[fizaali]

1) Correcting entries are actually the adjusting entries that will be adjusted or corrected into our nominal ledgers at the year-end?

2) I’ve seen some companies prefer to make unadjusted trial balance and then they do all the adjustments at the year-end (most probably) to prepare adjusted trial balance. BUT you prefer to make adjusting entries directly into the general/nominal ledgers and then make adjusted trial balance. Can we do both ways?

Thanks you do much for your kind help always:)

[fizaali]

I know but I’m trying to make sense whether these statements are correct or not. Please say whether they are right. Thanks

[fizaali]

I already watched the lecture but please correct me if I am wrong anywhere.

(1) Whenever we write-off the irrecoverable debtor we make this entry.

DR Irrecoverable expense
CR Receiveable

(2) We make the allowance against doubtful debt at the year-end but it does not remove the receivables from our books (so we need to remove).

DR Irrecoverable expense
CR Allowance For Receivable

(3) Whenever we write-off the doubtful debtor we make this entry

DR Allowance For Receivable
CR Receiveable

(4) Whenever we receive a cash from customers previously irrecoverable or doubtful debtors we always make this entry.

DR Cash
CR Receiveable

(5) We make allowance at the end of Year 1 and then we adjust it by the increase or decrease in Allowance For Receivable account at the end of Year 2.

[fizaali]

Sorry to ask again 🙂

1. I understood the prepayment but i don’t understand that when we pay the insurance do we received the invoice already and paid for it. (correct?)

2. Since prepayments are when we have paid for an expense but we pay for it only when we have received invoice from insurance company and then we make the payment?

3. In prepayment we pay for insurance once we have received the invoice and paid for it from insurance company. That’s why I said in the case of prepayment we have already received the invoice and made the payment. (correct?)

4. Please explain when we pay for the prepayment do we receive the invoice before we pay for the insurance (correct?)

I watched your lectures again nd again.

[fizaali]

Is it true that:
1. If invoice is received then it is prepayment whereas receiveable is when invoice is not received?

2. In accrual, if invoice is not received then it is accrual whereas payable is when invoice is received?

3. I thought prepayments and receiveables were related to each other likewise accruals and payables?

[fizaali]

My apology first to ask again but I was confused SIR.

1. Cash Account in maintained in general ledgers where we may have mistakes or errors which we need to identify?

2. If there is a mistake in the cash book then we correct the cash book balance which is not part of a bank reconciliation statement?

3. Bank Reconciliation statement is a statement which explains the difference in between the balances of CB differ with BS – which is due to unpresented cheques and lodgements not yet credited.

4. Bank reconciliation statement only adjust the balance as per bank statement by making entries of those items which is not already made by the bank?

5. My question is that do we adjust ONLY unpresented cheques and lodgements not yet credited and errors by bank in the bank reconciliation statement?

6. If there is a mistake in the bank statement then we correct the bank statement when we prepare bank reconciliation statement?

7. I did not understand your answer to this question. When making the entries in the cashbook OR bank reconciliation statement how do we know which item to add or less and in which book whether cashbook or bank reconciliation statement?

[fizaali]

1) Are you saying that when making the bank reconciliation statement do we always adjust only two balances into bank statement: unpresented cheques and lodgements not yet credited?

2) However all the other items will be adjusted in our cashbook?

3) Is it correct that when we prepare the bank reconciliation statement we adjust the balances in both the cashbook in T-account and bank statement (like you did in lecture) in order to reconcile them?

3) When making the bank reconciliation statement how do we know which item to add or less and in what book (whether cashbook or bank statement)?

Thank you for your last answer 🙂

[fizaali]

Sorry to ask in this thread. I hope you do not mind.

1) General ledgers is a book (ie ledger) where we record our entries in a T-shaped accounts which are called “T-Accounts”?

2) Receivable ledgers and Payable ledgers (ie personal ledgers) are called T-ledgers where we have individual T-ledgers of each customer and supplier?

3) In general ledgers: we have a T-shaped account where we record double entry. The reason it is an account because it has double entry system?

4) In personal ledgers: we have a T-shaped account where we have no double entry. The reason it is NOT an accout because it has no double entry system?

5) Account is where we record our double entry system with debits and credits likewise in the general ledgers BUT IF it is without double entry then it is not regarded as an account likewise in the personal ledgers?

Are they all correct?

[fizaali]

You mean that the company prepare draft financial statements (you mean all statements except statement of cash flows and Notes to SOPL) before the year-end so we can make adjustments for changes after the reporting date until they are finally authorized by the Board of directors and published to the Public.

Secondly, Final Accounts are prepared in the same way SOPL and SOFP is usually made?

Is that true?

[fizaali]

1. This means that the business can adopt any method either markup or margin profits they choose to apply. Both of these methods are used to choose a selling price for a product.

2. To apply markup we need to assess the cost of a product first before we add the desired % markup profit to get the selling price for their product.

3. To apply margin we need to choose the selling price of a product first before we add the desired % margin profit to getthe cost for their product.

Am I correct?

[fizaali]

1) Factory was burned by fire:
IF we had the information at the year-end that factory would be destroyed in future – we would have not adjusted it because the factory existed at reporting date but burned in another period.

But the next year we will reduce our non-current assets by $1m as the cost of factory.

2) Customer went bankrupt:
IF we had the information at the year-end that customer will not pay us – we would have written-off as irrecoverable debt.

3) Errors found in books:
IF we had the information at the year-end that there is an error in our book – we would have adjusted it.

4) Inventory sold for lower of cost:
IF we had the information at the year-end that inventory is valued wrongly (not according to IAS 2) – then we would have adjusted it by correcting.

5) New shares were issued:
IF we had the information at the year-end that new shares are issued – we would have not adjusted it because it happened after the reporting date for which we have no information about at year-end because it does not change our financial statement how we show it.

6) Dividend was announced but issued after year-end:
If we had the information at the year-end that dividend will be issued – we would have not adjusted it because the shares were issued after the year-end and we had no information about it at the year-end.

Sorry for a lengthy question. Thanks for your time SIR 🙂

[fizaali]

I did watch your FA lecture on this. I have few questions relating to you previous answer.

1) If I get it right then capital is refer to a money raised from equity and non-current liabilities

2) Net assets (total assets less current liabilities) is the excess assets left after settling all the current liabilities. This means that it will be equal to the capital plus non-current liabilities?

3) BUT we learn that private companies are not allowed to raise money from public by law!!!

Thanks after all 🙂

[fizaali]

Plesse respond to this whether we should take the profit before interest and tax (PBIT) OR profit after tax (net profit) for the calculation of sensitivity analysis?

Secondly, the higher the % of sensitivity analysis the better it is. (Is this correct too?)

[fizaali]

Can you please explain should we take the profit before interest and tax OR profit after tax for the calculation of sensitivity analysis?

Is this the correct formula =? PBIT / Any variable item

The higher the percentage the better it is.

[fizaali]

Please explain these too. Thank you

(Q#1)
The money borrowed by shareholders is called equity which we have to return to the people in case of liquidation. Similarly, the money borrowed from financial institutions such as banks is called liabilities.

(Q#2)
Another question is that: I have read in my textbook that ROCE shows how efficiently the company has used its assets to generate profits for the business.

Could you please explain why the word assets are used instead of capital employed because it is the capital that generate profits according to ROCE formula (where the assets come from!?)

[fizaali]

Please explain both common law remedy and equity law remedy in contract law, tort law and employment law!?

[fizaali]

I wanted to know how do we assess the damages when there is a breach in contract law, Tort law, and Employment law?

[fizaali]

Thanks for your reply. 🙂 🙂

[fizaali]

Yes I have seen your lecture frequently and this is what I understood.

If division A is shut down then we’ll save divisional fixed costs of $650m and half of allocated head office cost of $25m plus the variable costs of $400m so the total costs saved is $1075. While we lose sales revenue of $1000m so it will change our net loss of $100m to the net profit of $75m.

When considering a shutdown situation we always lose sales revenue that we would be earning otherwise but we’ll save all the costs related to production.

[fizaali]

Thanks for the answer and the link 🙂

Sir I need your help with the question Medcomp in mar/june 2021 where we are asked the perspective of the balanced scorecard but I was unable to correctly write down the correct goals and their measures to evaluate the performance.

I hope CSFs are goals and KPIs are measures.

Please help me here!!!

[fizaali]

Thanks for that but please first tell me what I said in my previous query was correct about scenarios of relevant cost when material is regularly used and when it is not regularly used?

For example:
If a contract requires 100 kgs of material X which is not regularly used but it can be modified at a cost of $12 per kg so it could be used as substitute for material Y which is in regular use and currently cost $20 per kg.

[doubt 1]
We have a choice either to buy the material Y at $20 or we could modify material X at $12 which obviously we prefer to modify and use it due to lower cost.

Since we are considering the option to modify and losing the opportunity of purchasing material Y at a cost of $20 so the opportunity cost is the net incremental cost of $8.

[doubt 2]
But I don’t understand that how it could be incremental cash flow because we are modifying because of lower cost so we actually don’t have any incremental cost rather we have a saving of $8.

Please help me here with these two doubts which one is correct?

[fizaali]

Replacing every two years = NPV ($72,972)

This is the cost of replacing the asset every two years – means that we will sell this machine after two years at a cost of $72,972 and this is going to be paid every two years time even if we bought a new machine.

You said in the lecture that we can’t compare the asset replacing every 2 years with the replacing every 3 years because there would be different NPVs resulted due to differences in years of asset replacement [Is that correct?]

So to make comparable the asset replacement of every 2 years & every 3 years; We calculate EAC which means to discount the NPV $72,972 with the Annuity Discount Factor of 15% for 2 years of replacement which would result in a cost of ($44,878) which is paid every year.

If we discount the EAC of ($44,878) every 2 years it will be equal to the NPV of ($72,972) like as such:

[Time 1]
$44878 / (1.15)^1 = $39,025
[Time 2]
$44878 / (1.15)^2 = $33,935

Sum of the figures would be equal to $72,972 replacing every two years. The difference is due to the rounding issue…

[fizaali]

[Question]
A company is calculating the relevant cost of the material to be used on a particular contract. The contract requires 4200 kgs of material H and this can be bought for $6.30 per kg. The company bought 10,000 kgs of material H some time ago when it paid $4.50 per kg. Currently 3700 kgs of the remains in inventory. The inventory of material H could be sold for $3.20 per kg.

The company has no other use for material H other than on this contract, but this could be modified it at a cost of $3.70 per kg and use it as a substitute for material J. Material J is regularly used by the company and can be bought for $7.50 per kg.

[My questions]
Is it true that we are considering whether the 3700 kgs held in inventory which has no other use besides this new contract; so we have two choices here such as:

either:
1) we can sell the 3700 kgs in scrap at a cost of $3.20 or
2) we can use 3700 kgs of material H in new contract rather than on another project as a substitute for material J; so in this case, we do save $3.80 (7.50 – 3.70) because we are modifying the material H at a cost of $3.70 to use it on another project for the material J but we are also saving the cost $7.50 of buying the material J. So, the Net Benefit from alternative use is $3.80.

Please correct me if I am wrong somewhere. Thanks for your last reply 🙂

[fizaali]

Yes, I have watched it 🙂 BUT sir you never used any diagram for relevant cost for material in different situations!?

Could you also please tell me if I have correctly got the relevant cost for material in situations like below?

1) If material is not in stock:
RC = Purchase cost

2) if material is in stock but it has no regular use:
RC = Opportunity cost

where opportunity cost is higher of:
i) Scrap value
ii) Alternative Use

Please first correct me if I had correctly mentioned everything or not. Secondly, please do share how do we calculate the Net Benefit from Alternative Use? Does Alternative Use include modification cost?

[fizaali]

1) You mentioned Asset Valuation which I assume also called Net Assets Method (Total Assets – Total Liabilities) which is actually Equity of the company which is used to measure the value of a company.

2) How is it possible or logical that the market value of shares is determined by the shareholders! (I’m puzzled) because I thought it was the stock market that set the MV of share price for shareholders by taking demand & supply into consideration to set the share price.

(I’m thinking that if shareholders are allowed to set MV of shares then they will set such a high market value which could be overvalued so that they can sell at high value earning more profits?)

3) Is Net Asset Method is actually the most common way to measure the value of the company which is actually the Equity of the company (or any other ratios that I mentioned above which is most common) & whether it is used by the company specifically to know the worth of their company (in case they want to liquidate the company)?

4) Equity section in SOFP simply represents the worth of the company. Anyone considering buying the company will simply be looking at the company’s SOFP to know its worth & how much to offer for the purchases?

Thanks for your previous reply. It was worth great help 🙂

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