Account 3 Marks Question

Investors: They can assess the short-term and long-term financial soundness and earning capacity of the business with the help of financial statements. They can also study the trend of sales, trend of profits, shortcomings and the prospects of future growth of the enterprise.

In the Order of Liquidity:
Current Assets:

• Cash in Hand
• Cash at Bank
• Bills Receivable
• Short Term Investments
• Sundry Debtors/ Book Debts
• Closing Stock
• Prepaid Expenses
• Accrued Income

Long Term Investments
Non-Current Assets:-

• Furniture
• Loose Tools
• Motor Vehicle
• Plant and Machinery
• Land and Buildings
• Patents and Trade Marks
• Goodwill

Indirect expenses are those expenses that are incurred to operate a business as a whole or a segment of a business, and so cannot be directly associated with a cost object, such as a product, service, or customer. A cost object is any item for which you are separately measuring costs. Examples of indirect expenses are:

1. Accounting, audit, and legal fees.
2. Business permits.
3. Office expenses.
4. Rent.

Operating Profit: Operating Profit is the profit earned through normal operating activities of the business. It is arrived at by deducting the operating expenses from gross profit. Expenses which are related to the main or normal activities of the business are called operating expenses. They include office and administrative expenses and selling and distribution expenses, discount, bad-debts etc. Operating Profit is also called 'Earning. Before Interest & Tax or EBIT'.

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses - Closing Stock

Cost of Goods Sold = 40,000 + 50,000 + 10,000 - 15,000 = ₹ 85,000

Contingent Liabilities: These are the liabilities which will become payable 1 only on the happening of some specific event, otherwise not. The best example would be amount to be paid as compensation to some party if the company in question loses a certain case in court (ex-case related to extra payments to labourers). In this situation, two things may happen:

1. If the company loses the case, it will have to pay the compensation.
2. If it wins, no compensation will be paid,

Thus since the amount cannot be treated with certainty as liabilities (the compensation amount), it will be shown as contingent liabilities as a footnote in the balance sheet.

Cost of Good Sold = Net Sales - Gross Profit
= 15,000 - 6,000
= ₹ 9,000
Cost of Good Sold = OPening Stock + Net Purchase + Direct Expenses - Closing Stock
9,000 = 5,000 + (10,000 - 900) + 1,000 - Closing Stock
Closing Stock = 15,100 - 9,000
= ₹ 6,100

Operating Profit = Net Profit − Non-Operating Income + Non-Operating Expenses Non-Operating Income = Dividend Received + Rent Received = 6,000 + 24,000 = 30,000 Non-Operating Expenses = Loss on Sale of Furniture + Loss by Fire + Interest on Loan + Donation = 12,000 + 50,000 + 10,000 + 5,100 = ₹ 77,100 ∴ Operating Profit = 5,00,000 − 30,000 + 77,100 = ₹ 5,47,100 Note: Salary being an operating expense was already taken into account while determining net profit, thus, it will be ignored now.

Assets in the order of Permanence:

1. Goodwill.
2. Land and Building.
3. Plant and Machinery.
4. Motor Vehicle.
5. Loose Tools.
6. Furniture.
7. Investment (Long-term).
8. Stock.
9. Sundry Debtors.
10. Marketable Securities (Short-term).
11. Cash at Bank.
12. Cash in Hand.

As adjusted purchases is given, it means opening and closing stock are already adjusted. So, these two stocks will not be considered while calculating Gross Profit.

Cost Of Gold Sold = Net Sales + Gross Loss
= (3,60,000 - 5,000) + 20,000
= ₹ 3,75,000
Cost of Good Sold = Opening Stock + Net Purchase + Direct Expenses - Closing Stock
3,75,000 = 38,000 + (3,40,000 - 4,000) + 26,000 - Closing Stock
Closing Stock = 4,00,000 - 3,75,000
= ₹ 25,000

Note: Closing Stock will not be shown on the Credit side of Trading Account since it has already been adjusted while calculating adjusted purchases.
Adjusted Purchases = Opening Stock + Net Purchases - Closing Stock

6. Cash in hand

9. Cash at bank

2. Bills Receivable

7. Short-term Investments

1. Debtors

4. Closing Stock

5. Prepaid insurance

8. Loose Tools

10. Plant

3. Goodwill

1. Current Assets: Current Assets are those which are either in the form of cash or can be easily converted into cash within one year of the date of Balance Sheet. In the words of Hovard & Upton:

'The Current Assets are usually defined as those assets which are convertible into cash through the normal course of business within a short time ordinarily in a year.'

Current Assets include Cash, Bills Receivable, Short Term Investments, Debtors, Prepaid Expenses, Accrued Income, Closing Stock etc. While valuing these assets, Closing Stock is valued at cost or realisable value whichever is less and a reasonable provision for doubtful debts is deducted out of Sundry Debtors.

2. Non-Current Assets: Non-Current Assets are those which are acquired for continuous use and last for many years such as Land and Building, Plant and Machinery, Motor Vehicles, Furniture etc. According to Finney and Miller:

“Non-Current Assets are assets of a relatively permanent nature used in the operations of business and not intended for sale”.

As the purpose of keeping such assets is not to sell but use them, changes in their market values are ignored and these are always shown in the Balance Sheet at cost less depreciation.