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Accounting

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Question 1
Financial Statements represent a formal record of the financial activities of an entity.
These are written reports that quantify the financial strength, performance and liquidity
of a company. Financial Statements reflect the financial effects of business transactions
and events on the entity.
Assets
An asset is something that an entity owns or controls in order to derive economic
benefits from its use. Assets must be classified in the balance sheet as current or noncurrent depending on the duration over which the reporting entity expects to derive
economic benefit from its use. An asset which will deliver economic benefits to the entity
over the long term is classified as non-current whereas those assets that are expected
to be realized within one year from the reporting date are classified as current assets.
Assets are also classified in the statement of financial position on the basis of their
nature:
 Tangible & intangible: Non-current assets with physical substance are classified
as property, plant and equipment whereas assets without any physical substance
are classified as intangible assets. Goodwill is a type of an intangible asset.
 Inventories balance includes goods that are held for sale in the ordinary course
of the business. Inventories may include raw materials, finished goods and works
in progress.
 Trade receivables include the amounts that are recoverable from customers
upon credit sales. Trade receivables are presented in the statement of financial
position after the deduction of allowance for bad debts.
 Cash and cash equivalents include cash in hand along with any short term
investments that are readily convertible into known amounts of cash.
Liabilities
A liability is an obligation that a business owes to someone and its settlement involves
the transfer of cash or other resources. Liabilities must be classified in the statement of
financial position as current or non-current depending on the duration over which the
entity intends to settle the liability.
nature:
 Trade and other payables primarily include liabilities due to suppliers and
contractors for credit purchases. Sundry payables which are too insignificant to
be presented separately on the face of the balance sheet are also classified in
this category.
 Short term borrowings typically include bank overdrafts and short term bank
loans with a repayment schedule of less than 12 months.
 Long-term borrowings comprise of loans which are to be repaid over a period
that exceeds one year. Current portion of long-term borrowings include the
installments of long term borrowings that are due within one year of the reporting
date.
 Current Tax Payable is usually presented as a separate line item in the
statement of financial position due to the materiality of the amount.
Equity is what the business owes to its owners. Equity is derived by deducting total
liabilities from the total assets. It therefore represents the residual interest in the
business that belongs to the owners.
Equity is usually presented in the statement of financial position under the following
categories:
https://accounting-simplified.com/financial/statements/types
This FRS is a single financial reporting standard that applies to the financial statements
of entities that are not applying EU-adopted IFRS, FRS 101 or FRS 105. FRS 102 is
designed to apply to the general purpose financial statements and financial reporting of
entities including those that are not constituted as companies and those that are not
profit-oriented.
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FRS 102 is subject to a periodic review at least every five years. The last periodic
review, the Triennial Review 2017, was completed in December 2017, with an effective
date of 1 January 2019. We currently expect the next periodic review of FRS 102 to
take place five years after the previous one. This would mean that any amendments
would be effective from 1 January 2024 and outreach to inform the review would begin
in early 2021.
https://www.frc.org.uk/accountants/accounting-and-reporting-policy/uk-accountingstandards/standards-in-issue/frs-102-the-financial-reporting-standard-applicabl
A convention is formal agreement between states and is usually an instrument negotiated
under an international organisation.
For example, shipping has many conventions that were negotiated under International
Maritime organisation (IMO). Some of these are
International convention on safety of life at sea (SOLAS)
International convention for prevention of pollution at sea (MARPOL)
International convention on Load Lines
International convention on Tonnage measurement of ships
International convention on the control of harmful anti fouling system on ships
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Question 2
How to Calculate Ratios
Ratios are mathematical expressions that compare two or more numbers. They can
compare absolute quantities and amounts or can be used to compare portions of a
larger whole. Ratios can be calculated and written in several different ways, but the
principles guiding the use of ratios are universal to all.
1 Be aware of how ratios are used. Ratios are used in both academic settings and in
the real world to compare multiple amounts or quantities to each other. The simplest
ratios compare only two values, but ratios comparing three or more values are also
possible. In any situations in which two or more distinct numbers or quantities are being
compared, ratios are applicable. By describing quantities in relation to each other, they
explain how chemical formulas can be duplicated or recipes in the kitchen expanded.
After you get to understand them, you will use ratios for the rest of your life
2
Get to know what a ratio means. As noted above, ratios demonstrate the quantity of
at least two items in relation to each other. So, for example, if a cake contains two cups
of flour and one cup of sugar, you would say that the ratio of flour to sugar was 2 to 1.
 Ratios can be used to show the relation between any quantities, even if one is
not directly tied to the other (as they would be in a recipe). For example, if
there are five girls and ten boys in a class, the ratio of girls to boys is 5 to 10.
Neither quantity is dependent on or tied to the other, and would change if
anyone left or new students came in. The ratio merely compares the
quantities.
3
Notice the different ways in which ratios are expressed. Ratios can be written out
using words or can be represented using mathematical symbols.[2]
 You will commonly see ratios represented using words (as above). Because they
are used so commonly and in such a variety of ways, if you find yourself
working outside of mathematic or scientific fields, this may the most common
form of ratio you will see.
 Ratios are frequently expressed using a colon. When comparing two numbers in
a ratio, you'll use one colon (as in 7 : 13). When you're comparing more than
two numbers, you'll put a colon between each set of numbers in succession
(as in 10 : 2 : 23). In our classroom example, we might compare the number of
boys to the number of girls with the ratio 5 girls : 10 boys. We can simply
express the ratio as 5 : 10.
 Ratios are also sometimes expressed using fractional notation. In the case of the
classroom, the 5 girls and 10 boys would be shown simply as 5/10. That said,
it shouldn't be read out loud the same as a fraction, and you need to keep in
mind that the numbers do not represent a portion of a whole.
4 Formulas to Calculate Ratio in Excel
1. Simple Divide Method
2. GCD Function
3. SUBSTITUTE and TEXT
4. Using Round Function
1. Calculate Ratio by using Simple Divide Method
We can use this method when the larger value is divisible with the smaller value. In the
below example, we have value 10 and 2, where 10 is divisible with 2.
2. GCD Function to Calculate Ratio in Excel
As I said, there is no single function in excel to calculate the ratio for you. But, GCD
function is close enough.
It can help you to get common denomination for both of the values and then by using
little concatenation, you can calculate the ratio.
As I said, GCD can give you a common denominator for both of the values. So here you
have to use GCD in both of the parts of the formula to get a common denominator.
After that, you have to divide both of the values with that common denominator. And, in
the end, a little concatenation to join both of the values using a colon.
3. SUBSTITUTE and TEXT for Ratio Calculation
A combination of two awesome functions.
Yes, you can use SUBSTITUTE and TEXT function to calculate the ratio. This method
works like a charm just like GCD function.
Here we have below values to calculate the ratio.
4. Calculate Ratio with Round Function
Using round function to calculate a ratio is also a useful method. This is especially
useful when you want to calculate ratio with decimals for accurate comparison.
Here we have values in which higher value is not divisible with the smaller value.
So, in this situation instead of using them as they are you can divide them and show the
final ratio with decimals.
790 words
https://www.intechopen.com/books/fractal-analysis-applications-in-physicsengineering-and-technology/factors-affecting-accuracy-and-precision-inmeasuring-material-surfaces
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Question 3
The purpose of the income statement is to show the reader how much profit or loss an
organization generated during a reporting period. This information is more valuable
when income statements from several consecutive periods are grouped together, so
that trends in the different revenue and expense line items can be viewed.
 The purpose of the income statement is to show the reader how much profit
or loss an organization generated during a reporting period. This information
is more valuable when income statements from several consecutive periods
are grouped together, so that trends in the different revenue and expense line
items can be viewed.
 The income statement contains several subtotals that can assist in
determining how a profit or loss was generated. The gross profit is derived by
netting revenues and the cost of goods sold together, and provides an
indicator of the ability of a business to set price points that customers will
accept, and to maintain the cost of the goods and services that it provides.
The other key subtotal is the operating profit, which is the gross profit minus
all operating expenses (such as selling and administrative expenses). This
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subtotal reveals the ability of a firm to generate a profit before the effects of
financing activities are factored into the final profit figure.
The purpose of the income statement may differ somewhat, depending on the
user. An investor wants to see a consistent profit that proves the viability of
the business. A lender is most interested in a business generating a sufficient
profit to pay for interest expenses and a return of the loaned amount.
Unfortunately, the profitability of a business can be skewed by fraudulent
transactions that can alter the reported amount of revenue or expenses, resulting in
a profit or loss figure that does not represent the actual earning capability of the
business. For example, someone interested in falsely claiming a high profit figure
could capitalize certain assets so that they are not charged to expense until a later
period. Or, the individual could recognize a customer advance as revenue, even
though the related product has not yet been produced or shipped. Thus, fraudulent
intent can interfere with the purpose of the income statement. The income statement
is the statement of all expenses and income over some time. Every business when
preparing the financial statements starts with preparing the income statement for that
period. The income statement forms an integral part of the books of accounts. The
income statement serves as an indicator for the business, which shows the
performance of the company for the period ending every year or whenever the
statement is prepared.
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The purpose is to provide a representation of the company’s performance during
a period to the investors and the value of the company, which affects the share
price.
The income is used to summarize the profitability of the company by
classification of revenue and expense accrued in the income statement during
that period.
Importance of Income Statement
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Most important is that the income statement provides all the stakeholders with a
summary of the company’s performance during the period. All the activity and the
quantum of the activity performed by the company during the period are
summarized in the income statement.
It is a good statement for comparison of the company under analysis with its past
year performance and also among the peer companies operating in the industry.
All the analysts in the industry or tracking the stock of the company use the
income statement to analyze the numbers and it’s peer’s numbers. The
comparison of the margins and the growth in revenue and expenditure can be
quickly compared if the income statement is presented in the same format.
The income statement also shows the classification of the revenue and the
expenses, which shows how each department of the company is performing. It
gives a good indication to the manager or the management on which expense of
the company is growing at an unexpected rate and which expense needs to be
cut down in the future.
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The income statement is vital for ratio analysis, valuation, equity research of the
company. All analysts and research houses who track the company make
extensive use of the income statement to analyze, forecast, and do a valuation of
the company, which is used to make a future economic decision on the company.
Various income ratios like gross margin, EBITDA margin, Interest coverage ratio,
and other income ratios can be easily derived from the sample income
statement, which is an essential source of analysis
760 words
Ref: https://www.accountingtools.com/articles/the-purpose-of-the-incomestatement.html#:~:text=The%20purpose%20of%20the%20income%20statement%20is
%20to,revenue%20and%20expense%20line%20items%20can%20be%20viewed.
https://www.wallstreetmojo.com/purpose-of-income-statement/
Question 4
Organisational Objectives:
The compensation system should be duly aligned with the organisational need and
should also be flexible enough to modification in response to change.
Accordingly, the objectives of system should be to:
1. Enable an organisation to have the quantity and quality of staff it requires.
2. Retain the employees in the organisation.
3. Motivate employees for good performance for further improvement in performance.
4. Maintain equity and fairness in compensation for similar jobs.
5. Achieve flexibility in the system to accommodate organisational changes as and
when these take place.
6. Make the system cost-effective.
Individual Objectives:
From individual employee’s point of view, the compensation system should have
the following objectives:
1. Ensures a fair compensation.
2. Provides compensation according to employee’s worth.
3. Avoids the chances of favouritism from creeping in when wage rates are assigned.
4. Enhances employee morale and motivation.
Collective Objectives:
These objectives include:
1. Compensation in ahead of inflation.
2. Matching with market rates.
3. Increase in compensation reflecting increase in the prosperity of the company.
4. Compensation system free from management discretion.
Beach has listed the five objectives of wage and salary administration:
1. To recruit persons for a firm
2. To control pay-rolls
3. To satisfy people, reduce the incidence of turnover, grievances, and 4. To motivate
people to perform better
5. To maintain a good public image.
Principles of wage and salary administration:
The main principles that govern wage and salary fixation are three:
1. E Internal Equity
3. Individual Worth.
1. External Equity:
This principle acknowledges that factors/variables external to organisation influence
levels of compensation in an organisation. These variables are such as demand and
supply of labour, the market rate, etc. If these variables are not kept into consideration
while fixing wage and salary levels, these may be insufficient to attract and retain
employees in the organisation. The principles of external equity ensure that jobs are
fairly compensated in comparison to similar jobs in the labour market.
2. Internal Equity:
Organisations have various jobs which are relative in value term. In other words, the
values of various jobs in an organisation are comparative. Within your own Department,
pay levels of the teachers (Professor, Reader, and Lecturer) are different as per the
perceived or real differences between the values of jobs they perform.
This relative worth of jobs is ascertained by job evaluation. Thus, an ideal compensation
system should establish and maintain appropriate differentials based on relative values
of jobs. In other words, the compensation system should ensure that more difficult jobs
should be paid more.
3. Individual Worth:
According to this principle, an individual should be paid as per his/her performance.
Thus, the compensation system, as far as possible, enables the individual to be
rewarded according to his contribution to organisation.
Alternatively speaking, this principle ensures that each individual’s pay is fair in
comparison to others doing the same/similar jobs, i.e., ‘equal pay for equal work’. In
sum and substance, a sound compensation system should encompass factors like
adequacy of wages, social balance, supply and demand, fair comparison, equal pay for
equal work and work measurement.
Calculating PAYE
There are two standard methods for calculating employees’ tax – periodic and
averaging / annual equivalent – both of which are acceptable to SARS. These methods
will be discussed with reference to monthly-paid employees but the principles are the
same for employees who are paid weekly etc. The term “income” will be used in this
article to refer to the employee’s taxable income (remuneration for PAYE purposes).
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The periodic tax basis calculates tax on each payslip in isolation using the
monthly tax tables.
This method is not supported by SimplePay.
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Tax averaging takes into account an employee’s total income for the entire tax
year to date (YTD) and uses an annual equivalent to calculate tax.
SimplePay uses this method as it provides the most accurate results, especially in
cases of fluctuating income (please see below for more on this).
Where an employee is in non-standard employment or has received a tax directive from
SARS, tax will not be calculated as mentioned above. Please see the following sections
for more on each of these aspects:
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Ref: https://www.yourarticlelibrary.com/employeemanagement/wages/objectives-and-principles-of-wage-and-salaryadministration
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