Course Code:21ODMBT612 UID: D21MBA12387

Section - A

1.Name any two financial statements of the company.

Ans:
Any two financial statements of the company are -

(1) balance sheet : The term balance sheet refers to a financial statement that reports a company's
assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for
computing rates of return for investors and evaluating a company's capital structure. In short, the
balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as
well as the amount invested by shareholders.1 Balance sheets can be used with other important
financial statements to conduct fundamental analysis or calculating financial ratios.

(2) income statements: An income statement is a financial statement that shows you the company's
income and expenditures. It also shows whether a company is making profit or loss for a given period.
The income statement, along with balance sheet and cash flow statement, helps you understand the
financial health of your business.

2.List any two uses of analyzing financial statement.

Ans: They are-

1) Based on the material used :

(a) External analysis – This analysis is performed by people who are not directly
associated with the firm and don’t have right to access the in-house accounting records of the
company.
b) Internal analysis – This analysis is conducted by people who have permission to
handle the in-house accounting records of a firm.
2) Based on modus operandi :
(a) Horizontal analysis – This refers to the evaluation of finance related data of a firm for
many years. The figures in this type of analysis are reflected horizontally across many
columns.
(b) Vertical analysis – This indicates the study of the connection of the different items
reflecting in the financial statements in an accounting period.

3.Discuss the provisions given in AS-6 on Depreciation.

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Ans:
There are certain expenses/losses which are related to the current accounting
period but amount of which is not known with certainty because they are not
yet incurred. It is necessary to make provision for such items for ascertaining
true net profit. For example, a trader who sells on credit basis knows that
some of the debtors of the current period would default and would not pay or
would pay only partially. It is necessary to take into account such an expected
loss while calculating true and fair profit/loss according to the principle of
Prudence or Conservatism. Therefore, the trader creates a Provision for Doubtful
Debts to take care of expected loss at the time of realisation from debtors. In
a similar way, Provision for repairs and renewals may also be created to provide
for expected repair and renewal of the fixed assets. Examples of provisions are :
• Provision for depreciation;
• Provision for bad and doubtful debts;
• Provision for taxation;
• Provision for discount on debtors; and
• Provision for repairs and renewals.

4.Discuss the advantages and disadvantages of FIFO method of inventory valuation.

Ans:

Advantages of FIFO method : FIFO method saves money and time in calculating the exact
cost of the inventory being sold because the cost will depend upon the most former cash flows of
purchases to be used first.

Disadvantages of FIFO method : One of the biggest disadvantage of FIFO approach of

valuation for inventory/stock is that in the times of inflation it results in higher profits, due to which
higher “Tax Liabilities” incur. It can result in increased cash out flows in relation to tax charges.

5.What is deferred tax asset and deferred tax liability?

Ans:

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Deferred Tax Asset : A deferred tax asset is an item on a company's balance sheet that reduces its
taxable income in the future.Such a line item asset can be found when a business overpays its taxes.
This money will eventually be returned to the business in the form of tax relief.

Deferred Tax Liability : A deferred tax liability is a listing on a company's balance sheet that
records taxes that are owed but are not due to be paid until a future date.The liability is deferred due to
a difference in timing between when the tax was accrued and when it is due to be paid. For example, it
might reflect a taxable transaction such as an installment sale that took place one a certain date but the
taxes will not be due until a later date.

6.Explain the factors influencing choice of inventory methods.

Ans:
Financial Factors. Factors such as the cost of borrowing money to stock enough inventory can
greatly influence inventory management. ...
Suppliers. Suppliers can have a huge influence on inventory control. ...
Lead Time. Lead time is the amount of time that passes from the start of a process until its conclusion.
Companies review lead time in manufacturing, supply chain management, and project management
during pre-processing, processing, and post-processing stages.
Product Type. A product type is a template of settings and attributes that you create for a specific set of
products.
Management. Management is a process of planning, decision making, organizing, leading, motivation
and controlling the human resources, financial, physical, and information resources of an organization
to reach its goals efficiently and effectively.
External Factors. political ,economic ,social ,technological.

7.What are comparative statements?

Ans:
A comparative statement is a document used to compare a particular financial statement with
prior period statements. Previous financials are presented alongside the latest figures in side-by-side
columns, enabling investors to identify trends, track a company’s progress and compare it with industry
rivals.
Comparative statements can also be used to compare different companies, assuming that they follow
the same accounting principles. For example, they can show how different businesses operating in the
same industry react to market conditions. Reporting just the latest dollar amounts makes it hard to
compare the performances of companies of various sizes. Adding prior period figures, complete with
percentage changes, helps to eliminate this problem.

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8.What is horizontal analysis of financial statement?

Ans:
Horizontal analysis is used in financial statement analysis to compare historical data, such as
ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute
comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as
a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is
also known as base-year analysis.
Horizontal analysis is used in the review of a company's financial statements over multiple periods.
It is usually depicted as percentage growth over the same line item in the base year.
Horizontal analysis allows financial statement users to easily spot trends and growth patterns.
Horizontal analysis shows a company's growth and financial position versus competitors.
Horizontal analysis can be manipulated to make the current period look better if specific historical
periods of poor performance are chosen as a comparison.

9. What are operating expenses?

Ans:
An operating expense is an expense a business incurs through its normal business operations.
Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing,
payroll, insurance, step costs, and funds allocated for research and development.

KEY TAKEAWAYS
An operating expense is an expense a business incurs through its normal business operations.
Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing,
payroll, insurance, step costs, and funds allocated for research and development.
The Internal Revenue Service (IRS) allows businesses to deduct operating expenses if the business
operates to earn profits.1
By contrast, a non-operating expense is an expense incurred by a business that is unrelated to the
business's core operations.

10.What is ratio analysis?

Ans:
Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational
efficiency, and profitability by studying its financial statements such as the balance sheet and income
statement. Ratio analysis is a cornerstone of fundamental equity analysis.

KEY TAKEAWAYS
Ratio analysis compares line-item data from a company's financial statements to reveal insights
regarding profitability, liquidity, operational efficiency, and solvency.
Ratio analysis can mark how a company is performing over time, while comparing a company to
another within the same industry or sector.

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While ratios offer useful insight into a company, they should be paired with other metrics, to obtain a
broader picture of a company's financial health.

Section –B

1. Explain the meaning of the term ‘valuation.’ What are the objectives associated with valuation
of assets?
Ans:
Meaning
Valuation means finding out the correct value of the assets on a particular date. It is an act of
determining the value of assets and critical examination of these values based on normally accepted
accounting standards. Valuation of assets is to be made by the authorized officer and the auditor must
see whether they have been properly valued or not. For ensuring the proper valuation, the auditor
should obtain the certificates of professionals, approved values, and other competent persons. Valuation
is the primary duty of company officials. The auditor can rely upon the valuation of the concerned
officer but it must be clearly stated in the report because an auditor is not a technical person. Without
valuation, verification of assets is not possible.

If the valuation of assets is not correct, both the financial statements such as the Balance Sheet and
Profit and Loss Account cannot be accurate. Hence, the auditor must take utmost care while valuing the
assets to show an accurate and fair view of the state of affairs of the financial position of the concern.

Objectives of Valuation
1. To assess the correct financial position of the concern.

2. To enquire about the mode of investment of the capital of the concern.

3. To assess the goodwill of the concern.

1. To evaluate the differences in the value of the asset as on the date of purchase and on the
date of Balance Sheet.

3.Explain the procedures and justification for using the following (a) methods of revenue
recognition. and (b) Percentage-completion method.

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Ans:
Steps of revenue recognition:
1. Identify the contract with a customer. The guidance applies to each contract a company
has with a customer, assuming the contract meets certain criteria. In some cases, the company should
combine contracts and account for them as a single contract.

2. Identify the company’s performance obligations under the contract. If a contract contains obligations
to transfer more than one good or service to a customer, the company can account for each as a
separate performance obligation only if the good or service is distinct or a series of distinct goods or
services that are substantially the same.

A good or service is “distinct” if a) the customer can benefit from the good or service on its own or
together with other resources that are readily available to the customer, and b) the company’s promise
to transfer the good or service is separately identifiable from other promises in the contract.

3. Determine the transaction price. The company must determine the amount it expects to be entitled to
in exchange for transferring promised goods or services to a customer. The new rules list several
factors the company should consider, including the effects of any variable payment or significant
financing components.

4. Allocate the transaction price to the performance obligations in the contract. The company will
typically allocate the transaction price to each performance obligation based on the relative “standalone
selling price” of each distinct good or service promised in the contract. Any discounts or variable
payments that relate entirely to one of the performance obligations should be allocated to that
obligation.

5. Recognize revenue when (or as) performance obligations are satisfied. The company must recognize
revenue when it satisfies a performance obligation by transferring the promised good or service to a
customer — that is, when the customer obtains control of the good or service. The amount recognized
is the amount allocated to the performance obligation.

Justification:

The most important reason to follow the revenue recognition standard is that it ensures
that your books show what your profit and loss margin is like in real-time. It's important to maintain
credibility for your finances. Financial reporting helps keep your transactions aligned.

Ways to calculate percentage of completion

The percentage of completion is determined in one of three ways:

Cost-to-cost method
The cost-to-cost method compares the total expected costs of a project to the costs incurred to date. To
determine the percentage of completion, divide current costs by total costs and multiply by 100. For

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instance, if a project's total costs are expected to be $5 million, and the current costs incurred are $2
million, you can divide $2 million by $5 million and multiply by 100. The percentage of completion is
40%.

Efforts-expended method
The efforts-expended method compares the total estimated effort with the effort expended to date. The
units used to calculate effort expended may be labor hours, machine hours or amount of materials. The
calculation to determine the percentage of completion is the same: divide current effort by total effort
and multiply by 100. For example, if a contractor estimates a project will take 25,000 labor hours, and,
to-date, labor hours are at 16,000, you can divide 16,000 by 25,000 and multiply by 100 to determine
the project is at 64% completion.

Units-of-delivery method
The units-of-delivery method can be used when a project depends on deliveries of specific units. For
example, a contractor may be hired to build a 200-home development. The percentage of completion
can be determined by comparing the total number of homes (200) to the number of homes finished to
date. If the contractor has built 80 homes, the percentage of completion is 40%, or 80 divided by 200,
then multiplied by 100.

justification
This percentage of completion method recognizes revenue and income related to long-term projects.
The justification relies on the matching principle in accounting, where revenues and expenses are
matched in the applicable accounting period.

For example, if you’re handling a long-term construction project, the percentage of completion method
will help you identify the revenues and gross profit in the applicable periods of constructions, and not
solely in the period when the construction is over.

The two conditions for using this method are:

The contract specifies the rights regarding goods and services to be provided
The buyer and seller are expected to perform or satisfy all the contractual obligations.

5.Explain various types of analysis.

Ans:
Data Analysis can be separated and organized into 6 types, arranged with an increasing order
of difficulty.
Descriptive Analysis.

Exploratory Analysis.
Imagine your wolf pack decides to watch a movie you haven’t heard of.There is absolutely no
debate about that,it will lead to a state where you find yourself puzzled with lot of questions which
needs to be answered in order to make a decision.Being a good chieftain the first question you would

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ask, what is the cast and crew of the movie?As a regular practice,you would also watch the trailer of the
movie on YouTube.Furthermore,you’d find out ratings and reviews the movie has received from the
audience.
Whatever investigating measures you would take before finally buying popcorn for your clan in
theater,is nothing but what data scientists in their lingo call ‘Exploratory Data Analysis’.
It is a good practice to understand the data first and try to gather as many insights from it. EDA is all
about making sense of data in hand,before getting them dirty with it.

Inferential Analysis. Imagine your wolf pack decides to watch a movie you haven’t heard of.There is
absolutely no debate about that,it will lead to a state where you find yourself puzzled with lot of
questions which needs to be answered in order to make a decision.Being a good chieftain the first
question you would ask, what is the cast and crew of the movie?As a regular practice,you would also
watch the trailer of the movie on YouTube.Furthermore,you’d find out ratings and reviews the movie
has received from the audience.
Whatever investigating measures you would take before finally buying popcorn for your clan in
theater,is nothing but what data scientists in their lingo call ‘Exploratory Data Analysis’.

Predictive Analysis. With inferential statistics, you are trying to reach conclusions that extend beyond
the immediate data alone. For instance, we use inferential statistics to try to infer from the sample data
what the population might think. Or, we use inferential statistics to make judgments of the probability
that an observed difference between groups is a dependable one or one that might have happened by
chance in this study. Thus, we use inferential statistics to make inferences from our data to more
general conditions; we use descriptive statistics simply to describe what’s going on in our data.
Here, I concentrate on inferential statistics that are useful in experimental and quasi-experimental
research design or in program outcome evaluation. Perhaps one of the simplest inferential test is used
when you want to compare the average performance of two groups on a single measure to see if there is
a difference. You might want to know whether eighth-grade boys and girls differ in math test scores or
whether a program group differs on the outcome measure from a control group. Whenever you wish to
compare the average performance between two groups you should consider the t-test for differences
between groups.
Most of the major inferential statistics come from a general family of statistical models known as
the General Linear Model. This includes the t-test, Analysis of Variance (ANOVA), Analysis of
Covariance (ANCOVA), regression analysis, and many of the multivariate methods like factor analysis,
multidimensional scaling, cluster analysis, discriminant function analysis, and so on. Given the
importance of the General Linear Model, it’s a good idea for any serious social researcher to become
familiar with its workings. The discussion of the General Linear Model here is very elementary and
only considers the simplest straight-line model.

Causal Analysis. The term predictive analytics refers to the use of statistics and modeling techniques
to make predictions about future outcomes and performance. Predictive analytics looks at current and
historical data patterns to determine if those patterns are likely to emerge again. This allows businesses

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and investors to adjust where they use their resources to take advantage of possible future events.
Predictive analysis can also be used to improve operational efficiencies and reduce risk.

Mechanistic Analysis. it is for measuring the exact changes in variables that lead to other changes in
other variables.

6.What does too high or too low ‘Trade Receivables Turnover Ratio’ indicate?

Ans:

The receivables turnover ratio is an accounting measure used to quantify a company's

effectiveness in collecting its accounts receivable, or the money owed by customers or clients. This
ratio measures how well a company uses and manages the credit it extends to customers and how
quickly that short-term debt is collected or is paid. A firm that is efficient at collecting on its payments
due will have a higher accounts receivable turnover ratio.

It is useful to compare a firm's ratio with that of its peers in the same industry to gauge whether it is on
par with its competitors.

KEY TAKEAWAYS
The accounts receivable turnover ratio is an accounting measure used to quantify a company's
effectiveness in collecting its receivables or money owed by clients.
A high receivables turnover ratio may indicate that a company’s collection of accounts receivable is
efficient and that the company has a high proportion of quality customers that pay their debts quickly.
A low receivables turnover ratio could be the result of inefficient collection, inadequate credit policies,
or customers who are not financially viable or creditworthy.
A company’s receivables turnover ratio should be monitored and tracked to any trends or patterns.

Formula and Calculation of the Receivables Turnover Ratio

Accounts Receivable Turnover = Net Credit Sales/ Average Accounts Receivable
​
1.Add the value of accounts receivable at the beginning of the desired period to the value at the
end of the period and divide the sum by two. The result is the denominator in the formula (average
accounts receivable).
2.Divide the value of net credit sales (the revenue generated from credit sales minus any returns
from customers) for the period by the average accounts receivable during the same period.

Receivables Turnover Ratio:

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Companies that maintain accounts receivables are indirectly extending interest-free loans to their clients
since accounts receivable is money owed without interest. If a company generates a sale to a client, it
could extend terms of 30 or 60 days, meaning the client has 30 to 60 days to pay for the product.

The receivables turnover ratio measures the efficiency with which a company collects on its receivables
or the credit it extends to customers. The ratio also measures how many times a company's receivables
are converted to cash in a period. The receivables turnover ratio is calculated on an annual, quarterly, or
monthly basis.

A company’s receivables turnover ratio should be monitored and tracked to determine if a trend or
pattern is developing over time. Also, companies can track and correlate the collection of receivables to
earnings to measure the impact the company’s credit practices have on profitability.

For investors, it's important to compare the accounts receivable turnover of multiple companies within
the same industry to get a sense of the normal or average turnover ratio for that sector. If one company
has a much higher receivables turnover ratio than the other, it may be a safer investment.

High Receivables Turnover

A high receivables turnover ratio can indicate that a company’s collection of accounts receivable is
efficient and the company has a high proportion of quality customers that pay their debts quickly. A
high receivables turnover ratio might also indicate that a company operates on a cash basis.

A high ratio can also suggest that a company is conservative when it comes to extending credit to its
customers. Conservative credit policy can be beneficial since it could help the company avoid
extending credit to customers who may not be able to pay on time.

On the other hand, if a company’s credit policy is too conservative, it might drive away potential
customers. These customers may then do business with competitors who will extend them credit. If a
company is losing clients or suffering slow growth, they might be better off loosening their credit
policy to improve sales, even though it might lead to a lower accounts receivable turnover ratio.

Low Accounts Turnover

A low receivables turnover ratio might be due to an inadequate collection process, bad credit policies,
or customers that are not financially viable or creditworthy.

Typically, a low turnover ratio implies that the company should reassess its credit policies to ensure the
timely collection of its receivables. However, if a company with a low ratio improves its collection
process, it might lead to an influx of cash from collecting on old credit or receivables.

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7.Prepare a format of ‘Cash Flow Statement’ under Indirect Method.

Ans:
The discussion on the indirect method of preparing the statement of cash flows refers to the
line items in the following statement and the information previously given about the Brothers' Quintet,
Inc.

Operating activities :
Although the total cash provided by operating activities amount is the same whether the direct or
indirect method of preparing the statement of cash flows is used, the information is provided in a
different format.

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The indirect method assumes everything recorded as a revenue was a cash receipt and everything
recorded as an expense was a cash payment. Remember that under the accrual basis of accounting,
revenues and expenses are recorded following the revenue recognition and matching principles which
do not require cash receipts to record revenues or cash payments to record expenses. The operating
activities section starts with net income per the income statement and adjusts it to remove the
significant non‐cash items.
Significant non‐cash items on the income statement include depreciation and amortization expense and
gains and losses from the sales of assets or retirement of debt. As depreciation expense and
amortization expense are deducted in calculating net income (expenses are subtracted from revenues to
determine net income), and depreciation and amortization expense do not result in cash payments by
the company, depreciation expense and amortization expense are added back to net income.
Given the financial statements and information for the Brothers' Quintet, Inc., net income is $6,300.
Net income first needs to be adjusted by significant non‐cash items from the income statement:
depreciation expense and the loss on the sale of the equipment.

Next, net income is adjusted for the changes in most current asset, current liability, and income tax
accounts on the balance sheet. The accounts receivable balance decreased $663 from $19,230 to
$18,567. As cash is increased when cash is collected from customers, a decrease in the accounts
receivable balance represents an increase in cash. Therefore, the $663 is added back to net income. If
the accounts receivable balance increases, the amount of the increase is subtracted from net income, the
opposite of what happens when the balance decreases. The inventory balance increased $107. As
inventory is purchased, cash is assumed to be paid, so the $107 increase in the inventory balance is
subtracted from net income (a decrease in the inventory balance would be added to net income).
Similarly, the $142 increase in the prepaid expenses balance is also deducted from net income. The
accounts payable balance decreased $919. When cash is paid to a supplier for purchases previously
made on account, cash decreases. Thus, a decrease in the accounts payable balance represents a
decrease in cash and the $919 decrease is subtracted from net income.
An increase in the accounts payable, or any current liability account balance is added to net income.
The wages payable balance increased because a larger accrual was made to represent wages owed at
the end of 20X1 than 20X0. Accrued wages are owed but not paid at the end of the month. An increase

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in a current liability account balance means cash has not been paid and therefore, the $320 increase in
the wages payable balance is added to net income. The decrease in the accrued expenses balance of
$1,295 is subtracted from net income. Once all of the changes in the current asset, current liability, and
income tax accounts have been listed, the total cash provided by (used by) operating activities is
determined by totaling all of the activity. Notice the amounts of any decreases are in parentheses.

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