Income Statement Issues - Assignment Example

The paper 'Income Statement Issues" is a good example of a finance and accounting assignment. Mark’s venture is successful as you can see from the income statements and balance sheets that the business has enough earning to repay its loans. At the same time, the business is making a profit, so the business is less likely to stick with unpaid expenses and bills. Furthermore, the primary goal for any business venture is profitability; without profit, a business will not be able to survive for a long time. Profitability is measured with expenses and income the companies generate. Income or revenue is money that the company generates from its business activities. From the income statement, the business made a profit.

Question 2

• Depreciation is a process by which a company records the loss in value of its fixed asset. At moment accountants don’t recognize price-level adjustments when preparing their accounts. It will mislead if there is a deviate from the principle cost because conjecture or opinions by accountants can take place. It should be argued that deprecation is not a matter of valuation as it is used to in cost allocation. Assets don’t depreciate in value on the basis of a decline in fair market value, but an asset is found to depreciate on systematic charges of expired costs against profits or revenues.
• All accounting methods have been created based on the assumption that a business venture will have a long working period. Acceptance of this assumption will give credibility to the historical principle which would provide limited usefulness if liquidation is assumed. If we assume some permanence to a business enterprise and that is used in amortization policies and depreciation is made appropriately and is justified. Therefore, it is incorrect to assume liquidation. It should be seen that only in a situation where liquidation appears imminent; the going concern assumption will not be applied.
• Yes! Depreciation will be included in income statement if the business makes a loss because income statement is used to display revenues that have been generated by the company and it is recognized for a specific period of time, while the expenses and costs that are charged against the revenues will include write-offs ( such as depreciation etc).

Questions 3

Particulars

DR

CR

Paid Rent

Rent Expenses

Office furniture

Advertising expenses

Commission expenses

Accrued commission expenses

Drawings

Vehicle expenses

Unearned

Earned

Paid Expenses

Insurance Expense

Interest Expenses

Accrued interest expenses

Depreciation expenses-building

Accrued depreciation expenses-building

Depreciation expenses-office furniture

Accrued depreciation expenses-furniture

660

1750

2000

750

350

720

960

360

400

660

1750

2000

750

350

720

960

360

400

Reconciliation A/c

Debit

Credit

Profit

Account receivable

Rent

Furniture

Commission expenses

Drawings

Uneared

Paid expenses

Interest expenses

Depreciation expenses-building

Depreciation expenses-office furniture

Profit

21300

1310

660

1750

2000

750

350

720

960

360

400

23,330

Rent expense

Advertising expenses

Accrued commission expenses

Vehicle expenses

Earned expenses

Accrued interest expenses

Accrued depreciation-furniture

Accumulated depreciation-building

660

1750

2000

750

350

960

360

400

30,560

30,560

Question 4

RELIANCE LTD CASH FLOW STATEMENT

FOR THE YEAR ENDED JUNE 30, 2014

Cash Flows from Operations:

Net Income5,887

Non-Cash Changes:

Depreciation expenses 5,400

Change in doubtful debts 250

Net Income Adjusted for Non-Cash Changes11,537

Change in Accounts Receivable (700)

Change in inventories (3,000)

Change in Account Payable 3,000

Net Cash Flow from Operating Activities12,237

Net share capital 6000

Net retained capital 10,810

Net Change in Cash 29,047

.Question 5

1a:

ROA = 

Annual Net Income

Average Total Assets

ROA=54,338/558,900= 0.097

1b. Return on Equity = Net Income/Shareholder's Equity

Where shareholder’s equity= total assets- total liabilities [558,900-310,500]=248,400

ROA=54,338/248,400=0.2187

2a.

For 2014profit margin=54,338/600,300=0.091

For 2013 profit margin=58,065/595,125=0.0975

2b.

For 2013341,550/574,425=0.595

For 2014310,500/558,900=0.556

2c.

Times Interest Earned= Earnings Before Interest and Taxes/ Interest Expense

For 2013[58,065+27,428+54,855]/27428= 5.117

For 2014 [54,338+23,805+46,161]/23,805=5.221

3.

a. Return on assets (ROA) ratio will tell an investor what earning have been generated from the invested assets or capital. The ROA figure will give an investor an idea of how effectively the company is converting the money it has to invest in net income. The higher the ROA number, the better, this shows the company will be earning more money on a small investment.