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This should be
recognized by exercising prudence in preparing financial statement. Explain this
concept with the help of an example.
Ans. Financial Statements are used to find the financial health of a company or of an
individual. There are two basic statements to be considered. The Statement is simply Assets
less liabilities.
In the example picture I have listed all of the Assets, which in include your house,
401k, car, savings, and furniture. I then listed the accounts that are owed, including house,
car, and Visa. Add up all of the Assets. Add up all of the Liabilities. Subtract the Liabilities
from the Assets and you have the Net Worth. A positive net worth means you have more
assets than you have debts. This is a good thing. A negative net worth means you have
more debts than you have things of worth. Not so good.
A business uses several accounting reports to keep track of its assets. These reports include
the balance sheet, income statement, retained earnings Statement and statement of cash
flows. Businesses rely on these reports for many reasons which include finding out whether
or not the company is profitable, where a company is spending its capital, and what the total
value of the company is. Companies also use these reports for planning for the future. One
of the most important reports is the balance sheet.
The balance sheet provides a snapshot of the company’s assets and liabilities on the
final day in a given period the balance sheet really has three different sections such as
assets, liabilities and the owner’s equity. Another report widely regarded as important in a
business is the income statement.
Another common financial statement is the statement where you list all of your
income and then all of your expenses. This can be for a week, month, or year. In the
example shown I'm using monthly increments. You will note that in the month of Feb the
Property Tax bill is due which drives the Net Cash Flow negative. But the months of Jan and
Mar are positive, so money will have to be managed from these months to fill the gap in Feb.
Again, if the Net Cash Flow is positive you are in good shape. If negative, you must increase
your income or decrease your expenses to bring it back in balance.
We have a team of qualified professional accountants who will provide you with
services such as:
• Preparing financial statements
• Preparing balance sheets
• Preparing income statements
• Financial report analysis
Preparing financial statements and reports require meticulous checking and shrewd
accounting knowledge. The statutory relevance of each of these statements makes it all the
more critical for your business. Keeping this in mind, we have devised processes in
preparing the most accurate statements and reports for you. You can leverage our
experience in preparing the following statements:
• Day to day maintenance of records which help you draw financial statements at any point in
time
• Accurate and error free statement preparation ensuring smooth and hassle free corporate
audits
• Compliance with country specific statutory regulations and relevant accounting/auditing
standards
• Usage of latest bookkeeping and accounting software such as QuickBooks, Net suite,
Peachtree, MAS 90, MAS 200, MAS 500, Quicken, MYOB, SAGE, Intuit Pruderies and Lacerate
• Generation of financial reports coupled with expert analysis of financial statements
Error free preparation of statements ensured by stringent quality measures. We can
guarantee an accuracy level of almost 98%
Q.2 (A) When is the change in accounting policy recommended and what are the
disclosure requirement regarding the change in accounting policy?
Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
If refers to specific accounting principles and methods of accounting adopted by the
enterprise while preparing and presenting the financial statement. The management of each
enterprise has to select appropriate accounting policies based on the nature and
circumstances of the business they are in. some of the areas in which different accounting
policies may be adopted are:-
➢ Treatment of expenditure during construction,
➢ Methods of depreciation, amortization,
➢ Conversion or translation of foreign currency items,
➢ Valuation of inventories,
➢ Valuation of investments,
➢ Treatment of goodwill,
➢ Valuation of fixed assets,
➢ Recognition of profit on long-term contract and
➢ Treatment of contingent liabilities.
A change in accounting estimate is an adjustment of the carrying amount of an asset or
liability, or related expense, resulting from reassessing the expected future benefits and
obligations associated with that asset or liability.
Objective:-
The main objective of IFRS are-----
Benefits:-
The main benefits of IFRS are—
To Discount 1.200
Note:-
On 05.01.09 it’s assumed that all the payment are made on same day of purchase.
Q.4 Bring out the different between Funds Flow Statement and Cash Flow
Statement, mention up to what point in time they are similar and from where the
different begin.
In brief it may be said that fund statement focuses on flow of funds between the
various assets and equity items during the accounting period. And analysis base4d on this
statement is generally called “fund flow statement”.
Meaning of fund:The term “fund” refers t cash, to cash equivalent or to working capital
and all financial resources which are used in business.
Meaning of flow of fund:The term “flow of funds” refers to change or movement of funds
or change in working capital in the normal course of business transactions.
FIRM
BUSINESS
TRANSACTIONS
INFLOW OF
OUTFLOW OF
FUNDS FUNDS
Cash flow is the life blood of a business which plays a vital role in an entire economic life.
Cash flow s refers to actual movement of cash into and out of an organization. In other
words, the movement of cash inclusive of inflow of cash and outflow of cash. When the cash
flow into the organization, it represents ‘inflow of cash’. Similarly when the cash flows out of
the business concern, it called as “cash outflow”.
In order to ensure cash flows are adequate to meet current liabilities such as tax
payments, wages, amounts due to trade creditors, it is essential to prepare a statement of
changes in the financial position of a firm on cash basis is called as “cash flow statement”.
This statement depicting movement of cash position from one period to another.
1. provide information on a firm's liquidity and solvency and its ability to change cash
flows in future circumstances
2. provide additional information for evaluating changes in assets, liabilities and equity
The cash flow statement has been adopted as a standard financial statement because it
eliminates allocations, which might be derived from different accounting methods, such as
various timeframes for depreciating fixed assets.
Difference between Funds flow statement and Cash flow statement
1. Funds Flow Statement showing the Cash Flow Statement showing changes in
source & application of funds during the inflow & outflow of cash during the period.
period.
2. FFS is showing the fund for the future CFS is showing the fund for present
activates of the activates of the company
Company.
3. Fund Flow statement helps to measure Cash flow statement focuses on the causes
the causes of change in working capital. for the movement of cash during a
particular period.
4. Fund flow statement is prepared on the Cash Flow statement is based on cash
basis of fund or all financial recourses. basis of accounting.
Q.5 (A) Determine the sales of a firm with the following financial data.
Ans. (A)
The right side of the chart highlights the determinants of total assets turnover ratio. If this
study is supplemented by the study of other ratios such as inventory, debtors, fixed asset
turnover ratios, a deeper insight into efficiencies and inefficiencies of asset utilization can be
sought.
The basic Du Pont analysis can be extended to explore the determinants of the Return on
Equity (ROE).
Importance of Du-Pont Analysis:-Any decision affecting the product prices, per unit
costs, volume or efficiency has an impact on the profit margin or turnover ratios. Similarly
any decision affecting the amount and ratio of debt or equity used will affect the financial
structure and the overall cost of capital of a company. Therefore, these financial concepts
are very important to evaluate as every business is competing for limited capital resources.
Understanding the interrelationships among the various ratios such as turnover ratios,
leverage, and profitability ratios helps companies to put their money areas where the risk
adjusted return is the maximum.
(B) Number of units that must be sold to earn a profit of Rs. 60, 000 per year
Ans. (A)
Given,
= 7,92,0006 ,
= 7,92,0006 × 20,
(B)
= 8,52,0006,
= 1, 42,000 (units)