Financial Accounting Study Material

This study material provides comprehensive information on financial accounting, including topics such as trading accounts, profit and loss accounts, statement of financial position, and ratio analysis. It also discusses the importance and benefits of financial information for users of financial statements. The material includes examples and explanations of various ratios used in financial analysis. The document also includes a trial balance and accounts balances at the end of two-month periods.

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
Evaluation of the six main features of the information for users of the financial statements.
Importance and benefits of the financial information for the users.............................................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).....................................................................................................................................8
(i) Straight Line method at 12.5%..............................................................................................8
(ii) Reducing Balance Method 15%............................................................................................9
(iii) Meaning and significance of the 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
Total Assets 18230 Total Equity & Liabilities 18230
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Question 1b)
Evaluation of the six main features of the information for users of the financial statements.
Importance and benefits of the financial information for the users.
Financial information refers to the quantitative information about the internal operations
of the business. Financial information provides the users about the performance and position of
the company. Financial information about the company is presented in income statement,
statement of financial position and cash flow statements which are known as financial statements
of the company.
There are six main features of the financial information to the users of financial
statements. These six factors include
1. Relevance
The relevant information is one which is capable to make difference in decision by the
users. The relevance requires the financial information provided by the statements to be relevant
for the economic decisions else information is not useful for the business. Financial information
is considered useful and relevant if it provides confirmatory and predictive values. The
information provided by the financial statements should be relevant (Schroeder, Clark and
Cathey, 2019). The relevance is materiality aspect that requires the business to provide all the
information relevant to the business. Information is relevant and material if it could influence the
decision of the users of statements.
2. Faithful Representation
Financial information in financial statements should present all the information that is
purported to represent. It should reflect all the actual position and performance of the company.
Faithful representation provides that the information provided should give true and fair view of
the financial position and performance provided by the company. Three characteristics of the
faithful representation are completeness that requires company should give complete information
about the transactions and events occurred during the year. Neutrality requires that it should give
fair information free from biases not focusing over any specific information or group. Third
requires the financial statements to be free from errors and mistakes. The financial statements
should not include omissions or misstatements.
3. Comparability
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Financial statements should be prepared following uniform standards given by the
accounting bodies. The uniformity allows comparison of the entity within and outside the entity.
For internal management information is compared between one period to another. External users
compare the information of financial statements with other companies to identify the most
profitable company from the different companies. It allows users of the financial statements to
make sound decisions. Performance could not be measured without bringing them on similar
standards.
4. Verifiability
It helps the business to assure information is representing fairly what it is purporting to
present. The financial information of the entity should be supported by the evidence. Users of the
financial information should be able to identify that the information is fairly presented (Robson,
Young and Power, 2017). The information is verifiable when it is audited by recognised
accounting firm and assuring that the financial statements represent true and correct view of the
financial position of the company. Audit report provides that statements are free from material
omissions or misstatements.
5. Timeliness
The timeliness refers to providing users of financial statements information timely
enabling them to make accurate decisions. If the information influencing the decision is not
provided on time it could lose its importance or value. Firm should ensure that financial
statements are prepared timely and provided for making decisions analysing the company
information.
6. Understandability
The feature requires that information provided by the statements should be
comprehensible or understandable to the users with adequate knowledge of the economic and
business activities. Information in the financial statements should be presented concisely and
clearly of the entity. It should not exclude important terms and information from the reports to
make them simple and understandable. Users may not be able to make accurate decisions if the
information is not understandable. The language used in the statements should be clear and
understandable by the common people. Statements may not be useful if they include highly
complex terms that are not known to the common people.
Importance and benefits of financial statements to users
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Financial statements of the company provide enormous information that are relevant and
important regarding the entity. It includes all the information regarding he revenues, expenses,
debt load, profitability and ability of meeting the short term as well as long term financial
liabilities of the business. Users of the financial statements could adequately evaluate the
financial performance and position of the company (Dutta and Patatoukas, 2017). Information
presented in the statements is also required by the law or accounting standards as well.
It is an important tool for the senior managers for communicating the past achievements
and future targets and goals. The internal management communicate with the public through the
financial statements about the performance of company and about the future aspects or goals to
be achieved. Investors use financial statement for assessing the risks and returns associated with
the company in which it is proposing to invest the funds. Company having high returns and low
financial risks are preferred by the investors. Users through statements make sound decisions and
make predictions about the future prospects of the business. External users invest analysing the
position of company. Internal users of the financial information analyse the performance so that
effective and accurate steps could be taken for improving the performance and achieving the
goals and objectives.
Question 2a)
Ratio Analysis
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%
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
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Current ratio
Current assets / current
liabilities 3.16 2.85
Quick Ratio
(Current Assets -
Inventory) / Currentg
Liablities 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
Interpretation
Return on Capital Employed
The return on capital employed is a ratio used for assessing the efficiency of management
in generating returns by using the existing resources of the entity. It is an investor ratio used for
analysing whether company is efficient in using the resources or not. ROCE of company in year
1 were 12.07 that reduced to 7.35% in year 2. It showed downward turn of the ratio in second
year. Decline shows that returns of the company have decreased and also company has invested
new capital in the company.
Gross Profit Margin
The gross profit margin ratio is used by the company for assessing that company is
earning sufficient returns from the business. it is the profit earned after meeting all the cost of
production or cost of sales. It is the amount left with company for meeting all the other
operational expenses of the business. GP ratio of company in year 1 is 38.87% and in year 2 is
32.12%. It could be seen that there is decline in the profit margins from year 1. A company must
earn adequate amount of profits for growth and success.
Current Ratio
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The ratio is used for measuring the liquidity position of company. the current ratio
measures the ability of company to meet the short term obligations from the available current
assets. Current ratio of company is 3.16 in year 1 that declined to 2.85 in year 2. There has been
a downward movement in ratio (Accounting, 2017). It could be analysed that the liquidity
position of the company is strong and shows that company is having enough current assets for
meeting the short term obligations.
Trade Payable Ratio
It evaluates the business the days within which the company makes payment to the
creditors of company. The payable days have increased to 41 days in year 1 to 45 days in year 2.
This shows that there has been increase in the payment days of entity.
Trade Receivable Days
It refers to the days taken by company to make collections for amount due from debtors.
It is having receivable days of 61 days that increased to 65 days in year 2. It could be evaluated
that the receivable days are higher than the payable days. This does not represent efficient cash
cycle of the company as standards provide for payable days to be higher than the receivable
days.
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
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
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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-
Mar To Bank 50
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
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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
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
Advertisments 55
Capital 500
Drawings 175
Total 1990 1990
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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 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 can be taken as the accounting term which can be used for an
organisation which consists of resources that is been required to operate. It basically means that
business will run for longer duration of time and will continue to run in future. It also refers to
firms ability to make enough money so that bankruptcy can be avoided. It is one of the most
important accounting concept as it allows business to defer some of the business expenses to
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future accounting period rather than recognising them all at once. It means that business is able
to meet out its obligation in future. Certain assets can also be deferred in the future, if it has been
added in going concern concept (McCallig, Robb and Rohde, 2019). It can be taken as accrual
of expenses and also pre-payment of expenses has been done under this type of concept. There
are also various advantages of going concern concept.
Materiality concept: In accounting, materiality refers to the impact of an omission or
misstatement of information in a company's financial statements. It can be considered as a
situation where the financial data of a firm can be taken as material so that adequate financial
statement can be prepared by making use of it. This concept is been used in preparation of
financial statement. It is been related to both concepts of financial statement and the type of
testing which needs to be done on it. Materiality concept is really important as it can assist in
analysing if company has prepared the misleading financial information. It also assits in
analysing the errors which is been made while preparation of financial statement. It also assist in
analysing the balance that has been kept in financial statement. It is been fundamental to
audit.This concept also have various advantages like it assist in making an error less financial
statement which is really important for the company.
Business entity concept: This concept provides details that business is been treated
differently from their owners. It can also be taken as one of the most simplest form of
accounting. According to this concept sole trader must be kept away from personal affairs of
business. It has been analysed that according to this concept business stands apart from other
organisations and be considered as separate economic unit. This concept also is really important.
It assists in making sure that financial transaction and personal transaction of business and
owners can not be inter-linked or mixed. This is because of the reason as entity is been treated as
separate unit, and all the decisions related to it are made differently (Robson, Young and Power,
2017). This business entity concept is also significant as it assists in taking better financial
decisions and also it supports in doing proper tax accounting. Thus, assist in making sure that
proper financial reporting is been done with the help of it. In this transactions are been noted
separately so better accounting decisions can be made.
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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.
Accounting, L.S.I.F., 2017. Financial accounting.
McCallig, J., Robb, A. and Rohde, F., 2019. Establishing the representational faithfulness of
financial accounting information using multiparty security, network analysis and a
blockchain. International Journal of Accounting Information Systems. 33. pp.47-58.
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