Prachi Industries purchased a land worth 2 crores, office fixtures and furniture worth Rs 50 lakhs. Five years back the company has purchased an investment property for Rs 5 crores out of which today they disposed of 20% of the property, at a realizable value of Rs 3 crores. As a consultant to the company discuss as per the needs of corporate reporting the nature of these items, how the above items needs to be presented and disclosed in the corporate financial statement. (10 Marks)
Corporate Reporting for Prachi Industries
Introduction:
Financial reporting plays a crucial role in presenting a clear picture of a company’s financial health to stakeholders. This report discusses the classification, presentation, and disclosure of recent transactions by Prachi Industries in their corporate financial statements, based on the principles of financial accounting.
Nature of the Items:
- Land: This is a tangible fixed asset with a relatively long useful life. Its value is unlikely to fluctuate significantly in the short term.
- Office Fixtures and Furniture: These are also tangible fixed assets with a shorter useful life than land. Their value gradually decreases over time due to depreciation.
- Investment Property (Original Purchase): This is classified as a non-current asset held for the purpose of generating rental income or capital appreciation.
- Disposal of Investment Property: This transaction represents the sale of a portion of the non-current asset.
Presentation and Disclosure in Financial Statements:
1. Land:
- Presentation: Land will be included in the Property, Plant & Equipment (PPE) section of the balance sheet at its historical purchase price of ₹2 crore.
- Disclosure: No additional disclosures for land are typically required.
2. Office Fixtures and Furniture:
- Presentation: These will be included in the PPE section of the balance sheet, with their net book value reflecting the initial purchase price minus accumulated depreciation.
- Disclosure: The company can disclose depreciation methods used and the average useful life of these assets in the notes to the financial statements.
3. Investment Property (Original Purchase):
- Presentation: Initially, the investment property will be included in the non-current assets section of the balance sheet at its purchase price of ₹5 crore.
- Disclosure: The company should disclose the nature and purpose of holding the investment property, along with its gross carrying amount and any depreciation recognized.
4. Disposal of Investment Property:
- Presentation: The sale proceeds of ₹3 crore will be recognized as revenue in the income statement.
- Disclosure: The company should disclose the disposal of a portion of the investment property in the notes to the financial statements, including the original purchase price, sale proceeds, and any gain or loss recognized on the transaction.
Conclusion:
By following these guidelines, Prachi Industries can ensure accurate and transparent presentation of their financial position and activities in their corporate financial statements. This facilitates informed decision-making by stakeholders and enhances the company’s credibility.
Ms. Shravani , our accounts manager, is responsible for overseeing financial activities at Mogra Enterprises. She ensures accurate bookkeeping and compliance with accounting assumptions. Her junior executive is confused about how the various accounting assumptions plays a vital role in accounting. Further she wants Ms Shravani to help her in understanding the difference between the accounting period assumption and separate entity assumption, Discuss how (you being) Ms. Shravani would like to explain all these in simple terms. (10 Marks)
The Accounting Period Assumption:
Imagine Mogra Enterprises is like a movie. The movie has a beginning, middle, and end, but it actually happened over a continuous period of time. Similarly, a company’s life is continuous, but for accounting purposes, we divide it into artificial periods like months or years. This is the accounting period assumption.
Think of it like taking snapshots of the movie at regular intervals. Each snapshot captures what’s happening at that specific point in time, but it doesn’t show the whole picture. Financial statements are like those snapshots – they provide a glimpse into the company’s financial health at a specific point in time, usually at the end of a quarter or year.
The Separate Entity Assumption:
This assumption states that the business is a separate entity from its owner(s) and other businesses. This means that the personal transactions of the owner(s) should not be mixed with the business’s transactions.
For example, if the owner of Mogra Enterprises uses company funds to buy a personal car, that transaction wouldn’t be recorded in the company’s financial statements. It would be considered the owner’s personal expense, not a business expense.
Here’s an analogy to explain the difference:
Imagine Mogra Enterprises is a pizza restaurant. The accounting period assumption is like dividing the restaurant’s operations into slices, like lunch and dinner rushes. Each slice represents a specific period of time. The separate entity assumption is like saying that the ingredients used to make the pizza (business’s money) are separate from the owner’s personal groceries (owner’s money).
By following these assumptions, we can ensure that financial statements are consistent and comparable across different companies and over time. This helps users, like investors and creditors, to better understand the company’s financial performance and make informed decisions.
NMIMS April 2024 Assignment Solution link:
https://www.youtube.com/playlist?list=PLHnbiOKlMXfmGmDGVp92aaaZ-pGtAB3qv
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