SMU BBA 4 BB0017 ASSIGNMENTS SOLVED

Bachelor of Business Administration-BBA Semester 4

BB0017 – Financial Reporting- 2 Credits

(Book ID: B0097)

Assignment Set- 1 (30 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q1. Which stakeholders require financial reports and why?

Classification of Users of Financial Statements

The various users of financial statements are classified and detailed as follows:

Users of Accounting Information

Accounting reports are designed to meet the common information needs of most decision makers. These decisions include when to buy, hold or sell the enterprise shares. It assesses the ability of the enterprise to pay its employees, determine distributable profits and regulate the activities of the enterprise. Investors and lenders are the most obvious users of accounting information.

a) Investors: Investors may be broadly classified as retail investors, high net worth individuals, Institutional investors both domestic and foreign. As chief provider of risk capital, investors are keen to know both the return from their investments and the associated risk. Potential investors need information to judge prospects for their investments.

b) Lenders: Banks, Financial Institutions and debenture holders are the main lenders and they need information about the financial stability of the borrower enterprise. They are interested in information that would enable them to determine whether their borrower has the capability to repay the loans along with the interest due on it. They also use the information for monitoring the financial condition of the borrowers. They may stipulate certain restrictions (known as covenants) such as upper limit on the total debt borrowed from all sources or ask for additional security etc. Short term lenders (trade creditors) who provide short term financial support need information to determine whether the amount owing to them will be paid when due and whether they should extend, maintain or restrict the flow of credit.

c) Regulators, Rating Agencies and Security Analyst: Investors and creditors seek the assistance of information specialist in assessing prospective returns. Equity analyst, bond analyst and credit rating agencies offer a wide range of information in the form of answering queries on television shows, providing trends in business newspapers on a particular stock, offer valuable information in seminars, discussion groups, meetings and interviews. Security analyst obtain valuable information including insider information by means of face-to-face meetings with the company officials, visit their premises and make constant enquiry using e-mails, teleconference and video conference. Firms build a good rapport with such type of information seekers to gain visibility in the market.

d) Management: Management needs information to review the firm’s short term solvency and long term solvency. It has to ensure effective utilization of its resources, profitability in terms of turnover and investment. It has to decide upon the course of action to be taken in future. Management may also be interested in acquiring other business which is undervalued. When managers receive a commission or bonus related to profit or other accounting measures, they have a natural interest in understanding how those numbers are computed. Further when faced with a hostile takeover attempt, they communicate additional financial information with a view to boosting the firm’s stock price.

e) Employees, Trade Union and Tax authorities: Employees are keen to know about the general health of the organization in terms of stability and profitability. Current employees have a natural interest in the financial condition of the firm as their compensation will depend on the financial performance of the firm. Potential employees may use financial information to find out the future prospects of the firm. Trade unions use financial reports for negotiating wage package, declaration of bonus and other benefits. Tax authorities need information to assess the tax liability of the firm.

f) Customers: Customers have an interest in the accounting information about the continuation of company especially when they have established a long term involvement with or are dependent on the company. For e.g. Car owners, buyers of white goods, electronic gadgets, depend on the manufacturer for warranty service support, continued supply of spare parts. The sales of Matiz car was badly affected due to the abrupt closure of Daewoo Motors.

g) Government and regulatory agencies: Government and the regulatory agencies require information to obtain timely and correct information, to regulate the activities of the enterprise if any. They seek information when tax laws need to be amended, to provide institutional support to the lagging industries. The regulatory agencies use financial reports to take action against the firm when appropriate returns are not filed in time or when the returns fails to provide true and fair position of the business or to take appropriate action against the firm when complaints / misappropriation are being lodged. Stock exchange has a legitimate interest in financial reports of publicly held enterprise to ensure efficient operation of capital market.

h) The Public: Every firm has a social responsibility. Firms depend on local economy to meet their varied needs. They may get patronage from local government in the form of capital subsidy, cheap land or tax sops in the form of tax holidays for certain period of time. Prosperity of the enterprise may lead to prosperity of the economy both directly and indirectly. Growth in software industry in Bangalore, Karnataka State, led to boom in housing sector, education sector, entertainment sector, travel sector and tourism sector in and around Bangalore. Published financial statement assist public by providing information about the trends and recent developments of the firm.

Brief List of Users of Financial Statements

1. Existing equity investors and lenders, to monitor their investments and to evaluate the performance of management.

2. Prospective equity investors and lenders, to decide whether or not to invest.

3. Investment analysts, money managers, and stockbrokers, to make buy/sell/hold recommendations to their clients.

4. Rating agencies (such as Moody's, Standard & Poor's, and Dun & Bradstreet), to assign credit ratings.

5. Major customers and suppliers, to evaluate the financial strength and staying power of the company as a dependable resource for their business.

6. Labour unions, to gauge how much of a pay increase a company is able to afford in upcoming labour negotiations.

7. Boards of directors, to review the performance of management.

8. Management to assess

9. Corporate raiders, to seek hidden value in companies with under priced stock.

10. Competitors, to benchmark their own financial results.

11. Potential competitors, to assess how profitable it may be to enter an industry.

12. Government agencies responsible for taxing, regulating, or investigating the company.

13. Politicians, lobbyists, issue groups, consumer advocates, environmentalists, think tanks, foundations, media reporters, and others who are supporting or opposing any particular public issue the company's actions affect.

14. Actual or potential joint venture partners, franchisors or franchisees, and other business interests who need to know about the company and its financial situation.

               

Q.2 Write a brief note on the ‘investment’ details required in the B/S.

Ans. “Balance Sheet shows the sources from which funds currently used to operate the business have been obtained (i.e. liabilities and owner’s equity) and the types of property and property rights, in which these funds are currently locked up (i.e. assets)”. Balance Sheet may be considered as a summarised sheet of balances remaining in the books of accounts, after the preparation of the Profit and Loss Account. Thus a Balance Sheet can be rightly called as a statement of position of an enterprise, as it indicates what the business owns and what it owes on a particular date. The things that the business owns are called “Assets” and the various sums of money that it owes are called ‘liabilities’ (including that of the owners).

The term ‘Balance Sheet’ comes from the fact that the total assets must be equal to total liabilities, they balance each other. The liabilities side shows the various sources from which money was made available for the assets and the assets side shows the way those funds were employed in the business.

As we have seen earlier, a balance sheet is so called because its two sides must always balance, i.e., the assets must be equal to the liabilities plus owner’s funds. This can be expressed in the form of an equation.

Assets = Liabilities + net Capital

Classification of Assets and Liabilities

The assets and liabilities are classified and listed under different heads in the Balance Sheet. Similar assets and similar equities or liabilities are grouped together on the basis of their nature and characteristics in order to make comparison of items within a group or category simpler.

Some of the more commonly used categories are as under:

Liabilities                                                          Assets

Proprietor’ Funds                                                   Fixed Assets

Long-term Liabilities                                               Current Assets

Current Liabilities                                                  Other Assets

Other Liabilities

Classification of Assets

1) Fixed Assets: Fixed Assets are called long-term assets. They do not flow through the cash cycle of business within one year or the normal operating cycle. They are major sources of revenue to the business. They do not vary day in and day out due to routine business transactions. They are intended for long-term use in the business. They are called “bundle of future services” or “Sunk Costs”.

The group of fixed assets consist of the following:

a) Land.

b) Buildings.

c) Plant and Machinery.

d) Transportation Equipment,

e) Furniture,

f) Other long-term Assets.

g) Intangible Assets such as patents, copyrights, goodwill, etc.

Classification of Fixed Assets

a) Tangible movable assets

b) Tangible immovable assets and

c) Intangible assets

a) Tangible movable assets are the assets which can be seen, touched and moved from one place to another place. Plant and machinery, furniture and fixtures, transportation equipment etc. are tangible movable assets.

b) Tangible immovable assets are the assets which can be seen and touched but cannot be moved from one place to another place. Such assets include land, buildings, mines, oil wells, etc.

c) Intangible assets are the assets which cannot be seen and touched. However, their existence can only be imagined such as patents, trademarks, copyrights, goodwill, etc. Their existence is very important for the business. Intangible assets have several characteristics.

           

Characteristics of an Intangible Asset

Intangible Asset

a) Enables business managers to attain the goals of profitability.

b) Is long term in nature, and whose benefit is available to the business for more than the current accounting period.

c) Has a determinable acquisition cost, except in the case of self generated assets.

d) Is used in conducting business activities, and

e) Provides certain rights or privileges to the business.

Fixed assets are presented in the Balance Sheet at cost or as “Gross block” less accumulated depreciation to date.

Gross Block less depreciation is called as net fixed assets or ‘Net Block’ of depreciable fixed assets.

2) Investments

Investments may be short-term and long-term. Short-term investments are marketable securities and they represent temporary investments of idle funds. These investments can be disposed off by the company at its own will at any time. Investments are shown at cost. Cost includes brokerage, fees and all other expenses incurred on acquisition of investments. However, the market value is shown by way of a note to Balance Sheet.

Long-term investments are held for long time. They are required to be held by the very nature of business. Here the intention of the investor is to retain the securities for a longer period of time. For example, a company engaged in generating electricity may be required to hold the bonds of the Electricity Board. These bonds are retained by the company so long as the company uses electric power.

           

3) Current Assets and Quick Assets

Current Assets: “Current Assets include cash, assets that are likely to become or converted into cash, or assets that are otherwise consumed in the normal process or within one year from the balance sheet date (or within the normal operating business cycle, if it is longer than one year) and the cash thus generated is available to pay current liabilities.”

Current assets are not intended for long-term use in business. Current assets represent employment of money by the company on a short-term basis. They are also called “Circulating Assets” as one item becomes another; they circulate within the group. For example, cash becomes raw material when material is purchased, material becomes finished goods, and finished goods become cash or debtors when sold and so on. Usually, the following assets are classified as current assets:

a) Cash balance,

b) Bank balance

c) Short term investments

d) Debtors

e) Inventory (Stock of Raw materials, semi-finished goods, finished goods, stores and spares)

f) Expenses paid in advance.

           

In fact, total current assets are known as ‘Gross Working Capital’. Current assets less current liabilities are known as ‘net working capital’.

Quick Assets: These assets are known as ‘near cash assets’. In other words, quick assets are those which can be converted into cash quickly. Therefore, they are also known as liquid assets. Cash and bank balances are the most liquid assets, Debtors and cash advances can be converted into cash at a short notice. Therefore, they are also regarded as quick assets. Marketable investments can be converted into cash, fall into the category of quick assets. Inventory does not fall in this category of quick assets, since it cannot be converted into cash quickly, as material is to be converted into saleable goods and then only they should be sold. If sale is on credit, there is a further delay in realization.

Quick assets are current assets less inventories and prepaid expenses.

 Nature of Current Assets

1. Cash on hand

‘Cash’ in the balance sheet includes coins, currency, cheques, pay orders, money on deposit in banks, postage stamps, stamp papers, etc.

2. Bank balances

As per the requirements of Indian Companies Act, 1956, bank balance has to be disclosed in the balance sheet as under:

Bank Balances:

a) With scheduled banks.

b) With others.

Bachelor of Business Administration-BBA Semester 4

BB0017 – Financial Reporting- 2 Credits

(Book ID: B0097)

Assignment Set- 2

Q.1 In the B/S what are the disclosures to be made in case of Loans and advances.

Ans. Disclosure Requirements of Schedule VI

Schedule VI, Part I of the Companies Act 1956 requires loans and advances to be classified and disclosed under the following sub-heads:

(1) Advances and loans to subsidiaries

(2) Advances and loans to partnership firms in which the company or any of its subsidiaries is a partner.

(3) Bills of exchange

(4) Advances recoverable in cash or kind or value to be received e.g. Rates, Taxes, Insurance etc.

(5) Balance with customs, port trust etc. (where payable on demand). Instructions in accordance with which the loans and advances be made out and spelled by way of side note in the Part I of Schedule VI are as under:

(a) Loans and Advances due from Directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively which any director is a partner or a director or a member to separately stated.

(b) Loans and Advances due from other companies under the same management with in the meaning of sub section (1B) of section 370 to be disclosed with the names of the companies.

(c) The maximum amount due by directors or other officers of the company at any time during the year to be shown by way of a note.

(d) The provisions to be shown under this head should not exceed the amount of debts stated to be considered doubtful or bad and any surplus of such provision if already created should be shown at every closing under Reserves and Surplus (in the liability side) under a separate sub head “Reserve for doubtful or bad debts”.

Q.2 What should be the disclosure requirement in case of ‘depreciation’ in the Profit and Loss Account of a company?

Ans. If you want disclosures strictly for depreciation alone, they'd be method (straight-line, reducing balance, etc), useful lives or depr rates, and amounts.

 Disclosure requirements for property, plant & equipment in general: For each class of property, plant, and equipment, disclose: [IAS 16.73]

 - basis for measuring carrying amount

 - depreciation method(s) used

 - useful lives or depreciation rates

 - gross carrying amount and accumulated depreciation and impairment losses

 - reconciliation of the carrying amount at the beginning and the end of the period, showing:

 -- additions

 -- disposals

 -- acquisitions through business combinations

 -- revaluation increases or decreases

 -- impairment losses

 -- Reversals of impairment losses

 -- Depreciation

 -- Net foreign exchange differences on translation

 -- Other movements

 Also disclose:

 - Restrictions on title

 - Expenditures to construct property, plant, and equipment during the period

 - Contractual commitments to acquire property, plant, and equipment

 - compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss.