NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES (NMIMS)
GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION
(NGA-SCE)
INTERNAL ASSIGNMENT
COURSE: FINANCIAL ACCOUNTING AND ANALYSIS
APPLICABLE FOR JUNE 2021 EXAMINATION
NMIMS GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION (NGA-SCE)
COURSE: FINANCIAL ACCOUNTING AND ANALYSIS
INTERNAL ASSIGNMENT APPLICABLE FOR JUNE 2021 EXAMINATION
QUES 1.) ACCOUNTING EQUATION
S.NO PARTICULARS LIABILITY EQUITY ASSETS JOURNAL ENTRY
.
1. Purchased Furniture (+)6,75,000 (+)6,75,000 Furniture A/c Dr.
for Rs. 6,75,000. 6,75,000
To Creditors A/c
6,75,000
(Being furniture purchased on
credit.)
2. Capital Introduced by (+)12,00,000 (+)12,00,000 Bank A/c Dr.
the business Owner 12,00,000
by depositing Rs.12 To Capital A/c
Lakhs in the bank 12,00,000
account. (Being business commenced
with cash and deposited in
bank.)
3. Goods purchased on (+)1,05,000 (+)1,05,000 Purchases A/c Dr.
credit from Aman 1,05,000
Enterprises for Rs. To Aman Enterprises A/C
1,05,000. 1,05,000
(Being business commenced
with cash deposited in bank.)
4. Goods sold on credit (+)1,00,000 (+)4,00,000 Sundry Debtors A/c Dr.
for Rs. 4,00,000. The (-)3,00,000 3,00,000
cost of the goods sold Profit and Loss A/c Dr.
was Rs. 3,00,000. 1,00,000
To Sales A/c
4,00,000
(Being goods sold on credit at a
profit of Rs. 1,00,000)
5. Purchased goods from (+)6,00,000 Purchases A/c Dr.
Sneha Enterprises for (-)6,00,000 6,00,000
Rs. 6,00,000 and To Bank A/c
made the payment 6,00,000
from the business's (Being goods purchased from
bank account. Sneha Enterprises and payment
made through business’s bank
account.)
TOTAL 5,80,000 13,00,000 22,80,000
QUES. 2) RECORDING OF VARIOUS TRANSACTIONS OF MS. DORATI
It is given in the question that Love Doodle is a gifting enterprise of Ms. Dorati. It mainly deals
in gifting goods. Further information given about various inflows are as follows:
Sale of Gift hampers =Rs. 5,05,000
Interest and dividend receipts from bank = Rs. 4,200
REVENUE FROM OPERATIONS
Revenue refers to gross inflow of economic benefits during the period arising or during the
ordinary course of business when those activities result in inflow of cash or increase in Equity
other than increase relating to contributions from equity shareholders.
It is the revenue which company generates from its primary business activities.
For example: A retailer earns revenue through sales
A physician earns its revenue from medical services, etc.
A company discloses revenue from operations under the following heads by way of notes:
a. Sale of products (including excise duty or goods and service tax)
It refers to all the activities undertaken for the purpose of selling of products or services
in return of money or consideration.
b. Sale of services
It generally refers to the task of carrying out activities that have been contractually
agreed to be carried out during a period decided by the company during the normal
course of business.
c. Other operating revenues
It includes revenue from all other operating activities which are not related to the
principal activities of the company such as
Profit or loss from disposals
Interest income
Dividend income, etc.
There are various ways of recognition of revenue on the basis of quantum of revenue and
timing of recognition. Revenue is generally recognized using the accrual principle.
When revenue from providing services is recognized, it is recognized on the basis of
stage of completion and not on lump sum basis.
The current year’s amount is considered as revenue income and the remaining amount is
capitalized or set aside.
OTHER INCOME
There are incomes which are generated outside the ordinary course of business in addition to
regular operating activities. A company may also generate income from other sources such as
Income from rent
Dividend income
Profit or loss on sale of assets or investments
Interest income earned by a finance company, etc.
The disclosure of income from other sources is done as follows under various heads:
a. INTEREST INCOME
Interest income is income generated from various savings such as fixed deposits,
recurring deposits and other investments to pay some form of interest.
Where net interest income= Revenue generated by assets
- Loans, mortgages and securities
- Interest cost on liabilities such as deposits in checking
and savings account
b. DIVIDEND INCOME
It refers to income from shares held as investments which shall be taxable under the head
“other sources” in the hands of recipient shareholders.
c. OTHER NON-OPERATING INCOME
It is the part of organization’s income which is derived other than main business
activities. It includes income from dividend, profits or losses from investments, foreign
exchange gains or losses, etc.
Treatment of various items given in the question is as follows
Sale of Gift hampers =Rs. 5,05,000
It is shown as revenue by way of addition to revenue from operations.
REVENUE FROM OPERATIONS
Particulars Amt.
Sale of gift hampers 5,05,000
Interest and dividend receipts from bank = Rs. 4,200
It is income from other sources. Therefore it is shown by way of addition to the
head income from other sources.
INCOME FROM OTHER SOURCES
Particulars Amt.
Interest and dividend receipts from bank 4,200
QUES. 3 (a) ANALYSING RATIO ANALYSIS AND FINANCAL PERFORMANCE OF
COMPANIES
i. CURRENT RATIO
Current ratio is ratio of company’s current assets to current liabilities. It signifies the
ability of the individuals to meet its short term commitments and obligations and
therefore particular significance is given to short term creditors. Current ratio includes
current assets and current liabilities.
Current ratio is calculated as follows:
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITIES
An ideal current ratio is 2:1.
Current assets are as follows:
Cash and cash equivalents Debtors
Trade Receivables Inventory
Loans and Advances Prepaid Expenses
Accrued Income Short term investments
Marketable Securities
Current Liabilities are as follows:
Loans and deposits Bank overdraft
Trade payables Sundry Creditors
ii. QUICK RATIOS
Quick ratio is used to measure the liquidity of an organization and is more accurate as
compared to Current ratio. It is also known as Acid test ratio or liquid ratio. It relates
quick current assets to current liabilities.
Quick assets are the assets which are generally converted into cash early such as cash,
marketable securities etc. Inventory is not treated as quick current assets as it is not likely
to be realized early.
Quick ratio is calculated as follows:
QUICK RATIO = CURRENT ASSETS - INVENTORIES
CURRENT LIABILITIES
An ideal quick ratio is 1:1.
Quick assets refers to sum total of all current assets excluding stock or inventory.
There are two companies which are Aman Ltd. And Roger Ltd. The analysis of various
ratios are as follows: –
i. Current ratio of Aman Ltd is 2:01 which means that company’s liquidity position
is sound. Current ratio of Roger Ltd. which is 1.60:1 (less than 1) which means
that the Company would have difficulty in paying bills as they become due
without selling some long term assets.
Aman Ltd is financially more stable for short term as compared to Roger Ltd.
ii. Quick ratio of Aman Ltd is 1.35:1 which more than the ideal ratio. It means that
the Company has surplus cash to meet its business obligations. Whereas quick
ratio of roger Ltd. is 1:01 which means that it has comparatively less cash as per
requirement to meet its business obligations.
Aman Ltd has more sound short term liquidity position than Roger Ltd.
Therefore Aman Ltd is considered more preferable as compared to Roger Ltd as its
liquidity position is more stable.
(b) RETURN ON INVESTMENT (ROI) and DEBT-EQUITY RATIO and
analysis on financial Performance
i. RETURN ON INVESTMENT (ROI)
Return on investment refers to the evaluation of how well an investment has
performed. It refers to proceeds of investments received from sale of
investment or interest. It is more popular metric as it is more simple and
versatile.
It is defined as the ratio between net income and investment.
Net income = Sales- Cost of goods sold, selling expenses, general and
administrative expenses, operating expenses, depreciation,
interest, taxes and other expenses
Investment = Fixed investments + inventory investments
A high ROI means the investment’s gains compare favorably to its cost. As a
performance measure, ROI is used to evaluate the efficiency of the investment
or to compare the efficiency and effectiveness of several business operations.
It is generally required for real estate transactions. It is computed as follows
RETURN ON INVESTMENT = INVESTMENT NET PROFIT
INITIAL CASH OR OUTLAY
ROI of Aman Ltd is 15 % as compared to Roger Ltd which is 13%. It means that
the return received from Aman Ltd is more than the return received from Roger
Ltd.
Aman Ltd is more preferable as compared to Roger Ltd.
ii. DEBT-EQUITY RATIO
Debt Equity ratio is a financial ratio indicating the relative proportion of
shareholder’s equity and debt used for the purpose of financing the
company’s assets. It is also known as risk gearing or leverage.
It relates to debt to equity or owner’s funds. Debt means long term liabilities
which mature after 1 year and it includes long term loans from various
financial institutions, banks, public deposits and debentures.
Equity refers to owner’s finds and and it includes:
Equity share capital,
General reserves,
Capital reserves
Share premium and other reserves
It also includes accumulated losses and fictitious assets such as preliminary
expenses, discount on issue of shares or debentures, which are yet to be written
off. It is computed as follows:
DEBT-EQUITY RATIO = DEBT
EQUITY
Debt-Equity ratio of Aman Ltd is 2.5:1 which more than the ideal ratio. It means that
it has sufficient amount of Equity for the purpose of repayment of debt. Whereas,
Roger Ltd Debt-Equity ratio is 1:01 which means it has less funds than required
amount for the purpose of repayment f debt and other obligations.
Aman Ltd is more preferable as compared to Roger Ltd.
OVERALL INTREPRETATION: Therefore, from the analysis of the above
given ratios, it is clear that Aman Ltd is more viable as compared to Roger Ltd.
Therefore it is more preferable over other company.
