Question

Assignment No. 2 Advanced Accounting (MC-525) Roll No. Name: Class: M Com II Dear Students, here is your Assignment 2. Submit within due date and time. Write in your own words. Explain the concept with help of proper examples. Copy/paste from Books, Internet Resources, Journals and Material provided by Course Instructor will lead zero marks. Late submission will lead to zero marking. If students are unable to attempt in MS Word, they can submit handwritten with proper lining and formats within time. Q 1: Explain following: (Draw three column table, explain each item heading wise. Also discuss Cash Inflow and Cash Outflow of each activity) Investing Activities Financing Activities Operating Activates Q2: Differentiate between Absorption and Amalgamation? Q 3: From the following profit and loss and balance sheet information, prepare a cash flow statement as required by FRS 1 using the indirect method. P&L A/c for the Year Ending 31 December 2019 Sales $10,000 Cost of Goods Sold (6,000) 4,000 Expenses: Depreciation 600 Interest 150 Other Expenses 2,100 (2,850) Profit for the Year before Tax 1.150 Tax (200) Profit for the Year after Tax 950 Dividends (150) Retained Profit $800 Balance Sheet as on 31 December 2018 Fixed assets at cost $6,000 Less accumulated depreciation 3,000 2019 $6,000 2,400

Answer 1

1.

INVESTING ACTIVITIES :-

Investing activities are one of the main categories of net cash activities that businesses report on the cash flow statement. Investing activities in accounting refers to the purchase and sale of long-term assets and other business investments, within a specific reporting period. A business’s reported investing activities give insights into the total investment gains and losses it experienced during a defined period. Investing activities are a crucial component of a company’s cash flow statement, which reports the cash that’s earned and spent over a certain period of time.

When a business buys or sells an investment, that activity will result in either a gain or loss in the company’s cash flow. Some of the most common accounting transactions that appear in the investing activities section of the cash flow statement include:

• The Purchase of Investments: If a business purchases an investment in cash, whether it’s stocks, bonds or another type of investment, the cost of that investment will mean a decrease in the company’s cash flow from investing activities. That’s because cash is flowing out of the business to cover the purchase.
• Proceeds from the Sale of Investments: When a company sells off one of its investments for cash, the sale will result in an increase in cash flow from investing activities. Even in the case where a company loses money on an investment by selling it for less than the purchase price, the cash flow from investing will still increase.
• The Purchase of Fixed Assets: Fixed assets, including buildings, land and vehicles, are usually purchased on credit, not using cash. Because of that, the purchase of fixed assets usually shows up in the cash flow from investing activity section slowly over time. Every time the company makes a cash payment toward the credit purchase (for example, $1,000 per month over the span of a year), it will show up as a decrease on the cash flow from investing activity line item.
• Proceeds from the Sale of Fixed Assets: When a company sells a fixed asset, whether its a property, a used vehicle or a computer for parts, the proceeds of the sale are recorded as an increase in its cash flow from investing activity.

FINANCING ACTIVITIES :-

Financing activities often refers to the cash flows from financing activities, which is one of the three main sections of the statement of cash flows (or SCF or cash flow statement). In this section of the SCF, the company lists the cash inflows and cash outflows from:

• Borrowing and repaying short-term loans
• Borrowing and repaying long-term loans and other long-term liabilities
• Issuing or reacquiring its own shares of common and preferred stock
• Paying cash dividends on its capital stock

Examples of Financing Activities

When a company borrows money for the short-term or long-term, and when a corporation issues bonds or shares of its common or preferred stock and receives cash, the proceeds will be reported as positive amounts in the cash flows from financing activities section of the SCF. A positive amount informs the reader that cash was received and thereby increased the company's cash and cash equivalents.

When a company repays the principal portion of its short-term or long-term loans, redeems any of its bonds payable, purchases its owns shares of capital stock (treasury stock), or pays dividends on its capital stock, the amount of cash used will be reported as negative amounts in the cash flows from financing activities section of the SCF. The negative amount informs the reader that cash was used and thereby reduced the company's cash and cash equivalents.

OPERATING ACTIVITIES :-

Cash flows from operating activities are among the major subsections of the statement of cash flows. It is separate from the sections on investing and financing activities. Investing activities refer to earnings or expenditures on long-term assets, such as equipment and facilities, while financing activities are the cash flows between a company and its owners and creditors from activities such as issuing bonds, retiring bonds, selling stock or buying back stock.

To get an accurate picture of a company’s cash flow from operating activities, accountants add depreciation expenses, losses decrease in current assets and increases in current liabilities to net income, and then subtract gains, increases in current assets and decreases in current liabilities. Investors examine a company’s cash flow from operating activities separately from the other two components of cash flow to see where a company is really getting its money.

Investors want to see positive cash flow because of positive income from operating activities, which are recurring, not because the company is selling off all its assets, which results in one-time gains. The company’s balance sheet and income statement help round out the picture of its financial health.

An Example of Cash Flow from Operating Activities

Let’s look at the cash flow details of the leading technology company Apple Inc. (AAPL). The iPhone maker reported the following for the fiscal year ended September 2017:

• Net income of $48.35 billion
• Depreciation, depletion, and amortization of $10.16 billion
• Deferred taxes and investment tax credit of $5.97 billion
• Other funds of $4.67 billion

Following the first formula, the summation of these numbers brings the value for funds from operations as $69.15 billion. The net change in working capital for the same period was (-5.55 billion). Adding it to funds from operations gives the cash flow from operating activities for Apple as ($69.15 - $5.55) = $63.6 billion.

2.

ABSORPTION VS AMALGAMATION :-

Both amalgamation and absorption relate to the merger of two or more companies.

Amalgamation occurs, when two or more companies decide to unite to carry on their business together. In other words, it is a merger of one or more companies with another in such a way that all assets and liabilities of the amalgamating companies(the ones which are designed to shut down) become assets and liabilities of the amalgamated company (the one which is not being designated to close down).

In regards to ownership, shareholders of not less than the certain value level of the shares (usually nine-tenths in value) in the amalgamating company or companies become shareholders of the amalgamated company.

Usually after amalgamation, the amalgamated company has a new name and a separate legal existence which has assets and liabilities of the two companies.

Amalgamation of companies can be done in the form of absorption or consolidation.

Absorption is a form of merger where there is a combination of two or more companies into an 'existing company'. In the case of absorption, only one company 'survive' and all other lose their identity.

Usually company which acquiring the other companies (buyer) survives, while an acquired company (a seller), ceased to exist. Acquired company transfers its assets, liabilities and shares to the acquiring company. Thus the company that absorbs acquires all the rights and obligations of the company that is absorbed.

So, in summary:

Both amalgamation and absorption relate to a merger of two or more companies. Amalgamation can take various forms, among others, also absorption. The result of amalgamation is often new legal entity with assets and liabilities of acquired companies. The result of the absorption is the "old" legal entity, who did not change legal name, but solely increased the assets and liabilities by acquiring another company.

3.

Cash Flow Statement
Particulars	Amounts
Cash & Cash Equivalents at the end of the Period	150
Cash Flow from Operating Activities
Retained Profit from Profit & Loss	800
Dividend Paid	150
Depreciation	600
Tax Expenses	200
Interest Expenses	150
	1,900
Changes in Current Items :-
Increase in Inventory	(50)
Decrease in Debtors	50
Increase in Creditors	10
Tax Paid	(150)
Total Cash flow from Operating	1,760
Cash Flow from Investing Activities
Total Cash flow from Investing	-
Cash Flow from Financing Activities
Interest Expenses	(150)
Dividend Paid	(150)
Total Cash flow from Financing	(300)
Total Cash Flows for the Period	1,460
Cash & Cash Equivalents at the end of the Period	1,610

4.

Calculation of Purchase Consideration
Land	12,500
Plant	12,000
Laibilities	(5,000)
Net Assets	19,500
Goodwill Paid	11,000
Purchase Consideration	30,500