Assignment: Role of Accounting Information and Concept: A Practical Approach

Assignment
Role of Accounting Information and Concept:

A Practical Approach
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ROLE OF ACCOUNTING INFORMATION AND CONCEPT:

PRACTICAL APPROACH
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Table of Contents
INTRODUCTION ............................................................................................................................... 1
TASK 1 ............................................................................................................................................. 1
Solution: ...................................................................................................................................... 2
TASK 2 ............................................................................................................................................. 3
Solution. ...................................................................................................................................... 4
Content. ................................................................................................................................... 6
Purpose.................................................................................................................................... 7
Calculations..............................................................................................................................7
Comparison and analysis of the ratios for the two companies calculated in task 2. ................... 7
Efficiency ratio. ........................................................................................................................8
Liquidity ratio .......................................................................................................................... 8
CONCLUSION................................................................................................................................. 10
REFERENCE ................................................................................................................................... 11

INTRODUCTION
Accounting or better the financial accounting is the heart of any business as by this the
supply of life blood to the rest of the organization is controlled. Accounting information and
concepts provides the ground for any financial analysis. By knowing the importance of any
entity, thought process can be improvised. Here, in the present report, attempt is made to explain
the role and importance of accounting information and concepts. This is done by applying the
concepts in a practical problem. In the course, different computer packages such as MS-excel etc
are being applied for data processing. Different performance measures in terms of ratios are
being calculated and interpreted. For these calculations and interpretations, a detailed report has
been draft indicating the analysis findings. Entire work has been segregated in three tasks. In the
first one, method of carving out financial statements from the trial balance is demonstrated with a
real time question. Task 2 deals with calculation of different ratios. In the last task i.e. task 3, a
detailed report for both the above task findings has been drafted.
TASK 1
Trial balance extracted from the accounting books of Mr Sunshine as on 31 December 2011
Trial balance as on 31st Dec, 2011
DR
CR
150,000
Purchases
Capital
213,000
Long term Loan
80,000
Printing and Stationery
5,000
Drawings
16,000
General expenses
50,000
Sales
452,000
Trade Receivables
95,000
Trade Payables
40,000
Bank overdraft
13,000
Selling and distribution expenses
10,000
Light and Heat
7,000

5,000
Interest Paid
Furniture
Cost
300,000
Accumulated Depreciation
Motor Vehicles
90,000
50,000
Cost
Accumulated Depreciation
15,000
3,000
Allowances for Trade receivables

Wages and Salaries
86,000
Rent and Rates
52,000
Inventory at 1 January 2011
80,000
906,000
906,000
Given Additional Information:

1.
Inventory as at 31 December 2011 was valued at 60,000.
2.
Depreciation is to be charged as follows:-
3.
Furniture:
30% on reducing balance basis.
Motor vehicles:
30% on straight-line basis.
The allowances for trade receivables should be made equal to
5% of outstanding trade
receivables as at 31 December 2011.

st
4.
Included in rent and rates is one months rent paid in advance amounting to 4,000.
5.
General expenses amounting to 5,000 are still outstanding for the year ending 31
December 2011.
Solution:
Income Statement for Mr Sunshine for the year ended 31 December 2011
Particular
Note
Amount ()
Amount ()
Sales revenue
452000
cost of goods sold
(311000)
raw material
Light and Heat
170000
7,000


Outstanding general expenses
(5,000)
Provision for receivables
3,000
Noncurrent liabilities
Long term Loan
80,000
Capital
213,000
7
Net profit (earnings)

Total Liabilities and capital
60,000
404,000
Notes:
1. Raw Material consumed:
Inventory as on Jan 1st, 2011 = 80000
Inventory as on Dec 1st, 2011 = 60000
Total purchase during the year = 150000
Raw material consumed = 170000 (80000+150000-70000)
2. Rent paid during the year = 52000
Rent paid advance for the next year = 4000
3. Furniture worth = 300000
Depreciation = 90000 (30% with written down method)
Current worth of furniture = 210000
4. Motor vehicle price = 50000
Depreciation = 15000 (30% with written down method)
Current worth of vehicle = 35000
5. Outstanding general expenses = -5000 (given)
6. Provision for trade receivables = 3000
As given that the allowance must be 5% of the total outstanding receivables but that will
be charged in the coming years liability side.
7. Net profit = 55000
(Taken from the income statement after adjusting the drawings)
TASK 2
Given accounts for the two businesses are shown in the below tables:
Income Statement for the year ended 31 December 2011


Oliver
Stan
000s
000s
Sales Revenue
1,200
1,700
Cost of goods sold
(900)
(1,248)
Gross profit
300
452
Administration expenses
(128)
(106)
Distribution expenses
(56)
(110)
Sundry expenses
(40)
(40)
Net Profit before Interest
76
196
Statement of Financial Position as at 31 December 2011

Oliver
Stan
000s
000s
124
263
Inventory
140
104
Accounts receivables
180
134
Bank
16
Total Assets
460
502
Capital plus profits
200
320
Long term loan
180
10
Accounts payables
80
172
Total liabilities and capital
460
502
Non Current Assets

Current Assets
Capital & Liabilities
Solution
Ratios calculated for both Oliver and Stan are as given below:Oliver
Stan
Gross Profit Margin
25.00%
26.59%
Net profit margin
6.33%
11.53%
Return on Capital Employed
0.61
1.58


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income statements cover business proceedings for three months period. Time frame for which
the statement has been prepared should clearly be mentioned on the income statement (Brigham
and Hrharted, 2004). Here, in the task 1, an income statement for Mr. Sunshine has been
prepared for the duration of one year i.e. for 1 Jan, 2011 to 31
st
Dec, 2011. Contrasting with the

st
income statement, the balance sheet reflects the financial condition of the business at a specified
point of time. Balance sheet always contains a specific date not a time period and the values
expressed in this are applicable and accurate for that date only. Here, in the task 1, balance sheet
i.e. statement of position has been prepared as on 31
Dec, 2011 on the basis of the provided

st
information and trial balance. Thus, both statements prepared above differ as far as the time
frame is considered.
Content
Income statement covers all the income and expenses of any business accrued during a
period of time. If the two sided of the book keeping system are considered, revenues are recorded
at the credit side in income statement whereas
expenses at the debit side. Here, in the task 1,
sales revenue has been the income whereas the rent and rates, light and heat, wages and salaries,
raw material consumption, interest payment, general expenses and other operating expenses such
as stationary etc are the costing or the expenditure for Sunshine. Balance sheet gives a picture of
finances in a company (Gazely and Lambert, 2006). Largely, it portrays 3 items i.e. assets,
liabilities and owners' equity or capital. Assets further can be current or noncurrent. Assets are
basically the properties belonging to the company. Liabilities are monetary obligations in
account of the company. Capital or the owners' equity is the aggregate worth of a company.
Profits become parts of the capital at the end of an accounting period.
Here, the balance sheet
prepared contains the current assets in the form of trades receivables, advance payments and
inventories and the noncurrent assets are the fixed or long-lasting assets such as the motor
vehicles, furniture etc. As far as the constituents of the liability side are considered, current
liabilities include trade payables, bank over drafts, outstanding expenses, allowances for
receivables etc. while the non current liability is the long term loan of the business. Capital is the
total capital plus the current years retained profit.


Purpose
Purpose behind preparation of the income statement is to determine the profits earned or
losses made by a company over a period of time. In income statement, earnings and expenses are
broken down into categories, which makes it much clear for the manager to comprehend
bottleneck items of expenses and sources of profits and losses. As in the above prepared income
statement, profit has been segregated in three parts, i.e. gross profit, operating profit and net
profit. Gross profit is the raw profit after considering the functional expenses only whereas the
operating profit is the profit adjusted for the operating expenses. Net profit comes after making
adjustments for interest payments, depreciations, taxes etc. Purpose behind preparation of
balance sheet is to have an overview of companys current standing in terms of financing
(Bagad, 2004).
Calculations
For preparing the income statement, just a simple set of calculations are required. For
this, company's revenue are added up and at the same time the
expenses also. By subtracting
expenses from revenue will give company's profit or loss. Net retained profit in the business is
added in the capital side of the balance sheet. Also some basic calculations are also required for
the balance sheet as well (Bagad, 2004).
Thus on the basis of above given points, both, statement of financial position and
statement of income differ from each other.
Comparison and analysis of the ratios for the two companies calculated in task 2
In finance, ratio expresses the relationship existing b/w different financial variable
concerning the company's activities or financial position. Ratios are generally calculated on the
basis of data supplied by the financial statements such as income statement, balance sheet or the
cash flow statement (Rudas, 1997). The ratios, basically, aid in identifying the strength or
soundness of firm in financial terms. Ratio analysis is considered as the strongest tool for
Financial Management decisions and to comprehend the financial viability of a business.
Different ratios are suits different purposes (Reimers, 2007).
Ratios calculated are as described below:
Gross Profit Margin
Oliver
Stan
25.00%
26.59%


Efficiency ratio
Inventory turnover: This ratio measures the time (days) required to convert the inventory in cash
i.e. the average time of keeping the inventory in a business. Low value is better for the business.
Formula for this ratio is as given:
365
=
Receivables turnover: This ratio measure the time required for converting the credit sales in cash.
The lower the value better is for the business. Formula for calculating this ratio is:
365
=
Payables turnover: This ratio measure the time required for keeping the trade credit
(Mayes and
Shank, 2011). The higher the value better is for the business. Formula for calculating this ratio is:
365
=
Here, the inventory turnover for Oliver is 42.54 4 3 days and for Stan it is 22.33 22
days. Also, Accounts receivable turnover for Stan is 22.77 23 days, whereas the same for
Oliver has been calculated to be 54.75 55 days. The accounts payable turnover for Oliver, as
calculated is 28.08 28 days and the same for Stan is 46.43
46 days. After analyzing all the
three efficiency ratios, it can be observed that, Stan holds a better position.
Liquidity ratio
Current ratio: This ratio indicates the ability of business to meet its current liabilities. It is
calculated by dividing the current assets by the current liabilities. Current assets cover the
inventory, accounts receivables, cash, bank balance etc. Current liabilities cover the accounts
payable, overdrafts, other provisions etc. Standard value of this ratio lays b/w 1 to 1.5 (Reimers,
2007).
Quick ratio: Quick ratio is the modified form of current ratio, representing the real time liquidity
in the business. Here, the quick assets, i.e. the cash plus
accounts receivables and bank balance
are divided by the current liabilities. Standard value of the ratio lays b/w 0.5 to 1 (Reimers,
2007).


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Here, Current ratio for Oliver has been calculated to be 4.2 and for Stan it is 1.39. Also
the Quick ratio for Oliver is 2.45 and the same for Stan is 0.78. Thus it is obvious that Stan is
holding better liquid position than Oliver. Oliver is having significantly higher liquidity which is
a dangerous thing for any business.
On the ground of entire analysis, it is obvious that, Sunshine should preferably invest in
Stan.
CONCLUSION
From the above entire, analysis and work it is clear that accounting concepts and
accounting information plays a vital role in financial management. For preparing a financial
statement, strong background of accounting and book keeping is a must.
Here, in the present
report, the role and importance of accounting information and concepts
are demonstrated by a
real time question of Mr. Sunshines business.
Also, different computer packages such as MS-
excel etc are quite important. Different performance measures in terms of ratios are being
calculated and interpreted. Ratio analysis clears the picture of any businesss performance, which
can be seen in the above report.

REFERENCE
Bagad, V. S., 2004. Management and Finance, Pune: Pragati Book House.
Brigham, E. F. and Hrharted, M. C., 2004. Financial management theory and practice.
southern-western Cengage learning.
Chadwick, L., 1998. Management Accounting. 2
USA:
ed. London: International Thomson Business
nd
Press.
Gazely, M. A., and Lambert, M., 2006. Management Accounting. SAGE.
Lucey, T., 2003. Management Accounting. 5th ed. Cengage Learning EMEA.
Mayes, T. R., and Shank, T. M., 2011. Financial Analysis with Microsoft Excel. 6 ed. Cengage
th
Learning.
Reimers, A., 2007. Financial Accounting. India: Pearson Education.


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Assignment

Role of Accounting Information and Concept:

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ROLE OF ACCOUNTING INFORMATION AND CONCEPT:

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Long term Loan

Printing and Stationery

Selling and distribution expenses

Light and Heat

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Allowances for Trade receivables

Rent and Rates

Inventory at 1 January 2011

Given Additional Information:

Inventory as at 31 December 2011 was valued at 60,000.

Depreciation is to be charged as follows:-

30% on reducing balance basis.

30% on straight-line basis.

The allowances for trade receivables should be made equal to

receivables as at 31 December 2011.

cost of goods sold

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Provision for receivables

Net profit (earnings)

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Cost of goods sold

Net Profit before Interest

Statement of Financial Position as at 31 December 2011

Capital plus profits

Long term loan

Total liabilities and capital

Non Current Assets

Capital & Liabilities

Gross Profit Margin

Net profit margin

Return on Capital Employed

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Dec, 2011. Contrasting with the

Dec, 2011 on the basis of the provided

expenses at the debit side. Here, in the task 1,

Here, the balance sheet

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expenses also. By subtracting

Gross Profit Margin

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46 days. After analyzing all the

accounts receivables and bank balance

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For complete project contact