Financial Accounting

K.V.Ramesh
Assistant Professor ( Finance)
Coordinator MBA(PE)
Course outline
Fundamentals of Accounting


Mechanics of Accounting


Financial Statement Analysis

Important Terminology Unit I
Accounting and Book - Keeping
Accountancy
Assets
Liabilities
Accounting principles and policies
Accounting cycle and process
Accounting Equation
Generally Accepted Accounting Principles ( GAAP)
International Financial Reporting Standards ( IFRS)

Books must be referred
Fundamentals of Accounting PC
Tulsian Mc GrawHil
An Introduction to Accountancy SN/
SK Maheswari Vikas
Annual reports latest
Introduction
Accounting is a term as the language of the business
and is a part of accountancy . The basic function of a
language is to serve as a means of communication.
It communicates the results of business operations
to various parties who have some stake in the
business.
Need for accounting : A person who is running business
must know
i. What he owns?
ii. What he owes?
iii. Whether he has earned a profit or loss of running a
business?
iv. What is his financial position?

Accountancy & Book- keeping
refers to a systematic knowledge of accounting.
It tells us why and how to prepare the books of
accounts and how to summarise the accounting
information and communicate it to the interested
parties.
Book keeping is a part of accounting and is concerned
with record keeping and clerical in nature.
The basic objective is to maintain systematic record of
all financial transactions.
DEFINITIONS

Accounting is the art of recording, classifying and
summarising in significant manner and in terms of money,
transactions and events which are, in part, at least of a
financial character and interpreting the results thereof. CPA


Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgments and decisions by users of the information. AAA



The function of accounting is to provide Quantitative
information, primarily of financial nature, about economic
entities, that is needed to be useful in making economic
decisions.

Accounting is an information system that measures,
processes, and communicates financial information about
an economic entity.

IS a link between business activities and decisions.

FUNCTIONS OF ACCOUNTING
Recording:- This is the basic function of accounting. It is
essentially concerned with not only ensuring that all
business transactions of financial character are in fact
recorded but also that they are recorded in an orderly
manner. Recording is done in the book journal.
Classifying:- This is concerned with the systematic analysis
of the recorded data, with a view to group transactions or
entries of one nature at one place. Classification is done in
the book termed as Ledger.
Summarising:- This involves presenting the classified data
in a manner which is understandable and useful. This
process leads to preparation of the following statements.
Namely Trial Balance, Income Statement and Balance
sheet.


Functions
Dealing with financial transactions.


Analysing and Interpreting:- This is final function of
accounting. The recorded financial data is analysed and
Interpreted in a manner that the end-users can make a
meaningful judgement about the financial condition and
profitability of the business operations.

Communicating:- The accounting information after being
meaningfully analysed and interpreted has to be
communicated in a proper form and manner to the proper
person.

Importance

Proprietors.
Managers.
Creditors.
Prospective Investors.
Government.
Employees.
Citizen.

Objectives of Accounting

To keep systematic records.
To protect business properties.
To ascertain the operational profit or loss.
To ascertain the financial position of
business.
To facilitate rational decision making.


CVS Caremark
CVS operates a chain of more than 6000 stores. Its
pharmacies fill more than 1billion prescriptions each
year. Over the last five years, CVS has opened or
purchased 2100 new stores and more than doubled its
sales and profits. This performance places it among the
fastest-growing retail companies.
Why is CVC considered successful?
Customers give the company high marks because of
the quality of the products that it sells and the large
selection and good service that its stores offer.
ACCOUNTING PRINCIPLES
They are a body of doctrines commonly associated with the
theory and procedures of accounting, serving as an
explanation of current practices and as a guide for selection
of conventions or procedures where alternatives exist.

It is defined as those rules of action or conduct which are
adopted by the accountants universally while recording
accounting transaction. It is also termed as Accounting
Standards.

Accounting principles are classified into two categories.
Namely Accounting concepts and Accounting conventions.

ACCOUNTING CONCEPTS
The term concepts include those basic assumptions upon which
accounting is based.


Separate Entity Concept
Money Measurement Concept
Cost Concept
Going Concern Concept
Dual Aspect Concept
Realisation Concept
Accrual Concept


ACCOUNTING CONVENTIONS
Customs and traditions which guide the accountants while
preparing the accounting statements.

Consistency

Full Disclosure

Conservatism

Materiality


Fundamental Accounting Assumptions

Going concern

Consistency

Accrual
ACCOUNTING POLICIES
Accounting policies refer to specific
accounting principles and the methods of
applying those principles adopted in the
preparation and presentation of financial
statements. The choice of appropriate
accounting principles in the specific
circumstances of each enterprise calls for
considerable judgment by the management
of the enterprise

example:-Methods of depreciation

Accounting Cycle
A complete sequence beginning with the
recording of the transactions and ending
with the preparation of the final accounts.
Jounalising
Posting
Balancing
Trial Balance
Income Statement
Balance Sheet

Accounting Process & Equation
An overview of the steps of cycle,
beginning with a transaction and
ending with the closing of the books
and reversing entries.
Equation
Assets= Capital+Liabilities or
Shareholders equity= Assets
Liabilities


GAAP
Generally Accepted Accounting Principles :
Standard framework of guidelines for financial
accounting. It includes the standards,
conventions , and rules accountants follow in
recording and summarising transactions, and in
the preparation of financial statements.



7 Ps
Principle of regularity: Regularity can be defined as
conformity to enforced rules and laws. This principle is
also known as the Principle of Consistency.
Principle of sincerity: According to this principle,
the accounting unit should reflect in good faith the
reality of the company's financial status.
Principle of the permanence of methods: This
principle aims at allowing the coherence and
comparison of the financial information published by
the company.
Principle of non-compensation: One should show
the full details of the financial information and not
seek to compensate a debt with an asset, a revenue
with an expense, etc.

7 Ps
Principle of prudence: This principle aims at
showing the reality "as is" : one should not try to
make things look prettier than they are. Typically, a
revenue should be recorded only when it is certain
and a provision should be entered for an expense
which is probable.
Principle of continuity: When stating financial
information, one should assume that the business will
not be interrupted. This principle mitigates the
principle of prudence: assets do not have to be
accounted at their disposable value, but it is accepted
that they are at their historical value.


7 Ps
Principle of periodicity: Each
accounting entry should be allocated
to a given period, and split
accordingly if it covers several
periods. If a client pre-pays a
subscription (or lease, etc.), the given
revenue should be split to the entire
time-span and not counted for
entirely on the date of the transaction


IFRS
International Financial Reporting Standards are standards
and interpretation adopted by the International
Accounting Standards Board (IASB). In April 2001,
the IASB adopted all IAS and continued their
development, calling the new standards IFRS.
Assumptions
Accrual basis: The effect of transactions and other
events are recognised when they occur, not as cash is
received or paid.
Going concern: The financial statements are prepared
on the basis that an entity will continue in operation
for the foreseeable future.

International Financial Reporting Standards
IFRS financial statements consist of
Statement of Financial Position ( Asset, Liability and Equity)
Statement of Comprehensive Income or
two separate statements comprising an Income Statement and
separately a Statement of Comprehensive Income, which reconciles
Profit or Loss on the Income statement to total comprehensive
income
Statement of Changes in Equity (SOCE)

Cash Flow Statement or Statement of Cash Flows

notes, including a summary of the significant accounting policies
Qualitative characteristics of financial
statements
Understandability

Reliability

Comparability

Relevance

True and Fair View/Fair Presentation

Assumptions in IFRS
Accrual basis

Going concern

Stable measuring unit assumption

Units of constant purchasing power
Implementation Phases
The ICAI has also stated that IFRS will be applied to
companies above Rs.1000 crores from April 2011.
Phase wise applicability details for different companies
in India:
Phase 1:
Opening balance sheet as at 1st April 2011.
Companies which are part of NSE Index Nifty 50
Companies which are part of BSE Sensex BSE 30
Companies whose shares or other securities are listed
on a stock exchange outside India
Companies, whether listed or not, having net worth of
more than INR1,000 crores
Phase 2: Opening balance sheet as at 1st April
2013.
Companies not covered in phase 1st and having
net worth exceeding INR 500 crores.

Phase 3: Opening balance sheet as at 1st April
2014.
Listed companies not covered in the earlier
phases

Mechanics of Accounting
Transaction of a business refers to an event the recognition of
which gives rise to an entry in account records.

Account is a summary of the relevant transactions at one place
relating to a particular head. It records not only the amount of
transaction but also their effect and direction.

It is a comprehensive and classified record of transactions affecting
one person, one kind of property or one class of gains and losses
arising out of expenses or incomes.


Accounts

Accounts can be broadly classified into Personal
Accounts and Impersonal Accounts.

Impersonal Accounts are further classified into
Real Accounts and Nominal Accounts.

Classification
Personal Accounts:- These are the accounts of persons with whom the
business deals. Ex: Sold goods to kumar, paid cash to ravi.
DEBIT THE RECEIVER
CREDIT THE GIVER
Real Accounts :- These are the accounts of tangible objects ie. Assets
owned by an enterprise and carrying probable future benefits.
Ex: cash received from ravi.
DEBIT WHAT COMES IN
CREDIT WHAT GOES OUT
Nominal Accounts :- These accounts are opened to explain the nature of
transactions. Nominal accounts include accounts of all expenses, losses,
incomes and gains.
Ex: Paid wages, commission received.
DEBIT ALL EXPENSES AND LOSSES
CREDIT ALL GAINS AND INCOMES




Meaning and Rules of Debit &
Credit
Debit means to enter an amount of a
transaction on the left side of an account,
Credit means to enter an amount of a
transaction the right side on an account.
Dr. and Cr. are the abbreviated form of
debit and credit.
Both debit and credit may represent either
increase or decrease depending upon the
nature of an account.
Journal
Journal:- The book in which the business transactions are recorded in a
chronological order, after analysing them and classifying the benefits
according to the principles of debit and credit is called journal.
The transactions in the journal are recorded on the basis of the rules of
debit and credit.

Debit is that aspect of transaction that causes:
An increase in an Asset, a decrease in Liability
An increase in Expense or Loss, a decrease in Income or Gain
An increase in Drawings, a decrease in Capital

Credit is that aspect of transaction that causes:
A decrease in Asset, an increase in Liability
A decrease in Expense or Loss, an increase in Income or Gain
A decrease in Drawing, an increase in Capital



Advantages of journal entries
A businessman can find out the information when
required, quickly and easily.
When any difference arises with regard to past
transactions, the trader can satisfy by explaining the
dates and the circumstances of the differences.
It helps in the preparation of final accounts at the end
of the year.
Business transactions have been classified into three
categories:
Transactions relating to persons, properties and
assets and to incomes and expenses.

PROFORMA OF JOURNAL
Date Particulars L.F Debit Credit
Rs Rs.

Date:- The date on which the transaction was entered is recorded here.
Particulars:- The two aspect of the transaction are is recorded in the
column i.e., the details regarding accounts which have to be debited
and credited.
L.F:- It means ledger folio .the transactions entered in the journal are
later
on posted to the ledger procedure regarding posting the transactions in
the ledger

Debit:- In this column, the amount to be debited is entered.
Credit:- In this column, the amount to be credited is shown.

Ledger & Posting
Ledger :- A book containing different accounts
of an entity and facilitates recording of all
types of transactions related to Personal,
Real and Nominal accounts separately in
related accounts.

Posting :- Transferring the debit and credit
items from the journal to the respective
accounts in the ledger


PROFORMA OF LEDGER
Date particulars Amount
Rs
Date Particulars Amount
Rs
Dr Cr
Account
Notes:1) It is customary to use words To and By while making posting in the
Ledger.
2) The word To is used with the accounts which appear on Debit side
of a Ledger Account.
3) Similarly, the word By is used with accounts appear on the Credit side
of a Ledger Account.

1. Journalise the following transactions and post them into
Ledger
1. Ram started business with a capital of Rs 10,000.

2. He purchased furniture for cash Rs 4,000.

3. He purchased goods from Mohan on credit Rs2,000.

4. He paid cash to Mohan Rs 1,000.

5. He received cash from Suresh Rs 1,000.




2.From the following transactions journalise.
a) Rent paid.
b) Salaries paid.
c) Interest received.
d) Dividends received.
e) Furniture purchased for cash.
f) Machinery sold.
g) Outstanding for salaries.
h) Paid to Suresh.
i) Received from Mohan (the proprietor).
j) Lighting.

1. Ganesh started his business with cash
2. Borrowed from Mahesh
3. Purchased furniture
4. Purchased furniture from Mohan on credit
5. Purchased goods for cash
6. Purchased goods from Ram on credit
7. Returned goods to Ram
8. Sold goods for cash
9. Sold goods to Shyam on credit
10.Shyam returned goods
11.Received cash from Shyam
12. Paid cash to Ram
13.Deposited into bank
14.Withdrew cash for personal use
15.Withdrew from bank for office use
16.Withdrew from bank for personal use
17.Received a cheque from a customer,Shyam at 8 PM
18.Deposited Shyams cheque next day
19.Bank intimated that Shyams cheque was dishonoured
20.Paid Ram by cheque
21.Paid salary
22.Paid rent by cheque
23.Goods withdrawn for personal use
24.Paid an advance to a supplier of goods
25.Received an advance from customers
26.Paid interest on loan
27.Paid installment of loan
28. Interest allowed by bank
2) Pass journal entries from the following

1.Jul.1,2007,Ajit started business with cash Rs 40,000.

2.Jul.3,he paid into the Bank Rs 2,000.

3.Jul.5,he purchased goods for cash Rs 15,000.

4.Jul.8,he sold goods for cash Rs 6,000.

5.Jul.10,he purchased furniture and paid by cheque Rs 5,000.

6.Jul.12,sold goods to Arvind Rs 4,000.

7.Jul.14,he purchased goods from Amrit Rs10,000.
.

8.Jul.15,he return goods to Amrit Rs 5,000.

9.Jul.16,he received from Arvind Rs3,960 in full settlement

10.Jul18,he withdraw goods for personal use Rs1,000.

11.Jul.20,he withdraw cash from business for personal use Rs 2,000.

12.Jul.24,he paid telephone charges Rs 1,000.

13.Jul.26,cash paid to Amrit in full settlement Rs4,900.

14.Jul.31, Paid for stationery Rs 200, rent Rs 500 and salaries to staff
Rs 2,000.

15.Jul..31, goods distributed by way of free samples Rs 1,000.


3) Journalise the transactions given below in the books of Prasad.

April 1 Prasad commenced business with a cash of Rs.30,000.

April 3 Cash sales Rs.4,000.

April 4 Bought Machinery Rs.15,000.

April 7 Sold goods to Raju Rs. 10,000.

April 9 Purchased goods from Ramana Rs.8,000.

April 10 Sold goods to Gupta Rs.5,000.

April 12 Paid for stationery Rs.1,000.

April 14 Carriage expenses Rs.500.



April 15 Bought furniture for proprietor's residence and paid cash
Rs.7,000.
April 17 Sold goods to Krishna for cash Rs.3,000.

April 22 Received Discount Rs. 800.

April 24 Paid for wages Rs.1,200.

April 26 Sales Rs.15,000.

April 27 Deposited cash with Bank Rs.10,000.

April 28 Received cash from Mahesh Rs.1,500.

April 29 Received Interest on loan from Viswanath Rs.600.

Trail balance
It is a statement containing the various ledger balances on a
particular date, arranged in the form of debit and credit
columns placed side by side and prepared, the object of
checking the arithmetical accuracy of the ledger postings.

Objectives of preparing trail balance
Checking of the arithmetical accuracy of the accounting
entries.
Basis for financial statements.
Summarised ledger

Trial balance Errors
Error of original entry
Error of omission
Error of reversal
Error of commission
Error of principle
Compensating errors
Transposition error
Trading Account
This is the first step in preparation of final accounts. It is prepared at
the end of each accounting period to asses the Gross Profit or Gross
Loss.

Advantages:-

We can ascertain Gross Profit/Gross Loss.

We can observe the changes in direct expenses.

We can calculate the cost of production.

We can establish the relation between the costs and revenues.

We can analyse the trend in sales.

We can decide the earning capacity of the firm

PROFORMA OF TRADING ACCOUNT
Particulars Amount
Rs
Particulars

Amoun
t
Rs
To Opening stock
To Purchases
Less Returns
To Direct
Expenses

TO Gross Profit
c\d






By Sales
Less Returns
By Closing Stock
By Gross Loss c\d


Dr
Cr
Trading Account of
for the year ended
PROBLEMS
From the following ledger balances as on 31-12-2010,
prepare Trading Account.

Rs
Stock as on 1-1-2010 2,000
Purchases 38,000
Sales 56,000
Returns Inward 2,000
Returns Outward 3,000
Closing Stock 12,000
You are requested to prepare Trading Account from the following
information.
Rs


Stock(1-1-2010) 1,000
Purchases 25,000
Sales 35,000
Returns Inward 1,500
Returns Outward 1,000
Direct Wages 2,000
Carriage Inward 3,000
Carriage Outward 1,800
Factory Rent 1,000
Office Rent 800
Customs Duty 200
Electricity (motive power) 500
Office Lighting and repairs 700
Closing Stock 5,000
PROFORMA OF P&L ACCOUNT
Particulars
Amount
Rs
Particulars
Amount
Rs

To Gross Loss b/d
To Salaries
To Rent
To Commission
To Advertisement
To Bad Debts
To Discount
TO Net Profit
Transferred to Capital
a/c
By Gross Profit b/d
By Discount
Received
By Interest on
Drawings
By Profit on Sale of
Assets
By Net Loss
Transferred to
Capital a/c

for the year of ending
Profit and Loss Account of
Cr Dr
From the following particulars prepare Profit and Loss Account.
Rs


Gross Profit 2,56,250
Rent 6,500
Commission Paid 3,250
Salaries 9,750
Taxes 9,750
Trade Expenses 1,625
Bank Charges 1,950
Printing & Stationery 8,125
Packing Charges 1,625
Carriage Outward 6,500
Discount Received 3,250
Discount Allowed 2,112
Bad Debts 2,438
Depreciation on Plant 4,875
From the following Ledger balances of X Ltd, prepare Trading & Profit and Loss
Account for the year ended 31
st
Dec,2010.
Rs
Opening Stock 1,87,500
Purchases 2,71,875
Sales Returns 15,000
Furniture 52,500
Machinery 2,43,750
Carriage Outward 5,625
Wages 37,500
Sales 6,90,000
Purchase Returns 9,375
Carriage Inward 7,500
General Expenses 7,500
Salaries 7,500
Commission Received 1,875
Discount Allowed 2,750
Bad Debts 1,000
Commission to Agent 1,875
Bank Charges 563
Interest Received 1,125
Rent Received 16,875
Investments 3,75,000
Insurance 3,750
Closing Stock 3,75,000


Very important terms
Depletion refers to the physical deterioration by the
exhaustion of natural resources. Ex: Ore deposits in
mines, oil wells, quarries, timber stands etc.
Amortisation refers to the economic
deterioration by the expiration of intangible assets. Ex:
patents, copyrights, goodwill etc.
Obsolescence refers to the economic
deterioration by invention of improved technique or
equipment, market decline due to change in taste and
fashion etc and inadequacy of existing plant to meet
the increased business.


Very important terms
Financial statements include Income statement (during an
accounting period) and Balance sheet (at a particular point
of time).
Final accounts include Trading and Profit & Loss Account
and Balance Sheet.
Provision means any amount written off or retained by way
of providing depreciation or diminution in the value of
assets or for providing any known liability of which the
amount cannot be determined with substantial accuracy.
Charge against profits.
Reserve means that portion of earnings, receipts or other
surplus of an enterprise appropriated by the management
for a general or a specific purpose other than a provision for
depreciation or diminution in the value of assets or for a
known liability. Appropriation of profits.

Assets- Resources acquired
Circulating/Floating
Assets constantly
change in value through
transactions that are
entered into. These are
meant to be converted in
to cash at the earliest
opportunity.

Liquid assets
Fixed:- these are not meant to be sold but are
meant to be utilized in the firms Business.
Tangible
Which can be seen
and felt
Intangible
Which cannot be seen
Fictitious
Assets of which no
value




Liabilities are claims of the creditors against the enterprise
arising out of past activities that are to be satisfied by the
disbursement or utilisation of corporate resources.

Liabilities

Current
Repayment obligation
Payable within one
year from the date of
Balance sheet.
Fixed
Other than current
Contigent
Which may arise in
future depending on
happening of an
uncertain event.
PROFORMA OF BALANCE SHEET

Balance sheet of
as on-
Liabilities Amount
Rs
Assets Amount
Rs
Capital
Add: Net Profit,
Additional
capital,
Interest
on
capital.
Less:
Drawings, Int
on drawings,
Net Loss.
Long term
debts
Short term
debts









***

***

***
Fixed Assets :
Good will, Patents,
copy right, trade
marks, Land
&Buildings, Plant
& Machinery,
Furniture &
Fittings etc.
Investments
Current Assets:
Debtors, closing
stock, cash in
hand& at Bank
***






***
Permanency Order
Liabilities Amount
Rs
Assets Amount
Rs
Current
Liabilities:
Creditors, Bills
payable, Bank
Overdraft,
Outstanding
Expenses,
Income
received in
advance.


***



***








****

Prepaid Expenses
Accrued Incomes
Bills Receivable
***
***











****
PROFORMA OF BALANCE SHEET
Liabilities Amount Rs Assets Amount Rs
Current Liabilities:
Outstanding Expenses
Income Received in
Advance
Bills Payable
Bank Overdraft
Creditors
Loans:
Long Term Loans
Short Term Loans
Capital:
Capital
ADD: Additional capital
Interest on capital
Net Profit
Less: Drawings
Interest on drawings
Net Loss









***
***
***









Current Assets :
Prepaid Expenses
Accrued Income
Cash in Hands
Cash at Bank
Bills Payable
Debtors
Investments
Loose Tools
Fixed Assets:
Furniture & Fittings
Vehicles
Leasehold Property
Plant & Machinery
Land & Buildings
Patents
Trade Marks
Copy rights
Goodwill

***





***













Liquidity Order
10)From the following Trial Balance as on 31 Dec 2011, Prepare a Trading and a
Profit and Loss Account, Balance Sheet.
Trail Balance on 31 Dec 2011
Debit Amount
Rs
Credit Amount
Rs
Cash
Purchases
Traveling Expenses
Carriage
Discount Allowed
Audit fees
Debtors
Furniture
Trade Expenses
General Expenses
Legal Expenses
Penalties
Salaries
Opening Stock
Carriage Outward
Postage
Telephone
Goodwill
Commission
Wages
Drawings
Loose Tools
Interest on Overdraft
1,740
2,69,320
10,510
86,580
1,800
2,746
68,440
2,180
3,250
9,950
2,540
4,300
25,200
5,200
43,810
2,790
1,930
21,270
3,370
13,230
20,340
14,870
1,720
Profit on sales of Assets
Recovery of Bad Debts
Bank Overdraft
Creditors
Commission
Bills Payable
Capital
Purchase Returns
Sales
Interest Received
2,130
1,440
24,420
52,290
3,450
17,780
40,656
1,320
4,72,290
1,310
6,17,086 6,17,086
Closing Stock as on 31-12-2011 Rs 10,580.
Adjustment Entries

1. Closing Stock.
2. Expenses Outstanding.
3. Prepaid Expenses.
4. Accrued Incomes.
5. Incomes Received in Advance.
6. Depreciation on Assets.
7. Bad Debts.
8. Reserve for Doubtful debts.
9. Reserve for discount on debtors.
10. Reserve for discount for creditors.
11. Interest on Capital.
12. Interest on Drawings.
13. Stock lost in Accident.





1. Closing Stock
Closing Stock A/c ..........Dr
To Trading A/c
a) Given in the adjustment
b) Appearing in the Trial balance
2. Expenses Outstanding
Rent A/c .Dr
To Out Rent A/c
a) Given in the adjustment
b) Appearing in the Trial balance
3. Prepaid Expenses
Prepaid Expens A/c. Dr
To Expense A/c
a) Given in the adjustment
b) Appearing in the Trial balance




4) Accrued Income- Income which has been earned during
the accounting year but which has not yet become due
and therefore has not been received
Accrued Income A/c.Dr
To Income A/c
a) Given in the adjustment
b) Appearing in the Trial balance
5) Income Received in Advance.
Income A/c ..Dr
To Income Received in Advance
Adjustment
1.Should be deducted from the relevant A/c in the Profit
and Loss A/c
2. Shown in the Liabilities side of the Balance sheet.







6)Depreciation
Depreciation A/c .Dr
To Fixed Asset A/c
a) Given in the adjustment
b) Appearing in the Trial balance
7)Bad Debts
Bad Debts A/cDr
To Debtors A/c
a) Given in the adjustment
Bad Debts should be debited to P&L A/c
and Should be deducted from Debtors in the assets side of
the Balance Sheet.
b) Appearing in the Trial balance
To be shown in the Debit side of the P&L A/c
C) Bad debts were given in the Trial Balance and
Adjustment.





8. Provision for Bad and Doubtful debts
Profit and Loss A/c Dr
To Prov for Bad debts A/c
a) Given in the adjustment
b) Appearing in the Trial balance
9. Provision for Discount on Debtors
Profit & Loss A/c..Dr
To Dis on Debtors A/c
10. Provision for Discount on Creditors
Prov for Dis on Creditors..Dr
To Profit & Loss A/c
11.Interest on Capital
Int on Capital A/cDr
To capital A/c
12. Interest on Drawings
Drawings A/c ..Dr
To Int on Drawings



Stock Lost in Accident



1.For the Loss sustained by fire accident
Loss on fire accident A/c .Dr
To Trading A/c

2.Claim received from Insurance Company
Cash A/c Dr
To Loss A/c
3.Loss On fire Transferred to P&L A/c
P&L A/c .Dr
To Loss A/c

11. From the following Trail Balance As on 31-3-2012, Prepare
the Trading Profit & Loss A/c and Balance Sheet.
Trail Balance
Debit Balance Amount
Rs
Credit Balance Amount
Rs
Salaries
Purchases
Trade Expenses
Wages
Carriage
Office Expenses
Commission
Bad Debts
6,000
26,000
1,000
7,800
400
500
600
1,200

Capital
Sales
Discount
Creditors
Bills Payable
25,000
47,000
200
21,000
6,800

(1) (2) (3)
(4)
Debtors
Furniture
Machinery
Insurance
Bills Receivables
Opening Stock
Cash in Hands
Cash in Bank
30,000
3,000
10,000
400
2,000
7,000
500
3,600
. 1,00000








1,00,000
Adjustments:
1.Closing Stock Rs. 11,000.
2.Outstanding Wages Rs.2,000.
3.Prepaid InsuranceRs.50.
4.Provide Bad Debts Reserve at 5%
5.Depreciation on machinery and furniture by 5%.
12. Prepare Final Accounts of Mr X
Trial Balance as on 31-12-2011

Particulars Debit Rs Credit Rs
Capital
Drawings
Purchases and Sales
Returns
Debtors, Creditors
Stock (1-1-2011)
Bad debts
Bills Receivable
Bills Payable
Cash in Hand
Office expenses
Sales Van
Expenses of Sales van
Discount
Rent
Telephone Charges
Postal Charges
Furniture
Commission
Carriage inward
Salaries & Wages

7,500
72,100
1,300
18,200
19,800
3,000
12,000

800
6,210
15,000
1,400

10,700
1,050
3,700
5,000
8,400
3,200
20,000

2,09,360
50,000

95,000
2,700
35,750



23,000




2,910








2,09,360

Adjustments :
1.Closing Stock Rs 61,700.
2.Depreciate Furniture by 10%, Sales van by 20%.
3.Rent Outstanding Rs 900.
4.Bad Debts Rs 200.
5.Provide 5% for Bad and Doubtful Debts.
6.one-fourth of salaries and wages belongs to factory.

13. Prepare final accounts.
Debit Balances Amount Rs Credit Balances Amount Rs
Purchases
Furniture
Wages
Machinery
Opening Stock
Sales Returns
Debtors
Carriage Inward
Salaries
Carriage
outward
Rent& Taxes
Cash at bank
25,200
1,600
3,500
20,000
17,525
1,200
10,400
200
10,600
503

2,001
8,000

1,00,729
Sales
Capital
Creditors
Purchase Returns
61,604
35,000
3,903
222









1,00,729
Adjustments
1. Closing Stock Rs. 16,800.
2. Outstanding Salaries Rs 400: Prepaid
rent Rs. 201.
3. Provide 5% to Bad and Doubtful
debts on debtors.
4. Depreciation on machinery is 10%.
5. Interest on capital is 5%.

14.Prepare a Trading and Profit &Loss a/c and Balance Sheet.
Trail Balance as on 31-12-2011
Debit Amount Rs Credit Amount Rs
Drawings
Stock
Bills Receivables
Sales Returns
Purchases
Wages
Salaries
Fixed Deposits
Insurance
Buildings
Furniture
Debtors
Cash in Hand
750
6,920
1,000
300
4,500
70
200
3,000
120
3,000
700
6,000
470

27,030
Capital
Purchase Returns
Bills Payables
Sales
Discount
Creditors
Bank overdraft

15,000
320
1,180
8,300
30
1,300
900







27,030
Adjustments:
1 Calculate 12% interest on Capital.
2 Insurance Premium Rs 120 was paid for the half year ended
with 31-3-2012.
3 Depreciate buildings and furniture by 10%.
4 Outstanding wages Rs 40.
5 Create provision for bad debts at 10%.also create a provision
for discount on debtors as well as creditors at 5%.
6 Closing stock as on 31-12-2011,Rs 8,000.


15.Prepare the final accounts of Mr X.
Trial Balance as on 31-3-2012

Debit Rs Credit Rs
Cash in Hand
Good Will
Purchases
Cash at Bank
Direct Wages
Opening stock
Interest on Loan
Insurance
Carriage on Sale
Carriage on Purchases
Commission
Fittings
Bad Debts
Buildings
Plant & Machinery
Postage
Debtors
Salaries

800
40,000
68,000
1,200
2,000
35,000
2,500
900
900
400
500
5,000
200
25,000
10,000
500
.25,000
3,000

220900
Sales
10% Loan(1-1-2012)
Reserve for Bad Debts
Creditors
Capital
Bills Payable

69,400
51,000
500
8,000
90,000
2,000













220900
Adjustments:
1 Stock as on 31-3-2012 Rs 75,000.
2 Provide 5% for doubtful debts.
3 Provide depreciation 10% on fittings and on Plant & Machinery,
5% on Buildings.
4 Mr X has taken Rs 500 worth of stock for his Domestic use.
5 Stock worth Rs 10,000 was destroyed in a fire accident for
which Insurance company agreed to reimburse Rs 2,000.

Reading of Financial statements
Statutory Disclosures


Voluntary Disclosures
Statutory Disclosures
1.Boards report
2.Directors Responsibility Statement
3.Management Discussion and Analysis
4.Report on Corporate Governance
5.Auditors Report
6.Balance sheet
7.Profit and Loss Account
8.Cash flow statement AS3
9.Accounting policies AS1
10.Segment Report AS17
Voluntary Disclosures
1. Human Resource Accounting
2. Accounting for changing prices
3. Value added Statements
4. Social Accounting Report
SCHEDULE Vl (sec 211)
Form of Balance Sheet
Balance Sheet of
As at
Liabilities Assets
SHARE CAPITAL
Authorised
Subscribed
Called up
Less Calls unpaid
Add Forfeited Shares
RESERVES AND SURPLUS
Capital Reserves
Capital Redemption reserve
Share premium
Other Reserves
Surplus
Proposed additions to reserves
FIXED ASSETS
INVESTMENTS
In Govt. Securities
In Shares, Debentures or Bonds
Immovable Properties
In the capital of Partnership firms
CURRENT ASSETS,LOANS AND
ADVANCES
A. Current Assets
Stores and spare parts
Stock-in-trade
Work in progress
Liabilities Assets
SECURED LOANS
Debentures
Loans and Advances from Banks
Loans and Advances from
Subsidiaries
Other Loans and Advances
UNSECURED LOANS
Fixed Deposits
Loans and Advances from
subsidiaries
Short Term Loans and Advances
From Banks
From others.
Other Loans and Advances
From Banks
From others
Sundry Debtors
Debts outstanding for a
period
exceeding six months
Other debts-
Less provision
Prepaid expenses
Cash Balance
Bank Balance-
With scheduled banks and
With others
B. Loans and Advances
Advances and Loans to:
Subsidiaries
Partnership firms
Bills of exchange

Liabilities Assets
CURRENT LIABILITIES AND
PROVISIONS
A Current Liabilities
Sundry creditors
Unclaimed dividends
Interest accrued but not due
B Provisions
Provision for Taxation
Proposed Dividends
For pf, Insurance, pension and
similar staff benefit schemes
MISCELLANEOUS EXPENDITURE
(to the extent not written off or
adjusted).
Preliminary expenses
Expenses including commission
or brokerage or underwriting or
subscription of shares or
debentures.
Discount allowed on the issue of
shares or debentures.
Interest paid out of capital during
construction.
Development expenditure not
adjusted

Vertical form of Balance Sheet
l

Sources of funds
1. Shareholders Funds
a) Capital
b) Reserves and surplus
2. Loan funds
a) Secured loans
b) Unsecured loans
Total
ll Applications of Funds
1 Fixed assets
a) Gross Block
b) Less: Depreciation
c) Net Block
d) Work in Progress





2. Investments
3. Current Assets, Loans and Advances
a) Inventories
b) Sundry Debtors
c) Cash and Bank balances
d) Other Current Assets
e) Loans and Advances
Less: Current liabilities and Provisions
a) Liabilities
b) Provisions
Net Current Assets
4. a) Miscellaneous Expenditure to the extent not written off or
adjusted.
b) Profit and Loss Account.
Total

Revised
A EQUITY AND LIABILITIES
1 Shareholders funds
(a) Share capital
(b) Reserves and surplus
(c) Money received against share warrants
2 Share application money pending allotment
3 Non-current liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (net)
(c) Other long-term liabilities
(d) Long-term provisions
4 Current liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions

B ASSETS
1 Non-current assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
2 Current assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
TOTAL


Profit and Loss Statement

Particulars Note No. Figures current/ previous
reporting period

I Revenue from operations
II Other Income
III Total Revenue (I + II)
IV Expenses:
Cost of Material consumed
Purchases of Stock in trade
Changes in Inventories of Finished goods , Work in progress and stock
in trade
Employee Benefits expense
Finance costs
Depreciation and amortisation expenses ,Other expenses
Total Expenses


V Profit before exceptional and extraordinary items and
tax (III - IV)
VI Exceptional items
VII Profit before extraordinary items and tax (V - VI)
VIII Extraordinary items
IX Profit before tax (VII - VIII)
X Tax expense:
(1) Current tax
(2) Deferred tax
XI Profit (loss) for the period from continuing operations
(VII - VIII)

XII Profit (loss) from discontinuing
operations
XIII Tax expense of discontinuing operations
XIV Profit/(loss) from discontinuing
operations (after tax) (XII - XIII)
XV Profit (Loss) for the period (XI + XIV)
XVI Earnings per Equity Share:
1) Basic
2) Diluted


1. Prepare Financial statements of DSG Ltd
Trial Balance as on 31-03-2012
Particulars Debit Rs Credit Rs
Equity Capital
Purchases and Sales
Debtors, Creditors
Stock 1-4-2011
Excise duty
Miscellaneous Income
Cash in Hand
Cash at Bank
Power and Fuel
Factory building maintenance
Packing material
Salaries and wages
Provision for Gratuity
Workers and Staff welfare
Interest on car loans
Bank Charges
Service tax

19,70,20,190
28,19,07,526
7,59,93,896
14,55,084

3,84,965
10,00,000
1,60,00,000
25,00,000
71,66,501
99,40,958
6,86,903
8,20,775
2,37,941
7,86,066
10,85,314
10,35,00,700
94,30,66,400
14,61,44,331


61,75,721
























Particulars Debit Rs Credit Rs
Traveling expenses
Capital reserve
Vehicle loan from bank
Unclaimed Dividend
Provision for taxation
Provision for Gratuity
Land and site development
Factory building
Plant and Machinery
Motor car
Security deposits
Raw materials stores and spares

25,00,000





36,90,056
4,11,73,513
19,66,24,348
85,24,555
17,01,260
9,79,92,270





94,91,92,121


15,00,000
7,00,000
3,97,758
7,00,00,000
24,00,000











94,91,92,121




Additional information
1. Stock Rs.1,65,10,550
2. Prepaid Power and Fuel Rs.2,06,760
3. Outstanding Salaries Rs. 50,000
4. Sales included domestic sales Rs.1,36,84,785.
5. Depreciation on Factory Building
Rs.10,00,000, Depreciation on Plant and
Machinery Rs.10,00,000 and Rs.5,00,000 on
Motor car

Trial balance of Virgo ltd as on 31
st
March, 2012
Particulars Debit Rs Credit Rs
Equity Capital Rs.4 each
Trade receivables and payables (short term)
Other liabilities
Income tax provision
Security Deposit
Interest Income
Cash in Hand
Cash at Bank - current account
Conveyance
Consultancy
Rates and taxes
Salaries and wages
Listing fees
Telephone
Sale of services
Office equipment

5,43,248




1,412
53,933
5,158
57,204
61,322
72,000
57,435
1,61,970

2,31,66,075

42,017,200
15,320,751
5,62,966
41,988
1,81,515
2,19,240








7,35,248













Particulars Debit Rs Credit Rs


Bank Charges and commission 31,512
Computer and Software 3,47,49,113
Traveling expenses 1,18,525

5,90,78,908 5,90,78,908

1. Authorised Capital Rs.6,69,74,200; 1,67,43,550 shares of Rs.4 each. Savera Media Ltd
held 33,53,750 shares of Rs.4 each.
2. Depreciation on Office equipment 15%.
3. Depreciation on Computers 60%.
Prepare Financial Statements from the above information .



Analysis of Financial Statements
Meaning of Financial Analysis
refers to the process of determining financial
strengths and weaknesses of the firm by
establishing strategic relationship between the
items of the balance sheet, Profit & Loss account
and other operative data.
is a process of evaluating the relationship
between component parts of a financial statement
to obtain a better understanding of a firms position
and performance.

Financial Statements
FS are the sources of information on the basis of which
conclusions are drawn about the profitability and
financial position of a concern.
Prepared for the purpose of presenting a periodical
review of report on progress by the management and
deal with the status of investment in the business and
the results achieved during the period under review.
They reflect a combination of recorded facts,
accounting principles and personal judgments.
RATIO ANALYSIS
A ratio is a simple arithmetical expression
of the relationship of one number to
another.
A ratio is an expression of the quantitative
relationship between two numbers.
Ratios are classified as-
Short term solvency ratios.
Long term solvency ratios.
Turnover ratios.
Profitability ratios.
Short term solvency ratios
are the ratios which measure the short term
solvency or financial position of a firm. It
indicates the ability to pay its current obligation
in time.
Current ratio or Working capital ratio = Current
assets/ Current liabilities
Note :
Ratio of 2:1 is considered satisfactory
Current assets include
1.Cash in hand & at Bank.
2.Short term investments.
3.Bills receivable.
4.Sundry debtors.
5.Stocks/ inventories.
6. Prepaid expenses.
7.Work in process.
Current liabilities include
1. Outstanding expenses/ accrued expenses.
2. Bills payable.
3.Sundry creditors.
4.Short term advances.
5.Income tax , Dividends payable.
6.Bank overdraft.

Quick ratio or Liquid ratio or Acid test
ratio

Quick ratio =Quick assets /Quick liabilities.
Note:
1 Quick assets =current assets prepaid expenses-
closing stock
2 Quick liabilities =current liabilities bank over
draft.
3 Ratio of 1:1 is considered as satisfactory.
Long term solvency ratios or Leverage
ratios or capital structure ratios
convey firms ability to meet the interest costs and repayment
schedules of its long term obligations. It helps in assessing the risk
arising from use of Debt capital.
Debt equity ratio= long term debt / share holders fund.
Note:
1 Long term debt includes mortgage loans , debentures, loans from
finance corporation.
2 Shareholders funds include Equity share capital +Preference share
capital + Reserves and surplus + profit and loss account+ share
premium preliminary expenses Discount on issue of debentures.
3. It is a ratio to measure the relative claims of outsiders.

Fixed assets ratio
Fixed assets / Long term funds

Notes:
1. This ratio indicates the extent to which the total of fixed assets
are financed by long term funds of the firm.

2. Long term funds include long term loans and share holder
funds.

Turnover ratios or Efficiency ratios or
activity ratios
1. Stock turnover ratio
Cost of goods sold / Average stock

Note: Cost of goods sold is sales- gross profit.

2. Debtors turnover ratio
Net credit annual sales /average trade debtors

Note: Trade Debtors include sundry debtors and bills receivable. No
provision for bad and doubtful debts be deducted.

3. Creditors turnover ratio
Net annual purchases / average trade creditors

Note: Trade creditors include creditors and bills payable


Profitability ratios


related to sales.(%)

1. Gross profit ratio
Gross profit/Sales
2. Net profit ratio
Net profit/Sales
3. Expenses ratio
Respective particular expense/Sales

Ratios related to Investment

1. Earnings per share
Profit after preference
dividend/Number of Equity shares

2. Price earning ratio
Market price per Equity share/EPS


Problems



Calculate short term solvency ratios from the following.
Rs

Stock 60,000
Sundry debtors 70,000
Cash balances 20,000
Bills receivables 30,000
Pre-paid expenses 10,000
Land and Buildings 1,00,000
Goodwill 50,000
Sundry creditors 20,000
Bills payable 15,000
Tax payable 18,000
Outstanding expn 7,000
Bank overdraft 25,000
Debentures 75,000


2.

Liabilities Rs Assets Rs
2,000 Equity shares of Rs 100
each
1,000 9% pref Shares of Rs
100 each 1,000 10%
Debentures of Rs 100 each
Reserves :General Reserve
Reserves for
contingencies
Current liabilities
2,00,000

1,00,000

1,00,000

50,000
50,000

1,00,000



6,00,000
Fixed assets

Current
assets
4,00,000


2,00,000









6,00,000
Calculate Debt Equity Ratio
3. The comparative balance sheets of a Ltd. Company are given
for the years ending December31,2010 and 2011.

2010 2011 2010 2011
Equity Share
Capital
Reserve Fund
8% Debentures
Mortgage Loan
Sundry creditors
Bills payable
Bank overdraft
Outstanding
expenses

Tax liabilities





3,00,000

1,50,000
2,00,000
4,00,000
50,000
25,000
40,000
10,000


15,000

11,90,000
4,00,000

2,80,000
3,00,000
2,58,000
70,000
35,000
60,000
15,000


20,000

14,38,000
Goodwill
Land& Buildin
Plant&machin
Patents
Stock
Sundrdebtors
Bills receivble
Marketable
securities
Cash
Prepaid
expenses



Sales
Purchases
2,00,000
3,00,000
2,50,000
50,000
1,50,000
1,00,000
80,000
18,000

40,000

2,000

11,90,000

5,00,000
3,00,000
2,00,000
4,00,000
3,50,000
50,000
2,00,000
80,000
90,000
20,000

45,000

3,000

14,38,000

6,00,000
4,05,000



Calculate the following for two years.
1 Current Ratio
2 Acid test Ratio
3 Inventory Turnover Ratio
4 Debtors Turnover Ratio
5 Creditors Turnover Ratio
Notes: a) Trade debtors include debtors and bills receivables.
b) Trade creditors include creditors and bills payable.
4.Following information is given to you.
Find out 1.Current assets 2. Current liabilities.
i. Current ratio 2.5
ii. Working capital Rs.90000

5.Following information is given to you.
Find out 1.Current assets 2. Liquid Assets.3.Inventory
Current ratio 2.5; Acid test ratio 1.5; Current liabilities
Rs.50000
6.Given
Current ratio 2.8; Acid test ratio 1.5; Working capital Rs162000.
Find out CA; CL; LA

7.The ratios relating to Osmos Ltd are given as follows
GP ratio 15percent
Stock velocity 6 months
Debtors velocity 3months
Creditors velocity 3months
Gross profit for the year Dec31st,2010amounts to Rs.60000.
Closing stock is equal to opening stock.
Find out Sales, Closing stock, Sundry Debtors, Sundry Creditors.
8.Prepare Balance Sheet from the following details:
1. Stock velocity 6
2. Capital turnover ratio 2
3. Fixed assets turnover 4
4. Gross profit turnover ratio 20%
5. Debtors Velocity 2 months
6. Creditors Velocity 73 days
The Gross profit was Rs.60,000. Reserves & Surplus
amounts to Rs.20,000. Closing stock was Rs.5,000 in
excess of opening stock.
9. From the following information, make out statement of
Balance sheet with as many details as possible:
1. Current ratio 2.5
2. Liquid ratio 1.5
3. Proprietary ratio (Fixed assets/ Proprietary funds)
0.75
4. Working capital Rs.60,000
5. Reserves and Surplus Rs.40,000
6. Bank overdraft Rs.10,000
7. There is no long term loan and fictitious assets

10.Following is the Profit and Loss Account of Matrix Ltd
for the year ended 31
st
March,2012
To Opening Stock 1,00,000 By Sales 5,60,000
To Purchases 3,50,000 By Closing Stock 1,00,000
To Wages 9,000
To Gross profit c/d 2,01,000
6,60,000 6,60,000
To Admin expense 20,000 By Gross profit b/d 2,01,000
To selling and Distri 89,000 By Int on Investments 10,000
To Non-operatng exp30,000 (Outside business)
To Net profit 80,000 By Profit on sale of Inv 8,000
2,19,000 2,19,000
1. GP ratio
2. NP ratio
3. Operating ratio
4. Operating profit ratio
5. Administrative expenses ratio
You are required to calculate the above ratios





11. Your company had the following earnings last year:
Profit before tax Rs 24.46 lakhs.
Tax rate 60%
Proposed dividend 20%
Capital of the company is
9% Preference shares Rs 10 lakhs
Equity Shares 30,000 Shares of Rs 100 each Rs 30 lakhs
Reserve in the beginning of the year Rs 22 lakhs.
From the above compute 1. EPS
2.P-E Ratio.
The current market price of equity share is Rs 200.
Funds Flow Statement
FFS or Statement of changes in Financial
Position
Is a statement which shows the movement of
funds and is a report of the financial operations
of the business.
Indicates various means by which funds were
obtained during a particular period and the
ways in which these funds were employed.
It is a statement of sources and application of
funds.
Procedure
Step 1 : Statement of changes in Working
capital

Notes:
1. An Increase in CA/ decrease in CL leads to
increase in WC.
2. A decrease in CA / increase in CL leads to
decrease in WC.
Step 2 : Calculation of Funds from Operations
Closing balance of P& L A/c or Retained earnings
Add: Non fund and Non- operating items debited to P & L A/c
1. Depreciation
2. Amortization of Fictitious and Intangible Assets
Goodwill, patents, trade marks, preliminary expenses,
Discount on issue of debentures.
3.Transfers to reserves
4. Loss on sale of any non current assets
5. Dividends ( only if not taken as CL )
6. Provision for taxation (only if not taken as CL )
7. Any other non-fund / non- operating items debited to P & L
A/c

MINUS: Non fund and Non- operating items credited to P & L A/c
1.Profit from sale of non- current assets
2. Dividend received
3.Appreciation in value of fixed assets, If credited to P
& L A/c
4. Excess provision retransferred to P & L A/c or
written off
5. Any other non- operating items credited to P & L
A/c
6. Opening balance of P & L A/c or Retained earnings


Step 3 :Statement Of Sources and Application
of Funds or Funds Flow Statement
Sources
Funds from operations
Issue of Share capital
Issue of debentures
Raising of long term loans
Receipts from partly paid shares
Sale of non current assets
Non trading receipts
Sale of long term investments
Net decrease in WC


Applications
Funds lost in operations
Redemption prefer share capital
Redemption of debentures
Repayment of long term loans
Purchase of non current assets
Purchase long term investments
Non trading payments
Net increase in WC
Problems
1. Prepare Statement of changes in working
capital and a Statement showing sources and
application of funds from the following balance
sheets.


Yes Kee Ltd
Balance sheets as at 31
st
December
Liabilities 2009
Rs
2010
Rs.
Assets 2009
Rs
2010
Rs
Share Capital
Sundry
creditors
P & L A/c



3,00,000

1,00,000
15,000







4,15,000
4,00,000

70,000
30,000







5,00,000
P & M
Furniture
Stock
Debtors
Cash
50,000
10,000
85,000
1,60,000
1,10,000






4,15,000
60,000
15,000
1,05,000
1,50,000
1,70,000





5,00,000

2. Balance Sheet of Mr.A
Liabilities 2009 2010 Assets 2009 2010
Capital
Long term
borrowings
Trade creditors
Bank overdraft
Outstanding
expenses







63,000
50,000

42,000
35,000
5,000






1,95,000

1,00,000
60,000

39,000
25,000
6,000






2,30,000
Cash
Debtors
Stock
Land &
Buildings
Furniture


15,000
30,000
55,000
80,000

15,000






1,95,000
20,000
28,000
72,000
1,00,000

10,000






2,30,000
3.Balance sheets of XYZ ltd As at March 31st
2010 2011
Capital: Rs Rs
10% Preference Share capital 1,00,000 1,10,000
Equity share capital 2,20,000 2,50,000
Share premium 20,000 26,000
Profit and Loss Account 1,04,000 1,34,000
Liabilities ( Non- Current):
12% Debentures 70,000 64,000
2010 2011
Current Liabilities:
Creditors 38,000 46,000
Bills payable 5,000 4,000
Provision for taxation 10,000 12,000
Dividends payable 7,000 8,000
Total liabilities and Capital 5,74,000 6,54,000
Non -Current assets:
Machinery 2,00,000 2,30,000
Buildings 1,50,000 1,76,000
Land 18,000 18,000



2010 2011
Current Assets:
Cash 42,000 32,000
Debtors 38,000 38,000
Bills receivable 42,000 62,000
Stock on hand 84,000 98,000
Total Assets 5,74,000 6,54,000
Prepare a statement of sources and application of funds
along with a supporting schedule of changes in
working capital.
Liabilities Rs. Rs. Assets Rs. Rs.
Eq. Sh. Capital 300,000 400,000 Goodwill 115,000 90,000
Red. Pref. Sh C 150,000 100,000 L & B 200,000 170,000
Gen. Reserves 40,000 70,000 Plant 80,000 200,000
P & L A/c 30,000 48,000 Debtors 160,000 200,000
Proposed Div. 42,000 50,000 Stock 77,000 109,000
Creditors 55,000 83,000 B/R 20,000 30,000
Bills Payable 20,000 16,000 Cash(Hand) 15,000 10,000
Prov. for Tax 40,000 50,000 Cash(Bank) 10,000 8,000
677,000 817,000 677,000 817,000
4.From the following Balance sheets of Xee ltd 2010 and 2011
Prepare 1.Statement showing changes in W.C and 2. Funds flow
statement.
Additional Information
1. Depreciation of Rs.10,000 and Rs.20,000
have been charges on Plant and Land &
Buildings respectively in 2011.
2. A dividend of Rs.20,000 has been paid in
2011.
3. Income tax of Rs.35,000 has been paid during
2011.

CASH FLOW STATEMENT
Introduction
It is a statement which describes the inflows and the
outflows of cash and cash equivalents during a
specified period of time.
The statement summarises the causes of changes in
cash position of a business enterprise between two
Balance Sheet dates.
According to AS-3 an enterprise should prepare a cash
flow statement and present it for each period for which
financial statements are prepared.
Definition
ICWAI defines CFS A Statement setting out the
flow of cash under distinct heads of sources of funds
and their utilisation to determine the requirements of
cash during the given period and to prepare for its
adequate provision.
It provides relevant information about cash receipts
and cash payments during a period. The information is
useful in assessing its liquidity, financial flexibility,
profitability and risk.
Importance
Provides clear indications for the cash flows in the
future period and thus helping forecasting the future
commitments and needs.
A comparison of the historical and projected CFS can
be made so as to enable the firm to take immediate and
effective action from the variations and deficiency
found.
Helps in planning the repayment of loans etc and
helping significantly for capital budgeting decisions.
Importance
A clear insight into the cash flows of a firm is the basis for financial
policies.
It is a foundation for cash budget. The cash flows in the recent past
indicate the quantum and direction of such flows and form the basis
for preparing budgets for ensuing year.
It explains better the causes for poor cash position in spite of
substantial profits.
It helps in answering what happened to the net profits, where the
profits went, and why more dividends are not paid in spite of
sufficient available profit.
It reveals the liquidity position by highlighting the various sources
of cash and its uses.
CFS-AS3
The cash flow statement is cash flow resulting
from
Operating activities
Investing activities, and
Financing activities.
The money coming into the business is called
cash inflow, and money going out from the
business is called cash outflow.

Operating activities
include the production, sales and delivery of the
company's product as well as collecting payment from
its customers. This could include purchasing raw
materials, building inventory, advertising, and
shipping the product.
operating cash flows include:
Receipts from the sale of goods or services
Receipts for the sale of loans, debt or equity
instruments in a trading portfolio
Interest received on loans
Dividends received on equity securities
Payments to suppliers for goods and services
Payments to employees or on behalf of employees
Interest payments

Investing activities
Purchase of fixed assets
Sale of fixed assets
Purchase or /and sale of investments
Receipt of capital subsidy
Interest received
Dividend received






Financing activities

Financing activities include the inflow of cash from investors such
as banks and shareholders, as well as the outflow of cash to
shareholders as dividends as the company generates income. Other
activities which impact the long-term liabilities and equity of the
company are also listed in the financing activities section of the cash
flow statement.
financing cash flows include:
Issue of share capital / debentures and bonds
Proceeds from / repayment of borrowings
Redemption of preference shares/ debentures and bonds
Payments of dividends/ interest
Payments for repurchase of company shares
Preparation methods

Direct method
The direct method for creating a cash flow
statement reports major classes of gross cash
receipts and payments.
dividends received may be reported under
operating activities or under investing activities. If
taxes paid are directly linked to operating
activities, they are reported under operating
activities; if the taxes are directly linked to
investing activities or financing activities, they are
reported under investing or financing activities.







Indirect method
uses net-income as a starting point,
makes adjustments for all transactions for
non-cash items, then adjusts for all cash-
based transactions. An increase in an asset
account is subtracted from net income, and
an increase in a liability account is added
back to net income. This method converts
accrual-basis net income (or loss) into cash
flow by using a series of additions and
deductions


From the following information prepare Cash flow statement


Share capital
Debentures
Reserve for
doubtful debts
Trade creditors
P& L A/c
31/3/2011
Rs.
70,000
12,000
700

10,360
10,040
31/3/2012
Rs.
74,000
6,000
800

11,840
10,560


Cash
Debtors
Stock
Land
Goodwill
31/3/2011
Rs.
9,000
14,900
49,200
20,000
10,000
31/3/2012
Rs.
7,800
17,700
42,700
30,000
5,000
Additional information:
1. Dividend paid Rs.3,500.
2. Land was purchased for Rs.10,000. Amount
provided for amortisation of goodwill
Rs.5,000.
3. Debentures paid off Rs.6,000.
Prepare Cash flow statement
Assets
March 2010(Rs)
Plant and machinery ( net of depreciation)
6,00,000
Land
2,00,000
Investments
3,00,000
Trade debtors
2,60,000
Stock
2,00,000
Bank balance
2,40,000
Total of assets
18,00,000
Liabilities and Capital
Long term borrowings
2,60,000
Trade creditors
2,00,000
Debentures
3,00,000
Equity share capital
8,00,000
Retained Earnings

2,,40,000
Total of liabilities and capital
18,00,000

During 2012 the following transactions took place:

1.Further land was purchased for cash Rs.1,50,000.
2.Rs.60,000 was repaid towards long-term borrowings.
3.Dividend paid Rs.1,20,000.
4.Plant of Rs.2,00,000 was purchased by issuing debentures at par Rs.2,00,000.
5.Part of investments was sold at Rs.1,20,000 at a profit of Rs.20,000.
6.Net profit Rs.3,50,000 after writing off depreciation Rs.90,000 on P& M.
7. The following were the balances as at March 31st , 2012
Debtors 3,30,000
Creditors 2,30,000
Stock 1,50,000
Investments 2,50,000
Bank 4,10,000
Prepare Cash flow statement for the year ended 31
st
March,2012 according to AS3.


Prepare Funds from operations and Cash
flow statement
Liabilities
Equity Share Capital
8% Red. Pref. Capital
General Reserve
Profit and Loss A/c
Provision Taxation
Proposed Dividend
Sundry Creditors
Bills Payable
31.3.2011
3,00,000
1,50,000
40,000
30,000
40,000
42,000
55,000
20,000

6,77,0000
31.3.2012
4,00,000
1,00,000
70,000
48,000
50,000
50,000
83,000
16,000

8,17,000
Assets
Goodwill
Plant and Machinery
Land and Building
Sundry Debtors
Stock
Cash
Bills receivable
31.3.2011
1,15,000
80,000
2,00,000
1,60,000
77,000
25,000
20,000


6,77,0000

31.3.2012
90,000
200,000
1,70,000
2,00,000
1,09,000
18,000
30,000


8,17,000

Additional information:

Depreciation of Rs.10,000 and Rs.20,000 have
been charged on Plant and Land & Buildings
respectively in 2012.
Rs.35,000 was paid towards income tax during
the year 2012.
Interim Dividend of Rs.20,000 has been paid
in 2012.

Prepare Fund flow and Cash flow statements
Liabilities
Capital
Sundry Creditors
Mrs.As loan
Loan from bank
Hire purchase vendor
1.1.2011
1,48,000
36,000
-
30,000
-




2,14,000

31.12.2011
1,54,000
40,600
20,000
25,000
20,000




2,59,600
Assets
Plant and Machinery
Land
Building
Sundry Debtors
Stock
Cash
Delivery van
1.1.2011
80,000
20,000
50,000
35,000
25,000
4,000
-


2,14,000
31.12.2011
86,000
30,000
55,000
38,000
22,000
3,600
25,000


2,59,600

The delivery van was purchased in December,2011 on
hire purchase basis, a payment of Rs.5,000 was made
immediately and the balance of the amount is to be
paid in 20 monthly installments of Rs.1,000 each
together with interest @12% pa. During the year the
partners withdrew Rs.26,000 for domestic expenditure.
The provision for depreciation against machinery on
31
st
December, 2010 was Rs.27,000 and on 31
st

December,2011 Rs36,000.