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Learning English-Lesson Ten ( Saying Sorry )

Learning English -- Lesson Nine ( F A M E )

ANALYSIS AND INTERPRETATION

ANALYSIS AND INTERPRETATION

1. What is the other name of Gross Profit Ratio?
Gross profit as a percentage of Turnover.

2. What is the formula to find out the GP%?
GP x 100
Sales

3. What would be the reason for the increase in GP%? Give 2 reasons.
(a) Selling goods, at higher prices.
(b) Buying the goods at cheaper prices.


4. What would be the reason for decrease in the GP%? Give 2 reasons.
(a) Selling goods at higher prices.
(b) Offering Trade discounts.
(c) Not passing on increase prices.
(d) Holding seasonal sales.

5. What is the formula to find out NP Ratio?
NP x 100;
Sales

6. What is the other name of NP Ratio?
NP as a % of sales
7. What is meant by liquidity?
It is the ability of the business to convert its assets into cash.

8. What is meant by working capital?
It is the money required to meet its every day expenses.

9. What does current Ratio measure?
It measures the ability of the business to meet its current liability as they fall due.

10. What is the standard current Ratio for a business?
Somewhere between 1.5 – 2:1.

11. What are the effects of not having enough working capital?
(i) Problems in meeting debts as they fall due.
(ii) Inability to take advantage of cash discount.
(iii) Difficulty in obtaining further supplies.
(iv) Inability to take advantage of business opportunity as they arise.

12. Quote 5 ways of improving working capital.
(i) Introduction of further capital.
(ii) Obtaining long-term loan.
(iii) Reducing owners drawings.
(iv) Selling out useless fixed assets.

13. What is the other name of Quick ratio?
Acid test Ratio

14. What is the formula to find out Quick Ratio?
CA – stock
CL

15. What is the standard quick ratio?
1:1

16. What is the formula to calculate stock turnover ratio?
Cost of goods sold
Average stock

17. In what way knowing the rate of stock turnover will be useful to the businessmen.

(i) For stock replacement.
(ii) For comparison.
(iii) For corrective action.
(iv) For identifying causes of changes.

18. What are the other names of debtors ratios?
Debtors Ratio/ Sales Ratio.


19. Give 4 ways of improving the collection period from debtors.
(i) Offer cash discount.
(ii) Charge interest on over dues.
(iii) Refuse further supplies.
(iv) Send regular reminder.


20. Give four ways of reducing the risk of bad debts.
(i) Obtain reference from new customers.
(ii) Fix a limit for each credit customer.
(iii) Follow up over dues promptly.
(iv) Refuse further supplies until old dues are paid.

21. Give two problem of inter-firm comparison.
1. All businesses are not same in all sense.
2. Different businesses follow different accounting policies.
3. One business may not be of the same size like the other.
4. Location of the business may not be at the same place.
5. They might have started at different dates.

22. Give four users of accounting information.
1. owner.
2. bank manager
3. business manager.
4. creditor






23. What are the limitations of ratio analysis?
Answer:
Accounting statements and ratio analysis provide valuable information about the business’s performance but it’s important to remember, however that they do have limitations. The comparison with other firms or previous years should be undertaken with caution for the following reasons:
(i) Difference in the type of stock which affects the rate of stock turnover and the gross profit margin.
(ii) Difference in the firm’s policy because some firms are selling on cash and on credit terms. Others do not use the same policy.
(iii) Difference in experience because some firms may not operate profitably in their early years of trading but this should not necessarily be the case expected in future years.
(iv) Difference in management: Because small firms such as a sole trader are not expected to use an efficient managers as well as large firms.
(v) Difference in location: because income and tastes and perhaps government policies may vary from one area to another, which will affect the performance of the firm.
(vi) Different accounting periods: because different firms are not expected to start their trading activities at the same date.
(vii) Difference in capital employed because some firms may have enough capital employed to finance purchases of premises and machinery while others do not and forced to pay more expenses.
(viii) Difference in accounting policies such as the application of the accounting concepts and methods of depreciation

CORRECTION OF ERRORS

CORRECTION OF ERRORS

Effect of Errors on Profit or Loss

Some errors affect the profit while others do not. This distinction does not always coincide with whether or not the trial balance balances.

Errors affecting Profit or Loss

These errors affect those accounts which are included in the Trading and Profit and Loss Account eg purchases, sales, expenses etc. We must ask the following questions:

1) Does the error affect the gross profit, the net profit or both?
(a) Errors which affect items that go into the trading account affect gross profit and net profit to the same extent and in the same direction. Such items are sales, purchases, returns, stock, carriage inwards etc.
(b) Errors which affect items that are entered in the profit and loss section of the account, i.e. operating expenses, affect only net profit. Purchases of fixed assets affect profit only indirectly through provisions for depreciation.

2) In what direction is profit affected?
(a) If sales are overstated or purchases understated, both gross profit and net profit are too high and must be reduced by the relevant amount. The same applies if sales returns are understated or purchases returns overstated.
(b) If sales are understated or purchases overstated, both gross profit and net profit are too low and must be increased by the relevant amount. The same applies if sales returns are overstated or purchases returns understated.
(c) If miscellaneous receipts are overstated or if expenses are understated, gross profit is not affected but net profit will be high and must be reduced.
(d) If miscellaneous receipts are understated or if expenses are overstated, again gross profit is not affected but net profit is too low and must be increased.
(e) If capital expenditure is wrongly treated as revenue expenditure, eg if the purchase of a fixed asset is treated as an expense, then net profit will be too low and must be increased. The opposite applies if revenue expenditure is treated as capital expenditure.
3) Does the errors that affect items in the balance sheet affect profit as well? The answer is only those that were adjusted after the trial balance was prepared. Errors affecting fixed assets, current assets and liabilities do not normally affect profit but if one of these items has changed as a result of an adjustment, then profit is affected. For example:
(a) If the closing stock has been overvalued, the stock figure in the balance sheet is too high and so are the gross profit and the net profit. The opposite is true of a closing stock which is undervalued. Remember that closing stock adds on to gross profit and opening stock takes away from it.
(b) If an accrued or prepaid expense is the wrong amount, both profit and the item in the balance sheet are wrong. If an amount owing is overstated or a prepayment is understated, profit is too low and must be increased, and vice versa.
(c) The opposite to (b) applies in the case of accrued or prepaid receipts.

Estimating the effects of errors can be confusing and you must keep a clear mind. Think how the original figure has affected profit and then try to see in which direction the error is affecting the profit.

CONCEPTS OF ACCOUNTING

CONCEPTS OF ACCOUNTING

These are the basic assumptions or rules to be followed while recording and presenting accounting information.

1. Business Entity Concept: This concept explains that the business is distinct from the proprietor. Thus, the transactions of business only are to be recorded in the books of business.

2. Duality Concept: According to this concept every transaction has two aspects i.e. the benefit receiving aspect and benefit giving aspect. These two aspects are to be recorded in the books of accounts.

3. Money Measurement Concept: According to this concept only those transactions which are expressed in money terms are to be recorded in accounting books.

4. Going Concern Concept: This concept assumes that the business has a perpetual succession or continued existence.

5. Realisation Concept: This concept speaks about recording of only those transactions which are actually realised. For example Sale or Profit on sales will be taken into account only when money is realised i.e. either cash is received or legal ownership is transferred.

6. Matching Concept: It is referred to as matching of expenses against incomes. It means that all incomes and expenses relating to the financial period to which the accounts relate should be taken in to account without regard to the date of receipts or payment.

7. Consistency Concept: This Concept says that the Accounting practices should not change or must remain unchanged over a period of several years.

8. Prudence Concept: According to this concept all the losses incurred or expected to be incurred are to be taken in to account but not all anticipated profits to be taken into consideration while finding the profit. Similarly while finding the value of closing stock, least of the two values i.e. Market price or Cost price is to be taken into account.
“Lower of the cost or net realisable value”.

DEPRECIATION

DEPRECIATION

“Depreciation is the gradual and permanent decrease in the value of an asset from any cause.”

Causes Of Depreciation:

2. Some Assets get worn or torn out due to its constant use in production.
3. Some Assets get decreased in their value with the passage of time.
4. Some Assets may meet an accident and therefore it may get depreciated in its value.

Reasons For Providing Depreciation:

1. To reveal the correct profit or loss of a business.
2. To show correct financial position of a business.
3. To make provision for replacement of an asset.

Methods Of Providing Depreciation:

There are three methods of providing depreciation

1. Straight Line Method: This is also termed as Fixed instalment method. Under this method Fixed Percentage on original cost is written off the asset every year. The amount of depreciation is calculated as follows.





2. Reducing Balance Method: This method is also known as Diminishing balance method or written down value method. Under this method depreciation is charged at a fixed rate on the reduced balance every year.

3. Revaluation Method: Sometimes it is not possible to maintain detailed records of certain types of fixed Assets, such as very small items of equipment packing cases and hand tools. In such case the revaluation method is used. under this method the assets are revalued at the end of each year and this value is compared with the value at the beginning of the period. The difference is treated as depreciation.

Formula = Value of Assets beginning + Purchases of Assets during the period –
value of Asset at the end.

Provision For Depreciation: It means saving a part of profit for the replacement of the Asset.

Prudence Concept: According to this concept all the losses incurred or expected to be incurred are to be taken in to account but not all anticipated profits to be taken into consideration while finding the profit. To apply this concept that we take depreciation in the profit and loss account.