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ACCOUNTING ENTRIES(3)
ACCOUNTING ENTRIES
1
...
For investing the money charged by way of depreciation;
DR: Depreciation Fund Investment a/c
CR: Bank a/c
...
At the end of last year, for the receipt of interest;
DR: P & L
CR: Depreciation
3
...
For the sale of Investment:DR: Bank
...
The pro t or loss on the sale of depreciation Fund investment will be transferred to
a depreciation Fund a/c
For the sale of old asset;
DR: Bank
CR: Assets
The balance on the depreciation Fund represents accumulated depreciation
...
The proceeds or the sales realized on the a/c of it sale and investment will be
utilized in the purchase of the new assets
...
1
...
It is estimated that the plant has the scrap value of
Tshs 16,000/= at the end of its useful life
...
decided to charge depreciation according to depreciation fund
method
...
a
...
180975
...
a produce
Tshs 1 at the end of 5 years
...
For sum
Tshs 65,000 A new plant was purchased for Tshs 120,000 on 1
...
The scrap of
the old plant realizes Tshs 17,000
...
Plant a/c
2
...
Depreciation plant a/c
4
...
1
...
12
...
1
...
12
...
1
...
12
...
1
...
12
...
1
...
1
...
12
...
DEPRECIATION AND INVESTMENT A/C CR
2005 Bank
15,202
31
...
2005 Balance c/d 15,202
1
...
2006 Balance b/d
15,202
Bank (15202+760)
15,962
31
...
2006 Balance c/d 31,164
31,164
31,164
1
...
2007 Balance b/d
31,164
Bank (15,202+1558 )
32,722
31
...
2007 Balance c/d 63,886
63,886
63,886
1
...
2008 Balance b/d
63,886
Bank (63886+2396)
66,282
31
...
2008 Balance c/d 130,168
130,168
130,168
1
...
2009 Balance b/d
130,168
Bank(130,168+3276)
133,444
31
...
2009 Balance c/d 263,612
263,612
263,612
1
...
2010 Balance b/d
263,612
DR DEPRECIATION FUND INVESTMENT A/C CR
2005 Bank
15,202
31
...
2005 Balance c/d
15,202
01
...
2006 Balance b/d
15,202
31
...
2006 Balance c/d
31,164
Bank (15202+760)
15,962
31,164
1
...
2007 Balance b/d
31,164
Bank (15202+1558)
16,760
31,164
31
...
2007 Balance c/d
47,924
1
...
2008 Balance b/d
47,924
Bank (15202 + 2396)
17,598
47,924
31
...
2008 Balance c/d
65,522
1
...
2009 Balance b/d
65,522
Bank
17,578
65,522
65,522
31
...
2009 Balance c/d
83,100
1
...
2010 Balance b/d
47,924
83,100
83,100
83,100
FINANCIAL STATEMENTS ANALYSIS AND INTERPRETATION
RATIO ANALYSIS
A ratio is one number expressed in terms of another number to show the
relationship between the numbers
...
This is Called percentage
...
Financial statements (trading pro t and loss A/C and balance sheet) are produced
not just for their own sake, but for the use to which they can be put by the various
parties interested in different aspects of these statements
...
The DIRECTORATE – interested in overall figure which show whether the company is
profitable and whether it is on a sound financial foo ng
...
In a manufacturing business, foremen may be concerned with me taken to complete a
job or material usage
...
Department and general managers are concerned about measurements rela ng to
ma ers falling within their individual responsibili es
...
Shareholders (actual and prospec vely are interested in their earnings (current &
future) out of which dividend can be paid, the security of dividend (dividend cover)
return on their investment (yield ) etc
...
External interested par es include loan creditors, for example debenture holders who
are concerned that the company is solvent and there is adequate cover for their
interest trade creditors (actual and prospec ve) who want to be assured that the
company is both solvent and liquid, that is it has adequate cash or cash conver ble
resources to metal current liabili es as they fall due to financial statement analysis
consists of applying any tools and techniques to financial statement (other relevant
data to obtain useful informa on)
...
The information shows the results or consequences of prior management decisions
...
In nancial statement analysis, it is drawn that there are certain important
relationships
...
CATEGORIES OF ACCOUNTING RATIOS
Normally classi ed according to the aspects of business they are designed to
highlight
...
Financial soundness and stability, short & long terms
...
Profitability and return on equity or assets
...
Capital structure and gearing measures
...
FINANCIAL SOUNDNESS AND STABILITY
These ratios measure the ability of the rm to meet its:
1
...
The current
ratio indicates the ability of a company to pay its current liability from current
assets
...
It is
calculated as:
Current ratio = (Current Assets)/(Current Liabilities)
...
N
...
But this is not conclusive evidence
...
Acid test / Quick Asset ratio
Current ratio assumes that current assets could be turned cash immediately
...
The acid test
ratio recognizes this limitation and excludes stocks and prepaid expenses on its
computation because they might not be readily convertible into cash
...
Debt service coverage ratio/ time interest came / interest coverage ratio
It measures the ability of a rm to service from operations this ratio is computed as
...
4
...
Gives an indication of the length of time it will take to repay borrowings out of pro t
of the business
...
Time preferred dividend earned ratio
This measure the ability of a company to make preferred dividend payments each
year
...
These ratios measure the rate of pro tability ratios
...
Ratios falling under this group are:1
...
The sales gure is VAT exclusive
...
It is given by:(Gross pro t )/Sales X 100
2
...
The sales gure is VAT exclusive
...
Return on capital employed (ROCE)
...
The net assets
by using the following alternative formula:-
gure is arrived at
Capital employed –
1
...
Total assets – current liabilities
It is given by the formula
Return on capital employed =
4
...
This ratio measures the ability of a rm in utilizing its total assets to generate
pro ts
It is given by the formula, Return by total assets = x 100
...
Return on owner’s equity
This ratio measures the return earned by the company on each shillings of
shareholders equity invested
...
ACTIVITY OR EFFICIENCY RATIOS
Various aspects of the ef ciency with which assets can be used, can be derived from
turn over ratios
The most important ones are;1
...
If the rate is too low or decreasing this may indicate over – stocking or presence of
obsolete merchandise
...
It is given as:
2
...
Amount receivable – debtor
...
It is given as:-
This ratio provides an indication of how quickly the receivable (debtors) are
collected
...
Debtors average collection period/ Average collection period for accounts
receivable
...
The
average length of time
...
To put the debtors average collection period in perspective credit period granted to
customers should not be out of line with the credit period granted by suppliers
...
This ratio indicates the
average period measured in terms of months, weeks or days for which creditors
remain unpaid
...
Total assets turn over / sales to total assets ratio
This ratio measures the ef ciency with which a company uses its assets to generate
sales
...
The larger the total asset turn over the larger will be the income on each
shilling invested in the assets of the business
...
Sales to capital employed ratio
It indicates the ef ciency of utilization of capital employed in generating revenue
...
CAPITAL STRUCTURE AND GEARING MEASURES
Under this category the following ratios can be looked as equity or longer solvency
ratios
...
It measure the
riskiness of business
...
Equity or stock holders equity ratio
It indicates the proportion of total assets, that is provided by stock holders (owners
) on any given date
...
Stock holders’ equity to debt ratio
...
It is given by:-
3
...
Gearing
xed liabilities (loans, debentures)
...
It indicates the degree of vulnerability of earnings available for ordinary shares
...
Some companies use ordinary share holder’s funds as denominator i
...
ordinary
share capital plus reserves and some use the book value of loans and shares
...
In practice
greater than 0
...
2:1 as low, with the range
between these two extremes being regarded as relatively high or relatively low
...
MARKET BASED RATIOS
These are additional ratios that can be computed when data from stock exchange
are incorporated
...
Dividend per share
Indicates the dividend and retention policy of the company when used in line with earnings
per share (below)
It is calculated as;
2
...
It is given by:-
It provides the investor with measure of the opportunity cost of his or her
investment in terms of yield
...
Dividend cover
It indicates the ability of a rm to sustain dividend payments out of its distributable
pro t
...
Earnings per share (EPS)
It indicates the amounts of the net pro t after tax (but before extra ordinary items)
attributable to each ordinary share in issue, and racing for dividend during the
period
...
B
...
And it presents the fund which
supports the distribution of pro t by the way of dividend to ordinary share holders
...
Price earnings ratio(P/E) ratio
It is usually used in establishing the market value of a company
...
It acts as the index of whether a stock is relatively
cheap or expensive based on ratio
...
Earning yield
It indicates potential return on investment
...
It is given by:-
LIMITATIONS OF RATIO ANALYSIS
In using ratios,the analyst must keep a few general limitations in mind
...
It lacks standard values for the ratio, therefore scienti c analysis is not possible
...
As there are no standard with to compare, it fails to throw light on the ef ciency of any
activity of the business
...
It gives only the relationship between different variables and the actual magnitudes are
not known through ratio
...
Ratio are derived from the nancial statement and naturally re ect their drawbacks
...
If fails to indicate immediately where the mistake or error lies
6
...
7
...
8
...
9
...
10
...
PROBLEM
The trading stock of Joan street, retailer, has been reduced during the year ended
31st march 2008 by Tshs 6000 from its commencing gure of Tshs 21000
...
Note:
Take the closing gure at 31st march 2008
...
L
36000 = 3C
...
L =12000
Debtors x 365 = 36 ½
Debtors x 365 = 36 ½
Sales 240,000
365 debtors = 36 ½x 240000
Debtors = 24,000
Trading and pro t & loss A/C for the year ended 31/3/2008
opening stock
21000
add: purchases
174000
cost of goods available or sale
less: closing stock
15000
cost of goods sold
180000
gross pro t c/d
60000
240,000
240,000
expenses
38400
net pro t
21600
60,000
60,000
sales
240,000
195000
gross pro t b/d
60,000
BALANCE SHEET AS AT 31 DECEMBER 2008
Capital
122,400
xed assets
Add; Net pro t
21600
144,000
15000
stock
current liabilities
bank
156,000
12000
108,000
current assets
debtors
24,000
9000
156,000
EXERCISE
The balance sheet and supplementary data for the KWABWANYENYE LTD
...
A 70,000
Inventory A
...
A 400,000
Less: accumulated depreciation 100,000 300,000
600,000
Liabilities and stock holders equity TSHS
Accounts payable C
...
L 10,000
Mortgage notes payable due in 2000 L
...
L 100,000
Common stock, Tshs 100 par value capture 300,000
Retained earnings reserve 120,000
Total liabilities and stock holders equity 600,000
Supplementary data:
1997 net income Tshs 60,000
1997 cost of goods sold Tshs
...
900,000
Inventory January 1, 1997 Tshs 100,000
Interest expenses Tshs 15000
1997 net income before interest and taxes Tshs 130,000
Net accounts receivable on January 1, 1997 Tshs 50,000
Total assets on January 1, 1997 Tshs 540,000
1997 divided paid Tshs 240,000
Current market price per share Tshs 150
Require: compute the following ratios:
Current ratio
Acid test ratio
Accounts receivable turn over
Inventory turn over
Total assets turn over
Equity ratio
EPs of common stock
P/E ratio
Dividend yield
Gearing
Earnings yield
Debtors days