MGT401 VU Assignment No 2 Spring 2012 Solution

Financial Accounting II (MGT401)

Question # 01
Any information which is displayed in the financial statements is useful for many people which are called stakeholders of the companies. Following information of a company is available with us:
· Profitability Analysis
· Liquidity Analysis
· Past performance Report
· Leverage condition
· Taxation policies
· Provident fund and gratuity
Required: You are required to check the information placed above and tell about people to whom this information could be important and relevant. Here you are required to give answer in tabulated form. i.e.


Profitability Analysis( shareholders, banks/financial institutions/ new coming investors)
· Liquidity Analysis(banks/Financial Institutions, shareholders, Sundery Creditors)
· Past performance Report( Banks/Financial Institutions, New Coming Investors who want to invest any company
· Leverage condition(shareholders, Creditors, Banks) becasue leverage condition shows equity and logn term debts
· Taxation policies(Govt.)
· Provident fund and gratuity(Employees)

Question # 02
Mr. A (chief accountant) is preparing financial statements of ABC Corporation. The annual statements of the company are prepared at 31st December of every year. He has provided the following information for the year 2011. Accounts officer issued a cheque of Rs. 10,000 for the payment of the ‘Rent of office’ on 30th December, 2011. As the payment is not made from the bank in the same financial year i.e., up
till 31st December, 2011. Accountant has recorded this information on 1st January, 2012 in the books of the company.
· Company is suffering losses from last three years and its investors suggests that company should be closed down as it is not able to cover its losses but management believe that if they do so it will be violation of an underlying assumption.
Required: You, as a finance specialization student, are required to tell us which underlying assumptions are violated in both cases.
Information category Relevant party(ies)


First Part is violated Accrual basis assumption because accounts office issued cheque on 30th December, 2011 but not made payment up till 31st December. in this case entry should be recorded on same financial year but not recorded and accountant record it 1st January, 2012 so it violation of Accrual basis assumption.
2nd part is violation of Going Concern Assumption

Question # 03
Required: You have been provided financial statements of X. Corporation. From these statements, you have to check that which major four qualitative characteristics are required to be fulfilled in order to make the financial information useful?
Balance sheet Rs.(000)
Authorized capital 1,250,000
(125,000,000 ordinary shares of Rs 10 each)
Issued, subscribed and paid-up capital 721,629
Unappropriated profit 4,043,176
Hedging reserve 13,062
Long term murabaha 422,500
Deferred taxation 636,870
Trade and other payables 856,330
Accrued markup 8,914
Taxation 70,320
Current maturity of long term murabaha 200,000
Total liabilities & Equity 6,972,801
Fixed assets 4,143,534
Long-term investment 4,500
Long-term loans and advances 19,438
Long-term deposits 42,980
Stores, spares and loose tools 599,605
Stock-in-trade 613,934
Trade debts – considered good 46,485
Loans and advances 26,208
Short-term deposits and prepayments 12,362
Accrued interest 7,676
Other receivables 26,988
Investments 557,265
Cash and bank balances 871,826
Total Assets 6,972,801
Profit and Loss Account Rs. (000)
Net sales 8,510,071
Cost of sales 5,801,099
Gross profit 2,708,972
Distribution cost -437,194
Administrative expenses -182,420
Other operating expenses -147,402
Other operating income 166,533
Operating profit 2,108,489
Finance cost -119,763
Profit before taxation 1,988,726
Taxation -495,775
Profit after taxation 1,492,951
Other comprehensive income
Fair value (loss) / gain on interest rate –
swap under cash flow hedge 12,134
Total comprehensive income 1,505,085