Financial Accounting

An intangible asset is a non-monetary asset that has no physical existence but gives its owner legal rights or future economic benefits. It is identifiable, controlled by the business and used for more than one year. Examples are patents, copyrights, trademarks, franchises, software and goodwill.

Statement of Other Comprehensive Income (NFRS)

The gain on sale of investment (Rs 22,000) is a realized item that is part of profit for the year, so it is not shown again as OCI.

Bank Reconciliation Statement as on 30th Shrawan 2079

A. Adjusting the bank statement balance

B. Adjusting the cash book balance

Both adjusted balances are Rs 45,000, so the statement reconciles.

SS Company: Statement of Cash Flows for the year ended 2022 (indirect method)

Notes

1. Tax paid = opening tax liability 0 + tax expense 18,750 - closing tax liability 18,750 = Rs 0.
2. PPE: closing 500,000 = opening 400,000 + purchases - depreciation 75,000, so purchases = Rs 175,000 (no disposals).

The closing figure of Rs 60,000 agrees with cash and cash equivalents in the statement of financial position.

Working figures (2022)

• Operating profit = 570,000 - 160,000 - 220,000 = Rs 190,000 (taken as consistent with profit before tax 160,000 + finance cost 30,000).
• Net profit after tax = 160,000 - 40,000 = Rs 120,000.
• Opening inventory = 170,000 - (30,000 + 40,000 + 60,000) = Rs 40,000; closing inventory Rs 40,000; average inventory Rs 40,000.
• Total receivables = 70,000 + 30,000 = Rs 100,000 in 2022 and 40,000 + 60,000 = Rs 100,000 in 2021; average Rs 100,000.
• Average total assets = (770,000 + 930,000) / 2 = Rs 850,000; average equity = (500,000 + 670,000) / 2 = Rs 585,000.
• Debt = long-term loan Rs 200,000; total capital = 200,000 + 670,000 = Rs 870,000.

a. Current ratio

$\frac{190{,}000}{60{,}000} = 3.17 : 1$

b. Acid test ratio

$\frac{190{,}000 - 40{,}000}{60{,}000} = 2.5 : 1$

c. Debt to total capital

$\frac{200{,}000}{870{,}000} \times 100 = 22.99\%$

d. Stock turnover ratio

$\frac{700{,}000}{40{,}000} = 17.5 \text{ times}$

e. Total assets turnover ratio

$\frac{1{,}200{,}000}{850{,}000} = 1.41 \text{ times}$

f. Net profit margin

$\frac{120{,}000}{1{,}200{,}000} \times 100 = 10\%$

g. Return on equity

$\frac{120{,}000}{585{,}000} \times 100 = 20.51\%$

h. Return on assets

$\frac{120{,}000}{850{,}000} \times 100 = 14.12\%$

i. Average sales (inventory holding) period

$\frac{365}{17.5} = 20.86 \text{ days}$

j. Account receivable turnover ratio

$\frac{\text{Credit sales}}{\text{Average receivables}} = \frac{650{,}000}{100{,}000} = 6.5 \text{ times}$

k. Comment on the results

The company has strong liquidity and low leverage, uses its assets and stock efficiently, and earns returns well above the targets. Two weaknesses remain: the net profit margin of 10% is below 12%, which calls for control of distribution and administrative costs, and receivables turn over only 6.5 times, so credit collection should be speeded up. The very high liquidity ratios may also suggest idle funds that could be invested more productively.

Statement of Other Comprehensive Income (as per NFRS)

Bank Reconciliation Statement as on 30 Ashwin 2081

Proof: adjusting the cash book (company) balance

Both sides agree at Rs 40,000, which is the correct bank balance to be shown in the Statement of Financial Position.

KK Company: Statement of Cash Flows for the year ended 2023 (indirect method, NFRS / IAS 7)

Working notes

• Purchase of PPE: $500{,}000 + \text{purchase} - 90{,}000 = 600{,}000$, so purchase $= 190{,}000$
• Purchase of investments: $220{,}000 - 160{,}000 = 60{,}000$
• Share capital issued: $600{,}000 - 500{,}000 = 100{,}000$
• Loans raised: $351{,}000 - 250{,}000 = 101{,}000$
• Tax paid: opening liability nil and closing liability 18,750 equals the year's provision, so tax paid = 0
• Retained earnings check: $30{,}000 + 50{,}250 = 80{,}250$

A. Cash flow from operating activities

B. Cash flow from investing activities

C. Cash flow from financing activities

Net increase in cash and cash equivalents $= 80{,}000 - 240{,}000 + 170{,}000 = 10{,}000$

The closing figure agrees with the Statement of Financial Position.

Basis of calculation: averages of the 2079 and 2080 balances are used for turnover and return ratios; 365 days in a year.

Data (2080): Sales Rs 600,000; cost of sales Rs 400,000; net profit Rs 37,500; current assets Rs 95,000; current liabilities Rs 25,000; inventory Rs 30,000 (opening 20,000); total assets Rs 407,500 (opening 335,000); equity Rs 307,500 (opening 245,000); long-term loan Rs 75,000; account receivable Rs 15,000 (opening 20,000).

(a) Current ratio $\frac{95{,}000}{25{,}000} = 3.8 : 1$ Standard 2:1, so the ratio is above the standard.

(b) Acid test ratio $\frac{95{,}000 - 30{,}000}{25{,}000} = 2.6 : 1$ Standard 1:1, so the ratio is above the standard.

(c) Debt to total capital ratio $\frac{\text{Debt}}{\text{Debt} + \text{Equity}} = \frac{75{,}000}{75{,}000 + 307{,}500} = 19.61\%$ Standard is less than 40%, so the ratio meets the standard.

(d) Stock turnover ratio $\frac{400{,}000}{(20{,}000 + 30{,}000)/2} = \frac{400{,}000}{25{,}000} = 16 \text{ times}$ Standard is at least 8 times, so the ratio meets the standard.

(e) Total assets turnover ratio $\frac{600{,}000}{(335{,}000 + 407{,}500)/2} = \frac{600{,}000}{371{,}250} = 1.62 \text{ times}$ Standard is more than 1 time, so the ratio meets the standard.

(f) Net profit margin $\frac{37{,}500}{600{,}000} \times 100 = 6.25\%$ Standard is at least 12%, so the ratio does not meet the standard.

(g) Return on assets $\frac{37{,}500}{371{,}250} \times 100 = 10.10\%$ Standard is at least 5%, so the ratio meets the standard.

(h) Return on equity $\frac{37{,}500}{(245{,}000 + 307{,}500)/2} \times 100 = \frac{37{,}500}{276{,}250} \times 100 = 13.57\%$ Standard is at least 7%, so the ratio meets the standard.

(i) Average sales period $\frac{365}{16} = 22.81 \text{ days}$ Standard is 45 days or less, so the ratio meets the standard.

(j) Account receivable turnover ratio $\frac{600{,}000}{(20{,}000 + 15{,}000)/2} = \frac{600{,}000}{17{,}500} = 34.29 \text{ times}$ Standard is at least 8 times, so the ratio meets the standard.

(k) Comment

The company's liquidity is very strong (current and acid test ratios far above standard), and its low debt (19.61%) shows low financial risk. Inventory and receivables are managed efficiently, and assets are used productively, giving a good return on assets and equity. The only weak point is the net profit margin of 6.25%, half the 12% target, so the company should control distribution and administrative expenses or improve pricing. The very high current ratio also suggests that some funds may be idle and could be invested more profitably. Overall performance is satisfactory, meeting 9 of the 10 standards.

Statement of Profit or Loss and Other Comprehensive Income

Bank Reconciliation Statement as on 31 Ashad 2081

Proof: adjusting the cash book balance

Both balances agree at Rs 43,000.

XYZ Company: Statement of Cash Flows for the year 2025 (indirect method, NFRS)

The comparison is made between the 2023 and 2025 statements of financial position.

Working notes

• Purchase of PPE: $300{,}000 + \text{purchase} - 30{,}000 = 400{,}000$, so purchase $= 130{,}000$
• Purchase of investments: $140{,}000 - 90{,}000 = 50{,}000$
• Share capital issued: $600{,}000 - 400{,}000 = 200{,}000$
• Loan repaid: $100{,}000 - 75{,}000 = 25{,}000$
• Tax paid: opening liability nil and closing liability 21,250 equals the year's provision, so tax paid = 0
• Retained earnings check: $40{,}000 + 31{,}750 = 71{,}750$

A. Cash flow from operating activities (4 marks)

B. Cash flow from investing activities (2 marks)

C. Cash flow from financing activities (2 marks)

D. Net change in cash (2 marks)

$61{,}000 - 176{,}000 + 155{,}000 = 40{,}000$

The closing balance agrees with the Statement of Financial Position.

Basis of calculation: averages of the 2080 and 2081 balances are used for turnover and return ratios; 365 days in a year.

Data (2081): Sales Rs 1,000,000; cost of sales Rs 600,000; net profit Rs 82,500; current assets Rs 190,000; current liabilities Rs 42,500; inventory Rs 50,000 (opening 60,000); total assets Rs 815,000 (opening 670,000); equity Rs 622,500 (opening 490,000); long-term loan Rs 150,000; account receivable Rs 30,000 (opening 40,000).

a. Current ratio $\frac{190{,}000}{42{,}500} = 4.47 : 1$ Standard 2:1, so the ratio is above the standard.

b. Acid test ratio $\frac{190{,}000 - 50{,}000}{42{,}500} = 3.29 : 1$ Standard 1:1, so the ratio is above the standard.

c. Debt to total capital ratio $\frac{150{,}000}{150{,}000 + 622{,}500} = 19.42\%$ Standard is less than 40%, so the ratio meets the standard.

d. Stock turnover ratio $\frac{600{,}000}{(60{,}000 + 50{,}000)/2} = \frac{600{,}000}{55{,}000} = 10.91 \text{ times}$ Standard is at least 8 times, so the ratio meets the standard.

e. Total assets turnover ratio $\frac{1{,}000{,}000}{(670{,}000 + 815{,}000)/2} = \frac{1{,}000{,}000}{742{,}500} = 1.35 \text{ times}$ Standard is more than 1 time, so the ratio meets the standard.

f. Net profit margin $\frac{82{,}500}{1{,}000{,}000} \times 100 = 8.25\%$ Standard is at least 12%, so the ratio does not meet the standard.

g. Return on assets $\frac{82{,}500}{742{,}500} \times 100 = 11.11\%$ Standard is at least 5%, so the ratio meets the standard.

h. Return on equity $\frac{82{,}500}{(490{,}000 + 622{,}500)/2} \times 100 = \frac{82{,}500}{556{,}250} \times 100 = 14.83\%$ Standard is at least 7%, so the ratio meets the standard.

i. Average sales period $\frac{365}{10.91} = 33.45 \text{ days}$ Standard is 45 days or less, so the ratio meets the standard.

j. Account receivable turnover ratio $\frac{1{,}000{,}000}{(40{,}000 + 30{,}000)/2} = \frac{1{,}000{,}000}{35{,}000} = 28.57 \text{ times}$ Standard is at least 8 times, so the ratio meets the standard.

k. Comment

The company is highly liquid, with low reliance on debt, so both liquidity and solvency are strong. Inventory and receivables move quickly, and assets are used efficiently, giving returns on assets and equity well above the targets. The only shortfall is the net profit margin of 8.25% against the 12% target, caused by high distribution and administrative expenses (35% of sales together). Cost control or better pricing is needed. The very high current ratio suggests surplus idle funds that could be invested more productively. Overall, performance is satisfactory, with 9 of the 10 standards met.

Accounting is the practical process of identifying, recording, classifying, summarizing and communicating financial transactions. Accountancy is the whole body of knowledge, the theory, principles, rules and techniques that govern how accounting is done.

A cheque is a written order to a bank to pay a stated amount to the named person or the bearer. The main types are:

• Bearer cheque: payable to the person who presents it.
• Order cheque: payable to a named person, who must endorse it.
• Crossed cheque: marked with two parallel lines and payable only through a bank account (general or special crossing).
• Open (uncrossed) cheque: can be encashed over the counter.
• Post-dated cheque: dated in the future and payable only on or after that date.
• Stale cheque: presented after its validity period, generally six months, and not honoured.
• Self cheque: drawn in favour of oneself to withdraw cash.

Depreciation is charged at 15% p.a. on original cost (straight line), for the period of ownership. Machine A (Rs 300,000, 1 Jan 2021) is sold on 30 June 2023; Machine B (Rs 400,000) is bought on 1 July 2022.

Working

• 2021: A = $300{,}000 \times 15\% = 45{,}000$
• 2022: A = 45,000; B = $400{,}000 \times 15\% \times \tfrac{6}{12} = 30{,}000$; total 75,000
• 2023: A = $45{,}000 \times \tfrac{6}{12} = 22{,}500$; B = 60,000; total 82,500
• Book value of A at sale = $300{,}000 - (45{,}000 + 45{,}000 + 22{,}500) = 187{,}500$
• Profit on sale = $270{,}000 - 187{,}500 = 82{,}500$

Machinery Account

Closing balance of Rs 310,000 is machine B: $400{,}000 - 30{,}000 - 60{,}000 = 310{,}000$.

KK Company: Statement of Profit and Loss for the year ended 31 December 2023

KK Company: Statement of Financial Position as on 31 December 2023

The statement balances at Rs 614,000.

Depreciation is 15% p.a. on cost (straight line). Machine A (Rs 400,000) was bought on 1 July 2022 and sold on 30 June 2025; Machine B (Rs 500,000) was bought on 30 June 2023 (treated as 1 July 2023, so half a year's depreciation in 2023). Accounts close on 31 December.

Working

• Accumulated depreciation of A $= 30{,}000 + 60{,}000 + 60{,}000 + 30{,}000 = 180{,}000$
• Book value of A at sale $= 400{,}000 - 180{,}000 = 220{,}000$
• Profit on sale $= 300{,}000 - 220{,}000 = 80{,}000$

Machinery Account

The closing balance Rs 312,500 is machine B: $500{,}000 - 37{,}500 - 75{,}000 - 75{,}000 = 312{,}500$.

B & B Company: Statement of Profit or Loss for the year ended 31 December 2025

Statement of Financial Position as on 31 December 2025

Both sides total Rs 706,400.

NFRS means Nepal Financial Reporting Standards. They are the accounting and reporting standards issued by the Accounting Standards Board (ASB) Nepal, and are based on the International Financial Reporting Standards (IFRS). They set out how companies should recognize, measure, present and disclose transactions in their financial statements, so that the statements are transparent and comparable.

The matching concept states that the expenses of an accounting period must be matched with the revenues earned in the same period. Revenue is recognized when it is earned, and the costs incurred to earn it are charged against it, whether or not cash was paid. This gives a correct profit for the period. For example, the cost of goods sold is matched against the sales revenue of the same period.

Under the accrual basis of accounting, revenues are recorded when they are earned and expenses when they are incurred, whatever the time of cash receipt or payment. Outstanding expenses, prepaid expenses, accrued income and unearned income are therefore recognized in the books. It gives a true measure of profit and financial position for the period, and NFRS requires it for financial statements, except for the cash flow statement.

A cheque is a written order to a bank by the account holder to pay a stated sum to the person named or to the bearer. The main types are:

• Bearer cheque: payable to whoever presents it; it can be transferred by delivery.
• Order cheque: payable to a named person or to his order; it needs an endorsement to be transferred.
• Crossed cheque: has two parallel lines on its face, so it can only be paid through a bank account and not in cash.
• Open (uncrossed) cheque: can be cashed over the counter.
• Post-dated cheque: bears a future date and cannot be paid before that date.
• Stale cheque: presented after the validity period (six months in Nepal), so the bank refuses it.
• Self cheque: drawn by the account holder to himself, for cash withdrawal.

(a) Goods costing Rs 60,000 sold at 10% profit: profit = Rs 6,000 and sales = Rs 66,000 (taken as a cash sale).

$\text{Assets} = \text{Liabilities} + \text{Capital}$

Cash +66,000 and stock -60,000 give a net increase in assets of Rs 6,000, and capital increases by Rs 6,000 (profit).

(b) Rent received Rs 52,000 including advance rent of Rs 4,000: income earned = Rs 48,000, and Rs 4,000 is unearned rent (a liability).

Cash +52,000 = Unearned rent (liability) +4,000 + Capital (rent income) +48,000.

Cost of machine = 1,000,000 + 50,000 (installation) = Rs 1,050,000.

$\text{Annual depreciation} = \frac{1,050,000 - 50,000}{5} = \text{Rs } 200,000$

Period of use, from 1 Baisakh 2077 to 30 Ashwin 2078, is 18 months (12 + 6).

$\text{Accumulated depreciation} = 200,000 \times \frac{18}{12} = \text{Rs } 300,000$

$\text{Book value} = 1,050,000 - 300,000 = \text{Rs } 750,000$

$\text{Sale price} - \text{book value} = 650,000 - 750,000 = -100,000$

There is a loss on sale of machine of Rs 100,000.

This is the units-of-activity (service hours) method.

$\text{Depreciation per km} = \frac{2,020,000 - 20,000}{100,000} = \text{Rs } 20$

• Depreciation for 2077 = 16,000 km x 20 = Rs 320,000
• Depreciation for 2078 = 24,000 km x 20 = Rs 480,000

Accounting information is the output of the accounting process: it summarizes the financial results and position of a business in a form that decision makers can use. Every decision about money needs reliable information, so accounting is called the language of business.

Who uses it and for what decisions

• Owners and managers: to plan, control costs, price products, decide on expansion, and judge performance and profitability.
• Investors and shareholders: to decide whether to buy, hold or sell shares, and to judge dividends and returns.
• Lenders and creditors: to judge liquidity and solvency before lending or giving credit.
• Employees and trade unions: to assess job security, pay and bonus.
• Government and tax authorities: to assess tax, regulate companies and prepare statistics.
• Customers, suppliers and the public: to judge the stability of the firm as a long-term partner.

Why it supports good decisions

The information shows profit (income statement), financial position (statement of financial position), cash flows and changes in equity. Comparison over time and with other firms, and ratio analysis, show strengths and weaknesses. To be useful it must be relevant, reliable, comparable and timely, as NFRS requires.

Without accounting information, decisions would depend on guesswork. Thus accounting information is essential for decisions.

A trial balance is a statement prepared at a given date that lists the balances of all ledger accounts, with debit balances in one column and credit balances in the other. If the books are correct, the two totals agree because every transaction has an equal debit and credit under double entry.

Why it is prepared

• To check the arithmetical accuracy of the ledger postings: equal totals show that debits equal credits.
• To locate errors, since a difference indicates that something is wrong (though some errors, such as omission, compensating errors and errors of principle, do not affect the totals).
• To serve as the starting point for preparing the final accounts (income statement and statement of financial position).
• To give a summary of all the ledger balances in one place.
• To help in adjusting entries and in reviewing and auditing the books.

Comparative (Horizontal) Analysis of Assets

$\%\ \text{change} = \frac{\text{Current year} - \text{Base year}}{\text{Base year}} \times 100$

Interpretation: Total assets grew by 42.86%, mainly through investment (up 200%), buildings and equipment. Cash and stock fell, which may reduce liquidity, while receivables doubled, suggesting more credit sales or slower collection.

(a) Value Added Statement

Application of value added

(b) Net profit for the year

$560{,}000 - 70{,}000 - 20{,}000 - 30{,}000 - 40{,}000 = \text{Rs } 400{,}000$

Check by profit statement: Sales 800,000 + dividend 30,000 = 830,000; less material 200,000, carriage 20,000, office expenses 50,000, wages 70,000, depreciation 40,000, interest 20,000 and tax 30,000 (total 430,000) = Rs 400,000.

The trial balance or adjustments for this question are not given in the paper, so the required statements are shown in their NFRS format, with the way each figure is found.

a. Statement of Profit or Loss for the year ended 31st December 2022

b. Statement of Financial Position as at 31st December 2022

The two totals must be equal: Assets = Equity + Liabilities.

A patent is an exclusive legal right granted by the government to an inventor to make, use and sell an invention for a fixed period (usually 20 years). It is an intangible asset, recorded at cost and amortized over its useful or legal life, whichever is shorter.

The monetary concept (money measurement concept) says that only transactions and events that can be expressed in money are recorded in the books of account. Items such as the skill of employees, management quality or reputation are not recorded because they cannot be measured in money. Money gives a common unit that allows unlike items to be added, though it assumes that the purchasing power of money is stable.

GAAP means Generally Accepted Accounting Principles. It is the set of rules, concepts, conventions and standards that accountants follow in recording transactions and preparing financial statements, so that statements are consistent, reliable and comparable. Examples are the going concern, accrual, matching and consistency concepts. In Nepal, NFRS form the GAAP framework.

Accounting equation: Assets = Liabilities + Capital.

Assets Rs 200,000 = Liabilities Rs 0 + Capital Rs 200,000.

PQ Company Ltd: Statement of Changes in Equity for the year 2023

The opening components add to Rs 850,000 (500,000 + 150,000 + 200,000), which is the figure used for the opening total.

Units-of-production method:

$\text{Depreciation per packet} = \frac{1{,}000{,}000 - 100{,}000}{450{,}000} = \text{Rs } 2$

• Year 1: 110,000 x Rs 2 = Rs 220,000
• Year 2: 150,000 x Rs 2 = Rs 300,000

Journal entries

The accounting process is the series of steps through which business transactions are identified, recorded, classified, summarized and reported to users. The main steps are:

1. Identifying transactions: Only events that can be measured in money and that affect the business, such as sales, purchases and expenses, are selected, supported by source documents (invoices, vouchers, receipts).
2. Journalizing: Each transaction is recorded in chronological order in the journal (or subsidiary books) with the debit and credit accounts and a narration.
3. Posting to the ledger: Entries are transferred from the journal to the individual ledger accounts, which collect all transactions of each item.
4. Balancing and preparing the trial balance: Ledger accounts are balanced, and a trial balance is prepared to check that total debits equal total credits.
5. Adjusting entries: At the end of the period, adjustments are made for outstanding and prepaid items, depreciation, accrued income and provisions, to follow the accrual and matching concepts.
6. Preparing financial statements: The adjusted trial balance is used to prepare the statement of profit or loss, the statement of financial position, the statement of changes in equity and the cash flow statement.
7. Closing entries: Nominal accounts are closed and transferred to the profit and loss account, and the books are made ready for the next period.
8. Analysis and interpretation: The statements are communicated to users, who analyze them with ratios and comparisons for decisions.

Expenditure is classed as capital or revenue according to the benefit it gives.

For example, Rs 5,00,000 paid to buy a delivery van is capital expenditure, while Rs 5,000 paid for its yearly servicing is revenue expenditure.

Ledger is the principal book of accounts in which all transactions recorded in the journal (or subsidiary books) are classified and posted account-wise. Each account (for example Cash A/c, Sales A/c, Rent A/c) has its own page or folio showing all its debit and credit entries and the resulting balance. It is called the "book of final entry".

Why it is needed

• Account-wise information: it gathers all transactions of one account in one place, so the total and balance of each account can be found easily.
• Basis of trial balance: the balances of ledger accounts are listed in the trial balance to check the arithmetical accuracy of the books.
• Preparation of final accounts: the Income Statement and Statement of Financial Position are prepared from ledger balances.
• Control and decision making: it shows the amount due from debtors, due to creditors, and the level of expenses and incomes, which helps management.
• Permanent record: it is a classified, permanent record of all business dealings, useful for auditing and legal purposes.
• Detection of errors: by balancing accounts, errors and frauds can be located.

In vertical (common-size) analysis every item is expressed as a percentage of sales (Rs 10,000 = 100%).

Calculation: $\text{Profit before tax} = 4{,}000 - (1{,}500 + 500 + 800 + 400) = 800$, and $\text{Profit after tax} = 800 - 200 = 600$.

Interpretation: out of every Rs 100 of sales, Rs 60 goes to cost of sales, leaving a gross margin of 40%. After operating costs and interest, 8% remains as pre-tax profit and 6% as net profit.

(a) Value Added Statement

Application of value added

(b) Net profit for the year

$\text{Profit before tax} = 1{,}200{,}000 + 30{,}000 - (550{,}000 + 100{,}000 + 250{,}000 + 50{,}000 + 90{,}000 + 60{,}000 + 20{,}000 + 10{,}000) = 100{,}000$

$\text{Net profit after tax} = 100{,}000 - 70{,}000 = 30{,}000$

Net profit for the year is Rs 30,000 (Rs 100,000 before tax). After the dividend of Rs 30,000 nothing is retained.

Accounting is the process of identifying, measuring, recording, classifying, summarising and communicating the financial information of an organisation. The output of this process, accounting information, is the main input for decisions taken by owners, managers, investors, lenders, government and other stakeholders. Without reliable accounting information, decisions would be based on guesswork.

How accounting information helps in decision making

1. Management: managers use cost, revenue and profit information to plan, budget, price products, control expenses, decide to make or buy, expand or close a product line, and evaluate departmental performance.
2. Owners and investors: profit, earnings per share, dividends and the financial position help them decide whether to invest, hold or sell their shares.
3. Lenders and creditors: banks and suppliers study liquidity, solvency and cash flows to decide whether to grant loans or credit and on what terms.
4. Government and tax authorities: reported income is the base for assessing income tax, VAT and for regulating industries and preparing national statistics.
5. Employees: profitability and stability influence wage negotiation, bonus and job security decisions.
6. Customers and the public: they judge the continuity and social contribution of the organisation.
7. Planning and control: budgets prepared from past accounting data are compared with actual results to find variances and take corrective action.
8. Comparison: accounting data allows comparison over time (trend analysis) and with competitors or industry standards (ratio analysis).

Qualities needed for right decisions

Information must be relevant, reliable, timely, comparable and understandable. This is why standards (NFRS) and principles (going concern, consistency, matching, prudence) are followed.

Limitations

Accounting information is mainly historical, expressed only in money terms, depends on estimates and judgment (such as depreciation), and ignores non-financial factors such as employee morale. Hence it should be supplemented with other information.

Conclusion: accounting information reduces uncertainty, makes performance visible and supports sound planning, control and resource allocation, so it is essential for right decisions in any organisation.

Concept

An accounting standard is a written policy document issued by an authorised body that prescribes how particular transactions and events should be recognised, measured, presented and disclosed in financial statements. It reduces the alternative treatments available and brings uniformity. In Nepal, the Accounting Standards Board (ASB), formed under the Nepal Accounting Standards Board Act, issues Nepal Financial Reporting Standards (NFRS) based on the IFRS issued by the IASB. Nepal Chartered Accountants (ICAN) and the ASB oversee their implementation.

Importance

1. Uniformity and comparability: the same treatment is applied by all entities, so statements can be compared across firms and years.
2. Reliability and credibility: investors, lenders and regulators can rely on standard-based statements.
3. Reduces manipulation: fewer choices limit window dressing and creative accounting.
4. Guidance to accountants and auditors: they provide a benchmark for preparing and for auditing the statements.
5. Transparency through disclosure: required disclosures give users complete information.
6. International acceptability: NFRS aligned with IFRS helps attract foreign investment and raise capital abroad.
7. Protection of stakeholders: it helps protect the interests of shareholders, creditors and the public.
8. Basis for law and regulation: companies and tax laws can refer to the standards.

Limitations

1. Rigidity: rules may not suit every business, and flexibility is limited.
2. Choice of methods still exists: alternatives (for example, FIFO or weighted average, depreciation methods) and use of estimates and judgment allow some manipulation.
3. Cost and complexity: implementation (especially fair value measurement) needs training and professional help, which is costly for small firms.
4. Delay and difficulty in updating: standards may lag behind new business practices.
5. Conflict with law and local conditions: differences between standards, tax law and company law, and the economic and cultural environment, may cause problems.
6. Do not cover all areas: they cover only major issues; some new transactions may have no standard.
7. Overemphasis on form: compliance can become a formality, with the true and fair view neglected.

Accounting provides reliable financial information about profit, cost, assets, liabilities and cash flows. Managers, owners, investors, lenders and government use it to plan, control and evaluate performance, and to decide on investment, financing, pricing and expansion.

The going concern concept assumes that a business will continue to operate for the foreseeable future and will not be closed or sold off. Therefore assets are recorded at cost less depreciation rather than at forced-sale value, and prepaid expenses and long-term liabilities are shown in the normal way.

NFRS means Nepal Financial Reporting Standards. They are the accounting and reporting standards issued by the Accounting Standards Board (ASB), Nepal, which are based on the International Financial Reporting Standards (IFRS) and are followed by Nepali entities to prepare uniform, comparable and transparent financial statements.

Accounting equation: $\text{Assets} = \text{Capital} + \text{Liabilities}$

$43{,}000 = 37{,}000 + 6{,}000$

Assets: $170{,}000 + 150{,}000 + 40{,}000 + 300{,}000 + 25{,}000 = 685{,}000$ Liabilities: $120{,}000 + 100{,}000 + 20{,}000 = 240{,}000$ Capital $= 685{,}000 - 240{,}000 = 445{,}000$

Opening Journal Entry

(Being opening balances of assets and liabilities brought forward.)

Depreciation under the units of activity (per kilometre) method:

$\text{Rate per km} = \frac{880{,}000 - 80{,}000}{160{,}000} = \text{Rs } 5 \text{ per km}$

• 2080: $15{,}000 \times 5 =$ Rs 75,000
• 2081: $21{,}000 \times 5 =$ Rs 105,000

Double-entry system

The double-entry system of book-keeping is the system under which every transaction has two aspects, a debit aspect and a credit aspect, and both are recorded in the books. For every debit there is an equal credit, so the total of debits always equals the total of credits. Because both aspects are recorded, it follows the accounting equation $\text{Assets} = \text{Capital} + \text{Liabilities}$, allows a trial balance to check arithmetical accuracy, and gives a complete record of the business.

Debit and credit rules

Accounts are classed as personal, real and nominal, or as assets, liabilities, capital, expenses and incomes.

Under the modern (accounting equation) approach:

Example: goods purchased for cash Rs 10,000 means Purchases A/c is debited (expense, goods coming in) and Cash A/c is credited (asset going out) by Rs 10,000.

Financial statement

Financial statements are the formal reports prepared at the end of an accounting period which present the financial performance and financial position of a business. As per NFRS, a complete set includes the Statement of Financial Position, Statement of Profit or Loss and Other Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows and notes to the accounts.

Why they are prepared

1. To know the profit or loss earned during the period.
2. To show the financial position, that is, the assets, liabilities and equity at the end of the period.
3. To provide information to owners, investors, lenders, employees, government and the public for their decisions.
4. To show how cash was generated and used (cash flows) and the liquidity of the business.
5. To enable comparison with previous years and with other firms, and to evaluate management's performance.
6. To meet legal requirements such as company law, tax assessment and audit.
7. To assist in planning, budgeting and control for the future.

In horizontal analysis the amounts of the two years are compared, and the change is shown in amount and as a percentage of the base year (2080).

$\text{Change \%} = \frac{\text{2081} - \text{2080}}{\text{2080}} \times 100$

Total assets increased by 25.15%, mainly because of the large rise in investment and in land and building. Cash and bank, plant and machinery and trademarks decreased, and the fall in cash shows that liquidity has weakened.

(a) Value Added Statement

Application of value added

(b) Net profit for the year

$\text{Profit before tax} = 700{,}000 + 30{,}000 - (250{,}000 + 15{,}000 + 20{,}000 + 30{,}000 + 50{,}000 + 40{,}000 + 10{,}000 + 25{,}000) = 290{,}000$

$\text{Net profit after tax} = 290{,}000 - 15{,}000 = 275{,}000$

Net profit is Rs 275,000 (Rs 290,000 before tax); after the dividend of Rs 20,000, Rs 255,000 is retained.

Financial accounting

Financial accounting is the branch of accounting concerned with identifying, measuring, recording, classifying and summarising the financial transactions of a business and communicating the results, mainly through financial statements, to external and internal users. It follows accepted accounting principles and standards (NFRS) and answers questions such as how much profit was earned and what the financial position is.

Features

1. Records financial transactions only: only events measurable in money are recorded.
2. Follows standards and principles: GAAP, NFRS and company law are followed, which gives uniformity.
3. Historical in nature: it records past transactions at cost.
4. Periodic reporting: statements are prepared for a fixed period, usually one year.
5. Mainly for external users: owners, investors, creditors, government and the public are the main users.
6. Entity as a whole: it reports for the whole business rather than for departments or products.
7. Statutory: preparation and audit of accounts are required by law.
8. Double-entry system: transactions are recorded through the double-entry system.
9. Outputs: the Income Statement, Statement of Financial Position, Cash Flow Statement and Statement of Changes in Equity.

Importance

1. Systematic record: it provides a permanent and reliable record of transactions, replacing dependence on memory.
2. Determines profit or loss: it shows the result of operations.
3. Shows financial position: it shows assets, liabilities and equity at a given date.
4. Helps decision making: managers, investors and lenders base decisions on it.
5. Control and planning: comparison of actual with past data and budgets helps control costs and plan the future.
6. Legal and tax compliance: it is the basis for tax assessment, audit and legal obligations.
7. Evidence in disputes: properly kept books are accepted as evidence.
8. Raising finance and valuation: audited statements help to get loans and to value the business when it is sold.
9. Prevents fraud and errors: the double-entry system and internal checks reveal them.

Accounting standard (4 marks)

An accounting standard is a written policy document issued by a recognised body that specifies how particular transactions and events must be recognised, measured, presented and disclosed in financial statements. Its purpose is to harmonise accounting policies and practices. In Nepal, the Accounting Standards Board (ASB) issues the Nepal Financial Reporting Standards (NFRS) and Nepal Accounting Standards for small entities, which are based on IFRS (IFRS for SMEs for smaller entities). ICAN monitors compliance. Examples include NAS 1 / IAS 1 Presentation of Financial Statements, NAS 2 Inventories, NAS 7 Statement of Cash Flows and NAS 16 Property, Plant and Equipment.

Needs (importance)

1. Uniformity and comparability: the same treatment of similar items across firms and years.
2. Reliability: users, such as investors and lenders, trust standard-based statements.
3. Reduces creative accounting: limits the choice of alternative treatments, so manipulation and window dressing are reduced.
4. Guide for accountants and auditors: they give a benchmark for preparing and for auditing the statements.
5. Full disclosure: the required disclosures help users understand the statements.
6. International acceptance: compliance with IFRS-based NFRS helps to raise foreign capital and investment and permits cross-border comparison.
7. Legal backing: companies, banks and insurers are required to comply, which protects stakeholders.

Limitations

1. Rigid rules: standards may not suit the special circumstances of each entity.
2. Choices and estimates remain: alternatives (for example FIFO or weighted average, depreciation methods) and judgment in estimates allow manipulation.
3. High cost and complexity: especially fair value measurement and disclosures, which is a burden for small entities.
4. Time lag: standards may be slow to deal with new transactions and business practices.
5. Conflicts with other laws: tax law and company law may differ from the standards.
6. Limited coverage: not all transactions are covered and some are open to different interpretation.
7. Ignores local conditions: standards based on IFRS may not match the economic and cultural conditions of a developing country such as Nepal.