FIN621 Current Solved Subjective by Tahir Naveed

Q1. State and explain any five generally acceptable accounting principles. 5

I) Entity principle: specific business entity separate from personal affairs of the owner(s). ii) Cost principle: valuation and recording of assets at cost. iii) Going-concern assumption: connected with cost principle, assets acquired for use and not for resale. IV) Objectivity principle: definite, factual basis for assets valuation; measuring transactions objectively. v) Stable currency principle. The currency remains more or less stable and rate of inflation is almost zero. vi) Adequate disclosure concept: facts necessary for proper interpretation of statements; Subsequent events”, lawsuits against the business, assets pledged as securities/collaterals, contingent liabilities etc; reflected in Notes.

Q2. What is the effect of financial leverage on the earnings of the firm? When leverage is advantageous? 3

Leverage: It means operating a business with borrowed money. It should be used to earn a return (on assets or equity) greater than cost of borrowing i.e. interest. Alternate term for this is “Gearing”. This is opposite of Debt ratio. Low equity ratio indicates extensive use of leverage i.e. borrowings. With leverage the financial risk is high and possibility that company may not pay back money borrowed and has entered bankruptcy. Advantage of it was that company can not pay dividends and fewer shares in the profit of company. Debt financing can be done to avoid giving up shares of ownership of the company. Unofficial financing known as trade financing usually provides the major part of a company's working capital (day-to-day operational needs).

Q3. If u buy an inventory for 20,000 what’ll be effect on new working capital.

If company purchases inventory on cash current assets of company increase and on the

other hand cash is decrease. So there is no effect in working capital.

Q4. Why revenue a/c is credited & expense a/c debited? Give reason.

This is consistent with the rule that increases in owner’s equity are recorded by credits

and decreases are recorded by debits. So when company get revenue owner’s equity is

increased and has credit balance of revenue account and when company incur expenses

owner’s equity decreased and has debit balance of expense account.

Q5. Find quick assets & total current assets

Current asset are all the assets in organization including inventory and prepaid expanses.

Quick assets are those asses which were conveniently convertible into cash. Only cash,

marketable securities and Receivables (called Quick Assets) are considered

Q6. What is vertical & common size analysis? What is its usefulness? 3marks

Vertical Analysis

When using vertical analysis, the analyst calculates each item on a single financial statement as a percentage of a total. The term vertical analysis applies because each year's figures are listed vertically on a financial statement. The total used by the analyst on the income statement is net sales revenue, while on the balance sheet it is total assets. Common Size:

A company financial statement that displays all items as percentages of a common base figure. This type of financial statement allows for easy analysis between companies or between time periods of a company.

Q7. Differentiate between operating cycle & accounting cycle of a company. 3marks

1. Journalize Transactions
2. Post to Ledger Accounts
3. Prepare A Trial Balance
4. End of Period Adjustments
5. Prepare an Adjusted Trial Balance
6. Prepare financial statements
7. Journalize and Post Closing Entries
8. Prepare an After Closing Trial Balance

Q8. ( Marks: 5 )

Following is the balance sheet of the ABC Company.