Introduction to Finance Accounting

This document provides an introduction to finance accounting, covering topics such as trading accounts, profit and loss accounts, and financial statements. It also discusses the importance and benefits of financial information for users. Additionally, it explores ratio analysis and different accounting methods. If you need study material or solved assignments on finance accounting, Desklib is the right place for you.

Introduction to
Finance 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
Evaluation of the features of the financial information for the users of the financial statements
with the importance and benefits to users....................................................................................2
Question 2a).....................................................................................................................................3
Ratio Analysis..............................................................................................................................3
Question 2b).....................................................................................................................................5
(a) Bank account balance at the end of every month...................................................................5
(b) Accounts balances at end of the 2 month periods..................................................................6
(c) Trial balance as at 30 April 2018...........................................................................................8
Question 2c).....................................................................................................................................8
(i) Straight Line method at 12.5%..............................................................................................8
(ii) Reducing Balance Method 15%............................................................................................9
iii) Significance and meaning of accounting concepts................................................................9
REFERENCES..............................................................................................................................11

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)
Evaluation of the features of the financial information for the users of the financial statements
with the importance and benefits to users
Financial statements could be defined as the summary of all the financial transactions and
events carried out during the year. The information provided by the financial statements is used
by different users as per their interest in the company. it enables the users of financial statements
to make informed business decisions about the company analysing the performance and position
of company over the period. The main six features of financial information to users of the
statements are
Relevance – Information could be stated as relevant if it could influence the decision of users.
Financial statements should provide relevant information about the company for making
economic decisions by the users. If the predictive and contemporary values are not provided by
the financial statements the information is not considered to be relevant for decision making.
Financial information should be relevant as different parties are associated with the business who
wants to evaluate internal functioning of company and the performance targets achieved during
the year.
Faithful Representation – Financial information revealed by the statements should represent
actual performance and position of organisation. The concept requires that information provided
gives a true and fair of financial position as well as performance of the organisations. The
information provided should be free from errors and misstatements and should not be falsely
prepared for representing good performance of the company (Weygandt, Kimmel and Kieso,
2019). The feature of completeness requires that every information that is stated in the financial
statements is true and free from errors and mistakes. All the material transactions or events that
are capable of influencing the behaviour of users should be stated in the statements of company.
Comparability – Financial statements are also prepared so that users can make comparisons
between different firms of the industry for analysing the performance and growth of the
organisation. Keeping this thing in mind the feature accounting bodies required the companies to
prepare financial statements on uniform basis. Financial statements are now prepared by the
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companies following defined accounting standards and presented in accordance with the
reporting frameworks. The accounting standards and reporting frameworks make the financial
standards comparable with the other firms. It allows the investors to make comparisons between
the growth, performance and position of the different companies.
Verifiability – The information of entity should be verifiable so that the assurance could be
framed regarding the authenticity of the transactions. all the material information in financial
statements should be supported with evidence. Users of financial information should be capable
of identifying information that is presented fairly in the statements. Information presented in the
statements is audited by the recognised auditing firms and ensuring that all the transaction are
recorded and carried out in accordance with law and standards. It also ensures that any mistakes
or frauds are not carried out within company.
Understandability – It is an important feature which is focused over by companies while
preparing financial statements for the companies. Information given in the statements by the
companies should be understandable by the common people. Information in the statements
should be represented by the companies concisely and in a manner which is clear to common
user. Important information and polices are not excluded from the report for making them
understandable and simple (Dutta and Patatoukas, 2017). Use of highly technical language that
makes it hard for the users to get information in right context will affect the reliability of
decisions that are taken on the basis of this information. Many decisions are taken on the basis of
financial information that requires the information to be clear and accurate for making sound
decisions.
Timeliness – It is the last feature but of relevant importance. It requires that information
regarding the performance and position should be provided timely to users of financial
statements for making accurate and informed decisions. If financial information containing
material events and transactions capable of influencing the decisions are not provided on time it
could cause serious consequences to users.
Question 2a)
Ratio Analysis
Year 1 Year 2
Employed Capital 3810 4760
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Net operating profit 460 350
Return on capital employed Net operating
profit/Employed Capital
12.07% 7.35%
Cost of Sales 3020 4650
Sales 4940 6850
Gross Margin Total Sales –
COGS/Total Sales
38.87% 32.12%
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
Efficiency Ratios
Trade Payables 560 840
Trade Receivables 820 1230
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
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Interpretation
 Return on Capital Employed: ROCE is uses to assess the ability of company in using
the resources for generating returns. ROCE of the company is lowered to 7.35% from
12.07% in year 1. There has been significant decline in performance of company which
could be evaluated from the return. The management is losing efficiency due to the old
strategies of generating returns. A company must have high ROCE for getting investor
attention.
 Gross profit margin: It reflects the returns generated by company from its trading
activities. All the other activities are carried out from the gross profits. If company is not
able to earn adequate gross profits from the business it will be losing significant profits.
GP of company has been reduced to 32.12% in year 2 from 38.87 % in year 1. It could
be valuated from the ratio that gross profit margin of company is not good (Cascino and
et.al., 2019). Cost of sales is high which are required to be controlled for higher returns. It
can also increase the sales keeping the cost at controllable levels.
 Current Ratio: The current ratio is liquidity ratio used for analysing the liquidity
position of the company. Current ratio measures capability of the firm in meeting short
term liabilities from the current assets. Company had a current ratio of 3.16 that reduced
to 2.85. It is having strong liquidity position and should maintain the position.
 Trade payable days: Company makes payment to creditors in 45 days currently where
previously it was making payments within 41 days. Increase in payment days represents
efficient management of the cash cycle for meeting the goals of business.
 Trade Receivable Days: The company make collection of dues from customers in 65
days where previously it was making collections n 61 days. Receivable days are
increased for attracting new customers to increase the sales of firm.
Question 2b)
(a) Bank account balance at the end of every 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 240 05-Mar By Rent 50
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takings to date
22-Mar By Advertising 25
26-Mar By Gilberto
Wahabo
Drawings
100
31-Mar By bal c/d 705
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 end of the 2 month periods
Sales
Date Particulars Amount Date Particulars Amount
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
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Date Particulars Amount Date Particulars Amount
05-
Mar
To Bank 50
05-Apr To Bank 50 30-Apr bal c/d 100
100 100
Advertisements
Date Particulars Amount Date Particulars Amount
22-
Mar
To Bank 25
29-Apr To Bank 30 30-Apr bal c/d 55
55 55
Loan L. lock
Date Particulars Amount Date Particulars Amount
14-Apr By Bank 450
30-Apr Bal c/d 450
450 450
Capital A/c
Date Particulars Amount Date Particulars Amount
01-Mar By bank 500
30-Apr By bal c/d 500
500 500
Drawings
Date Particulars Amount Date Particulars Amount
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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
Advertisments 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
12.5% p.a. 2000
2017 2018 2019
Provision for 2000 2000 2000
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depreciation
(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) Significance and meaning of accounting concepts
Going Concern
It is the accounting concept that ensures that business has been established by the company
with the motive of running for foreseen future. The concept ensures that business is running for
longer period of time in the future. It refers to the ability of firm in making money so that the
consequences of bankruptcy could be avoided (Sorensen and Miller, 2017). It is considered an
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essential and important accounting concept which allows the business in deferring expenses of
the business for the future accounting period instead of recognising them in one year. It also
protects the third parties by ensuring that business will be carried out in future in which it will be
meeting the financial obligations. There are various expenses and cost that are deferred by the
business under going concept. It motivates the employees to work hard for achieving growth and
promotions in coming years.
Materiality Concept
Materiality in accounting refers to information and transactions that are of significant
value and cause considerable impact over the business. It also refers to impact of errors or
omission in the financial statements over the users of financial information. The concept requires
that all the material information should be presented by the management in the financial
statement. For example a contingent liability of 1 million is material and can influence the
decisions of buyers and therefore should be included in the financial statements. The accounting
concept enables the management to analyse that statements prepared are not misleading and
represent the position of company accurately disclosing all the relevant information. It is a
fundamental accounting principle which is followed by all the organisations preparing financial
records.
Business entity Concept
The accounting concept state business is separate from the owners running it. In the
language of law company is a separate legal entity from its owners and promoters forming it.
The focus of accounting concept is that the business should be considered different from the
owners. From this concept it could be evaluated that business has the separate standing from the
owners and should be considered as a separate unit (Persson, 2019). It is essential for ensuring
that the personal and financial transactions are not treated as single business transactions and
added in business records. It enables the company to recognise business and personal
transactions separately.
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REFERENCES
Books and Journals
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2019. Financial accounting. John Wiley & Sons.
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.
Cascino, S., and et.al., 2019. The usefulness of financial accounting information: Evidence from
the field. Available at SSRN 3008083.
Sorensen, D.P. and Miller, S.E., 2017. Financial accounting scandals and the reform of corporate
governance in the United States and in Italy. Corporate Governance: The International
Journal of Business in Society.
Persson, M.E., 2019. Financial Accounting: Thoughts for the Future or Random Thoughts on a
Well-Worn Topic. In Harold Cecil Edey: A Collection of Unpublished Material from a
20th Century Accounting Reformer. Emerald Publishing Limited.
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