FINANCIAL ACCOUNTIND AND ANALYSIS

Answer 1.

INTRODUCTION

The accounting equation is known as the backbone of the double entry accounting system. The
net assets are equal to the sum of the company's liabilities and shareholders equity as seen on its
balance sheet. Each entry made on the debit side has matching access on the credit side. The
financial state of every company, big or small, is obtained by two main balance sheet
components assets and liabilities. The balance sheet's third chunk is owners equity which is also
called shareholders equity. The equation of accounting depicts how these three critical elements
are related to one another the equation of accounting as the balance sheet equation or the simple
accounting equation.

CONCEPT AND APPLICATION

The equation of accounting states that the addition of a company's assets, liabilities, and equity.
To put it another way, a company's equity is proportional to the number of its assets minus its
liabilities. This definition is the analytical basis for double-entry and it is a way to view and
evaluate financial statements.

The formula is

Asset = Liabilities + Owner’s Equity ( Stock holder equity )

1. Asset: Anything that has a worth or a resource that turns into cash is referred to as an
asset. Individuals, corporations, and states own properties. An asset may produce income
for a business, or it may support the company in any way by having the ownership of the
asset.
 2. Liability A liability is a debt that a person or the corporation owes to another party
generally in the form of property. Liabilities are resolved over time by exchanging
economic benefits such as capital commodities or services. Liabilities include debts,
accounts payable deposits taxable revenues bonds guarantees and unpaid expenses all
reported on one side of the balance sheet.
3. Owner's Equity ( Stock holder equity ): Owner's equity applies to a business owner's
stake of the firm, as well as the valuation of the company's properties. The amount of
capital the owner has put into the firm minus the money the owner has taken out.
Let us calculate analyze the equation of the accounts for X Ltd.

Particulars Assets = Liability + Owner’s Equity Total

1. Purchased Furniture for Furniture: Creditors: 6,75,000

Rs 6,75,000
6,75,000 6,75,000

2. Capital Introduced by Furniture: Creditors: Capital: 18,75,000

the business Owner by
6,75,000 6,75,000 12,00,000
depositing 12 Lakhs in
the bank account. Bank:

12,00,000

3. Goods purchased on Furniture: Creditors: Capital: 19,80,000

credit from Aman
6,75,000 6,75,000 12,00,000
Enterprises for
Rs105000 Bank: Creditors (Aman
Enterprises):
12,00,000
1,05,000
Inventory:

1,05,000

4. On credit the goods were Furniture: Creditors: Capital: 20,80,000

sold for Rs 4,00,000. The
 cost of the goods sold 6,75,000 6,75,000 12,00,000 + 1,00,000
was Rs 300000
Bank: Creditors Aman
Enterprises
12,00,000 – 6,00,000
1,05,000
Inventory:

1,05,000 + 6,00,000 –
3,00,000

Debtor:

4,00,000

5. Purchased goods from Furniture: Creditors: Capital: 19,80,000

Sneha Enterprises for Rs
6,75,000 6,75,000 12,00,000
6,00,000 and payment
made from the Bank: Creditors Aman
business's bank account Enterprises
12,00,000 – 6,00,000
1,05,000
Inventory:

1,05,000 + 6,00,000

Total Asset = Rs 20,80,000

Total Liability = Rs 7,80,000

Owner’s Equity = Rs 13,00,000

Explanation of accounting of equation

 1. Furniture has been purchased worth Rs 6,75,000 as nothing is mentioned if it was bought
on cash or credit we have assumed that the furniture has been purchased on credit.
Therefore we have increased the liability section of the equation by adding creditors
worth Rs 6,75,000.
2. In the second equation, the owner of the business introduces capital worth Rs. 12,00,000,
the amount has been deposited into the bank, and that's why the Asset side has been
increased by introducing the Bank column and the Owner's Capital has been increased by
Rs. 12,00,000 on the other section.
3. In the third equation X Ltd. has purchased goods worth Rs. 1,05,000 from Aman
Enterprises on credit, this will affect both the side of the equation. The asset side has been
affected by the introduction of inventors worth Rs. 1,05,000, and for the Liability side, it
has been affected by creditors worth Rs1,05,000.

4. In the fourth equation the goods have been sold on credit worth Rs. 3,00,000 for Rs.
4,00,000. This will affect the Asset side as well as the Owner's Equity of the accounting
equation. As the goods have been sold on credit it will increase the debtor by 4,00,000
and the inventory will decrease by Rs 3,00,000 as the cost of goods sold is only worth rs
3,00,000. As we can see that the goods have been sold on the profit of Rs. 1,00,000, this
will get added to the owner's capital.

5. In the fifth equation, Goods has been purchased from Sneha Enterprises for Rs 6,00,000.
Payment made from the bank. This will affect only the Asset section. As the payment has
been made through the bank, the bank amount will be decreased by Rs 6,00,000. Also the
inventory will increase by Rs 6,00,000.

CONCLUSION

Hence, the above accounting equation is for X Ltd. as per the accounting rules, which clearly
shows that one transaction always affects more than one account as per the double-entry system.
ANSWER.2

INTRODUCTION

Operating income and revenue are significant accounting figures that indicate that a business
generates some capital from the operation of the company. However the two figures are separate
ways of expressing a company's profits, and their calculations require different discounts and
credits. The revenue provided by a company's primary operations is referred to as operating
revenue. The exact operation that produces operational income varies. Consider a retailer: a
retailer's operating income from the sale of goods. The income from the operation of a physician
is provided by delivering medical services. Other money is gained from operations that are
unrelated to a corporation’s primary emphasis. Nevertheless, both sales and operating income are
relevant in assessing whether a corporation is doing well. Until any costs are excluded, revenue
is the net capital earned by a business from the selling of its merchandise or service. After
subtracting a corporation's normal recurring costs and liabilities operating profits is the net
benefit.

CONCEPT AND APPLICATION

The money that the corporation generates from business-related operations is known as revenue
or sales. The bulk of income for most companies comes from selling their products and services.
Revenue would not mean the capital the organization has at any given time. Since deducting
costs, benefit tells the capital the company earns or loses. One must use their business's sales as a
starting point to measure your benefit or net income/loss. Subtract your total costs from your
total income to arrive at your benefit.

Revenue is of two types

1. Operating Revenue
2. Non-Operating Revenue
Revenue from Operation

The revenue generated by a company's primary business operations is known as operating

revenue retailer's operating revenue comes from merchandise purchases, and a physician's
operating revenue comes from the prescription care they offer. Operating income varies
depending on the form of company or sector. Operating revenue must be distinguished from
overall revenue because it offers vital knowledge about the efficiency and performance of the
company's main market activity.Some businesses can merge operating and non-operating
revenue to mask the decline in revenue. By evaluating the health of the company and its
activities identifying sales streams will help the company go a long way.

In the given case as Love Doddle is a gifting enterprise of Ms. Dorati their main operating
activity for the business is gifting, and that is why the income that has been generated from the
sale of gift hampers worth Rs.5,05,000 shall be treated as the income from operating activities
and hence termed as the Revenue This is called Revenue from Operation.

Other Income

Other income can also be called non-operating income which is revenue generated from a
company's operations that is not the main business. Such things don't happen too often, and they
can be very rare. Any income that has been generated by the company, not from the operating
activities of the company these incomes are called the other income. As the main operating
activities do not include these to the company that is the reason it is called the other income.
Rental income generated by a washing machine maker by subleasing vacant office space to a
third party

example will be listed as other earnings on the earning statement. Profit revenue, dividends from
the selling of securities, and gains on foreign currency trades are examples of other forms of
income that are generally known as other income. The form of transaction that is classified as
other profits varies by sector. If a business is to stay afloat it must produce operating income.
Rising operating sales would limit the company's need for external funding.
In the given case as Love Doddle is a gifting enterprise of Ms. Dorati, their main activity of
operation for the business is gifting the income of Rs.4,200 which has come from the bank
interest dividend receipt shall be treated as the other income.

The recording of the above income should be done in the following manner by Ms. Dorati for
recording the profit and loss statement of the enterprise:

Particulars Note Amount in Rs.

1. Revenues from the Operations (a) 5,05,000

2. Other Income (b) 4,200

Total Income: 5,05,000 + 4,200 = 5,09,200

Notes

(a) Revenues from the Operations

The inflow of cash from selling the gift hampers = 5,05,000

(b) Other Income

Income from Interest received from bank and dividend received = 4,200

CONCLUSION

Disclosure of the information about the income generated by the company must every time be
revealing in the notes to accounts so that the stakeholders are aware of every income that has
been made by the company. Ms. Dorati should write the information about the Revenue from
Operation and Other Income in the above manner by disclosing all the important information for
their interested parties.

Answer.3.A

INTRODUCTION
The Current Ratio is that assesses a company's willingness to give short-term or one-year
commitments. It demonstrates to investors and analysts how any business can use existing assets
on its financial statement sheet to give down current debt and other commitments. The Quick
Ratio is a company's willingness to satisfy short-term commitments is a sign of its short-term
liquidity status.

CONCEPT AND APPLICATION

The Quick Ratio is a more traditional metric when compared with the current ratio which treats
all current assets as current liability coverage. The Quick Ratio assesses a company's capability
to link up its current requirement without selling products or obtaining extra funding. The larger
the figure, the greater the firm's potential, the smaller the ratio, the more it is that the company
would have trouble covering its debts.

INTERPRETATION

As the current ratio calculates the capability of the business to settle short-term liabilities with
less than 1.0 current ratio indicates that the company’s capital is not enough to settle the short-
term obligations in case all of the obligations were due together during the period. A current ratio
of more than 1 means that the firm has enough cash to stay afloat in the near term.

Hence, in the given case Aman Ltd. has a current ratio of 2:01 which is nothing but 2. This
indicates that Aman Ltd.s capacity to settle his short-term debts is very good if they were due
altogether. A current ratio of 2 indicates that for every 1 rupee Aman Ltd. has 2 rupees in hands
to pay. This is a positive sign for the company as well as for the stakeholders. When we look at
Roger Ltd the current ratio of Roger Ltd. is 1.60:1 which indicates that for every 1 rupee to be
paid, Roger Ltd. has 1.60 rupees to settle.

Quick ratio includes only the liquid assets. For Aman Ltd the quick ratio is 1.35:1. This indicates
that their liquid assets are in a good position to settle their debt. This indicates that for every 1
rupee of debt, it has 1.35 rupees to settle. For Roger Ltd the quick ratio is 1:1. This indicates that
for every 1 rupee of debt it has 1 rupee to settle.
CONCLUSION

Hence, we can conclude that Aman Ltd. is performing much better than Roger Ltd. from the
Current Ratio and Quick Ratio point of view as Aman Ltd. has higher rates when compared with
Roger Ltd.

Answer.3.B

INTRODUCTION

Return on Investment is a presenting metric for evaluating an investment's productivity or

profitability along with analyzing the returns of many investments. The Return on investment
attempt to explicitly calculate the profit made on a given investment in relation to its expense.
Divide a company's net liabilities from its shareholder equity to get the debt-to-equity ratio.
These statistics can be found on the financial statement sheet in its financial statements.

CONCEPT AND APPLICATION

Return on investment is for comparing and rate investments in various ventures or properties.
While the Return on investment is a clear and transparent metric it will not allow for the
retention duration or passing of time and as a consequence, it may overlook the opportunity costs
of spending elsewhere. If all else is equal risk-averse investors would usually tolerate lower
returns for taking less risk.

The Debt to Equity ratio determines the financial leverage of a company running. The debt to
equity ratio is a critical parameter. It's an indicator of how much a corporation relies on loans to
finance its activities rather than wholly-owned funds. During a corporate crisis, it represents the
willingness of shareholder interest to pay all unpaid debts.

INTERPRETATION
Return on Investment is used by the investors and other stakeholders to decide if they want to
invest in any company or not. For Aman Ltd the Return on investment is 15% a good ROI is
considered to be 7% and above so for Aman Ltd the returns on the investments are very positive.
For Roger Ltd., the ROI is 13%, which is again good for the investors of Roger Ltd.

The Debt to Equity ratio shows the number of debts used for the funding when compared to the
fully owned equity. For Aman Ltd., the Debt to Equity ratio is 2.5:1. This indicates that it has 2.5
rupees debt for every 1 rupee. Generally, a DE ratio of 1 is considered safe, and a ratio greater
than two can be risky for the company. For Roger Ltd. 1.01 this shows that for every 1 rupee of
equity, it has 1 rupee of debt. This is considered to be a safe ratio