Accountancy : Company Accounts and Analysis of Financial Statements 2007 CBSE [ All India ] Set I

Distinction between Shares and Debentures

a)     Ownership: A shareholder is an owner of the company whereas a debenture holder is only a creditor.

b)     Return: The return on share is known as dividend while the return on debenture is called interest. The rate of return on shares may vary from year to year depending upon the profits of the firm but the rate of interest on debentures is pre-fixed.

A preferential allotment is one that is made at a predetermined price to the preidentified people who are interested in taking a strategic stake in the company such as promoters, venture capitalists, financial institutions, buyers of companies products or its suppliers.

It refers to that amount which is stated in the memorandum of association as the share capital of the company. The company is registered with this amount of capital. This is the maximum limit of capital which the company is authorized to issue and beyond which the company cannot issue shares unless the capital clause in the memorandum is altered.

The factors that help in creation of goodwill of a firm are:

1. Time Factor: A company running from last 30years has more goodwill than the company which is established 1 year before.
2. Nature of Business: It also affects the goodwill. A monopolistic business has more goodwill.
3. Special commercial Advantage:  Long term contract for supply of raw material at a lower price
4. Location Advantage: If the company is centrally located then the value increases.

A Cash flow statement is a statement which describes the inflow(source) and outflow(uses) of cash and cash equivalents in an enterprise during a specified period of time. Such a statement describes net effects of the various business transactions on cash and its equivalents and takes into account receipts and disbursements of cash.A cash flow statements summarise the causes of changes in cash position of business enterprise between dates of two balance sheets.

Dividends received on investments represents an inflow of cash. Such inflow does not arises out of operating activity of own business but from investment made in other business. Hence, such flow falls under Investing activity but not under operating activity.

Interest on fixed capitals @ 10% per annum:

Jain = 1, 00,000 x 10/100 = Rs 10,000

Gupta = 1, 50,000 x 10/100 =Rs 15,000

As per  partnership agreement before  distribution of profits  in 3:2 ratios, interest on capitals has to be credited @ 10% to capital A/c ,which has not be treated.

Had it been adjusted, Gupta’s capital would have been credited Rs 5,000 more than Jain’s capital (that is 15,000-10,000 =5,000)

Adjustment entry for this error is ---

Jain’s Current A/c Dr. 5,000

            To Gupta current A/c           5,000

(i) Bank A/c         Dr. (105x100)              10,500

                To 7% debentures (Rs 100 x 100)                      10,000

                 To Debentures Premium A/c (Rs 5 x100)                  500

(Being the issue of 100 debentures at a premium of 5 % but repayable at par)

(ii)Bank A/c            Dr.                                 10,000

    Loss or Issue of debentures    Dr.                    500

               To 7% debentures A/c                                             10,000

                To Premium on redemption of debenture                          500

(Being the issue of debentures at par but redeemable at a premium of 10%)

(iii)Bank A/c                              Dr.        10,500                   

     Loss or Issue of debentures    Dr.              300       

               To 7% debentures A/c                                                  10,000

               To Premium on redemption of debenture A/c                           800

(Being the issue of debentures at premium of 5% but repayable at a premium of 8 %)

(i) Percentage of changes in sales

                   Percentage of change         = difference in sales / sales of 05  X 100

                                                          = 4,22,300 – 4,02,000 / 4,22,300 X 100

                                                          = 20,500 / 1,22,300 X 100 = 4.80%

Sales has been decreased by 4.80%

(ii) Percentage of change in cost of goods sold

Percentage of change = difference in cost of goods sold / Cost of goods sold 05 X 100

                                                           =        3,71,000 – 3,69,000 / 3,71,00 X 100

                                                           =        2000 / 3,71,000 X 100 = 5.390%

 Sales has been decreased by 5.390%

(i)  Percentage out Gross Profits

Percentage of changes in gross profit  = Difference in gross profit / gross profit 05 X 100

                                                     = 51,300-33,000 / 51,300 X 100

                                                     =  18,300 / 51,300 X 100 = 35.67%

Gross profit decreased by 35.67%

(i)                 Percentage of changes in Net Profit

Percentage of changes in Net Profit = Difference in net Profit / net profit 05 X 100

                                                     = 28,600 – 13,100 / 28,600 X 100

                                                     = 15,500 / 28,600 X 100 = 54.195%

Net Profit has been decreased by 54.195%

The limitation of financial statements :

i)  It is based upon only monetary information and non-monetary factors are ignored.

ii) It does not consider changes in price levels.

iii)           As the financial statements are prepared on the basis of a going concern, it does not give
exact position. This accounting concepts and conventions cause a serious limitation to financial analysis. 

iv) It is only a study of interim reports.