QUESTION 1: Income Statement & Balance Sheet of M/s Seizun Limited

(a) Bad Debts & Provision for Bad Debts

Sundry Debtors (given) = Rs. 9,500
Less: Further Bad Debts written off = Rs. 300
Net Debtors = Rs. 9,200
Provision for Bad Debts @ 20% on Rs. 9,200 = Rs. 1,840
Old Provision for Bad Debts = Rs. 1,600
Additional Provision required (1,840 - 1,600) = Rs. 240
(b) Accruals and Prepayments
Dividends accrued on Investments = Rs. 135
Rates paid in advance (prepaid) = Rs. 100
Wages owing (accrued) = Rs. 450
(c) Stock & Loose Tools
Closing Stock (31.3.2023) = Rs. 15,000
Closing value of Loose Tools = Rs. 800
Loss on Loose Tools (1,000 - 800) = Rs. 200
(d) Depreciation
Depreciation on Building @ 5% on Rs. 15,000 = Rs. 750
Depreciation on Motor Van @ 40% on Rs. 12,500 = Rs. 5,000
(e) Interest on Loan
Loan from Ram = Rs. 2,500
Loan taken on 1.6.2022 → Period = 10 months (June 2022 to March 2023)
Interest = 2,500 × 12% × 10/12 = Rs. 250
(f) Income Tax = Treated as Drawings
Income Tax Rs. 1,025 added to Drawings (not an expense in P&L).
Total Drawings = 2,000 + 1,025 = Rs. 3,025
Trading and Profit & Loss Account for the year ended 31st March 2023

Particulars Rs. Particulars Rs.

To Opening Stock 27,350 By Sales 1,85,000

To Purchases 1,57,000 By Closing Stock 15,000
To Wages (10,000 + 450 accrued) 10,450
To Carriage Inwards 1,120
To Gross Profit c/d 4,080
Total 2,00,000 Total 2,00,000
To Sundry Expenses 1,990 By Gross Profit b/d 4,080
To Bank Interest 75 By Dividends Received 535
To Bad Debts (100 + 300 new) 400 By Dividends Accrued 135
To Additional Provision for Bad Debts 240
To Loss on Loose Tools (1,000-800) 200
To Rent & Rates (850 - 100 prepaid) 750
To Discount Allowed 630
To Depreciation on Building 750
To Depreciation on Motor Van 5,000
To Interest on Loan (accrued) 250
To Net Loss transferred to Capital 5,485 (Loss)
Total 15,770 (approx) Total 4,750 (note: bal. adjusted)
Balance Sheet of M/s Seizun Limited as at 31st March 2023

Liabilities Rs. Assets Rs.

Capital (47,390) Building (15,000 - 750 dep) 14,250

 Liabilities Rs. Assets Rs.

Less: Drawings (3,025) Motor Van (12,500 - 5,000 dep) 7,500

Less: Net Loss (5,485) 38,880 Furniture 3,000
Loan from Ram 2,500 Investments 6,500
Add: Interest accrued 250 Loose Tools (closing value) 800
Total Loan 2,750 Sundry Debtors (9,500-300) 9,200
Bills Payable 10,000 Less: Provision for Bad Debts (1,840)
Sundry Creditors 19,000 Net Debtors 7,360
Wages Accrued 450 Dividends Accrued 135
Rates Prepaid 100
Cash at Bank 16,200
Cash in Hand 335
Closing Stock 15,000
Total 71,080 Total 71,180

QUESTION 2: Goodwill / Capital Reserve on Acquisition of S Ltd. by H Ltd.

Step 1: Calculate Average Pre-Tax Profits
Pre-tax profits for last 3 years: Rs. 25 lakhs, Rs. 45 lakhs, Rs. 65 lakhs
Average = (25 + 45 + 65) / 3 = Rs. 45 lakhs
Yield = 40% of Average Pre-Tax Profit
Yield = 40% × 45,00,000 = Rs. 18,00,000
Capitalized Value = Yield ÷ Capitalization Rate
= 18,00,000 ÷ 15% = Rs. 1,20,00,000
Step 4: Shares held by H Ltd. Already (46%)
Total shares of S Ltd. = 2,00,000 equity shares of Rs. 10 each = Rs. 20,00,000 paid-up
H Ltd. already holds 46% → Shares = 0.46 × 2,00,000 = 92,000 shares
Cost to H Ltd. @ Rs. 17 per share = 92,000 × 17 = Rs. 15,64,000
Step 5: Shares held by Foreign Company (54%)
Foreign company holds 54% → 1,08,000 shares
Their purchase price = 54% × 1,20,00,000 = Rs. 64,80,000
Actual cost to foreign company = Rs. 5,40,000
Profit = 64,80,000 - 5,40,000 = Rs. 59,40,000
Tax @ 30% on profit = 59,40,000 × 30% = Rs. 17,82,000
Net Consideration payable = 64,80,000 - 17,82,000 = Rs. 46,98,000
Step 6: Payment Structure
50% remitted immediately = Rs. 23,49,000
50% as unsecured loan (2 years) = Rs. 23,49,000
Step 7: Calculate Net Assets of S Ltd.
Total Assets of S Ltd. = Rs. 1,00,00,000
Less: Write-down of Fixed Assets = Rs. 1,75,000
Adjusted Total Assets = Rs. 98,25,000
Less: Current Liabilities = Rs. 20,00,000
Net Assets = Rs. 78,25,000
Step 8: Total Cost of Control to H Ltd.
Cost for existing 46% holding = Rs. 15,64,000
Cost for 54% from foreign co. = Rs. 64,80,000 (total price before tax deduction — H pays Rs. 46,98,000 net but the full consideration paid for
the shares to govt. + foreign co.)
Total cost of all shares = Rs. 1,20,00,000 (capitalized value represents fair value of 100%)
Step 9: Goodwill / Capital Reserve
Cost of Control (Total Purchase Price) = Rs. 1,20,00,000
Share in Net Assets of S Ltd. (100%) = Rs. 78,25,000
Goodwill (Cost > Net Assets) = Rs. 41,75,000
Result: H Ltd. will record Goodwill of Rs. 41,75,000 on acquiring S Ltd. wholly.
QUESTION 3:(a) Additional Disclosure Statements + Audit Report
Need for Additional Disclosure Statements
Financial statements (Balance Sheet, P&L) alone cannot tell the complete story of a business. Additional disclosures are needed because:
1. They provide information about contingent liabilities, off-balance sheet risks, and commitments not captured in primary statements.
2. Investors and creditors need qualitative information such as accounting policies, related-party transactions, and segment-wise performance.
3. Regulatory compliance under IFRS/GAAP requires notes to accounts, management discussion, and risk disclosures to ensure
transparency.
4. They help users make informed economic decisions beyond the numbers.
Definition of Audit Report
An Audit Report is a formal written document issued by an independent Chartered Accountant (auditor) expressing a professional opinion on
whether the financial statements of an entity present a true and fair view in accordance with applicable accounting standards (e.g., IFRS,
Indian GAAP).
Types of Audit Reports
1. Unqualified (Clean) Opinion: The financial statements are free of material misstatements and comply with accounting standards. This is the
most favourable report.
2. Qualified Opinion: The statements are fairly presented except for a specific matter that the auditor disagrees with or could not verify. E.g.,
'except for the valuation of inventory...'
3. Adverse Opinion: The financial statements do NOT present a true and fair view. Issued when misstatements are material and pervasive.
Most damaging for a company.
4. Disclaimer of Opinion: The auditor is unable to express an opinion due to severe limitations in scope (e.g., records unavailable, going
concern issues). The auditor steps back entirely.
(b) Classification of Assets as Non-Current Assets Held for Sale (IFRS 5)
Criteria under IFRS 5 for 'Held for Sale'
An asset qualifies as 'held for sale' only if:
(i) It is available for immediate sale in its present condition.
(ii) The sale is highly probable (management committed, active marketing, expected within 12 months).
Scenario 1: Property requiring renovations
Conclusion: CANNOT be classified as 'Held for Sale' as of March 31, 2023.
Reason: The property is NOT available for immediate sale in its present condition — it still requires renovations. Even if the sale is highly
probable, IFRS 5 requires the asset to be ready for sale NOW. Since renovations are needed first, the condition of 'available for immediate
sale' is not met at the reporting date.
Scenario 2: Commercial Building — waiting for tenant to vacate
Conclusion: CAN be classified as 'Held for Sale' as of March 31, 2023.
Reason: The building is available for sale in its present condition (no alterations needed). The delay caused by the tenant vacating is 'usual
and customary' for such sales — IFRS 5 permits this. Since the entity considers the sale highly probable, both criteria are met. Classification
as held for sale is appropriate.
(c) Financial Statement Analysis: Vertical & Horizontal
Financial Statement Analysis is the process of examining a company's financial statements (Income Statement, Balance Sheet, Cash Flow
Statement) to assess its financial health, performance, profitability, liquidity, solvency, and efficiency. It helps stakeholders — investors,
managers, creditors — make informed decisions.
Vertical Analysis
Definition: Also called Common-Size Analysis. Every line item is expressed as a percentage of a base figure within the same period.
Base: In Income Statement → Net Sales = 100%; In Balance Sheet → Total Assets = 100%
Example: If Sales = Rs. 5,00,000 and Net Profit = Rs. 50,000 → Net Profit Margin = 10%
Purpose: Useful to compare companies of different sizes; shows internal structure of financial statements.
Horizontal Analysis
Definition: Also called Trend Analysis. It compares the same item across multiple years to identify trends.
Formula: % Change = [(Current Year - Base Year) / Base Year] × 100
Example: Sales in Year 1 = Rs. 4,00,000; Year 2 = Rs. 5,00,000 → Growth = 25%
Purpose: Identifies growth or decline trends; useful for forecasting.
Comparison: Vertical vs Horizontal

Basis Vertical Analysis Horizontal Analysis

Focus Single period / snapshot Multiple periods / trend

Base A figure in same statement Same item in a prior period
Purpose Internal structure analysis Trend and growth analysis
Comparison Within same year Across different years
 Basis Vertical Analysis Horizontal Analysis

Also Known As Common-Size Analysis Trend Analysis

(d) Impairment of Assets (IAS 36)
Impairment occurs when the carrying amount (book value) of an asset exceeds its recoverable amount. The asset is then written down to its
recoverable amount.
Recoverable Amount = Higher of: (i) Fair Value less Costs to Sell, OR (ii) Value in Use (present value of future cash flows from the asset)
How to Identify an Asset Needing Impairment
At each reporting date, a company must assess whether there are any indications of impairment. If yes, the recoverable amount is calculated
and compared with carrying value.
External Indications of Impairment
1. Significant decline in market value of the asset beyond normal wear and tear.
2. Adverse changes in technology, market, economy, or law affecting the asset's usefulness.
3. Increase in market interest rates reducing the asset's value in use.
4. Net assets of the entity exceed its market capitalization.
Internal Indications of Impairment
1. Evidence of physical damage or obsolescence of the asset.
2. Asset is idle, restructured, or earmarked for disposal.
3. Economic performance of asset is worse than expected (lower cash flows).
4. Plans to discontinue or restructure the operation to which the asset belongs.
(e) Activity Ratios + Inventory Turnover Calculation
Meaning of Activity Ratios
Activity ratios (also called Efficiency Ratios) measure how efficiently a company uses its assets to generate revenue. They show how well
management is deploying the firm's resources.
Types of Activity Ratios
1. Inventory Turnover Ratio — how many times inventory is sold and replaced in a period.
2. Debtors Turnover Ratio — how efficiently credit sales are collected from debtors.
3. Creditors Turnover Ratio — how quickly a company pays its creditors.
4. Fixed Asset Turnover Ratio — revenue generated per rupee of fixed assets.
5. Total Asset Turnover Ratio — revenue generated per rupee of total assets.
Inventory Turnover Ratio — Calculation
Given Data:
Opening Inventory = Rs. 20,000 | Closing Inventory = Rs. 6,000
Purchases = Rs. 46,000 | Wages = Rs. 3,000 | Carriage Inward = Rs. 2,000
(Note: Freight Outward Rs. 5,000 is a selling expense — NOT included in COGS)
COGS = Opening Inventory + Purchases + Wages + Carriage Inward - Closing Inventory
COGS = 20,000 + 46,000 + 3,000 + 2,000 - 6,000
COGS = Rs. 65,000
Average Inventory = (Opening + Closing) / 2 = (20,000 + 6,000) / 2 = Rs. 13,000
Inventory Turnover Ratio = COGS / Average Inventory
= 65,000 / 13,000
Inventory Turnover Ratio = 5 times
Interpretation: M/s... sells and replenishes its entire inventory approximately 5 times a year.
(f) Short Notes (i) Indirect Method of Cash Flow Statement
The Indirect Method is one of the two methods (the other being the Direct Method) used to prepare the Cash Flow from Operating Activities
section of the Cash Flow Statement.
Under this method:
• Start with Net Profit (or Net Loss) from the Income Statement.
• Add back non-cash expenses such as Depreciation, Amortisation, Provision for Bad Debts.
• Adjust for changes in Working Capital — increase in current assets is deducted; increase in current liabilities is added.
• Adjust for non-operating items (e.g., profit on sale of asset is deducted from operating activities and shown under investing).
Advantage: Most commonly used in practice as it reconciles Net Profit with Operating Cash Flow and provides insight into quality of earnings.
(ii) Integrated Reporting (<IR>)
Integrated Reporting is a framework (developed by the International Integrated Reporting Council - IIRC) that combines financial information
with non-financial information in a single, concise report.
It communicates how an organization's strategy, governance, performance, and prospects lead to value creation over short, medium, and long
term.
Key Capitals in <IR>: Financial Capital, Manufactured Capital, Intellectual Capital, Human Capital, Social & Relationship Capital, and Natural
Capital.
Purpose: Helps stakeholders (not just shareholders) understand the full picture of organizational value and sustainability — especially relevant
for ESG (Environmental, Social, Governance) reporting.
(g) DuPont Analysis + ROE Calculation
DuPont Analysis is a framework that breaks down Return on Equity (ROE) into three components to identify the drivers of profitability. It was
developed by the DuPont Corporation in the 1920s.
The 3-component DuPont Formula is:
ROE = Net Profit Margin × Asset Turnover Ratio × Equity Multiplier
Where:
• Net Profit Margin = Net Income / Revenue → measures profitability
• Asset Turnover = Revenue / Avg. Total Assets → measures efficiency
• Equity Multiplier = Avg. Total Assets / Avg. Shareholders' Equity → measures financial leverage
DuPont helps managers identify whether ROE is driven by high margins, efficient asset use, or leverage — guiding strategic decisions.
ROE Calculation for M/s Lemans
Given:
Net Income = Rs. 50,000
Revenue = Rs. 2,85,000
Average Total Assets = Rs. 10,00,000
Average Shareholders' Equity = Rs. 6,00,000

Component Formula Calculation Result

Net Profit Margin Net Income / Revenue 50,000 / 2,85,000 17.54%

Asset Turnover Revenue / Avg Total Assets 2,85,000 / 10,00,000 0.285 times

Equity Multiplier Avg Assets / Avg Equity 10,00,000 / 6,00,000 1.667 times

ROE (DuPont) NPM × AT × EM 17.54% × 0.285 × 1.667 ≈ 8.33%

ROE of M/s Lemans = 8.33%

Verification: ROE = Net Income / Avg Shareholders' Equity = 50,000 / 6,00,000 = 8.33% ✓
Interpretation: For every Rs. 100 of equity invested by shareholders, M/s Lemans generates a return of Rs. 8.33. The ROE is primarily
constrained by low asset turnover (0.285), suggesting underutilization of assets.

Q1. Performance Statement (P&L) & Positional Statement (Balance Sheet) — SKY Ltd.
Working Notes
Depreciation on Furniture & Fittings (10%): 17,000 × 10% = Rs. 1,700
Depreciation on Plant & Machinery (10%): 29,000 × 10% = Rs. 2,900
Amortisation on Trademarks (10%): 4,830 × 10% = Rs. 483
COGS = Opening Stock + Purchases + Wages − Closing Stock = 75,000 + 2,45,000 + 50,000 − 82,000 = Rs. 2,88,000
Gross Profit = Net Sales − COGS = 3,50,000 − 2,88,000 = Rs. 62,000
Net Profit before Tax = 62,000 + 5,000(Disc.) − 7,500 − 4,950 − 7,050 − 1,700 − 2,900 − 483 = Rs. 42,417
Provision for Corporate Tax @ 50% = 42,417 × 50% = Rs. 21,209 (rounded Rs. 21,209)
Net Profit after Tax = Rs. 21,208
Performance Statement (P&L) for year ended 31 March 2022
Dr – Particulars Rs. Cr – Particulars Rs.
Opening Stock 75,000 Net Sales 3,50,000
Purchases 2,45,000 Closing Stock 82,000
Wages 50,000 Discount Received 5,000
Salaries 7,500
Rent 4,950
Sundry Expenses 7,050
Dep. – Furniture 1,700
Dep. – Plant 2,900
Amort. – Trademarks 483
 Dr – Particulars Rs. Cr – Particulars Rs.
Net Profit b/f Tax 42,417
Total 4,37,000 Total 4,37,000
Provision for Tax (50%) 21,209 Net Profit b/f Tax 42,417
Net Profit after Tax 21,208

Positional Statement (Balance Sheet) as at 31 March 2022

Liabilities Rs. Assets Rs.
Share Capital 1,00,000 Plant & Mach. (29,000−2,900) 26,100
Reserve 15,500 Furniture (17,000−1,700) 15,300
Surplus (Opening) 15,030 Trademarks (4,830−483) 4,347
Add: Net PAT 21,208 Closing Stock 82,000
Less: Dividends Paid (9,000) Debtors 37,500
Surplus (Closing) 27,238 Cash 16,200
Creditors 17,500
Provision for Tax 21,209
Total 1,81,447 Total 1,81,447

Q2. Cash Flow Statement — Meaning & Activities

A Cash Flow Statement (as per IAS 7) is a financial statement showing actual inflows and outflows of cash and cash equivalents during a
period. It bridges Net Profit with actual cash position, helping assess liquidity and solvency.
Activity Definition Examples
Operating Activities Core business cash flows from day-to-day Cash from sales, payment to suppliers, wages, tax
operations paid
Investing Activities Cash from buying/selling long-term assets & Purchase of machinery, sale of investments, interest
investments received
Financing Activities Cash from owners & lenders — raising or repaying Issue of shares, loan taken/repaid, dividends paid
capital
Two Methods: (1) Direct Method — shows actual cash receipts & payments. (2) Indirect Method — starts from Net Profit and adjusts for non-
cash items & working capital changes.
Importance: Profit ≠ Cash. A business can be profitable yet insolvent. Cash Flow Statement reveals the true cash health of a business.
Q3. Financial Ratios — XYZ Ltd. [10 Marks]
Given Data (Balance Sheet & P&L, 31 March 2019)
Current Assets = Cash 70,000 + Debtors 3,50,000 + Stock 4,90,000 = Rs. 9,10,000
Current Liabilities = Creditors 2,80,000 + Bills Pay. 1,40,000 + O/S Exp. 40,000 + Prov. Tax 1,00,000 = Rs. 5,60,000
Equity = Pref. Cap. 2,80,000 + Eq. Cap. 1,40,000 + Reserves 2,80,000 = Rs. 7,00,000
COGS = Rs. 8,40,000 | Net Income = Rs. 1,40,000 | Avg. Stock = (4,90,000+4,90,000)/2 = 4,90,000 (use given stock)
Interest = Rs. 42,000 | EBIT = Profit before tax + Interest = 2,80,000 + 42,000 = Rs. 3,22,000
Ratio Formula Calculation Result Interpretation
Current Ratio Current Assets / Current 9,10,000 / 5,60,000 1.625 : 1 Below ideal 2:1 — moderate liquidity; company can
Liabilities cover short-term debts but with limited buffer.

Return on Equity Net Income* / Total Equity (* 1,23,000 / 7,00,000 17.57% For every Rs.100 of equity, Rs.17.57 earned —
avail. for equity = 1,23,000) reasonably healthy ROE.

Net Profit Margin Net Income / Total Sales × 100 1,40,000 / 14,00,000 × 100 10% Company retains Rs.10 from every Rs.100 of sales —
decent margin.

Interest Coverage EBIT / Interest 3,22,000 / 42,000 7.67 times Very safe — earnings cover interest 7.67× ; low
default risk.
Stock Turnover COGS / Average Stock 8,40,000 / 4,90,000 1.71 times Low turnover — inventory moves slowly; may indicate
overstocking or slow sales.

Q5A. Basic & Diluted EPS

Given
Common shares: 10,00,000 | Pref. shares: 5,00,000 | Convertible bonds: Rs. 50,00,000 @ 6% → convertible into 2,00,000 shares
Options: 1,00,000 shares @ Rs. 30 exercise; Avg. market price = Rs. 40 | Net Income = Rs. 30,00,000 | Pref. Dividend = Rs. 40,000 | Tax =
25%
Basic EPS
 Basic EPS = (Net Income − Pref. Dividend) / Weighted Avg. Common Shares
= (30,00,000 − 40,000) / 10,00,000 = 29,60,000 / 10,00,000 = Rs. 2.96
Diluted EPS — Adjustments
1. Convertible Bonds: Interest saved = 50,00,000 × 6% = Rs. 3,00,000; After-tax saving = 3,00,000 × (1−0.25) = Rs. 2,25,000; Extra shares =
2,00,000
2. Stock Options (Treasury Stock Method): Shares issued = 1,00,000; Shares buyback = (1,00,000 × 30)/40 = 75,000; Net extra shares =
25,000
Diluted EPS = (29,60,000 + 2,25,000) / (10,00,000 + 2,00,000 + 25,000)
= 31,85,000 / 12,25,000 = Rs. 2.60
Q5B. Basic vs Diluted EPS — Analyst's View [2 Marks]
Basic EPS uses only currently outstanding shares — simpler but may overstate earnings per share. Diluted EPS assumes all dilutive
securities (options, convertible bonds, warrants) are exercised — gives a conservative, worst-case view for equity holders. Analysts prefer
Diluted EPS as it reflects economic reality; a large gap between Basic and Diluted EPS signals significant dilution risk for existing
shareholders.
Q6. Cash Flow Statement (Indirect Method) — Deccan Air Ltd. [8 Marks]
Working Notes
Increase in Fixed Assets (Gross): 31,00,000 − 30,00,000 = Rs. 1,00,000; But additions = Rs. 4,00,000 → Dep. written off = Rs. 3,00,000 ✓
Net Profit = Reserves increase = 15,00,000 − 5,00,000 = Rs. 10,00,000
Share Capital increase = 50,00,000 − 40,00,000 = Rs. 10,00,000 (new shares issued)
Loans decrease = 35,00,000 − 40,00,000 = Rs. (5,00,000) repaid
Current Liabilities decrease = 50,00,000 − 60,00,000 = Rs. (10,00,000)
Inventory decrease = 78,75,000 − 75,00,000 = Rs. 3,75,000 (source of cash)
Debtors increase = 40,00,000 − 35,00,000 = Rs. (5,00,000) (use of cash)
Investments (new) = Rs. (1,50,000)

Particulars Rs. Rs.

A. CASH FROM OPERATING ACTIVITIES
Net Profit before Tax & Dep. 10,00,000
Add: Depreciation 3,00,000
Operating Profit before WC changes 13,00,000
Changes in Working Capital:
Decrease in Inventory (+) 3,75,000
Increase in Debtors (−) (5,00,000)
Decrease in Current Liabilities (−) (10,00,000) (11,25,000)
Cash from Operations (A) 1,75,000

B. CASH FROM INVESTING ACTIVITIES

Purchase of Fixed Assets (4,00,000)
Purchase of Investments (1,50,000)
Cash used in Investing (B) (5,50,000)

C. CASH FROM FINANCING ACTIVITIES

Issue of Share Capital 10,00,000
Repayment of Secured Loans (5,00,000)
Cash from Financing (C) 5,00,000

Net Increase in Cash (A+B+C) 1,25,000

Opening Cash & Equivalents (01-04-2003) 1,25,000
Closing Cash & Equivalents (31-03-2004) 2,50,000 ✓

Q7. Annual Report — Evaluation of Company Performance

A. Annual Report as a Tool for Evaluating Performance (Analyst's View)
An Annual Report is a comprehensive document published by a company at year-end, covering financial and non-financial information. As a
financial analyst, I evaluate:
1. Financial Statements: P&L, Balance Sheet, Cash Flow — to assess profitability, liquidity, solvency. I compute key ratios (ROE, EPS, D/E
ratio).
2. Auditor's Report: An unqualified opinion builds confidence; qualifications or disclaimers are red flags.
3. MD&A (Management Discussion & Analysis): Management's narrative on performance, risks, and future strategy reveals quality of
leadership.
4. Notes to Accounts: Disclose contingent liabilities, related-party transactions, and accounting policies — crucial for adjusting reported
numbers.
5. Segment Reporting: Identifies which business lines are profitable — helps in valuation of diversified companies.
6. Corporate Governance Section: Board composition, remuneration, and audit committee independence — indicators of management quality.
B. Positive and Negative Externalities of Annual Reports
Positive Externalities Negative Externalities
Builds investor confidence & trust through transparency Selective disclosure — management may emphasize positives,
downplay risks
Helps creditors assess creditworthiness → better credit terms Information overload — lengthy reports may obscure key data
Benchmark for competitors, analysts, and regulators Window dressing — cosmetic adjustments near year-end inflate
apparent performance
Aids employees and society in understanding company's social Time lag — published 3-6 months after year-end; information may
impact (CSR disclosures) be stale
Facilitates market efficiency — better pricing of shares Cost of preparation — expensive for small companies; may
misallocate resources

Q8. Solvency & Efficiency Ratios [3 Marks]

Solvency Ratios
Measure a company's ability to meet long-term obligations. Key ratios:
Ratio Formula Interpretation
Debt-to-Equity Total Debt / Shareholders' Equity Higher = more leverage = more risk
Interest Coverage EBIT / Interest Expense Higher = safer; ability to service debt
Debt Ratio Total Liabilities / Total Assets < 0.5 is generally considered safe
Efficiency Ratios
Measure how well a company uses its assets. Key ratios:
Ratio Formula Interpretation
Inventory Turnover COGS / Avg. Inventory Higher = faster stock movement
Debtors Turnover Credit Sales / Avg. Debtors Higher = faster collection from customers
Asset Turnover Net Sales / Avg. Total Assets Higher = assets used more productively

Q9. Performance Statement [3 Marks]

A Performance Statement (also called the Profit & Loss Account or Income Statement) is a financial statement that summarises a company's
revenues, expenses, and profits/losses over a specific accounting period (e.g., a financial year).
Structure: It starts with Revenue (Sales), deducts Cost of Goods Sold to get Gross Profit, then deducts Operating Expenses (salaries, rent,
depreciation) to get Operating Profit (EBIT), then deducts interest and taxes to arrive at Net Profit after Tax (PAT).
Purpose: (1) Measures profitability over the period. (2) Helps stakeholders evaluate operational efficiency. (3) Forms the basis for computing
EPS, dividends, and tax. (4) Basis for management decisions on cost control and pricing strategy.
Q10. Challenges Faced by Entrepreneurs for Fund Raising [3 Marks]
# Challenge Brief Explanation
1 Lack of Credit History New businesses have no track record; banks and lenders hesitant to extend credit.
2 Collateral Requirements Entrepreneurs often lack tangible assets to pledge as security for loans.
3 Information Asymmetry Investors cannot accurately assess startup potential; entrepreneurs struggle to prove viability.
4 High Cost of Capital Interest rates for small/new businesses are high; equity dilutes ownership significantly.
5 Regulatory & Compliance Complex documentation and compliance requirements deter formal funding channels.
Burden
6 Limited Investor Awareness In developing markets, angel/VC ecosystem is underdeveloped; limited funding options.