An accounting assignment analysing the financial performance of Surya Trading

Question

Task: What is your opinion about the performance of Surya Trading since its opening? Can you analyse its cash budget by preparing an accounting assignment?

Answer

TASK 1.1
Accounting assignment for cash budget of Surya Trading for the six months ended 31st December, 2022

TASK 2.1
Is cash and profits similar
A. Cash and cash profits are not the same. For example, amount realized or received from the customer on the sale of the product can be considered as cash whereas the profit is simply incomes less expenses. A company may be profitable by having excess of income over expenses and may not have the cash. The accounting assignment lists some of the example which affect the profitability but do not affect the cash are as follows:

• Outstanding expenses like outstanding salary or rent which has the impact of reducing the profitability but not the cash
• Prepaid expenses like prepaid insurance which has the impact of reducing cash but not profitability
• Accrued income like rent receivable which has the impact of increasing income but not the cash (Alexander, 2016) One of the examples mentioned in the accounting assignment is of the business transactions which does not involve immediate movement of the cash is depreciation and amortization expenses. Depreciation is the decrease in the value of the asset due to wear and tear over the period of time. It is the allocation of the original cost of the asset to the period in which they are used. It is booked in P&L as an expenses which reduces the profitability but does not involve any cash payment. Similarly amortization refers to the write off of the original cost of the intangible assets over the useful life of the asset.

Another example mentioned in the accounting assignment is the outstanding wages to the labours which has the impact of reducing the profitability but does not involve the immediate payment of the cash. The amount may be paid at the later date (Bogle, 2018).

B. The differentiation between each of the following terms has been explained in this accounting assignment:
a. Capital expenditure and Revenue expenditure: Capital expenditure may be referred to as the one time purchase or investment in the fixed assets which will be used for longer periods (typically more than a year) for revenue generation. On the other hand of the accounting assignment, revenue expenditure is the operating expenses which are used for the day to day business operations and the benefit from which is below 1 year. Example for capital expenditure is purchase of the machinery which would be used to generate revenue for a number of years. Example for revenue expenditure is the salary expenses the benefit for which can be available only for a fixed period of a month or fortnight (AASB, 2004).

b. Expenses and Drawings: Expenses refer to money spent in order to run the business however it is not in the nature of acquisition of asset. Example: purchase of the insurance or payment for the electricity used in company are expenses. Drawings are not expenses. It refers to the amount withdrawn by the owner from the capital invested by him/her in the business. This is usually tracked in order to understand the distributions to the owner over the year and then this account is closed by transferring the balance to the owner’s equity account. Drawings generally results in reduction of the owner’s equity (Farmer, 2018).

c. Gross Profit and Net Profit: As per this accounting assignment, gross profit refers to the difference between sales and the cost of goods sold whereas net profit is derived by deducting all the indirect losses expensesnet of other income from the gross profit. Gross profit considers all the direct expenses whereas net profit considers both direct as well as indirect expenses. Gross profit is usually analysed to estimate company’s profitability whereas net profit is analysed to determine company’s performance for the period. Gross profit is usually credit balance in trading account whereas net profit is usually the credit balance of the profit and loss account (Sithole, Chandler, Abeysekera, & Paas, 2017).

d. Cash budget and Cash flow statement: Cash budget is prepared for the future period and shows the estimated cash inflows and cash outflows for the given period of time. On the other hand, cash flow statement is prepared for the past period and shows the net cash flow during the year and divides the cash inflows and outflows into 3 segments – operating cash flows, investing cash flows and the financing cash flows. The purpose of preparation of accounting assignment for cash flow statement is to determine the sources and application of the cash and cash equivalents and whether the cash is being effectively utilized. On the other hand of the accounting assignment, cash budget is prepared with the objective of determining what will be future sources of cash and where the company’s management wants to utilize them. Cash flow statement is prepared for the comparison period as well however cash budget is usually prepared for the current period only. Cash flow statement is a post facto financial statement document which is prepared for use by external agencies and stakeholders whereas cash budget is prepared for only internal management use.

e. Accruals and Prepayments in accounting assignment: Accruals generally refer to cash paid or received after the consumption of expenses or the revenue being already earned. On the other hand, prepayments refer to the cash paid or received before the consumption of the related expenses or revenue. Accruals can be in the nature of accrued expenses or accrued incomes whereas prepayments can be in the nature of prepaid incomes and prepaid expenses. Accrued expenses are shown as current liabilities in balance sheet and accrued incomes as current assets. On the other hand of the accounting assignment, prepaid expenses are current assets whereas prepaidincome is current liabilities. For example, insurance expense paid in advance is an example of prepaid insurance and rent expense due but not paid is an example of accrued expenses.

C. The following terms have been explained in brief along with examples in this accounting assignment:

a. Assets: In terms of accounting assignment, asset may be defined as the resource which is owned or within the control of the entity or business and which can be used to derive future economic benefits. Assets can be both tangible as well as intangible. Example, land and building are tangible assets whereas goodwill is an intangible asset. Assets can be further classified into current and non current assets depending on the period for which the future economic benefits will be derived out of it. Current assets are one where the benefit can be availed with the operating year, fiscal year or financial year and includes short term assets like cash and cash equivalents, inventory and trade receivables. On the other hand of the accounting assignment, non-current assets are those where the benefits can be availed for more than a year and are not easily convertible into cash. For example, furniture and fixture, machinery, land and building etc are non current assets (Jefferson, 2017).
b. Liabilities: In terms of accounting assignment, liability may be defined as the financial obligation that the business is supposed to pay during the end of the period to a person or another business for the good consumed or services availed. Liabilities can be settled either in cash or in kind through goods and services. Liabilities again can be classified into 3 parts – current liabilities which are usually due and payable within the year; non current liabilities which are usually due and payable after an year or more and lastly contingent liabilities which are payable only on the occurrence of few events or in case of some contingencies.

Examples: Current liabilities – trade payables, outstanding rent, etc
Non-current liabilities – bank loan, debentures, etc.
Contingent liabilities – bank guarantees payable on demand, etc.

c. Ordinary shares: Ordinary shares shows the ownership in the company. Usually, ordinary shares represent the equity shares of the company. The share capital of the company is divided into small parts called shares; the holders of the ordinary shares are called equity shareholders and thereby they are the owners of the company. They have the voting rights and a right to participate in the profits of the company when the company declares the dividend as well as in the case of the winding up of the company in case surplus asset is left post paying off other liabilities. The ordinary share are not redeemable during the lifetime of the company and these class of shares are not even convertible (Grigg, 2005).

d. Preference shares: These are also known as the preferred shares and usually possess the characteristics of both common share as well as fixed income securities. As per the findings of the accounting assignment, these are usually the hybrid instruments. The holders of the preference shares are called preference shareholders and given priority when the dividend is paid by the company meaning first the preference shareholders are paid dividend and then the equity shareholders. The rate of dividend on preference shares is fixed and then might have an option to convert to equity shares. The preference shares can be redeemed during the life of the company and they have the preference when it comes to repayment of capital. One of the important features of this shares is that they don’t have the voting rights except at their class meeting (Alieid, 2016).

e. Dividend: Dividend refers to the share of profit of the company. It is usually declared and distribution by the company to be paid to the shareholders or owners of the company. The company has an option either to pay the profits earned after taxes to the shareholders via dividend or to retain the profits and reinvest it back in the business referred to as retained earnings (ICAEW, 2011). As per the findings of the accounting assignment, the board of directors decides it in the form of the amount or percentage. The dividend is one of the powerful indicators to check the company’s profitability and a measure of stability as seen by the investors (Linden & Freeman, 2017).

f. Stock exchange:As per the findings of the accounting assignment, stock exchange may be defined as the organized auction market where the buyers and sellers of securities effect the purchase and sales transaction of shares with the help of their brokers and depository participant. It is a body corporate which helps in controlling, assisting and regulating the purchase, sale and dealing of the shares and securities. All the shares which have been admitted to the exchange for the purpose of buying and selling are called the listed shares.

g. Venture Capital: As per the findings of the accounting assignment, venture capital may be defined as the long term equity investments in the businesses and technology based projects which shows the potential for future growth and returns. It is a mechanism whereby the investors and even the big business houses show support to the entrepreneurial talent by providing them finances and expertise to make long term capital gains by utilizing the market opportunities. This leads to dilution of ownership and control as the equity stake is given with the investors but helps in expansion of company with guidance and expertise from investors. This also leads to building connections and there is no obligation of repayment of capital (Arnott, Lizama, & Song, 2017).

h. Budget:As per the findings of the accounting assignment, budget may be defined as the operational plan for a defined period usually a year and represented in financial terms with the help of expected income and expenses. It is a quantified version of business expectations or intentions and what the organization wants to achieve for the given period (Heminway, 2017). It also includes how the company’s resources will be utilized. There can be various types of budget like the fixed budget, flexible budget, sales budget, production budget, purchase budget, overhead budget, capital expenditure budget, master budget, etc. Budget also ensures if the business is in line with the plans and is a useful measure when it comes to comparison vs actual achievement. It is also helpful in fixing the responsibility of the different departments and while fixing the variable pay linked to the achievement of the plans.

i. Capital Income: Any profit or gains arising out of the sale or transfer of the capital assets is terms as capital income. As per the findings of the accounting assignment, these are non-recurring in nature and effect of which is usually carried to the balance sheet of the company (Heminway, 2017). Some of the examples mentioned in the accounting assignment aresale of machinery, receipt from the issue of equity shares, capital infusion by the owner or partner of the company/partnership firm, receipt of loan from the bank or financial institution. These are usually one timers and not from the normal business operations of the company.

j. Company:A company may be defined as the institution or an association of the group of people who come together for a common purpose for doing business and earning profits. It is an artificial person created by law having separate legal entity and which has perpetuality in terms of existence and a common seal. In the company form of business, there is limited liability and the company may sue and may be sued in its name. There may be different types of company depending on the share capital and the number of members as well – like the private company and the public company (Goldmann, 2016). Some of the example mentioned in the accounting assignment of company form of business is Google, Apple Inc., Walmart.

References
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Alieid, E. E. (2016). The Role of Accounting Information Systems in Making Investment Decisions. Internal Auditing & Risk Management, 11(2), 233-242. Arnott, D., Lizama, F., & Song, Y. (2017). Patterns of business intelligence systems use in organizations. Decision Support Systems, 97, 58-68.

Bogle, J. C. (2018). The Modern Corporation and the Public Interest. Financial Analysts Journal, 74(3), 1-10.
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