FINANCIAL

ACCOUNTING
CASE STUDIES: I- VIII

CASES COVERED
Infosys

Technologies Limited.
Tea Board.
Chand Brothers
Murugan Automobile Company
Tumkur Watch Company
India Cements Limited
Oil Natural Gas Company

CASE:1
Case Study on
Infosys Technologies Limited

CASE1:
INFOSYS TECHNOLOGIES LIMITED

Various agencies in relation to the company.

I.
II.
III.
IV.

Auditing authorities/Audit Committee.

Credit Rating Agencies.
Government Authorities.
Management.

Roles and Responsibilities of each agency.

Various parties involved.

VARIOUS AGENIES INVOLVED

Auditing Authorities/Audit Committee:
The various agencies involved in relation to the
company`s financial reporting are as follows:

ICAI
SEBI
Indian stock exchange.
NASDAQ
There are 2 types of audit
1. Internal audit can be on-roll or off-roll basis.
2. External audit can only be on off-roll basis.

Roles and Responsibilities

INTERNAL AUDIT:

Fraud check.
Cash mismanagement check.
Checking all statutory requirements such as indirect tax,
direct tax, labour law etc are fulfilled .
All accounting standards prescribed by ICAI are being
followed.
Books are properly maintained according to company law
requirements.
Checking finance requirements and check over rate of
interest on loans taken from financial instituitions and non
banking financial company(NBFC) such as reliance capital
limited, India bulls, IARCL, Tata capital limited, SAFS.
Stock checking means physical verification of the stocks of
the company is done.

EXTERNAL AUDIT:
Check entire work of Internal Auditors
To ensure that all the statutory returns are being filled in time
along with disclosures of the same in their report submitted
to the management and government authorities of India.

CREDIT RATING AGENCIES:

Credit rating agencies such as ICRA limited, CRISIL Limited etc
are private companies authorized by government of India. They
take care of following checks:
Check the banking track i.e. if cheque has been bounced or not.
Checks P&L account, balance sheet , banking track to ensure loan
repayment track of the company.

CRA provides rating certificate to the company which helps the

companies to reduce their rate of interest .
Infosys will appoint a CRA to prove that the company is
financially stable and boost its investors to invest in their
company.

GOVERNMENT AUTHORITIES:

Government Authorities such as Comptroller and Auditor

General of India will play an important role if Infosys
technologies limited has received fund from government
then C&AG will audit the books of company.

MANAGEMENT:

The role of management is to check and insure that the

figures shown in the financial statement are true and fair.
The money share holders have invested is invested
properly or not.
To check no fraud occurs.
Depicts the actually picture of the organization
This helps in increasing the investors confidence and to
ensure the organization is financial stable.

VARIOUS PARTIES INVOLVED

Various parties involved in relation to company

are:
1.
2.
3.
4.

Investors.
Debtors & creditors
Bankers
Employees

To safe guard their interest the various parties

mentioned above can question them any time in
regard to fair and true view of the financial and
the business of the organization.

CASE:2
Case Study on
Tea Board

CASE2:
TEA BOARD
Brief Introduction
Short comings of Tea board.
The possibility of fraud and misappropriation of
any amount in such accounts cannot be ruled
out. Justification.
Balancing of Accounts.

BRIEF OVERVIEW
The case in question is related to the Tea Board,
which is an autonomous body under ministry of
commerce, government of India.
The report prepared by CAG (Comptroller and
Auditor General) of India has revealed some
various discrepancies in the financial accounts of
the board. The case violates the norms of
transparency, matching and other concepts,
which, it is given, have been caused by several
factors including miscalculation.

Shortcomings Of Tea Board

Common Errors of Principle, commission and

judgmental mistakes during calculation.
Non-compliance with the accounting standards
and rules while mixing up of plan and non plan
receipts and grants.
Intentional overstatement of assets by keeping
revenue expenses under capital expenses.
No preparation of Bank Reconciliation Statement
in order to correct the differences in pass book
and cash book.
Unaccountability of certain amounts like the
amount of Rs. 505,000 which went unstated.

The possibility of fraud and

misappropriation of any amount in
such accounts cannot be ruled out.
Justify.
Consider the following shortcomings:
The auditing firm has not been able to account
for the amount of 505,000.
It can be assumed that BRS (Bank Reconciliation
Statement) has not been prepared to hide some
information related to cheques issued, fines paid,
loan taken, etc.

Violation of standards is there as revenue

expenses are recorded under capital expenditure,
resulting in understatement of net profits, lower
taxes and dividends.

Grants which are mixed up with the plan and

non-plan receipts without approval, may lead to
understatement of net liabilities and hence
misrepresentation of actual financial position of
board.
So, these shortcomings concretely justify the
comment.

BALANCING OF ACCOUNTS.
Expenditures
Assets Overstated By

Net Profit

1077000

Receipts
Overstated By
Understated By

122000
2713000

Net Understated By

2591000

Receipts should increase by

2591000

1514000

Balance Sheet
Liabilities
Overstated By

Assets

Understated By

1093500
0
125000

Net Overstated By

1081000

Net Profit

1514000

Excess Liabilities

9296000

Overstated By

Revenue Expenditure is taken as

capital

1077000

BALANCING OF ACCOUNTS.
The accounts do not match because of the
following:
Liabilities have been overstated by Rs. 10.935
million and understated by Rs. 125000, which
gives a net overstatement of Rs. 10.81 million.
Revenue expenditure has been understated by
Rs. 1.077 million.
Assets have been overstated by Rs. 1.077 million

Receipts are overstated by Rs. 122000 and

understated by Rs. 2.713 million, which gives a
net effect of understatement of Rs. 2.591 million.

Thus the net effect of overstatement of liabilities

is by Rs. 9.296 million and overstatement of
assets is by Rs. 1.077 million.

Hence, the assets and liabilities do not match and

the difference is of Rs. 8.291 million.

CASE:3
Case Study on
Chand Brothers

BRIEF OVERVIEW

Uttam and Uday Chand opened Chand Brothers,

a souvenir store.
In the beginning business was good but lately
there has been some problem.

P&L account of the company for the Year Ended

October 31, 20X8 is:

PROFIT & LOSS STATEMENT

Sales
`86100
Cost of Goods Sold
`73600
Gross Profit
12500
Operating Expenses
`4900
Net Profits
`7600

Uttam believes that in the retail souvenir

business, the gross profit should be atleast 20%.
Further, in order to be profitable the operating
expenses need to be controlled more effectively.

PROPOSALS

Increase selling prices by 5%, on an average.

This would lower sales volume by 3%.

Avail purchase discounts fully; the usual purchase

terms are 1/10, n/30.

Increase spending on advertising by Rs.2000.

this would increase sales volume by 4%.

REQUIRED

Prepare a projected profit and loss account for the

year ended October 31, 20X9 assuming that all
the proposals are implemented.

Compute Increased Selling Price And Cost of

Goods Sold
Proposal 1:
Sales =`86100
Effect of Increased
=`1.05*86100
= `90405/-

Selling

Price

on

Sales

Effect of Decreased Sales Volume on Sales

=0.97*90405
=87692.85/Cost of Goods Sold
=`73600
Decreased Cost of Goods Sold
=0.97*73600
= 71392/Proposal 2:
Sales
=`87692.85
Cost of Goods Sold
=`71392
New Cost of Goods Sold
=0.99*71392
=70678.08/-

Proposal 3:
Sales=`87692.85
Effect of Increased Sales Volume on Sales
=1.04*87692.85
=91200.564/Cost of Goods Sold =`70678.08
Goods Sold =1.04*70678.08
=73505.2032/-

New Cost of

PROJECTED P/L ACCOUNT

Sales
`91200
Cost of Goods Sold
`73505
Gross Profit
17695
Operating Expenses
`4900
Advertising Expenses
`2000
Net Profits
`10795

REQUIRED

Suppose that proposals are independent, though

not mutually exclusive, of one another. In that
case, what would be the most profitable
alternative for Chand Brothers?

Proposal 1:
Sales

=`86100

Effect of Increased Selling Price on Sales

=`1.05*86100
= `90405/-

Effect of Decreased Sales Volume on Sales

=0.97*90405
=`87692.85/Cost of Goods Sold
=`73600
Decreased Cost of Goods Sold
=0.97*73600
= 71392/-

PROFIT AND LOSS ACCOUNT

Sales
`87693
Cost of Goods Sold
`71392
Gross Profit
`16301
Operating Expenses
`4900
Net Profits
`11401

Proposal 2:
Sales
=`86100
Cost of Goods Sold
=`73600
New Cost of Goods Sold
=0.99*73600
=72864/-

PROFIT AND LOSS ACCOUNT

Sales
`86100
Cost of Goods Sold
`72864
Gross Profit
`13236
Operating Expenses
`4900
Net Profits
`8336

Proposal 3:
Sales
=`86100
Effect of Increased Sales Volume on Sales
=1.04*86100
=89544/Cost of Goods Sold
=`73600
New Cost of Goods Sold
=1.04*73600
=76544

PROFIT AND LOSS ACCOUNT

Sales
`89544
Cost of Goods Sold
`76544
Gross Profit
`13000
Operating Expenses
`4900
Advertising Expenses
`2000
Net Profits
`6100

COMPARING THE 3
PROPOSALS
Proposal 1

Proposal 2

Proposal 3

SALES

87693

86100

89544

COST OF
GOODS SOLD

71392

72864

76544

GROSS
PROFIT

16301

13236

13000

OPERATING
EXPENSES

4900

4900

4900

ADVERTISING
EXPENSES
NET PROFIT

2000
11401

8336

6100

CASE:4
CASE STUDY ON
MURUGAN AUTOMOBILE
COMPANY

CASE 4:

MURUGAN AUTOMOBILE COMPANY

Overview about the case

Required Solutions

BRIEF OVERVIEW

Murugan Automobile Company manufactures a

component of a braking system for passenger
cars

For inventory system methods used are:

PERPETUAL INVENTORY SYSTEM
FIRST-IN FIRST-OUT

P&L account of the company for 2015 is:

PROFIT & LOSS STATEMENT

Net sales `12,000

Cost of Goods Sold

Beginning Inventory
` 3520
Manufacturing costs
` 8800
Cost of Goods Available for Sale ` 12320
Ending Inventory
` 1760
Cost of Goods Sold ` 10560

Gross Profit ` 1440

Operating Expenses ` 490
Operating Profits
` 950
Income Tax@30% ` 285
Net Profits ` 665

PUZZLING FIGURES

The P&L accounts suggested that the operating

profits of the company are `950/-.

But the accounts department in the internal

management report showed an operating profit
of `1210/-

It was realized that the difference is due to the

method company used for internal reporting
which was Direct Costing Method

REQUIRED

Compute the companys operating profits based

on Direct costing approach

STEP1: Compute the Sales cost

Sales in units
Sale Price per Unit
Sales Price(A)

1200
`10/`12000/-

STEP2: Compute Beginning Inventory Cost

Beginning Inventory in units
Costs(Mfg+ Variable cost)
Beginning Inventory Cost(B)

400
`(6+1.5)=`7.5/`3000/-

Compute the companys operating profits based

on Direct costing approach

STEP 3: Compute Normal Manufacturing Cost

Normal Capacity(units)
Costs(Mfg+ Variable cost)

1000
`(6+1.5)=`7.5/-

Normal Manufacturing Cost(C) `7500/-

STEP 4: Compute Ending Inventory Cost

Ending Inventory in units
Costs(Mfg+ Variable cost)
Ending Inventory Cost(D)

200
`(6+1.5)=`7.5/`1500/-

Compute the companys operating profits based

on Direct costing approach

STEP 5: Compute the Marginal Cost

This is given by :
B+C-D = `(3000+7500-1500)/(E)= `9000/-

STEP 6: Compute Contribution Margin

This is given by : (A) (E)
= `(12000-9000)
(F)= `3000/-

Compute the companys operating profits based

on Direct costing approach

STEP 7: Compute the Gross Profits

Annual Fixed Production Overhead
Gross Profits(G) =(F)- 1300/- .
=`(3000-1300)/=` 1700/-

` 1300/-

STEP 8: Compute Operating Profits

Operating Expenses ` 490/Operating Profits: = (G) 490
= `(1700-490)

= `1210/-

REQUIRED

Explain the reasons for the difference between

operating profits reported to the P&L and to the
internal management reports. Specify the
conditions under which they will differ

SOLUTION
Their was a difference reported in the operating profits
because of the treatment meted out to fixed
manufacturing overheads in the two costing methods.

Explain the reasons for the difference between

operating profits reported to the P&L and to the
internal management reports. Specify the
conditions under which they will differ

If inventory levels increase, absorption costing gives the

higher profit.
This is because fixed overheads held in closing inventory are
carried forward (thereby reducing cost of sales) to the next
accounting period instead of being written off in the current
accounting period (as a period cost, as in marginal costing).

If inventory levels decrease, marginal costing gives the

higher profit.
This is because fixed overhead brought forward in opening
inventory is released, thereby increasing cost of sales and reducing
profits.

REQUIRED

Why, in your view, did the company follow

different systems for internal and external
reporting purposes? What are the relative Merits
and Demerits of following the same method for
both the purposes?

SOLUTION
The company wanted to show lesser profits for the
purpose of saving of taxes.
It was given that the Income Tax is @30%, which implies,
IT @ 1210=0.9*1210= 363
IT @ 950=0.3*950= 285

Why, in your view, did the company follow

different systems for internal and external
reporting purposes? What are the relative Merits
and Demerits of following the same method for
both the purposes?

MERITS

DEMERITS

Easier to analyse financial No manipulation possible

data
Consistency is maintained
Reliability is maintained

CASE:6
CASE STUDY ON
TUMKUR WATCH
COMPANY

FRAMEWORK

Brief overview.

Required Solution.

BRIEF OVERVIEW

The company was set up in 20X4 to manufacture

Quartz watches

In 20X7, the company diversified into fashion

jewellery primarily for export to EU countries

The balance sheet of the company as on

September 30, 20X7 is given to us and we have
to determine the different ratios of the company
based on certain conditions

TUMKUR WATCH COMPANY

The company had taken a loan from National

Industrial Bank and the bank stipulates that, the
company should maintain the following ratios at
all times
Total Liabilities to Shareholders equity
1.60(maximum)
Long term Liabilities to Shareholders equity
1.00(maximum)
Current assets to Current Liabilities
1.20(minimum)

TUMKUR WATCH COMPANY

Calculating the ratios from the data given in the balance

sheet
Total Liabilities to Shareholders equity ratio =
41M/29M= 1.4137
Hence, this ratio is within the limits of 1.60
Long term Liability to Shareholders equity ratio=
23.320M/29M=0.802
(Rs 1680 is the liability of the current year)
Hence, this ratio is within the limits of 1
Current Assets to Current Liabilities=
22.8M/17.68M=1.29
Hence, this ratio is outside the limits of
1.20(M=Million)

TUMKUR WATCH COMPANY

The

company is obtaining an equipment costing 20 millions,

having a life of 10 years, @ lease rental of 4.5 million per annum
for 6 years

The

following values will get changed due to this :

Total Long term Liability = 23.32 M+ 15.5 M = 38.82 million
Current liabilities = 17.68 M+ 4.5 M = 22.18 million
Fixed Assets = 47.3 M + 20 M = 67.3 million

Re-computing

the ratios, taking these values into consideration:

Total Liabilities to Shareholders equity ratio = 61/29=2.10
Long term Liability to Shareholders equity ratio= 38.83/29=1.33
Current Assets to Current Liabilities= 22.8/22.18=1.03

As per the ratios computed in the last step, the company has
violated the norms of the bank and ratios have exceeded the
limit specified in case of: Total Liabilities to Shareholders equity ratio
Long term Liability to Shareholders equity ratio

The consequences of violation of the norms are as follows: The company can not meet its short term liabilities goals
The company has increased its liabilities , particularly long
term by a considerable margin which means it may have to
generate extra debt by other means like by raising bonds or
asking investors or equity shareholders to invest more.
Investors may think before investing in the company
The company stock may decrease due to this.

How can the company avoid

violation

The company can prepare the separate balance

sheet for the jewellery work which will be
separate from its Watch unit company.

Also , the company should generate its equity or

debt separately for jewellery unit.

This will not disturb the existing ratios of the

watch unit of the company and all the conditions
will be met .

Actions taken by Bank to ensure non

violation of Rules

Bank should adopt stringent policies with all its

loan borrowers ensuring that the company should
not take more liabilities .

The financial analysts of the banks should ensure

that the solvency ratios of the companies are not
increased and in case that happens , the analysts
should figure out the reason for them and ensure
that the company does not violate any rules

CASE:7
CASE STUDY ON
INDIA CEMENTS LIMITED

FRAMEWORK

Brief overview.

Required Solution.

BRIEF OVERVIEW

The method of earning of the company is not

proper
Main source of income not from its basic
business activity.
As nature of business of the company is
manufacturing of cement from the plant
situated in Andhra Pradesh and Tamil Nadu.

The actual earnings of the company are

from non business activities

Comment on India
Cements` Earnings quality
Sale

of land:

Earned income of Rs.140 million.

This source of income is not the business income
as it is not arising from the regular business but is
on account of sale of one of its asset.

Sale of Raasi cement plant:

Earned income of Rs.320 million

This source of income is also not from its regular
business

 Earned

profit of Rs. 800 million:

Company has not debited deferred revenue

expenditure of Rs 71.5million to P&L account.
The profit so arising is not the actual profit of
the company as the same has been inflated by
the company.
The actual revenue expenditure incurred has
not been claimed as expense in P&L account.
Borrowing

cost of Rs. 300 million

incurred in acquiring shares of company
Treated as capital expenditure however the
same should have been treated as revenue
expense.

 The

only source of income from business

activity is Rs. 258.1 million which the company
has earned in form of the fee recoverable from
the third party.

CONCLUSION:

The method of earning income by ICL does not

seem to be correct as the same seems to be
short term source of income because it is not
been earned from the sale of cement which is
one of the core business of the company.

CASE:8
CASE STUDY ON
Oil & Natural Gas
Comission

FRAMEWORK

Brief overview.

Required Solution.

BRIEF OVERVIEW

ONGC had various accounting policies that state

Expenses related
survey
Expenses related
Drilling Cost
Expenses related
Expenditure
Expenses related
facilities
Expenses related
Expenses related

to goelogical and geophysical

to Capitalise Exploring
to development Drilling
to installation of production
to plant and equipment
to replacement

New stated policies were:

Expenses related to goelogical and geophysical
survey
Expenses related to drilling cost will be expensed
as net of amortization
Expenses related to net of amortization will be
capitalised as Well In Progress
Accumulated exploratory drilling and development
drilling costs already commissioned will be
capitalised
Recoverable reserves will be limited to A,B nad C-1
cateogary reserves

CAG Report regarding

Account changes
Name Of
Expenditure
Depletion

Charged to
Profit
and Loss
Account
4174.8

Depreciation

4744

Amortization

2539.2

Total

11458

Increas
e/
Reduct
ion
(-)
1466.5 2708.3
(-)
2177.6 2566.4
(+)
2717.3 178.1
6361.
(-)
4
5096.6

Impact Of Accounting Changes

By the use of new methods of Accounting

principles, like method of calculating Amortization
or Depreciation, the revenue will increase
By the new Accounting estimates ,a revised
projection of Accounts Receivable and Net
Income increases

Potential Users Of ONGC

Internal Users:
Managers and Owners
Employee
External Users
Institutional Investors
Financial Institutions
Government
Vendors
General Mass and Media

Reaction Of Potential Users

As the revenue increases, potential users react
as:
Existing equity investors and lenders will be
happy by monitoring their investments and
evaluating the performance of management.
Prospective equity investors and lenderswould be
pleased to invest.
Management will be happy to assess its own
better performance.

Managerial motives for making

accounting changes
The managerial motives for making accounting
changes are:
To organize and access the data needed to
manage a company well.
Using a new method of recording or processing
management data for better performance.
While recording new types of data, the change
would affect the data would help the team make
better decisions.

Safeguards available against

attempts by Corporate Management
The various available safeguards are:

Large number of funds and assets leading to

large reseves and income to meet the future
needs.
No change in the regulatory requirement for
charities thereby sustaining the companies net
income.

CASE:8
Reliance Stationary Company

Cash Flow Statement: March

2014
SOURCE OF CASH

Rs

Sale of Inventory

28960

Sale of Investment

6400

Sale of Share of Capital

35200

Depriciation

5600

Long term Credit for Purchase of van

2400

Interest on Investments

640
79200

Cash Flow Statement: March

2014
USES OF CASH

Rs

Purchase of fixtures & Office Equipment

27200

Purchase of Inventory

20240

Operating Expenses

12800

Purchase of Investments

6800

Purchase on long term credit

2400

Repayment of loans

800

Interest on Bills Payable

240
70480

NET INCREASE IN CASH= Rs8720

Requirement1
Prepare a correct cash flow statement using the
direct method.
SOLN:
STEP1: CASH FLOWS FROM OPERATING
ACTIVITIES
OPERATING ACTIVITIES
Rs

Sale of Inventory

28960

Purchase of Inventory

(20240)

Operating Expenses

(12800)

Interest on Bills Payable

(240)
(4320)

Requirement1

STEP2: CASH FLOWS FROM OPERATING

ACTIVITIES
INVESTING ACTIVITES
Rs
Sale of Investment

6400

Interest on Investment

640

Purchase on Long Term Credit

(2400)

Purchase of Investment

(6800)

Purchase of fixtures & office

Equipments

(27200)
(29360)

Requirement1
STEP3: CASH FLOWS FROM FINANCING
ACTIVITIES
FINANCING ACTIVITES
Rs

Sale of Share of Capital

35200

Repayment of Loans

(800)

Long term credit for Purchase of van

2400
36800

NET CASH FLOW

NET CASH FLOW
Cash flow from Operating
Activities
Cash flow from Investing
Activities
Cash flow from Financing
Activities
NET CASH FLOW

Rs
(4320)
(29360)
36800
3120

Requirement 2

Prepare an evaluation of Reliance Stationary

Companys first year of working. Do you agree with
Udays assessment about the company.

SOLN: EVALUATION OF RSC:

The Cash flows from the operating activities of RSC
comes out to be negative with a value of Rs
4320.
But Cash Flow from operating activities should
always be positive signaling that a company is
getting more money from its day to day activities
contrary to that spent by it.
Hence, in this case it doesnt depict a good position
of the business

Requirement 2
SOLN: EVALUATION OF RSC:
It is good for a company to have a negative
cash flow from investing activities which
shows that the company is spending more on
purchase of fixed assets and utilising it in
good way.
But in this case it is positive, implying that
they are selling their fixed assets more, which
is not good for the company.
But from this it cannot be inferred that it is
bad for the company because there might be
a possibility that the company is selling its
obsolete assets.

Requirement 2
SOLN: EVALUATION OF RSC:

The Cash flows from the financial activities of RSC comes out to be
positive with a value of Rs 36800.

This positive value does not necessarily depicts a good position of the
company.

The only net positive source of cash in the company is from financing
activities which is mainly due to sale of share capital.

Thus, it doesnt depict a good position for the company as it is not able to
utilize its resources effectively and is more keen on increasing the cash in
the company via financing activities which will have adverse effects in the
long run as the cash flow from operating activities is not in a healthy state.

Requirement 2

The assessment made by Uday is not right

which states that the cash has increased by
Rs 8720.
The cash has actually increased by a
meager value of Rs 3120. This happened
because the depreciation(of Rs 5600) was
counted as a source of cash in determining
the net cash flows.
Thus, to arrive at cash paid for expenses we
must deduct depreciation provisions and
other expenses.
If non-cash items are not included in COGS
or other expenses but are shown separately
in P&L account there is no need to deduct