INFLATIONACCOUNTING

Q~1 X Ltd. whose order book is full and has been full for about 3 years, is suffering from an acute shortage of working capital. The current ratio, bad at the end of 1995, was only 0.8 at the end of 1996. Payments to suppliers are overdue to the extent of Rs. 4 lakhs and this has led to stoppage of certain essential supplies. The Company has approached a bank for accommodation. The bank has obtained the following information: 1994 1995 1996 Rs. Rs. Rs. Sales 50,00,000 63,00,000 69,30,000 Material Consumed 20,00,000 26,40,000 30,36,000 Wages 20,00,000 24,00,000 28,80,000 Factory Expenses 6,00,000 7,00,000 7,50,000 Administrative Expenses 2,50,000 3,20,000 3,50,000 Selling Expenses 50,000 2,00,000 2,50,000 Interest _________60,000 1,00,000 49,00,000 63,20,000 73,66,000 Profit (Loss) 1,00,000 (20,000) (4,36,000) The following index numbers have been worked out and are applicable to the whole of the year concerned: 1994 1995 1996 Sale Price 100 105 105 Price of Raw Materials 100 110 120 Wages 100 120 144 The bank requests you, to analyse these figures, work out the extent of efficiency in operations at constant price as well as effects of price changes. Offer your comments and advise whether accommodation should be extended to the company. Q~2 The Glamour Corporation has prepared the following comparative position statements (unadjusted): January 1 December 31 Rs. Rs. Cash in hand Nil 15,000 Inventory 10,000 8,000 10,000 23,000 Accounts payable 6,000 9,000 Stockholders equity: Paid-up capital 3,000 3,000 Reserves 1,000 11,000 10,000 23,000 Summary of the transactions for the year is as follows: (i) Merchandise purchase evenly throughout the year cost Rs.3,000 (ii) Cash sales during the year were Rs.15,000 1

(iii) Cost of merchandise sold on FIFO basis for Rs.5,000 The conventional income statement prepared for the year was as follows: Sales Rs.15,000 Less: Cost of goods sold - 5,000 Income 10,000 General price index during the year indicated the following: January 1, 1984 100 December 31, 1984 200 Assuming that all sales and purchases were made at an average of the periods beginning and ending price indices. 1. Prepare comparative position statements for January 1, 1984, and December 31, 1984 where all items are expressed in terms of rupees of the value of December 31, 1984; 2. Compute monetary gains or losses; 3. Prepare an income statement that shows all items in rupees of year end purchasing power. This statement should include the monetary gain or loss and a reconciliation of the changes in the stock equity. Q~3 The following is the comparative balance sheet of a company on historical cost accounting basis: 31st December 1985 Rs. Rs. 30,000 10,000 20,000 9,000 10,000 8,000 27,000 47,000 35,000 12,000 47,000 31st December 1986 Rs. Rs. 30,000 11,000 19,000 18,000 25,000 5,000 48,000 67,000 40,000 27,000 67,000

Fixed assets Less: Accumulated Dep. Stock Debtors Cash Shareholders equity Creditors

The profit and loss statement for the year ended 31st December 1986 is as follows: Rs. Rs. Sales 40,000 Less: Cost of sales 34,000 Depreciation 1,000 35,000 Profit 5,000 Notes on the accounts: (a) Sales were made on credit. (b) Cash received from debtors Rs.25,000 (c) Purchase stock on credit Rs. 43,000 (d) Cash payments made to suppliers Rs.28,000 (e) The company maintains its stock account on the FIFO basis. (f) All transactions may be assumed to have occurred evenly throughout the year. 2

(g)

Fixed assets were acquired on 1 January, 1970 General price indices are as follows: Year 31st December 1969 31st December 1985 31st December 1986 Price index 60 95 105

You are required to: (i) Prepare the balance sheets as on 31st December 1985 and 1986 in terms of current purchasing power (31 December 1986) (ii) Prepare the profit and loss statement for the year ended (31st December 1986) Q~4 Zero Limited commenced its business on 1st April, 1996. 2,00,000 equity shares of Rs. 10 each at par and 12.5% debentures of aggregate value of Rs. 2,00,000 were issued and fully taken up. The proceeds utilised as under: Rs. Fixtures and Equipments 16,00,000 (Estimated Life 10 years, no Scrap Value) Goods Purchased for Resale at Rs. 200 per unit 6,00,000 The goods were entirely sold by 31st January, 1997 at a profit of 40% on selling price. Collections from debtors outstanding on 31st March amounted to Rs. 60,000, goods sold were replaced at a cost of Rs. 7,20,000, the number of units purchased being the same as before. A payment of Rs. 40,000 to a supplier was outstanding as on 31st March, 1997. The replaced goods remained entirely in stock on 31st March, 1997. Replacement cost as at 31st March, 1997 was considered to be Rs.280 per unit. Replacement. cost of fixtures and equipments (depreciation on straight line basis) was Rs. 20,00,000 as at 31st March, 1997. Draft the Profit and Loss Account and the Balance Sheet on replacement cost (entry value) basis and on historical cost basis. Q~5 Beeta Ltd. had purchased one machine on 1st January, 1990 at a cost of Rs.10,00,000. The useful life of the machine is expected to the 10 year with no residual value. It is depreciated on a straight line basis. The company has been preparing current cost accounts since its inception. A suitable index has had the following values: Date Index Date of purchase of the machine 110 As on 31-12-92 170 As on 31-12-93 200 Average for the year 1993 190 3

Find out the amount of depreciation adjustment for the year ended 31st December, 1993. Q~6 The relevant part of the historical cost Profit and Loss Account of Zee Ltd. for the year ended 31st March, 1994 is given below Rs. Sales Opening stock Purchases Closing stock Gross profit 1,45,000 18,24,500 19,69,500 2,22,500 Rs. 20,45,000

17,47,000 2,98,200

Stock at each balance sheet date is estimated to have an age of two months. A suitable index has had the following values: 31-1-93 132 31.3.93 138 31-1-94 145 31.3.94 150 Average for 93-94 144 Find out cost of sales adjustment. Q~7 The following figures are available from the books of Zupiter Ltd. Particulars As on 31-3-93 As on 31-3-94 Rs. Rs. Trade debtors 1,25,000 1,40,000 Bills receivable 24,500 40,000 Trade Creditors 85,000 90,000 Bills payable 20,000 18,000 Outstanding expenses 5,500 7,000 All the above item have an average age of two months: Consider the following indices: 31-1-93 132 28.2.93 136 31.3.93 138 31-1-94 145 28.2.94 147 31.3.94 150 Average for 93-94 144 Calculate MWCA 4

Q~8 The Balance Sheet of S Ltd. at 31st December 1983 and 31st December 1984 were as follows: 31st Dec. 1983 31st Dec. 1984 (Rs. 000) (Rs. 000) Land and buildings (Cost of Rs.160) 152 148 Equipment (Cost Rs.100) 50 40 Stock 30 40 Debtors 13 28 Bank 10 14 235 270 Equity shares 150 150 Reserves 60 70 Debentures 10% 20 Creditors 10 15 Proposed Dividends 15 15 235 270 The profit and loss Account for the year ended 31st December 1984 was: Rs. (000) Rs. (000) Sales 100 Opening stock 30 Purchases 61 91 Less: Closing stock 40 51 Gross profit 49 Expenses (including debenture interest) 10 Depreciation Building 4 Depreciation Equipment 10 24 Net profit 25 Proposed Dividend 15 Balance carried forward 10 The relevant price indices are: (i) 1982 (Average) Date of building acquisition (ii) 1979 (Average) Date of equipment acquisition and issue of equity share (iii) 1983 (last quarter average) (iv) 1984- (1st January)- debentures issued (v) 1984- (last quarter average) (vi) 1984- (Average) (vii) 1984- (31st December) 125 105 80 114 116 122 118

Closing stock of 1984 was acquired during whole of 1984 and opening stock during 1983. Required: S Ltd. wishes to adjust its historic accounts to reflect current costs in line with Current Cost Accounting (CCA) method. Assuming that the Value to the business of the assets is given by the price indices above, prepare the accounts on a current cost basis showing current cost adjustments for the year ended 31st December 1984 under the following heads: 5

(a) Cost of Sales, (b) Depreciation, (c) Monetary working capital; and (d) Gearing. Q~9 From the following comparative balance sheet of ABC Ltd, as prepared according to Current Cost Accounting Method, you are required to calculate the Gearing Ratio Liabilities Share capital General Reserve Current cost account Reserve Secured loans Accounts payable Provision for Taxation Taxation Proposed dividend 1980 Rs. 50,000 25,000 50,000 58,000 50,000 15,5000 15,500 7,5000 2,56,00 0 1981 Assets Rs. 50,000 Fixed assets (net) 30,000 Inventories Accounts Receivable 60,000 Prepaid expenses 88,000 Cash 46,000 20,000 20,000 9,000 3,03,000 1980 Rs. 1,20,000 50,000 80,000 1,000 5,000 1981 Rs. 1,40,000 65,000 90,000 1,000 7,000

_________ 2,56,000

________ 3,03,000

Q~10 From the information given below, calculate: (i) the cost of sales adjustment for 1981 for raw materials and finished goods respectively using the averaging method; (ii) the current cost balance sheet values for stocks of raw materials finished goods respectively at 31st December, 1980 and 1981; Note: In view of its small account, unallocated work-in-progress may be treated as finished goods for calculations under (b) (i) and (ii). (iii) the monetary working capital at 31st December, 1980 and 1981. (iv) The monetary working capital adjustment for 1981. (You may assume that the finished goods price index is suitable for this purpose) Working must be shown. (1) The historic cost balance sheets of LM Limited, a manufacturing company, which produces partly for stock and partly against customers orders at 31st December, 1980 and 1981 are set out below: (In thousand rupees) 1981 1980 Fixed assets 1,964 1,820 Current assets: Stock and work-in-progress 502 432 Debtors 831 501 Cash 4 2 1,337 935 Less: Current liabilities Creditors 351 200 Bank overdraft 287 138 Taxation 104 82 Dividend 30 25 6

772 Net Current Assets Share capital Reserves Medium-term loan Deferred taxation (2) 565 2,529 1,200 1,012 200 117 2,529

445 490 2,310 1,200 809 200 101 2,310

The relevant price indices for stock are as follows: Mid-month Raw materials Finished goods 1980: October November December 1981: January October November December 1982: January 158.5 160.8 161.3 162.1 176.5 177.3 178.1 179.7 153.4 154.8 156.8 158.0 171.2 182.1 82.9 184.0

(3)

(4) (5)

Stocks and work-in-progress are included in the balance sheet at the lower of cost (including, where appropriate, overhead) and net realizable value. The totals are made up as under. Amount (In thousand rupees) 1981 1980 Raw materials 248 212 Work-in-progress: Allocated to customers Unique 81 68 Unallocated 20 22 101 90 Finished goods 153 130 502 432 Year-end stockholding represent: Raw materials 3 months purchases Finished goods 2 months stock It is calculated that the hard core element of bank borrowing which does not fluctuate with working capital is Rs.1,00,000 in both years. Debtors represent two months sales and creditors two months supply of goods and services.

Q~11 Prepare a statement showing the amount of depreciation under Current Cost Accounting (CCA) method for each of the four years as well as the backlog depreciation for a certain item of the asset from the following details: 7

Cost of machine Estimated life Residual value Inflation factor Assume straight lime method of depreciation. Q~12 Following data relate to Gearing Ltd. (i) Net Long-term Borrowings Creditors Bank Overdraft Taxation Cash (ii) Share Capital and Reserve from Current Cost Balance Sheet Proposed Dividend Total Shareholders Interest (iii) Current Cost Adjustment Depreciation Fixed Assets Disposal Cost of Sales Adjustment Monetary Working Capital Adjustment

Rs. 50,000 4 years Nil 10% P.A.

Beginning of the year 14,000 4,000 5,000 1,500 (5000) 19,500 37,080 500 37,580

Rs. (000) End of the year 14,000 2,800 5,600 1,400 (8,400) 15,400 47,056 600 47,656 1,700 1,800 1,620 1,120 6,240

Find Out: (i) Gearing Adjustment Ratio and (ii) Current Cost Adjustment after abating gearing adjustment. Q~13 (Determination of return on capital employed Historical Cost and Replacement Cost). Rising Ltd. is a company that was established in 1984 is in the grip of rising prices. It depreciated its plant and machinery by the reducing balance method, charging 33-1/3 of the reducing balance each year. All fixed assets can be assumed to have been purchased at the beginning of the year in which they are acquired. Capital employed is taken at the year-end value. Details of the companys capital employed and profit are as follows : Plant and machinery Year of purchase 1984 1985 1986 Cost (Rs. 000) 324 81 54 Working Capital at year-end (Rs. 000) 130 8 Profit before depreciation (Rs. 000) 142

The replacement cost of plant and machinery has been rising and price index for plant and machinery costs is as follows : End of Index 1983 244.8 1984 260.1 1985 275.4 1986 306.0 Required : Calculate Rising Limiteds Return on Capital Employed using : (a) Historical cost and net book values to value fixed assets; (b) Replacement costing for fixed assets values and depreciation. Q~14 (Ascertaining changes in net profit and reserves with given retail prices indices). (a) Inflation is known to be beneficial to those who owe money and detrimental to those who are owed money- Explain. (b) In the context of Inflation Accounting System adjust the following Profit and Loss Account and Balance Sheet under the Current Purchasing Power (or CPP) method to ascertain the changes in Net Profit and Reserve. Profit and Loss Account for the year ended 31st December, 1984 (Rs. 000) Sales 500 Opening stock 80 Purchases 420 500 Less : Closing Stock 70 430 Gross Profit 70 Depreciation (buildings) 5 Administration 25 30 Net profit 40 Balance sheet as at 31st December Share Capital Reserves Land Building Less : Depreciation Stock Debtors Cash Less Creditors The following data are given : 9 200 45 70 40 30 140 35 (Rs. 000) 200 200 400 140 155

105 400

(1) (2)

Closing Stock was acquired during last quarter of 1984 and opening stock during the last quarter of 1983. The land and buildings were acquired and the capital issued during 1976. The buildings are depreciated straight line over 40 years. The relevant retail price indices are a) 1976 average b) 1983 last quarter average c) 1983 December 31 d) 1984 last quarter average e) 1984 average f) 1984 December 31

(3)

60 108 110 116 114 118

(4)

Sales, Purchases and Administration expenses are assumed to occur evenly over the year and hence an average prices.

Q~15 (Current Cost Operating Profit Interest Coverage Ratio, Rate of Return on Equity and Debt-Equity Ratio). The following information has been extracted from the accounts of N Ltd. prepared under the historical cost conversion for 1993. Profit and Loss Accounts Extracts , 1993 : Turnover Operating profit Less : Interest payable Net Profit (Rs. in millions ) 200 15 3 12 Summarized Balance Sheet at 31st December 1993 : (Rs. in millions) Fixed assets at cost less depreciation Current assets : Stock Debtors Bank Less : Current Liabilities Net current assets Total assets less current liabilities Less : 15% debentures 20 30 2 52 30 22 82 20 62 62 (Rs. in millions) 60

Capital and reserves The companys accountant has prepared the following current cost data : (Rs. in millions) Current cost adjustments for 1993 : Depreciation adjustment 3 Cost of sales adjustment 5 10

Replacement cost at 31st December 1993 : Fixed assets, net of depreciation Stocks

85 21

Required : (a) A calculation of the current cost operating profit of N Ltd. for 1993 and summaries current cost balance sheet of the company at 31st December 1993 so far as the information permits. (b) Calculations of the following ratios from both the historical cost accounts and current cost accounts : (i) interest cover; (ii) rate of return on shareholders equity; (iii) debt/ equity ratio. (c) A discussion of the significance of the ratios calculated under (b) and of the reason for differences between them. Note : Ignore taxation. Q~16 (Current Cost Gearing Adjustment). (a) The current cost balance sheet of a company contained the following figures : Current Assets Bank and Cash (not included in Monetary Working Capital) Current Liabilities Creditors (Hire Purchase) Taxation Proposed dividends Bank overdraft (not included in Monetary Working Capital) Net Assets employed Shareholders funds Long-term loans Debentures Deferred Liabilities Deferred taxation (Rs. 000) 450 170 210 250 190 3,540 2,680 540 320

Required : Calculate the current cost gearing proportion. (b) The facts are exactly the same as (a) above and the current cost adjustments were : Depreciation 870 Fixed Asset disposals 80 Cost of sales 1,050 Monetary Working Capital 320 Required : Calculate the Current Cost Gearing Adjustment

11