PROJECT wORK P.

COMPREHENSIVE PROBLEMS

PROBLEM 1

Title o the Project. Analysis of the Financial Position of Arvind Auto Agency.
Objectives of the Project:
1. To know the short-term solvency position of the business.
2. To judge the Operational efficiency of the business.
3. To judge the Overall profitability of the business.
Source Material: Statement of the Project.

ARVIND AUTO AGENCY

FACTS OF THE STATEMENT

Mr.Arvind has good amount of savings. He wanted to start a business which can give him
a good margin of profit. He planned to start an Auto agency to Purchase and sell Scooters and
Motorcycles. According to his calculations there was a capital requirement of 75,00,000 [75
lakhs). His savings was not sufficient for this business so he decided to take a loan from the
bank for 60,00,000 (60 lakhs] on the security of his own house. The loan was sanctioned on
15th March, 2007.
After sanctioning of loan he purchased the required fixed assets for this business which
are as follows:

() Office Premises 37,50,000 (37,50,000)

Gi) Office Equipment 7 3,60,000
ii) Furniture and fittings 3,90,000.
Mr. Arvind has done all the transactions through Bank. All the sales were made on cash
basis and same cash is deposited in the bank. On the other hand all the expenses were also
made by cheque. Purchases were also through cheque. However, the purchase made of March
2008 was done credit basis.
on

Following transactions were made during the year.

1. Cash Purchases 37,20,000

2. Credit Purchases 3,00,000
3. Sales (All on Cash Basis) 47,70,000
4. Water and Electricity Expenses 39,000
5. Mobile Courier Expenses 17,700
 P.6 ACCoUNTANCY-x
6. Salaries 1,95,000
7. Sales Promotion Expenses 18,000
8. Trade Expenses 9,000
9. Miscellaneous Expenses 52.500
10. Printing and Stationary 6,000
Some of the expenses for the month of March, 2008 were not paid yet.

These are as follows:

1. Water and Electricity 2.400
2. Salaries 20,100
3. Mobile Expenses 900
On 31st March, 2008, the stock in hand was 8,70,000. The stock for unused stationary
was7 1,500.Office premises was to be charged depreciation of 26,where as 10% depreciation
was charged on office equipment and furniture.
Now to judge the short-term solvency and efficiency to know the overall profitability of
this auto business, we have to analyse the financial statements of this business. But to analyse
the financial statements or we can say to make available the financial statements of this Auto
Agency, following steps will be taken.
Steps:
1. First of all we have to record all the financial transactions of this auto agency. It means
first of all we have to prepare Journal.
2. After Journalising (recording) all the financial transactions Ledger Posting will be
done.
3. With the help of balance of all the ledger accounts next step will be preparation of
Trial-balance.
Now with the help of Trial Balance, further statements will be prepared and Analysis
will be done from those statement to Judge the solvency, profitability and efficiency
of this auto agency. So further stpes will be
4. Preparation of Trading and Profit and Loss Account with the help of Trial-balance
5. Preparation of Balance-sheet with the help of Trading and Profit and Loss Accou
and other information available.
6. After Preparing the Financial Statements in the form of Trading and Profit and
Account and Balance-sheet we will analyse the with

performance of this auto agency

the help of one of the most important tools of
analyse i.e., Ratio Analysis.
pROJECT WORK P.7

tep 1.
JOURNAL OF MS ARVIND AUTO AGENCY FOR THE MONTH OF MARCH, 2008

Particulars Amount Amount

Date LF.

Bank Ac Dr 75.00.000
15.00,000
To Capital Ac
60.00.00
To Loan Ac
Being started business with Capital
and Bank loan

Ofire Fremises Ac Dr 37.50.000

Dr 3.60.000
Ofice Equipment Ac
Dr 3.90.000
Furniture and Fittings Ac
45,00.000
To Bank Ac
Being various fixed assets purchases

Bank DT 47,70.000
47,70.000
To Sales Ac
Being Sale made

Purchase Ac Dr 37,20,000
37.20,000
To Bank Ac
Being purchases made in cash

Purchases Ac Dr 3,00.000
To Creditors Ac 3,00,000

Being purchases made on credit basis

Salaries Ac Dr 1.95,000
Water and Electricity A/c DT 39.000
Mobile and Courier Charges Ac Dr. 17.700

Sales Promotion A/c Dr. 18,000

Trade Expenses A/c Dr 9,000

Miscellaneous Expenses Ac Dr. 52.500
Printing and Stationary A/c Dr 9,000
To Bank A/c 3,40.200
Being various expenses made)
SalariesAc Dr. 20.100
Water and Electricity Expenses Ac Dr 2.400
Mobile Expenses A/c Dr. 900
To Salaries Outstanding Expenses 20,100
To Water and Electricity Outstanding A/c 2.400
To Mobile Expenses Outstanding A/c 900
Being Expenses outstanding
Depreciation A/c Dr. 1,50,000
To Office Premises Ac 75,000
To Office Equipment A/c 36,000
To Furniture A/c 39.000

(Being depreciation charged on assets)

 P.8 ACCoUNTANCY-x
Step 2. Preparation Ledger Accounts

Dr. BANK ACcoUNT Cr.

Date Particulars Amount Date Particulars Amount

To Capital 15,00,000 By Office Premises 37,50,000

To Loan 60,00,000 By Office Equipment 3.60.000
To Sales 47,70,000 By Furniture 3,90.000
By Purchases 37.20.000
By Salaries 1,95.000
By Water and
Electricity Expenses 39,000
By Mobile Charges 17,700
By Sales Promotion 18,000
By Trade Expenses 9,000
By Printing and
Stationary 6,000
By Miscellaneous
Expenses 52.500
By Balance c/d 37,12.800

1,22,70,000 1,22,70,000

To Balance bld 37,12,800D

LEDGER ACCOUNT

Dr. CAPITAL ACCOUNT Cr.

Date Particulars J.F Amount Date ParticularsJ.FAmount

To Balance cld 15,00,000 By Bank Ae 15,00,000

15,00,0000 15,00,000

By Balance b/d 15,00,000

Dr. LOAN ACcoUNT Cr

Date Particulars J.F Amount Date Particulars J.F Amount

To Balance cdd 60,00,000 By Bank Ae

60,00,000

60,00,000
60,00,000

60,00,000

By Balance bd
 PROJECT WwORK P.9

Dr. OFFICE PREMISES ACCOUNT Cr.

Date Partieulars J.F Amount Date Particulars J.F. Amount

To Balanee Ac 37,50,000 By Dep 75,000

By Balance c/d 36,75,000

37,66,000 37,50,000

To Balance bd 36,75,000

OFFICE EQUIPMENT ACCOUNT Cr.

Dr.
Amount
Date Particulars J.F Amount Date Partieulars J.F

36,000
To Bank Ac 3,60,000 By Dep.
By Baiance c/d 3,24,000

3,60,000 3,60,000

To Balance b/d 3,24,000

FURNITURE AND FITTINGS ACCOUNT Cr.

Dr.
Particulars J.F Amount
Date Particulars J.F. Amount Date

3,90,000 By Bank A/c 39,000

To Bank A/c
By Balance c/d 3,51,000

3,90,000 3,90,0000

To Balance b/d 3,51,000

SALES AcCOUNT Cr.

Dr.
Amount Date Particulars J.F. Amount
Date Particulars J.F

By Bank A/c 47,70,000

To Profit and
Loss A/c 47,70,000

47,70,000 47,70,000
 P.10 ACCoUNTANCY-xI
Dr. PURCHASES ACCOUNT Cr.
Date Date Particulars J.F. Amount
Particulars J.F Amount

To Bank A/c 37,20,000

By Profit and Loss 40,20,000
To Creditors A/c 3,00,000

40,20,000 40,20,000

Dr. SALARIES ACCOUNT Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount

To Bank A/c 1,95,000 By Profit and

To Outstanding Loss A/c 2,15,100
Salaries 20,100

2,15,100 2,15,100

Dr. WATER AND ELECTRICITY EXPENSES ACCOUNT Cr.

Date Particulars J.F. Amount Date Particulars J.F Amount

To Bank A/c 39,000 By Profit and

To Oustanding Loss A/c 41,000
Water and
Electricity
Expenses 2,400

41,400 41,400

MOBILE CHARGES AND COURIER EXPENSES ACcOUNT Cr.

Dr.
Date ParticularsJ.F Amount Date Particulars J.F. Amount

To Bank A/c 17,700 By Profit and

18,600
To Outstanding Loss A/c
Mobile Expenses 900
18,600
18,600
 PRDJECT woRK P.11

Dr. SALES PROMOTION EXPENSES ACCoUNT Cr

Date Particulars J.F. Anount Date Partieular JF Amount

To Bank Ac 18,000 ByProfit d

Loee Ac 18.000

18.000 18,000

Dr. TRADE EXPENSES AccoUNT Cr

Date Particulars J.F. Amount Date Particulars JF. Amount

To Bank A/c 9.000 B Proit and

Loss Ac 9.000

9.000 9.000

Dr.
PRINTING AND STATIONARY EXPENSES ACCOUNT CT
Date Particulars J.F. Amount Date Particulars J.F Amount

To Bank A/c 6.000 By Profit and

Loss Ac 4.500
By Balance cd 1.500

6,000
6,000

To Balance b/d 1,500

DEPRECIATION ACCOUNT Cr.

Dr.
Particulars J.F. Amount
Date Particulars J.P Amount Date

By Profit and
To Office
Loss A/c 1.50,000
Premises Alc 75,000
To Office
Equipment A/c 36,000
To Furniture and
Fittings Alc 39,000
1.50,000
1,50,000
P.12 ACCoUNTANCY-xI
MISCELLANEOUS EXPENSES ACCOUNT
Dr. Cr
Date Particulars J.F Amount Date Particulars J.F Amount

To Bank A/c By Profit and

52,500
Loss A/c 52,500
52,500 52,500

Dr. CREDITORS ACCOUNT Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount

To Balance c/d 3,00,000 By Purchases A/c 3,00,000

3,00,000 3,00,000

By Balance b/d 3,00,000

Step 3.

Dr. TRIAL-BALANCE Cr.

Particulars Amount Particulars Amount

Bank 37,12,800 Capital 15,00,000

Office Premises 36,75,000 Loan 60,00,000
Office Equipment 3,24,000 Sales 47,70,000
Furniture and Fixture 3,51.000 Creditors 3,00,000
Purchases 40,20,000 Expenses Outstanding
Salaries 2,15,100 Salaries 20,100
Water and Electricity 41,400 Water and Electricity 2,400
Mobile Charges and
Courier Expenses 18,600 Mobile and Courier 900
Sales Promotion
Charges
18,000
Trade Expenses 9,000
Printing and Stationary 6,000
Depreciation:
Office Premises 75,000
Office Equipment 36,000
Furniture 39.000 1,50,000
Miscellaneous Expenses 52,500
1,25,93,400 1,25,93,400
 PROJECT wORK
P.13

Adjustments:
1. Closing stock 8,70,000.
2. Unused Stationary 1,500.
Step 4.
TRADING AND PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2008

Particulars Amount Particulars Amount

(R)

To Purchases 40,20,000 By Slaes 47,70,000

To Gross Profit 16,20,000 By Closing Stock 8,70,000

5640,000 56,40,000

To Salaries 2,15,100
To Water and Electricity
Expenses 41,400 By Gross Profit 16,20,000
To Mobile and Courier Expenses 18,600
To Sales Promotion 18,000
To Trade Expenses 9,000
To Printing and Stationery
6,000
Less: Unused 1,500 4,500
To Miscellaneous Expenditure 52,500
To Depreciation Office
on Premises 75,000
To Depreciation on Office
Equipment 36,000
To Depreciation on Furniture 39,000
To Net Profit 11,10,900

16,20,000 16,20,000

Step 5.
BALANCE-SHEET OF ARVIND AUTO AGENCY AS AT 31ST MARCH, 2008
Particulars Amount Particulars Amount

Capital 15,00,000 Stock of Stationery Unused 1,500

Add: Net Profit 11,10,900 26,10,900 Bank Balance 37,12,800
Loan
60,00,000 Closing Stock 8,70,000
Creditors 3,00,000 Office Premises 36,75,000
Outstanding Expenses Salaries 20,100 Office Equipment 3,24,000
Water and Electricity
2,400 Furniture and Fittings 3,51,000
Mobile and Courier
Expenses 900
89,34,3000 89,34,300
 P.14 ACCoUNTANCY-J
Step 6.
AGENCY
RATIO ANALYSIS OF ARVIND AUTO
shorn-term sokvency we wil
caiculate
A) To Judge the
Currert Ratio 2 LiQuid Ratio

Current Assets
Current Ratio
Current Liabilities

Current Assets
Stock
Bank Balance Stock of Stationery Closing
=73712 800 1500 8 70.000
745 84 300
Whereas Current Liabilit
= Creditors Outstanding Salaries Outstanding Water
andElectricity Outstanding Mobile Charges
= 7 300.000 20.100 2400 900 =7323 400
745 84 300 4
Current Ratio =

73.23 400
Quick Assets
Quick Ratio =

Current Liabilities
37.12800
Quick Assets =Bank Balance =

737.12.800
Quick Ratio 11 15
323 400
of this Auto
Comments. From the above ratios we can say short term solvency position
be suggested that some of the cash
Agency is very sound. But on the other hand it can also
c a n b e i n v e s t e d as ideal Current Ratio is 2 : 1 a n d liquid ratio is 1 : 1 b u t t h e liquidity r a t i o s o f

this auto agency is much higher so there may be some idle cash which can be utilized.
Now to judge the operational efficiency of this auto agency we will calculate Operating

Ratio
Operating expenses
Operating Ratio = Costor goods sold 100
Net Sales
sold Opening stock Net purchase Cost stock
Whereas cost of goods =

Purchases - Closing stock

(40.20,000 -8.70,000) =* 31.50.000

Net Sales = 747,70,000
Whereas
So Operating Ratio

Operating Expenses= 7 5,09,100

31.50.000-5,.09.100x
47,70.000
100 76.71o.
 PROJECT wORK
P.15

Comments. From the ratio we can say operating expenses are on higher side so AiVd
should try to reduce the operating expenses.
Now to judge the profitability we will have to calculate the Gross Profit and Net Protit

Ratio.
Gross Profit Ratio Gross Profit
=
100
Net Sales
16,20,000 x 100 33.96%
47,70,000
Net Profit
Net Profit Ratio = x 100
Net Sales
11,10,900
x 100 = 23.28%.
47,70,000
efficiency is 9ood but Net
Comment. From the above G.P. Ratio we can say production
Profit ratio can be increased by proper utilization of resources.