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WHAT IS LIFO AND FIFO

admin — Wed, 25 Nov 2009 11:06:10 +0000

LIFO method is based on the assumption that last item of material purchased is the first to be issued. While FIFO is based on the material first received are the first to issue.

In LIFO price of the last consignment is used for pricing material issues until it is exhausted. In FIFO units issued are priced at the oldest cost price listed in stock ledger sheets.

LIFO helps reducing the burden of income tax during period of rising price. FIFO is not suitable in times of rising or falling prices.

USES OF FUNDS

admin — Sat, 21 Nov 2009 12:55:11 +0000

The transactions that decrease the working capital are application or uses of funds.

Following are the main uses of funds

1) Loss from operations – Just as profit from operations is treated as a source of funds, in the same way, loss from operations should be treated as an application if funds. Funds lost in operations result in an outflow of funds from business as a result of which either there is decrease in current assets or increase in current liabilities.

2) Redemption (or repayment) of share capital -: Pay back of Equity shares and redemption of preference shares result in the decrease of cash or working capital. Hence it is an application of funds. The premium paid on redemption is also an application of funds.

FUND FLOW STATEMENT

admin — Fri, 20 Nov 2009 22:41:47 +0000

The balance sheet of a firm discloses the position of assets, liabilities and capital at the end of particular year. But it doesn’t disclose the causes of changes in these items between the end of previous year and the end of current year. Therefore, an additional statement called ‘ funds flow statement’ is prepared to show the changes in assets, liabilities and capital between the dates of two balance sheets. Funds flow statement is known by various other names also, such as “ Statement of sources and Application of Funds” and “where got and where gone statement”.

A “statement of changes in financial position’ summarizes for the period covered by it, the changes in the financial position including the sources from which funds were obtained by enterprise and the specific uses to which such funds are applied”.

Sources of funds

Funds (profits) from operations – Profits resulting from business operations are the most important sources of funds. Various non – funds items are added back to the figure of net profit as shown by the profit or loss account, such as Depreciation, goodwill written off, Preliminary Expenses written off, discount written off, transfer to reserve, loss on sale of fixed assets etc. Similarly, various non-trading income are deducted from profits such as, dividend received and gains on sales of fixed assets.

Issue of shares – When shares are issued for cash they are source of funds because the net amount received from the issue of shares increases the working capital. If the shares are issued at a premium, the premium is also a source of funds. But when shares are issued for some fixed asset, they are not source of funds.

Conservatism principle

admin — Thu, 19 Nov 2009 13:02:24 +0000

I) Conservatism Principle – According to this principle, all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealized gains should be ignored. On other words, conservatism is the policy of playing safe. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty, like- wise, when there are different alternatives for recording a transaction, the one having least favorable immediate effect on profits as capital should be adopted. Following are the principle of conservatism:-

a) Closing stock is valued at cost price as market price whichever is less.

b) Provision for a doubtful debt is created in anticipation of actual bad – debts.

c) Jointly life insurance policy is shown only at sounder value as against the amount paid.

d) Provision for a pending law suit against the firm, which may either be decided in its favor.

TRIAL BALANCE

admin — Thu, 19 Nov 2009 02:02:59 +0000

I) Trail Balance – Trail balance is the list of debit and credit balances, taken

out from ledger. It also includes the balances of cash and bank taken from cash book.

According William Pickles,” The statement prepared with the help of ledger balance at the end of financial year (or it any other date) to find out whether debit total agrees with credit total is called Trail Balance”

Needs for preparing Trail Balance

a) To ascertain the arithmetical accuracy of the ledger accounts – The trail balance provides a useful check upon the ledger postings. If a trail balance tallies, it is proved that the posting to the ledger account is correct.

b) To help in the detection or location of errors – If a trail balance does not tally it indicates that some errors have occurred and the accountant will them proceed to locate such errors.

c) For the preparation of Final accounts – As the trail balance contains the list of all the ledger accounts, it provides a basis for further processing of accounting data, i.e., preparation of final accounts namely Trading and Profit & Loss Accounts and a Balance Sheet.