Financial Accounting and Analysis

1. This pandemic situations has drawn the attention of a lot of individuals to actively
watch and participant in the Indian financial market. As a life-long learner, you also
decide to understand the fundamentals of certain companies listed on the stock
exchanges in India. One of your friends advised you to look in to the various techniques
of financial analysis, as one of the way of evaluating the financials of business entities.
You are done with getting an understanding about various techniques of financial
analysis. Elaborate any five of the said techniques for financial analysis. (10 Marks) –
800 Words

INTRODUCTION:

Financial analysis refers to the analysis of financial projects/activities or financial statements

of a business which includes a balance sheet, a profit statement, and accounts notes or
financial ratios to evaluate company results, performance and trend that will be useful for
taking major decisions such as investments and project planning and funding. A person who
evaluates the performance of the firm by utilising financial data presents results for the
company's senior management with recommendations for improving it in the future.
Financial analysis consists of evaluation, in order to assess their performance and adequacy,
of companies, projects, budgets and other financial activities. Financial analysis is usually
used to assess if a company is stable, solvent, liquid, or sufficiently lucrative to secure a
monetary investment.

CONCEPT AND APPLICATION:

There are a number of ways to do financial analysis; the following are the most prominent
kinds and instruments —

1. Vertical Analysis: Vertical Analysis is a strategy to determine how and to what extent
its resources are utilised throughout the income statement and balance sheet. As a
percentage of total assets, liabilities and equity of shares are represented. In the case
of the income statement, the proportion of total sales is defined for each element of
revenue and expenditure. Vertical analysis utilises percentages to demonstrate in a
single sentence the relation between the various components and the whole. Vertical
analysis determines a total figure of 100 per cent in the statement and calculates the
proportion of each component. For balance sheets, revenues or sales for profit and
loss accounts the amount to be utilised as 100 percent will be total assets or total
liabilities and equity capital.
2. Horizontal Analysis: The company's financial accounts are examined for several years
in Horizontal Analysis, which is also termed a long-term assessment. For long-term
planning it is useful and compares statistics of two or more years. Here the current
year's growth rate is determined to discover possibilities and challenges as compared
with the prior year.
 3. Trend Analysis: The study of trends includes gathering data from several time periods
and tracing the data obtained across a horizontal line in order to discover the
actionable patterns of the data. The trend analysis may take account of percentage
changes over time in selected data using the data of a business firm from the previous
year. For multiple subsequent years instead of two years, the trend analysis calculates
percentage changes. Trend analysis is essential because it may indicate to
fundamental changes in the nature of the company with its long-term perspective. If
one sees a trend in a specific ratio, it may be determined if the ratio falls, increases or
remains generally stable. An issue or the indicator of effective management is
identified from this observation.
4. Ratio Analysis: Ratio analysis is an essential way in which two numbers can represent
their connection. Any pair of numbers can calculate a ratio. A ratio needs to be
relevant, but the use of ratios cannot substitute the examination of the underlying
facts. Ratio is a guide or shortcut used for assessing and comparing a company's
financial situation and activities with past years or comparable firms. The main
objective of these ratios is to indicate topics for future research. It should be utilised to
understand the firm and its surroundings in general. In terms of ratios, a comparison
of the revenue statement and the balance sheet figures might create issues because of
the financial statements' timeliness. In particular, the profit and loss accounts span the
full financial year, whereas the balance sheet is at the conclusion of the period for one
single point. Ideally, we need a fair measure of the average receivables for the year
covered by the sales number to match the revenue statement figure such as sales to a
balance sheet statistic such as receivables.
5. Common Size Analysis: Common size analysis is a method used by financial
managers to examine financial accounts. The financial statements are evaluated by
expressing a percentage of the base amount in each item for that term. The analysis
helps to understand the effect and contribution of each item in the financial statement.
It may be used to evaluate three main financial reports, i.e., the balance sheet, the
statement of revenue and the statement of cash flow. Total assets form the common
basis for other items on the balance sheet, whereas total revenues appear in the
revenue statement.

CONCLUSION:

The language of finance, which is the capacity to interpret financial data as well as presenting
data in the form of financial reports, has to be fluent in order to understand and run company
effectively. The examination of the finance generates the circumstances and peace for the
management of the Company. Investors have the concept whether or not to invest in a certain
firm, via an examination of the company's financial report. They appraise a firm by just
reading its financial documents and determining the relationships by evaluating its financial
situation. It is not simple to run a firm, however financial analyses help you keep the
company's financial records, which clarify the ownership of previous and future activities.
2. Mahesh wants to start his business and for that he decides that he will take loan for
Rupees 7 Lakhs from the Bank of Baroda. He also decides to use his saving worth 3
lakhs in the bank account to start the business. Discuss how these two transactions will
be recorded in the books of accounts by passing the relevant journal entries? How these
transactions will be reflected in the Books of accounts (that’ is in the financial
statements)? Lastly, conclude your answer by stating the applicability of
which accounting assumption/s you did the above mentioned accounting treatment/
recognition and presentation in the books of accounts. (10 Marks) – 800 Words

INTRODUCTION:

There are some theoretical assumptions that are usually followed in the preparation of a
company's financial accounts. It is thus believed that these principles were put into practise in
the company's final accounting, unless otherwise indicated. The three very fundamental
accounting ideas or policies which are supposed to be followed in an entity's accounting
transactions are the accounting assumptions. There is hence a requirement for a particular
indication that such notions have been respected, they are understood. This does not,
however, mean that all businesses must compulsorily adopt such fundamental accounting
concepts. If a company does not follow such assumptions while documenting its financial
transactions, it is completely permissible. If these basic assumptions have not been met, this
information and its financial statements should be expressly disclosed by the organisation.

CONCEPT AND APPLICATION:

In the given case, Mahesh decides to take loan of Rs. 7 lakhs from bank of Baroda to start his
business. Banks and NBFCs are part of an economy by providing additional cash leverage in
the form of loans as assistance for firms. The accounts of the firm reflect such a loan as a
liability.

Depending on the terms and conditions specified by a bank, the loan acquired from a bank
might pay in short or long term. The repayment of the loan is subject to the agreed timetable.
The present obligation for a short-term loan is a long-term responsibility, while the long-term
loan is a long-term responsibility.

The journal entry would be:

Cash Account ---------- Dr 7,00,000

To Bank of Baroda Account 7,00,000

(Being loan taken from Bank of Baroda for starting the business.)

Mahesh also decides to introduce his savings of Rs. 3,00,000 into the business as his capital.
Journal entry for the introduction of capital into the business would be:

Cash Account ---------- Dr 3,00,000

To Capital Account. 3,00,000

(Being Capital worth Rs. 3,00,000 introduced by the owner into the business)

Following Accounting Assumption has been used for the given case:

 Business Entity Concept: The idea of the company says that the company is
independent from the company's owners. Accordingly, even the smallest firm, the
single trader, should keep accounting records separate from the proprietors' personal
issues. The assumption of economic entities is an accounting theory which separates
the transactions performed by the company from its owner. The distinction between
different divisions of a corporation may also be considered. Each department keeps its
own business-specific accounting records. All types of corporate organisations as well
as non-profit organisations are subject to the principles of double-entry bookkeeping.
The idea of business entity (also known as the concept of a distinct entity and an
economic entity) argues that transactions relating to a company must be registered
separately from its owners and any other business. In other words, we only take into
account events affecting the particular enterprise when documenting transactions in an
enterprise; occurrences affecting others outside the corporation are not relevant and
are thus not included in the company' accounting records.
 Liability: In terms of accounting, liability may be seen as a preliminary finding, the
need to pay or otherwise surrender resources on the basis of the past decisions of a
person or a company and the other relates. There is current liability and it is generally
expected that resources, whether money or anything else, be employed to meet this
obligation. This notion is defined by the accounting coach as a duty originating from a
previous corporate event, which has been documented in all circumstances on the firm
balance sheet. The underlying notion of responsibility may be contextualised in
numerous ways. An example of a liability in personal finance is a vehicle or home
loan from a financial institution that has to be reimbursed in time. Another example
would be if a person had obtained some type of advantage in a contract with another
company and had to repair the arrangement. Loans are a comparable type of
responsibility for firms, regardless of whether they are linked to property, equipment
or anything else. Many more operational examples, including accounts payable,
employee payroll, income taxes and interest payments, are available.

In the books of accounts, the loan taken from the Bank of Baroda, shall be treated as liability
and hence, it will be shown on the liability side of the balance sheet. The short-term loans
shall be shown under the current liability of balance sheet. The loan taken will increase the
cash account on the asset side of the balance sheet and hence balancing the balance sheet.
The cash shall be shown under the current asset on the asset side of the balance sheet. The
loan amount is not treated as an expense, only the interest part in a loan payment. The
principle paid is a reduction in the "loans paid" by a firm and is recorded on the Cash Flow
Statement by administration as a cash outflow.

CONCLUSION:
We can thus conclude that the credit accounts are liable. A company might owe the bank's
money or even another company at any point in its history. The "Claims of Loan" shows the
exact amount of money your debtors ow. If you're the company which lends the money. This
is not about paying the money, but just the amount to be paid. A debit on capital accounts
shows that a business does not owe so much to its owners (i.e., reduces the firm's capital), but
a loan for a capital account shows the company owes more to its owners (i.e. raises the
capital of the company).

3. Take Britannia Industries Ltd as a case. In the context of its financial statements and
annual report answer the following

a. It’s a largely acceptable practice among the corporate entities to pay dividend to its
shareholders. Take Britannia Industries Ltd as a case. Discuss and differentiate the
types of dividend the company paid for the financial year 2020-2021. Also, mention your
understanding about what could be the accounting treatment of Dividend in the books
of Britannia Industries Ltd. (5 Marks) – 400 Words

INTRODUCTION:

A dividend may be described as a reward by publicly listed companies to its shareholders and
the company's net profit. These incentives might be in cash, currency, stocks, etc. and are
typically paid out of the remainder of the profit once considerable expenditures have been
met. The dividend rate will be determined on by the management board of a company that
also includes majority shareholders' consent.

CONCEPT AND APPLICATION:

Types of Dividends:

1. Special dividends: The common stock pays for the dividend. It is often offered in a
certain context, when over numerous years a company has generated large profits.
Most of these earnings are believed to be over cash not to be spent at or in the
foreseeable future.
2. Preferred Dividends: The dividend is distributed to preferred shareholders and is
usually a fixed quarterly amount. This kind of dividend is also earned on bond-like
shares.
3. Cash dividends: Most companies prefer to provide a dividend in cash for their
shareholders. Such income is generally transmitted or extended by cheque
electronically.
4. Interim dividends: the shareholder's pay out must be a temporary dividend which has
been announced and paid prior to calculating a company's full-year profit. The holders
of a company's ordinary shares frequently get such dividends regularly or semi-
annually.

Treatment of Dividend:
Interim dividend as a final dividend should be presented on the debit side of the profit and
loss appropriation account. It is also indicated as an appropriation of profit as an interim
dividend on the profit & loss account negative side. If a final dividend is issued as an interim
dividend, such dividend is not modified unless specified in the resolution. Section 205(1) of
the Companies Act stipulates that any dividend that has arisen after depreciation has been
provided under the requirements of the sub-section for any financial year is to be declared
and paid out of the profits that it has received for that year.

When interim dividend is paid, the following entry is passed:

Interim Dividend A/c Dr.

To Bank A/c

At the time of preparation of Final Accounts, it is closed by passing the following entry:

Profit & Loss (Appropriation) Dr.

To Interim Dividend A/c

CONCLUSION:

When dividends are paid whether they are temporary or final, they are subtracted from the
balance sheet of the Reserve and Surplus. Because the dividend paid is an appropriation
either of our present earnings, or of our profit and loss balance, or of our free reserves. The
payment of the dividend is not considered as a cost.

b. Discuss and share your understanding on any three profitability ratios which you
feel relevant to assess the profitability of the company. (5 Marks) – 400 Words

INTRODUCTION:

Ratios on profitability quantify and assess the capacity of a firm to produce revenues over a
certain period of time. Since the profitability ratios reflect the financial success of the firm,
calculating its measurements helps business leaders to strategize and build action plans to
guide the company in the proper path. If ratios show that the performance of a firm is
reduced, a company owner can create and deploy strategies and budget cutbacks to raise and
boost profitability.

CONCEPT AND APPLICATION:

1. Margin Ratios: Margin ratios reflect the capacity of a firm to make profits from its
revenues. You deduct all business expenditures, including raw materials, labour,
overhead charges and so on, from your revenues and calculate the extent of the total
sales of your firm transformed into profits for that particular period.
  Net Profit Margin: All expenditures linked to sales of the firm are subtracted
from income from the net profit margin. This is the ratio of income earned by
the firm in a certain time after all costs, including taxes and interest.
 Gross Profit Margin: A firm's ratio of gross profit speaks about earnings made
by a corporation in a certain time following the sale of the cost of products.
The selling expenses and administrative charges of the product or service that
is sold include the cost of the items.
2. Return Ratio: o
 Return on Asset (ROA): The return of assets, as the name indicates, is the
overall profit generated by the firm compared to its total assets (i.e.,
equipment). It indicates how much the firm earns for every dollar of an asset it
possesses.
 Return on Equity (ROE): The equity return estimates the percentage of income
generated by the firm in relation to the equity or shares of its shareholder. The
ROE of an enterprise is usually the one where stock markets and analysts
decide to acquire stocks from a certain enterprise.
3. Cash Flow Ratios: The cash flow ratios measure the ability of a firm to convert its
sales in cash. Stable cash flow is essential in companies as it allows corporate
spending, including daily operational costs and debt repayment, to be maintained.
More money, the more debts, supplier, utilities and other expenditures the enterprise
can pay. The greater the cash flow ratio.

CONCLUSION:

Revenues of a firm are subject to seasonality from time to time. The measurement of your
profitability ratio is one approach to track your business success. You will ultimately track
the figures and discover what part of your company you need to enhance and take necessary
measures.