Unit: 1

Financial Accounting

The process of recording, compiling, and reporting the numerous transactions occurring
from corporate operations throughout time is known as financial accounting. It is a
particular branch of accounting. The preparation of financial statements, such as the
balance sheet, income statement, and cash flow statement, which document the
operating performance of the company over a given period, summarizes these
transactions. The first video of this course is all about a briefing on the course title itself.
The video focuses on the objectives of financial accounting, and its limitations as well as
describes slightly about bookkeeping and accounting along with cash basis and accrual

1.1 Meaning, Objectives, and Limitations

⋆ Meaning

Financial accounting is the branch of accounting that keeps the record of all the
monetary transactions. The process of recording, summarizing, and reporting the
business conclusion resulting from business operations over some time is called
financial accounting. Its main purpose is to provide enough operation for the
stakeholders to know the value of the company themselves.

⋆ Objectives

The following are the main objectives of Financial Accounting:

● Calculation of business profit and loss.

● Systematic recording of transactions.
● Ascertainment of the financial position of the business.
● Providing information to the users for rational decision-making.
● Valuation of assets, liabilities, and taxable amount of a company.
● Future forecasting and planning.

⋆ Limitations

Some limitations or disadvantages of financial accounting are as follows:

● It records and measures quantitative, not qualitative information about any
business or company.
● It emphasizes only historical data and information.
● It neglects the price level change of goods and services.
● It does not provide the cost of manufacturing the product.

1.2 Bookkeeping and Accounting

Bookkeeping is an act of recording financial transactions systematically and

scientifically. It keeps a record of the business in chronological order. Generally, there
are two types of bookkeeping: Single- Entry Bookkeeping systems and Double- Entry
Book Keeping systems.
On the other hand, accounting is a continuous process, which includes a series of
identifying, recording, classifying, summarizing, analyzing and interpreting, and
communicating financial transactions of the business.

Bookkeeping is a subset of accounting that is concerned with the recording of

transactions that are frequently routine and clerical, whereas accounting also performs
other functions, such as measurement and communication, in addition to recording. An
accountant must have a much higher level of knowledge, conceptual understanding,
and analytical skill than a bookkeeper.
An accountant creates the accounting system, supervises and audits the bookkeeper's
work, prepares reports based on the recorded data, and interprets the reports. He is
now expected to participate in matters of economic resource management, control, and
planning.

1.3 Cash Basis and Accrual Basis

⋆ Cash Basis

Under the basis of accounting for a business, the organization recognizes revenue
when cash is received and similarly the expenses when the cash is paid. This is the
simplest approach to recording financial transactions and is very popular among smaller
businesses. The cash basis of accounting has not been recognized by GAAP (
Generally Accepted Accounting Principles). In cash basis accounting there are
receivables and payables.

⋆ Accrual Basis
Under this basis of accounting, the business organization recognizes revenue when
earned and expenses when expenditures are consumed. This approach is wider and
more rational for the global market of the 21st century which requires a greater
knowledge of accounting. On an accrual basis, there are receivables and payables.

Unit: 2
Conceptual Framework of Accounting

2.1 Conceptual Framework of Accounting

Conceptual Framework of accounting is all about basic accounting concepts and

principles.The theory known as the accounting conceptual framework explains the
fundamental assumptions that underlie financial statements and financial reporting in
general.Creating a conceptual framework is important because it provides a framework
for establishing accounting standards, a foundation for resolving accounting disputes,
and fundamental ideas that do not need to be repeated in accounting standards.

The following are the concepts/principles:

1) Business Entity Concept

In accounting, we distinguish between the business and the owner. All books of
accounts record day-to-day financial transactions from the perspective of the business
rather than the owner. The proprietor is considered a creditor up to the amount of capital
he brought into the business. For example, if a person invests Rs. 10 lakh in a business,
the business will be treated as having borrowed that amount of money from the owner,
and it will be recorded as a 'liability' in the business's books of accounts.

2) Money measurement concept

Accounting records only business transactions that can be expressed in monetary

terms. In other words, a fact, transaction, or occurrence that cannot be expressed in
monetary terms is not recorded in the accounting books. Money has a significant
advantage over other assets and equities in that it can be measured and expressed in
terms of a common denominator because it is accepted not only as a medium of
exchange but also as a store of value.

3) Accounting period concept

This concept requires that the business's life be divided into appropriate segments to
study the financial results displayed by the enterprise after each segment. Although the
results of a specific enterprise's operations can be known precisely only after the
business has ceased operations, its assets have been sold, and liabilities have been
paid off, knowledge of the results is also required regularly. In the case of Nepal, the
fiscal year starts at 1 Shrawan ( July 16) and ends at 1 Ashad ( July 15).

4) Dual aspect concept

All financial transactions and events are recorded in financial accounting. Each of these
transactions necessitates the recording of two aspects. A dual aspect analysis is the
recognition of these two aspects of every transaction. Every business transaction has a
dual effect, according to this concept. For example, if a company sells goods worth Rs.
10,000, the transaction has two components. The first is the delivery of goods, and the
second is the immediate receipt of cash (in the case of cash sales). In fact, the term
"double entry" bookkeeping has gained popularity because each transaction requires
two entries. The total amount debited always equals the total amount credited under this
system.

5) Matching concept

The accounting period concept serves as the foundation for this concept. In reality,
during the accounting periods, we match revenues and expenses. Matching refers to
the entire process of measuring periodic earnings, which is often described as a
process of matching expenses with revenues.
In other words, the enterprise's income can only be measured when the revenue earned
during a period is compared to the expenditure incurred to earn that revenue.

6) Cost concept

The term 'assets' refers to a company's resources, such as land, buildings, and
machinery. The cost concept is used to calculate the monetary values assigned to
assets. According to this concept, an asset is normally recorded on the accounting
books at the cost of acquisition. For example, if a company purchases a plant for Rs. 6
lakh, the asset is recorded in the books at Rs. 6 lakh, even if its market value at the time
is Rs. 3 lakh. Thus, assets are recorded at their original purchase price, and this cost
serves as the foundation for all subsequent business accounting.

Unit: 3
Accounting Process

3.1 Subsidiary Books Meaning and Types, Debit Note and Credit Note,
Difference between Trade Discount and Cash Discount

Subsidiary Books Meaning and Types, Debit Note, and Credit Note

Subsidiary books are special-purpose accounting books that sequentially record

transactions belonging to the same category in a specific book. Furthermore, the
transactions are recorded in their original form, i.e. as and when they occur, they are
entered in the subsidiary book before posting them anywhere, which is why it is also
known as the book of original entry. Subsidiary books are books in which credit
business transactions are recorded in future references.

The following are the types of Subsidiary Books:

1) Purchase Book

This book is used to keep track of all credit purchases of goods made by the company
during the accounting period. Purchase invoices serve as the foundation for recording
transactions in the purchase book. It is always recorded on the debit side.

2)Sales Book

This book records all of the credit sales of goods made by the firm during the
accounting period. Sales invoices serve as the foundation for recording sales
transactions. It is always recorded on the credit side.
Purchase Return Book

It keeps track of the returns of goods made by the firm to its suppliers. When the goods
are returned to the supplier, the firm (debtor or buyer) issues a debit note to the supplier
(creditor or seller). The debit note serves as the foundation for entering transactions into
the purchase return book. It is always recorded on the credit side.

Sales Return Book

This book, also known as the return inward book, keeps track of goods returned by
customers and sold by the firm. When a customer returns goods to the firm, the firm
issues a credit note to the customer (buyer or debtor) (creditor or seller). These notes
serve as the foundation for documenting the transaction in the sales return book. It is
always recorded on the debit side.

⋆ Trade Discount and Cash Discount

Typically, a trade discount is allowed on the list price of the goods. It may be permitted
by the producer to the wholesaler and by the wholesaler to the retailer for the purchase
of large quantities of goods. It is not recorded in the books of account, and only the net
amount paid or received is entered.
A cash discount is a capitulation made by the seller to the buyer in order to encourage
him to make an early cash payment. It is a fictitious account. The person who allows a
discount treats it as an expense and debits it in his books; this is known as a discount
allowed, and the person who receives a discount treats it as an income and credits it in
his books as a "Discount Received Account."

3.2 Numerical Problem for Accounting Equations

Before starting with the numerical one must get familiar with the terms assets, capital,
and liabilities.
● Assets: The economic resources of the business organization that facilitate the
organization to generate revenue are called assets. They increase when a
company makes a purchase or receives something. While it decreases when
they sell an asset or make a payment.

● Capital: The running fuel of a company economically is termed capital. It

increases when there is an income or gain and decreases if the company faces a
loss or expenses.

● Liabilities: The obligations of the business which are to be satisfied by the

business are called liabilities. The liabilities of the company increase with the
increase in payables and decrease along with payables.

We have,
Assets = Capital +Liabilities
Hence, the video is entirely based on the numerical problems based on accounting
equations and the given formulae.

3.3 Numerical Problem for Subsidiary Book

Subsidiary books are actually original entry books. They are also called special journals
or day books. In subsidiary books, we record transactions of a similar sort. They assist
in getting around the drawbacks of journal books or journal entries.This video entirely
depicts the formulae related to subsidiary books and the mathematical problems
associated with it.

3.4 Numerical Problem for Triple Column Cash Book

The above video is a complete numerical video related to the triple column cash book. A
triple-column cash book, sometimes known as a three-column cash book, has three
money columns: one for recording discount, cash, and bank amounts on each side of
the debit and credit sides.

A three-column cash book is preferable to a single or double-column cash book if a

business regularly receives and makes payments through that bank account.

3.5 Numerical Problem for Journal Entries, T-Account, and Trial

Balance

The following video or topic: Journal Entries, T-Account, and Trial Balance and
numerically based on them carries 15 marks for the exam, so, considered one of the
important topics of accounting. The book of original entries is another name for the
journal. The journal entries are what they are called: journal entries. A trial balance is a
list of all the accounts and their respective balances for a business. Each business
account has what is known as a normal balance since it belongs to one of the three
main categories of asset, liability, or owner's equity. A collection of financial records that
employ double-entry accounting are referred to informally as T-accounts.

Unit: 4
Accrual Basis of Accounting

4.1 Numerical Problem for Opening Entry, Closing Entry, Adjustment

Entries

The title of the video itself portrays the intention of the video. This video covers the
mathematically solved problems for opening entry, closing entry, and adjustment entries.
The first transaction that is documented or carried over from a prior accounting period to
the current accounting period is referred to as the opening entry.

A journal entry that is made at the end of the accounting period is a closing entry. It
entails transferring information from floating accounts on the income statement to
floating accounts on the balance sheet.
Adjusting entries are modifications to previously written entries in your diary.
4.2 Numerical Problems for Adjustment Entries and Adjusted Trial
Balance

Adjustment entries are already discussed in the previous videos.The new topic for this
video is adjusted trial balance which means a sequence of journal entries that are
intended to account for any transactions that have not yet been completed are created
in order to create an adjusted trial balance. Payroll costs, prepayment costs, and
depreciation costs are some of these expenses.The numerical based on both
adjustment entries and adjusted trial balance are practiced in this video.

Unit: 5
Accounting for Inventories and Cost and Goals Sold

5.1 Meaning of Inventory, Cost of Goods Sold, Perpetual Inventory

System, and FIFO/LIFO with Numerical Problem

⋆ Meaning of Inventory

Inventory is the total amount of goods and materials combined in a store or factory at
any given time. Inventory items differ from organization to organization according to the
nature of the business. To a wholesaler or retailer, finished goods become ending
inventory. To a manufacturing concern, there may be different forms of inventories like
raw materials, work in progress, and finished goods. Inventory is one of the important
assets of a company.

⋆ Cost of Goods Sold (COGS)

COGS refers to the cost of those goods that are incurred in connection to making the
inventory items into sellable condition. COGS is a major expense item in the income
statement. It is a direct cost-involved income statement. It is a direct cost involved in the
production of a good.

⋆ Perpetual Inventory System

The perpetual inventory system is the system of record keeping of inventories as in
when the purchase and sales are made. With a perpetual inventory system, all
transactions are recorded to the inventory account as they happen. The account
balance reflects the inventory on hand at any moment. Perpetual means continuous and
this is a system where a business keeps continuous moment-to-moment records of the
number, value, and type of inventories that it has all the business.

FIFO: Under First In First Out (FIFO) the cost of goods sold is based upon the
cost of materials brought earliest in the period and the cost of materials bought
later in the year.

LIFO: Last In First Out (LIFO) is the cost of goods sold based upon the cost of
materials bought towards the end of the period.

Unit: 6
Accounting for Cash and Internal Control

6.1 Meaning of NSF Cheque, EFT, Deposit in Transit, and Petty Cash
Fund

This video covers the meaning of NSF Cheque, EFT, Deposit in Transit, and Petty Cash
Fund.All the theoretical parts are included here.A checking account that has inadequate
funds, often known as non-sufficient funds (NSF), cannot process any transactions.
NSF also refers to the charge made when a cheque is presented but not enough money
is available in the account to cover it.
A pooled investment security called an exchange-traded fund (EFT) functions very
similarly to a mutual fund.
Checks or other non-cash payments that a business receives and records in its
accounting system but that have not yet been cleared by its bank are referred to in
accounting as "deposits in transit."
Petty cash is a small number of discretionary funds in the form of cash that is used for
expenditures where it would be inconvenient and costly to make a disbursement by
cheque due to the inconvenience and cost of writing, signing, and then cashing the
cheque.

6.2 Bank Reconciliation Statement Format and Adjusting Entries

The topic included in this video is accountable for 5 marks questions for the exam.
A bank reconciliation statement is a declaration that lists discrepancies between the
general ledger and the bank statement. There may be a discrepancy between the
amount shown in the bank statement that the bank issues and the amount recorded in
the organization's accounting book that the Chartered Accountant maintains. Numerical
based on bank reconciliation statement format and adjusting entries are solved in the
given video.

6.3 Numerical Problem for Bank Reconciliation Statement

The cash balance on a company's balance sheet and the matching amount on its bank
statement are compared in a statement called a bank reconciliation statement. It is
possible to determine whether accounting changes are required by reconciling the two
accounts. To guarantee that the company's cash records are accurate, bank
reconciliations are done on a regular basis. They also aid in the detection of fraud and
money laundering. Given video focuses on the solution of numerical problems related to
the Bank Reconciliation Statement.
Unit: 7

Accounting for Receivables

7.1 Journal Entries of Receivables and Numerical Problems

This video entirely focuses on the numerical problems related to journal entries of
receivables. The sum that the business is owed by the client for the sale of its products
or services is known as account receivable. The accounts receivable account is debited
and the sales account is then credited to record the credit sales of goods and services.

Unit: 8
Accounting for Current Liabilities and Contingencies

8.1 Accounting for current Liabilities & contingencies

In accounting, for a corporation, both current and contingent liabilities are crucial
financial factors. A present responsibility is an amount you already owe, but a
contingent liability is an amount you might owe depending on the outcome of certain
events. This is the main distinction between the two. Therefore, the following video is
responsible for a theory question of 2 marks and one numerical of 2 marks.
Current Liabilities are liabilities that have a short maturity period of less than one
accounting period.
A contingent liability is a potential liability. It depends on the outcome of an uncertain
future event. The liability is not an actual or confirmed obligation.

Some of the journal entries are as follows:

1. Notes Payable Received

Cash/Bank A/C……. Dr.

To Notes Payable A/C
( Being notes payable received)

2. Notes Payable Payment

Notes Payable A/C… Dr.

Interest A/C….. Dr.
To cash A/C
( Being payment of notes payable)

The differences between Accounts Payable and Notes Payable are as follows:

Accounts Payable Notes Payable

Account Payable is an informal and Notes Payable is a formal written

verbal agreement. agreement.

There is no specific term of account Notes payable must have a maturity

payable. period.

Account payable is a current liability. Notes payable ares long-term liabilities.

No interest is associated with the account The interest of a certain amount is

payable. associated explicitly or implicitly involved.

Unit: 9
Accounting for Long-Lived Assets

9.1 Meaning of Long-Lived Assets, Depreciation

Assets with a long lifespan, also known as non-current or long-term assets, are those
that are anticipated to generate income over the long term—generally more than a year.
Long-lasting assets might be material, immaterial, or financial in nature. During the
asset's anticipated useful life, depreciation is allocated in order to charge a fair
percentage of the depreciable amount in each accounting period. Amortization of assets
with predetermined useful lives is included in depreciation. Theoretical aspects of
depreciation and long-lived assets are compiled in this video thoroughly.
9.2 Numerical Problem for Straight Line Method of Depreciation

Previously, depreciation was focused but in this video, the center of focus is the
straight-line method of depreciation. The most popular and simple depreciation method
for dividing up the cost of a capital asset is straight-line depreciation. It is determined by
merely dividing the asset's cost, less its salvage value, by its usable life. The
mathematical problems related to depreciation using straight-line methods are solved in
the given video. The formula for calculating depreciation charge for each accounting
period is :

Amount of annual Depreciation = Original cost of fixed assets- Salvage Value

Estimated life in years

9.3 Numerical Problem for Diminishing Balance Method of

Depreciation

The video includes overall numerical calculations based on the diminishing balance
method of depreciation. Depreciation is calculated using the book value of the asset at
the beginning of the year rather than the principal amount and fixed percentage in the
declining balance approach. This has the same proportion, but the amount of
depreciation steadily declines because it is based on book value.

Depreciation rate= 200%

n

9.4 Numerical Problem for Annuity Method of Depreciation

The annuity method of depreciation is a technique used to determine the rate of

depreciation on an asset, precisely as if it were an investment. It is frequently applied to
assets with high initial costs, lengthy useful lives, and fixed (or at least consistent) rates
of return. All the vital, as well as basic math practice problems related to the annuity
method of depreciation, are solved in the following video.
9.5 Numerical Problem for Sinking Fund/ Depreciation Fund Method

As in the previous video, this video also accounts for numerical problems. The
depreciation fund method related to numerical is calculated in this video. The sinking
fund method is a technique for depreciating an asset while generating enough money to
replace it at the end of its useful life. As depreciation charges are incurred to reflect the
asset's falling value, a matching amount of cash is invested. These funds sit in a sinking
fund account and generate interest.

Unit: 10
Accounting for Long Term Liabilities

10.1 Journal Entries for Debenture or Bond and Numerical Problem

Numerical problems based on journal entries for debenture are performed here where
several journal entries are related to the issuance of debentures: Upon receiving the
application fee. The application money for the debentures is transferred to the
debentures account upon allocation.
Bond Payable is an unconditional promise where the borrower promises to pay a
specific sum along with stated interest at a specific period.

- Calculation of issue price of bond payable:

IP= I(PVIFAk%n years) +M( PVIF%years)

Where,
I= Coupon Interest/Cash Interest
k=Market interest years
M= Maturity Value
n= Maturity period.

Journal Entries For the issue of Bonds

1. At par value

Cash/Bank A/C…… Dr.

To Bond Payable A/C..
(Being bond payable)

2. At Discount

Cash/ Bank A/C…….Dr.

Discount on bond payable A/C….Dr.
To Bond PayableA/C
( Being bond payable issued at discount)

3. At premium

Cash/Bank A/C…..Dr.
To bond payable A/C
To premium on bond payable A/C
( Being bond payable issued at a premium)

Balance Sheet ( Partial)

Long Term Liabilities

Bonds payable…………………… *******

Less: Discount on bonds payable (******)

Add: Premium on bonds payable *******

Redemption of Bond

It is the process of returning back the maturity value of the bond by a company to the
investor. There might be gain or loss in the redemption of the bond.
- If carrying value (CV) > REdemption value(RV)=gain on redemption
- If CV<RV=Loss on redemption

Journal Entries
Bond Payable a/c dr…
Loss on redemption a/c dr….
Premium on bond payable a/c dr...
To discount on bond payable a/c
To gain on redemption a/c
To cash a/c
( To record redemption on bond payable)

Unit: 11
Accounting for Shareholder’s Equity

11.1 Meaning of Stock Dividend and Stock Splits, Shareholder’s

equity, the difference between Common Share and Preference Share
and related entries.

⋆ Stockholders Equity

Corporation is provided a stock certificate to the investors as evidence. This stock may
be common or preferred. Each stock certificate shows how many shares of ownership it
represents. The stockholder's equity of a company consists of two parts:
I. Share Capital
Ii. Retained Earnings

⋆ Components of the stockholder's Equity

1. Contributed Capital/ Capital Stock

This is the amount of stockholder equity the stockholder has contributed to the
corporation. Corporation received the capital amount from the sale of stock to the
stockholders.
2. Retained earnings
This is the amount of shareholder's equity the corporation has earned through profitable
operation and has not been distributed for dividends. It represents an important link
between the income statement and the balance sheet.

⋆ Types of stock

1) Common stock

a) They have voting rights in the Annual general meeting.

b) The rate of the dividend of common stock is not fixed. The holder of common
stock is common shareholders.
c) They can plan, organize and make decisions and take part in the
decision-making process.
d) They are allowed to claim residual income from the business.

2) Preferred Stock

a) They do not have voting rights in the Annual General Meeting.

b) The rate of dividend in preferred stock is fixed.
c) They cannot take part in making decisions.
d) They are not allowed to claim a residual income of the business.

⋆ Stock split
It is the technique of increasing and decreasing the number of shares by adjusting the
market value and the par value. A stock split does not affect the shareholders' equity.

11.2 Journal Entries for Cash Dividend and Stock Dividend and
Numerical Problem

In this video, mathematical problems based on journal entries for cash dividend and
stock dividend are carried out where retained earnings, a stockholders' equity account,
are debited in the journal entry to reflect the declaration of the cash dividends, while
Cash Dividends Payable is credited (a liability account).
When a tiny stock dividend is declared, the market value of the issued shares is moved
from retained earnings to paid-in capital by a journal entry. Large stock dividends occur
when the number of new shares issued exceeds 25% of the value of all shares
outstanding previous to the payout.

Dividend
Dividend is defined as the part of net income which is distributed to the shareholders. It
is simply the distribution of earnings to the common and preferred stockholders. The
dividend can be in different types:

1) Cash Dividend

The type of dividend under which the earnings are distributed to the shareholders as
cash.

The following journal entries are passed for cash dividends:

a. At the time of declaration of cash dividend:
Retained Earnings a/c Dr.
To cash dividend payable
( To record the declaration of cash dividend)

b. At the time of payment of cash dividend:

Cash dividend payable a/c dr.
To cash a/c
( To record payment of cash dividend)

2) Stock Dividend

Stock dividend is the type of dividend under which the new share or bonus shares are
issued to the shareholders as a dividend. It is the way of distributing earnings to the
shareholders in the form of additional shares. The following journal entries are passed
to record stock dividends.

a. At the time of declaration of stock dividend:

Retained Earnings a/c dr.
To stock dividend payable a/c
(To record declaration of stock dividend)
b. At the time of payment of stock dividend
Stock dividend Payable a/c dr.
To additional paid-in capital a/c
To common stock a/c
(To record payment of stock dividend)

Unit: 12
Basic Financial Statements

12.1 Format of Income Statement, Return Earning, Balance Sheet, and

Cash Flow Statement

This video elaborates the formatting of income statement step-wise and describes
return earning, balance sheet and cash flows statement. Here, return earning means
the amount of profit a business keeps after paying all of its direct and indirect expenses,
income taxes, and dividends to shareholders is known as retained profits. This is the
percentage of the company's equity that may be utilized, for example, to fund the
purchase of new machinery, research and development, and marketing.

12.2 Numerical Problem for Adjusted Trial balance, Income Statement,

Return Earning ,Balance Sheet and Cash Flow Statement

The title of the video itself covers the overview of the video. This video is all numerical
related to the income statement, return earning, balance sheet, cash flow statement,
adjusted trial balance, etc. Here, a cash flow statement is a type of financial statement
that gives total information on all of a company's cash inflows and outflows.

Unit: 13
Cash Flow Statement

13.1 Numerical Problem of Cash Flow Statement

This video consists of nothing but the mathematical problem based on the cash flow
statement of the course financial accounting and analysis.

Unit: 14
Value Added Statement

14.1 Format of Value Added Statement and Numerical Problem

The value added statement displays the wealth that a company's employees,
government, capital providers, or the firm itself have accrued over a given period of
time, as well as how the generated value has been allocated among its employees,
government, and capital suppliers. The video also consists of the stepwise methods to
make format for value-added statements along with respective numerical.

Unit: 15
Analysis of Financial Statement

15.1 Meaning of Financial Statement, its Objectives, Meaning of Ratio

Analysis and its Limitations and Formulas of Ratio Analysis

Meaning

Financial statements are documents that describe a company's operations and financial
performance. Government organizations, accounting companies, etc. frequently audit
financial statements to guarantee accuracy and for tax, financing, or investing purposes.

Objectives

1. To provide information about a company's economic resources and obligations:

They are prepared to provide adequate, reliable, and timely information about a
business firm's economic resources and obligations to investors and other
external parties with limited authority, ability, or resources to obtain information.
2. They are to provide information about cash flows that will be useful to investors
and creditors in predicting, comparing, and evaluating potential cash flows in
terms of amount, timing, and related uncertainties.
3. Financial statement analysis provides information and guidelines for making
future company plans by determining what courses of action should be taken to
achieve a goal.

Ratio Analysis
Ratio analysis is a quantitative method of gaining insight into a company's liquidity,
operational efficiency, and profitability through the examination of its financial
statements, such as the balance sheet and income statement.
Limitations
1. Historical Data: The data used in the analysis is based on actual past results
released by the company. As a result, ratio analysis metrics do not always
accurately predict future company performance.
2. Seasonal effects: An analyst should be aware of seasonal factors that may
result in ratio analysis limitations. The inability to adjust the ratio analysis for
seasonality effects may result in an incorrect interpretation of the analysis results.
3. Ignore price changes: Ratios ignore price changes caused by inflation. Many
ratios are calculated using historical costs, and they ignore price changes
between periods.
4. Ignore the firm's qualitative aspects: Accounting ratios completely ignore the
firm's qualitative aspects. They are only concerned with the monetary aspects.

⋆ Formulas of Ratio Analysis:

1. Liquidity ratios:
a. Current ratio: Current Assets
Current Liabilities

b. Quick ratio: Quick Assets

Current Liabilities

2. Solvency/Leverage Ratios:

a. Debt equity ratio= Long-term debt

Shareholders equity

b. Debt to total capital ratio= Long-term debt

Capital employed

c. Interest coverage ratio= Net profit before interest and taxes

Interest

d. Fixed coverage ratio= Net profit before interest and taxes

Fixed charge

3. Turnover ratios:

a. Inventory Turnover= Cost of goods sold

Average inventory

b. Debtors turnover ratio= Net credit sales

Average Debtors

c. Average collection period= Days in a year × Average Debtors

Net sales

d. Fixed assets turnover ratio= Net sales

Net fixed assets

e. Total assets turnover ratio= Net sales

Net total assets

f. Capital employed turnover ratio= Net sales

Capital Employed
4. Profitability ratio:

a. Gross profit margin ratio= Gross profit × 100

Net sales

b. Net profit margin ratio= Net profit ×100

Net sales

c. Operating ratio= Operating expenses × 100

Net sales

d. Return on shareholders equity= Net profit after tax × 100

Shareholders equity

e. Return on common shareholders equity= Net profit after tax -Preference dividend
× 100
Common shareholders equity

f. Return on assets= Net profit after tax + Interest × 100

Net assets

g. Return on capital employed ratio = Net profit after tax +Interest × 100
Capital employed

5. Other ratios:

a. Earning Per Share (EPS)= Net profit after tax- Preference Dividend
No. of equity shares outstanding

b. Dividend Per Share(DPS)= Dividend paid to equity shareholders

No. of equity shares outstanding

c. Dividend payout ratio= DPS × 100

EPS

d. Dividend yield ratio = DPS × 100

Market price per share(MVPS)
e. Price earnings ratio= MVPS
EPS

f. Basic earning power ratio = Net profit before interest and tax × 100
Net assets

g. Earning yield ratio= EPS × 100

MVPS

15.2 Numerical problem of Ratio Analysis

This last video of this course is based on numerical problems related to ratio analysis
where, ratio analysis refers to a mathematical technique for analyzing a company's
financial documents, such as the balance sheet and income statement, to gather
knowledge about its liquidity, operational effectiveness, and profitability. Fundamental
equity research is built on ratio analysis.