio and operating profit ratio. Discuss, how they differ from each other?