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Financial Accounting and Analysis

ANS. 1.

CONCEPT:

Written Down Value method is a depreciation technique that applies a constant rate of
depreciation to the net book value of assets each year thereby recognizing more depreciation
expense in early years of the life of the asset and less depreciation in the later years of the life
of the asset. In short, this method accelerates the recognition of depreciation expense in a
systematic way and helps business recognize more depreciation in the early years. It is also
known as Diminishing Balance Method or Declining Balance Method.

Written Down Value Method = (Cost of Asset – Salvage Value of the Asset) * Rate of Depreciation
(in %)

One of the most common and popular types of Written Down Value method is Double
Declining Balance Method. This method applies depreciation two times the Straight Line Rate.
The word “Double” signifies this aspect. The method is suitable for assets which quickly lose
their value and as such requires higher depreciation.

Advantages :

 Written down Value Method helps in determining the depreciated value of the
asset which is helpful in determining the price at which the asset should be sold.
 Written Down Value method applies a higher amount of depreciation in the initial years
of the useful life of the asset and is an ideal method to record depreciation of assets
which lose their value quickly. An example of such assets could be any Technological
development software by an IT company. By recognizing accelerated depreciation in
the early years the business can determine its fair market value on the Balance Sheet
before the technology becomes outdated.
 As appeared by Income Tax Act it is a reasonable procedure.

Challenges :

A. Written Down Value Method recognizes higher depreciation during early years and may
not be an ideal method of depreciation for those assets which have uniform utility throughout
their useful life and doesn’t suffer from the risk of obsolescence and technology change.

B. In this framework resource can never be decreased to zero.


Financial Accounting and Analysis

C. Higher Depreciation expenses due to this method result in reduced Net Income for the
business.

D. This structure requires create accounting. The referencing of right pace of obliging is a
bewildered undertaking.

Details of M/s Wildcat Ltd.

Year Rate of Dep. Opening WDV Depreciation Closing WDV

1st 20% 15,00,000 3,00,000 12,00,000

2nd 20% 12,00,000 2,40,000 9,60,000

3rd 20% 9,60,000 1,92,000 7,68,000

4th 20% 7,68,000 1,53,600 6,14,400

Total 8,85,600

As per the date given by Wildcat ltd. the WDV of machinery at the end of 4 th year will be Rs
6,14,000/-.

And the cumulative Depreciation on that machine for the 4 years will be Rs 8,85,600/-

Thus as the machinery is sold for Rs 8, 00,000/- company made a profit of = Sales price Less
WDV

=8, 00,000-6, 14,000

= 1, 85,600/-

Profit = Rs. 1, 85,600/-

Conclusion:

Written down Value method is an appropriate method for matching the expenses to revenues
as most of the long-lived assets generate more benefits in the early years of their economic life
and fewer benefits in the later years of their life and it ensures the same by more Depreciation
expenses in the early years and fewer depreciation expenses in the later years of the assets
useful life.
Financial Accounting and Analysis

ANS. 2

Introduction:

Financial statements are critical to your business. Without them, you wouldn’t be able to do
things like plan expenses, secure loans, or sell your business.

But how do they get created? Through the accounting cycle (sometimes called the
“bookkeeping cycle”).

The accounting cycle is a multi-step process designed to convert all of your company’s raw
financial information into financial statements.

Concept:

The six steps of the accounting cycle:

1. Analyze and record transactions


2. Post transactions to the ledger
3. Prepare an unadjusted trial balance
4. Prepare adjusting entries at the end of the period
5. Prepare an adjusted trial balance
6. Prepare financial statements

The beginning of period building

The first step in the accounting cycle is gathering records of your business
transactions—receipts, invoices, bank statements, things like that—for the current
accounting period.

This is the raw financial information that needs to be translated into something useful.

This involves recording all of the financial information we gathered in step one into
the general ledger.

The ledger is made up of journal entries, a chronological list of all of a business’s


transactions, written down according to the rules of double-entry accounting. This means that
whenever a transaction occurs, two journal entries must be made, affecting at least two
accounts: a debit and a credit.
Financial Accounting and Analysis

If you buy a new MacBook Pro for your business, for example, your assets account will go
up, and your bank account will go down.

Once you’ve converted all of your business transactions into debits and credits, it’s time to
move them into your company’s ledger.

The ledger is a large, numbered list showing all your company’s transactions and how they
affect each of your business’s individual accounts. The general ledger is like the master key
of your bookkeeping setup. If you’re looking for any financial record for your business, the
fastest way is to check the ledger.

Journal entries are usually posted to the ledger on a continuous basis, as soon as business
transactions occur, to make sure that the company’s books are always up to date.

If you use accounting software, posting to the ledger is usually done automatically in the
background.

A section it ought to be watched that a titanic bit of the truncations are recorded fittingly or
not.

2. Change the Trial Balance : It may be fundamental to adjust the starter leveling, pro to pass
on goofs or to make expenses of various sorts and to aggregate for money or expenses in the
period.

Next comes preparing an unadjusted trial balance, which happens at the end of the
accounting period.

The first step to preparing an unadjusted trial balance is totaling up all the debits and credits
in each of your company’s accounts, and calculating a total balance for each individual
account.

An unadjusted trial balance brings all of these totals together in one place, and looks
something like this:

If you use accounting software, this usually means you’ve made a mistake inputting
information into the system.

Searching for and fixing these errors is called making correcting entries.

Adjusting entries make sure that your financial statements only contain information that is
relevant to the particular period of time you’re interested in. There are four main types of
adjustments: deferrals, accruals, tax adjustments, and missing transaction adjustments.
Financial Accounting and Analysis

1. Deferrals have to do with money you spent before seeing any resulting revenue (e.g.
buying office supplies that you will use in the future), or cash you received before delivering
a service or good (e.g. an advanced payment from a customer).

Put another way, deferrals remove transactions that do not belong to the period you’re
creating a financial statement for.

2. Accruals have to do with revenues you didn’t immediately record at the time (such as a
bill that you sent to the customer two weeks after giving them consulting services), or
expenses you didn’t immediately pay for (e.g. rent you owe a landlord and haven’t paid yet).

Accruals make sure that the financial statements you’re preparing now take into account
those future payments and expenses.

3. Missing transaction adjustments help you account for the transactions you forgot about
while bookkeeping—things like business purchases on your personal credit. You’d add them
in here.

4. Tax adjustments help you account for things like depreciation and other tax deductions.
For example, you may have paid big money for a new piece of equipment, but you’d be able
to write off part of the cost this year. Tax adjustments happen once a year, and your CPA will
likely lead you through it

Once you’ve posted all of your adjusting entries, it’s time to create another trial balance, this
time taking into account all of the adjusting entries you’ve made.

This new trial balance is called an adjusted trial balance, and one of its purposes is to prove
that all of your ledger’s credits and debits balance after all adjustments.

Once you have an adjusted trial balance, you have all the information you need to start
preparing your company’s financial statements.

The last step in the accounting cycle is preparing financial statements that tell you where
your business’s money is, and how it got there. It’s probably the biggest reason we go
through all the trouble of the first five accounting cycle steps.

Once you’ve created an adjusted trial balance, assembling financial a fairly straightforward
task.

First, an income statement statements is can be prepared using information from the revenue
and expense account sections of the trial balance.

A balance sheet can then be prepared, made up of assets, liabilities, and owner’s equity.
Financial Accounting and Analysis

Ans 3 (A)

INTRODUCTION:

 Earnings per share (EPS) is calculated as a company's profit divided by the outstanding
shares of its common stock. The resulting number serves as an indicator of a company's
profitability. It is common for a company to report EPS that is adjusted
for extraordinary items and potential share dilution. The higher a company's EPS, the
more profitable it is considered.

CONCEPT:

Calculation of EPS :

EPS = Net Income-preferred dividend________

Weighted average common shares outstanding

= 50,00,000-(35% of 50,00,000)/5,00,000

=50,00,000-17,50,000/5,00,000

=32, 50,000/5,00,000

=6.50

Earnings per Share is Rs. 6.50

 Dividend Pay Out Ratio : The dividend payout ratio is the ratio of the total amount of
dividends paid out to shareholders relative to the net income of the company. It is the
percentage of earnings paid to shareholders in dividends. The amount that is not paid
to shareholders is retained by the company to pay off debt or to reinvest in core
operations. It is sometimes simply referred to as the 'payout ratio.

Dividend pay off ratio = Dividend paid/ net income of the company

Retention ratio = dividend per share/ EPS

Dividend pay off ratio = 2*5,00,000/50,00,000-(35% of 50,00,000)


Financial Accounting and Analysis

= 10,00,000/50,00,000-(17,50,000)

=10,00,000/32,50,000

=0.3076=0.31

Dividend pay off ratio = 0.31

 Price Earnings ratio : The price-to-earnings ratio (P/E ratio) is the ratio for valuing a
company that measures its current share price relative to its per-share earnings
(EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the
earnings multiple.

P/E ratio = market rate of share/ EPS

=200/6.50

=30.769

P/E ratio =30.77

Ans 3(B)

Cash flow statement: Cash Flow from Investing Activities is the section of a company’s cash
flow statement that displays how much money has been used in (or generated from) making
investments during a specific time period. Investing activities include purchases of long-term
assets (such as property, plant, and equipment), acquisitions of other businesses, and
investments in marketable securities (stocks and bonds).

Which are improvement, experience and financing. Despite the course by which that the
compensation clarification is seen as less head.
Financial Accounting and Analysis

In the given case:

Cash Flow Statement:

Particulars Cash inflow Cash Outflow Net impact

Plant Acquired (investment activity) 1,60,000

Claim received for loss of plant in 45,500


fire(financial activity)

Unsecured loans given to 5,95,000


subsidiaries( investing activities)

Interest on loan received from 72,500 (-)


subsidiary companies (financial 6,37,000
activities)

Cash receipts: 45500 + 72500 = 118000.

Cash paid: 160000 + 595000 = 755000.

Net cash flow: Cash receipts – Cash Paid

Net cash flow: 118000 - 755000 = 637000

Total outflow of cash is 6, 37,000/-

CONCLUSION:

The motivation driving mix of any business is benefits, all around portrayed by the Cash in the
association. As it is fittingly said by individual, "absolutely the soonest practice I learned in
business was that bookkeeping reports and pay clarifications are fiction, pay is reality.