Financial Accounting Study Material

This study material for Financial Accounting covers topics such as trading account, profit and loss account, statement of financial position, features of financial statements, ratio analysis, bank account balancing, and accounts balances. It provides a comprehensive understanding of financial accounting concepts and their application.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
Question 1a).....................................................................................................................................1
(a) Bob’s Trading Account for the year ending 30th April 2019..................................................1
(b) Bob’s Profit and loss Account for the year ending 30th April 2019.......................................1
(c) Bob’s statement of financial position for the year ending 30th April 2019............................1
Question 1b).....................................................................................................................................2
Feature of information of financial statement.............................................................................2
Question 2a).....................................................................................................................................4
Ratio Analysis..............................................................................................................................4
Question 2b).....................................................................................................................................6
(a) Bank account balancing at the end of each month.................................................................6
(b) Accounts balances at the end of two month periods..............................................................7
(c) Trial balance as at 30 April 2018...........................................................................................8
Question 2c).....................................................................................................................................9
(i) Straight Line method at 12.5%..............................................................................................9
(ii) Reducing Balance Method 15%............................................................................................9
(iii) Meaning and significance of the accounting concepts.......................................................10
REFERENCES..............................................................................................................................12

Question 1a)
(a) Bob’s Trading Account for the year ending 30th April 2019
Particulars Amount Particulars Amount
To Opening 4700 By Sales 30000
To Purchases 15700
By closing stocks 4400
To Gross Profit 14000
34400 34400
(b) Bob’s Profit and loss Account for the year ending 30th April 2019
To shop wages 4420 By Gross Profit 14000
To light and heat 260
To Rent 4500
To insurance 120
To Net Profit 4700
14000 14000
(c) Bob’s statement of financial position for the year ending 30th April 2019
ASSETS LIABILITIES
Non Current Assets Non Current Liabilities
Shop Fittings 13000 Borrowings 0
Current Assets Current Liabilities
Bank 610 Creditors 2030
Cash 100
Debtors 120 Owners Capital
Inventory 4400 Capital 15000
Add: Profit 4700
Less : Drawings -3500 16200
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Total Assets 18230 Total Equity & Liabilities 18230
Question 1b)
Feature of information of financial statement
Financial statements are important for variety of the different parties interested in the
performance of business (Pelekh, Khocha and Holovchak, 2020). Financial Statement generally
contain significant amount of the information about a company financial health. This information
is used by different user to perform variety of different activity. Some of the advantages of
financial information statement are as follows:
Decision making: It is the first feature of information which is performed by the
financial statement information. This sort of the information is generally used by the company
management in the long run. It has been identified that management generally used to analysis
the financial statement of the company on the monthly or the timely basis in the organization.
The main motive of management behind analysing the same in the organization is to find out
variety of the deficit which is presented in the performance of the business across the time. After
that management generally try to find out the solution within the financial statement or from
outside of the same as well. On the basis of variety of different information which is gather from
the financial statement and from outside management generally used to make variety of different
decision in the organization to improve the efficiency of variety of operation. Hence company
management generally uses the financial statement information in taking variety of decision
making.
Valuation of Company: It is another important feature of information presented in the
financial statement of the company. This type of the feature is generally used by the Investor or
the Bank. As investor and Loan provider in the market generally looks at the position of the
business before investing any sort of the money in the organization. Investor and Bank Loan
provider generally looks for the information related to return on the capital and resources and
liability and debtor of the company. On the basis of all the information they generally try to fix
the valuation of the company and on the basis of same they used to decide whether to invest
money into the company or not. Hence Investor generally uses the feature of Valuation of
company feature in the market.
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Taxation: It is another feature of information presented in the financial statement of the
company. This sort of the feature is generally used by the Government of the nation.
Government of the nation is another user of the financial statement of the company. Government
of the nation generally looks to financial statement with the purpose of the fixing it up the
taxation of the company in the long run. Hence they generally looks at the information of the
revenue, liability and resources sell or bought in the financial year. Hence Government is one of
the users of the financial statement of the company and on the basis of the same Government
looks to fix the taxation of the company or the liability of company on to the Government of the
nation.
Budget Formation: Budget formation is also the feature of information presented in the
financial statement of the company (Kutsyk, Shevchuk and Holovatska, 2018). This sort of
information is generally used by the planner or employee in the organization who are having the
responsibility of planning the future activity of the company in the market. They generally looks
at the financial position of the company in the market and on the basis of the same employee in
the organization used to fix the different assumption and permutation in the market and try to
draw the future budget of the company. On the basis of the same company used to carry out
variety of different activity by keeping budget of the company in mind. Hence Employee are
another user of the financial statement information. They generally used to use the same to plan
variety of different activity which need to be carried out by them in the coming future.
Current position of business: It is another feature of information of the financial
statement of the company in the market. It has been identified that these sort of the information is
generally used by the stakeholder of the company in the market. They generally used to consider
the same for understanding the current position of the business. As they are owner of the
company they understand the resources and liability of the company in the market and on the
basis of the same they looks to guide the variety of the information to the management of the
company to improve the position of the company in the market (Lapiţkaia and Leahovcenco,
2020). As stakeholder are the one who used to possess good sort of the information about the
market condition of the company and on the basis of the same they try to fix the position of the
company in the market in a way that they used to present the company in the better way in front
of the other in the market. Hence Stakeholder are the other user in the market which generally
used to consider the information from the financial statement to understand current position and
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improve the position or the image of the company so that future uncertainty can be managed by
the company in the better way.
Coordinating: It is another feature of the information which is gather from the financial
statement of the company (Duvanskaya and Ol’ga, 2016). As it has been identified that
Company management generally used to see the current position of the company and on the
basis of the same they look to coordinate the position of the company in the way it help them in
coordinating with variety of the future situation which may occur in the market. As it has been
identified that coordinating the current activities with future uncertainty generally help the
company in getting ready for future difficult. Competitor in the market also some time looks into
the financial statement of the company and on the basis of same try to coordinate own activity in
a way that they used to get the competitive advantage in the market as well.
Question 2a)
Ratio Analysis
Return on Capital Employed
Year 1 Year 2
Employed Capital 3810 4760
Net operating profit 460 350
Return on capital
employed
Net operating
profit/Employed Capital 12.07% 7.35%
It is the ratio used to assess the efficiency of management of organisation. Company has
earned return of 7.35% in 2nd year with downward movement from 12.07%. It could be analysed
from the above ratio that management is required to change the existing business strategies for
increasing the returns. Decreasing returns imposes negative impact over the investors in
business.
Gross Profit Margin
Year 1 Year 2
Cost of Sales 3020 4650
Sales 4940 6850
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Gross Margin
Total Sales – COGS/Total
Sales 38.87% 32.12%
Ratio shows the gross profit margin of the company during the year. Gross profits of a
company are calculated after meeting all the cost of sales. Gross profit of company is 32.12%
with decline from 38.87% in year 1. The decrease is seen due to increase in cost as against the
increase in revenues (Schroeder, Clark and Cathey, 2019). GP margin is to be increased by the
business using cost efficient strategies in the production.
Current Ratio
Current assets 1770 2390
Current liability 560 840
Inventory 930 1150
Quick Assets 840 1240
Current ratio
Current assets / current
liabilities 3.16 2.85
Quick Ratio
(Current Assets -
Inventory) / Current
Liabilities 1.50 1.48
Liquidity is an important aspect that is required to be analysed in a business before
making investment. It also analysed by the management for taking strategic decisions for
increasing the liquidity of company. Liquidity position in year 2 is 2.85 which was 3.16 in year
1. There has been down ward movement. Company has enough assets for meeting the short term
obligations and working capital requirements of the business. Higher liquidity refers to blocked
funds in company that should be utilised adequately.
Trade Payable and Receivable Ratio
Efficiency Ratios
Trade Payables 560 840
Trade Receivables 820 1230
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Sales 4940 6850
Days 365 365
Trade Payable days
Accounts Payable / Sales
*365 41.38 44.76
Trade Receivable days
Accounts Receivables /
Sales *365 60.59 65.54
Trade payable days of company are 45 that have increased from 41 days in year 1. The
increase in payments days have been made from the last year to manage the cash operating cycle
of the business.
Trade receivable days are 65 that have increased from 61 in year 1. Company has
increased its collection days in year 2 as part of the sales promotional policy (Dutta and
Patatoukas, 2017). Higher credit days enable the company to increase the sales revenue and
managing the cash operating cycle.
Question 2b)
(a) Bank account balancing at the end of each month
Date Particulars Amount Date Particulars Amount
01-Mar To Capital 500
10-Mar
To Business
takings to date 290 01-Mar By Purchases 150
27-Mar
To Business
takings to date 240 05-Mar By Rent 50
22-Mar By Advertising 25
26-Mar
By Gilberto
Wahabo
Drawings 100
31-Mar By bal c/d 705
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1030 1030
April
01-Apr To bal b/d 705 02-Apr By Purchases 100
14-Apr To Loan L Lock 450 05-Apr By Rent 50
16-Mar
To Business
takings 330 23-Apr
By Gilberto
Wahabo
Drawings 75
26-Mar
To Business
takings 180 29-Apr
By advertisement
leaflets 30
30-Apr By bal c/d 1410
1665 1665
(b) Accounts balances at the end of two month periods
Sales
Date Particulars
Amoun
t Date Particulars
Amoun
t
10-
Mar Sales 290
27-
Mar Sales 240
16-Apr Sales 330
30-
Apr By bal c/d 1040 26-Apr Sales 180
1040 1040
Rent
Date Particulars
Amoun
t Date Particulars
Amoun
t
05- To Bank 50
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Mar
05-Apr To Bank 50 30-Apr bal c/d 100
100 100
Advertisemen
ts
Date Particulars
Amoun
t Date Particulars
Amoun
t
22-
Mar To Bank 25
29-
Apr To Bank 30
30-
Apr bal c/d 55
55 55
Loan L. lock
Date Particulars
Amoun
t Date Particulars
Amoun
t
14-Apr By Bank 450
30-Apr Bal c/d 450
450 450
Capital A/c
Date Particulars
Amoun
t Date Particulars
Amoun
t
01-
Mar By bank 500
30-Apr By bal c/d 500
500 500
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Drawings
Date Particulars
Amoun
t Date Particulars
Amoun
t
26-
Mar To Drawings 100
23-Apr To Drawings 750 30-Apr By bal c/d 175
175 175
(c) Trial balance as at 30 April 2018
Trial Balance
Particulars Debit Credit
Bank 1410
Sales 1040
Purchases 250
Loan 450
Rent 100
Advertisements 55
Capital 500
Drawings 175
Total 1990 1990
Question 2c)
(i) Straight Line method at 12.5%
Calculation of
Depreciation
Straight line method
Cost on 1/1/2017 16000
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12.5% p.a. 2000
2017 2018 2019
Provision for depreciation 2000 2000 2000
(ii) Reducing Balance Method 15%
Reducing balance
method
Cost on 1/1/2017 16000
Depreciation for 2017 2400
Reduced balance 13600
Cost 1/1/2018 13600
Depreciation for 2018 2040
Reduced balance 11560
Cost 1/1/2019 11560
Depreciation for 2018 1734
Reduced balance 9826
Cost 1/1/2020 9826
2017 2018 2019
Provision for depreciation 2400 2040 9826
(iii) Meaning and significance of the accounting concepts
Going Concern
It could be considered as an accounting term that is used by the firm or organisations that
have all the resources required to operate the business. This shows that the business is
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established by the owners for running for long duration and has the intention to run it in the
future. This could be also referred as the ability of firm to make required profits and earnings for
running the business successfully and avoiding the bankruptcy. It is considered as an important
accounting concept which allows the business to expenses of the business over future financial
periods instead of recognising them at once. This means obligations of the business will be met
in the future. It is an essential concept which is assessed in the financial statements of company.
Materiality Concept
This is an important accounting concept, where the materiality is considered as impact of
misstatements or omission of the information in financial statements of the company. It is
considered as the situation where financial data of the firm could be material for making
financial statements of the firm using the information (Robson, Young and Power, 2017). The
concept is essential that ensure that all the material transactions are covered in the financial
statements and statements discloses all the material events and transactions incurred during the
year that could impact the decision of users. The concept is used for assessing the errors and
misstatements in the financial statements.
Business Entity concept
The concept provides that owners and company are two separate entities. Company is a legal
entity different from the owners. It is simplest accounting concepts which states owners should
be considered separate from potential business affairs. The company makes transactions such as
sale purchase in its own name and all other transactions are made in its own name. It restricts the
liabilities of business to company does not extends it to owners as they separate from company
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REFERENCES
Books and Journals
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Robson, K., Young, J. and Power, M., 2017. Themed section on financial accounting as social
and organizational practice: exploring the work of financial reporting. Accounting,
Organizations and Society. 56. pp.35-37.
Dutta, S. and Patatoukas, P.N., 2017. Identifying conditional conservatism in financial
accounting data: theory and evidence. The Accounting Review. 92(4). pp.191-216.
Pelekh, U., Khocha, N. and Holovchak, H., 2020. Financial statements as a management
tool.Management Science Letters, 10(1), pp.197-208.
Duvanskaya, N. A. and Ol’ga, F. S., 2016. Features of adaptation of international financial
reporting standards in the Russian commercial organizations. International Journal of
Economics and Financial Issues, 6(1S), pp.68-73.
Lapiţkaia, L. and Leahovcenco, A., 2020. Features of intellectual property reflection in
accounting and in financial statements. Eastern European Journal for Regional Studies
(EEJRS), 6(1), pp.102-112.
Kutsyk, P., Shevchuk, V. and Holovatska, S., 2018. Consolidated Financial Statements: The
Genesis of Normatively Regulating in Ukraine. Accounting and Finance, (4), pp.26-37.
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