Financial Accounting and Analysis d8ppwmlHeunH
Financial Accounting and Analysis d8ppwmlHeunH
Financial Accounting and Analysis d8ppwmlHeunH
Answer 1:
Analysis of the given accounting transactions using the accounting equation framework:
Answer 2:
The five terms commonly used by the different users of accounting information for the sake of
understanding the financial statements are:
1. Asset:
Assets are economic resources controlled by an entity whose cost (or fair value) at the
time of acquisition could be objectively measured. Assets are resources with economic
value which companies expect to provide future benefits. These can reduce expenses,
generate cash flow or improve sales for businesses. Types of assets include fixed, current,
liquid and prepaid expenses. Assets may include long-term resources like buildings and
equipment. An asset can be cash or something that can be converted into cash (e.g.
accounts receivable), goods that are expected to be sold and cash received from them and
items that are to be used in the future activities that will generate cash flows. Current
assets include all assets a company expects to use or sell within one year. Liquid assets
can easily convert to cash in a short time-frame. In general, you can turn a current asset
into cash or cash equivalents quickly, whereas fixed assets are meant to be held for the
long term. Prepaid expenses include advance payments for goods or services a company
will use in the future.
For example, land and building, furniture and fixtures, plant and machinery, inventories,
creditors, debtors and cash balances are all considered as assets. Assets can also be
intangible such as copyrights and trademarks.
2. Liability:
3. Capital:
Capital is a broad term that can describe anything that confers value or benefit to its
owner, such as a factory and its machinery, intellectual property like patents, or the
financial assets of a business or an individual. While money itself may be construed as
capital is, capital is more often associated with cash that is being put to work for
productive or investment purposes.
In general, capital is a critical component of running a business from day to day and
financing its future growth. Business capital may derive from the operations of the
business or be raised from debt or equity financing. When budgeting, businesses of all
kinds typically focus on three types of capital: working capital, equity capital, and debt
capital. A business in the financial industry identifies trading capital as a fourth
component. Changes in capital/owners’ equity occurs when, owners either invest in or
withdraw cash or other assets from the business.
Any financial asset that is being used may be capital. The contents of a bank account, the
proceeds of a sale of stock shares, or the proceeds of a bond issue all are examples. The
proceeds of a business' current operations go onto its balance sheet as capital.
4. Expense:
All costs incurred by an entity are not expenses. An expertise is that cost which relates to
the operations of an accounting period (e.g. rent) or to the revenue earned during the
period (cost of goods sold) or the benefits of which do not extend beyond that period.
Expenses, thus, have a relation with the accounting period and represent that part of the
cost of an asset or services that is consumed during the accounting period. Expenses in
accounting are the money spent or costs incurred by a business in an effort to generate
revenue. Hence, expenses in accounting are the cost of doing business, including a sum
of all the activities that will hopefully generate profit for you.
For example, a businessman dealing in televisions buys 1,000 television set at a cost of
₹20 million during an accounting year. This amount of ₹20 million is a cost as it
represents the amount of resource (cash) used. During this accounting period, the
businessman sells only 800 televisions. The cost of 800 televisions, that is, ₹16 million is
the expense of that accounting year as it represents the cost that corresponds to the
revenue earned during the year from the sale of 800 televisions.
5. Revenue:
Revenue is also referred to as sales revenue. Revenue is the amount of gross income
gained through sales of items, products, or services. An easy way to calculate revenue is
by multiplying the number of sales and the sales price or average service price. Revenue
is the total earnings that your business generates through its operations, such as the sale
of service or products, rent on the property, interest on borrowings, etc. Revenue is the
value of all sales of goods and services recognized by a company in a period. Revenue
(also referred to as Sales or Income) forms the beginning of a company’s income
statement and is often considered the “Top Line” of a business. Expenses are deducted
from a company’s revenue to arrive at its Profit or Net Income.
For example, cookie seller's revenue is generated through the sale of cookies; hairdressers
earn their revenue by providing services, and banks generate their revenue in the form of
interest on the loans to borrowers. Your company's revenue is reported on the first line of
your income statement. It is usually described as sales or service revenues. Hence,
revenue is the amount that is earned from clients and customers before subtracting your
current expenses.
Answer 3a:
= 70 – 40 + 580= 610
Credit Purchases = Creditor’s Closing Balance + Cash Paid - Opening Creditor Balance
= 100 + 45– 60 = 85
Payment to Creditor
= Cost of Goods Sold + Increase in Inventory - Increase in Accounts Payable
580 + 30 - 40 = 570
Answer 3b:
Net book value is the amount at which an organization records an asset in its accounting
records. Net book value is calculated as the original cost of an asset, minus any
accumulated depreciation, accumulated depletion, accumulated amortization, and
accumulated impairment. Given these deductions, net book value represents an
accounting methodology for the gradual reduction in the recorded cost of a fixed asset. It
does not necessarily equal the market price of a fixed asset at any point in time.
Nonetheless, it is one of several measures that can be used to derive a valuation for a
business.
Accumulated depreciation is the total amount an asset has been depreciated up until a
single point. Each period, the depreciation expense recorded in that period is added to the
beginning accumulated depreciation balance. An asset's carrying value on the balance
sheet is the difference between its historical cost and accumulated depreciation. At the
end of an asset's useful life, its carrying value on the balance sheet will match its salvage
value. Accumulated depreciation is the sum of all recorded depreciation on an asset to a
specific date. Accumulated depreciation is presented on the balance sheet just below the
related capital asset line.
Therefore, the cash proceeds from sale of investment is 370 (in lacs).