ICWA(CMA) Coaching Updates

 This is one of the important chapter in graduation level as well as in professional exams.

The brief notes on methods and calculation of Goodwill in easy steps is presented below:

Methods of Valuation of Goodwill

1. Average Profits Method
2. Super Profits Method
3. Annuity Method
4. Capitalisation Method
   1. By Average Profits Method
   2. By Super Profits Method

 Let us discuss each method in detail.

1. AVERAGE PROFITS METHOD

STEPS for calculation

1. Adjusted average annual profits (See note 1)
2. Number of years of purchase (given in question)
3. Value of Goodwill= Adjusted average annual profits multiplied by number of years of purchase

Note :

• If number of years of purchase for valuation of goodwill not given in question, then the number of years for which data of profit or loss are given should be taken.

1. Calculation of Adjusted average annual profits:
   

      Steps for calculating it are as follows:

• Calculation of Adjusted profits OR Adjusted Future profits OR Future Maintainable Profits

•  Calculation of Adjusted average profits

There are 2 methods:

Simple average method

(If in the question there is fluctuation in the profits for given periods with no specific trend then use this method). The formula is

 Total adjusted profits of all the given years divided by number of years

Weighted average method

(Increasing or Decreasing trend in the profits for periods given in the question then use this method). The format for calculating it is as follows

2. SUPER PROFITS METHOD

STEPS for calcuation

1. Adjusted average annual profits (See Note below)
2. Average Capital Employed (See Note below)
3. Normal Rate of Return (given in question)
4. Normal Profits = Average Capital Employed multiplied by Normal Rate of Return
5. Super Profits = Adjusted average annual profits less Normal Profits
6. Value of Goodwill = Super Profits multiplied by number of years of purchase

Note

• Calculation of Adjusted average annual profits (as discussed earlier)

• Calculation of Average Capital Employed

            There are two ways to ascertain Average Capital Employed.Asset Based Approach

 Liabilities Based Approach

3. ANNUITY METHOD 

STEPS for calculation

1. Super Profits (Refer Super Profits method )
2. Annuity Value (given in question)
3. Value of Goodwill = Super profits multiplied by Annuity Value

4. CAPITALISATION METHOD

By Average Profits Method

STEPS for calculation

1. Adjusted average annual profits (See Note below)
2. Normal Rate of Return (given in question)
3. Total Value of Business = (Adjusted average annual profits divided by Normal Rate of Return) multiplied by 100
4. Value of Goodwill = Total Value of Business Less Capital Employed

 Note: Capital Employed = Assets minus Liabilities

By Super Profits Method

 STEPS for calculation

1. Super Profits (Refer Super Profits method )
2. Normal Rate of Return (given in question)
3. Value of Goodwill = (Super Profits divided by NRR) multipled by 100

Is accountancy science and art?:--Accountancy plays a very important role in these days of growing commercial and trade. Frequently various laws and Acts like—Company’s Act, M.R.T.P. Act are being changed to meet the various requirements of an economy. So, business, trade, commerce are becoming more and more complex with the changes of business laws and regulations , the role of accountancy is also changing. Accountancy is both science and art. Science means knowledge while art is action or the way of doing a thing in a significant way on the basis of certain accepted principles. Now-a-days , accountancy has so much of practical utility that its theoretical study is overshadowed by its practical application. It has now become a practice-oriented subject. If, we analyse the definitions of accountancy we will find that it is a systematic and scientific record of transactions in a set of books. Recording of transactions is an art which is done on the basis of certain accounting principles.

Co branding is the utilization of two or more brands to name a new product. The ingredient brands help each other to achieve their aims. The overall synchronization between the brand pair and the new product has to be kept in mind.

Example of co-branding - Citibank co-branded with MTV to launch a co-branded debit card. This card is beneficial to customers who can avail benefits at specific outlets called MTV Citibank club.

A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.

When a corporation declares a dividend on its common stock, it will credit a current liability account Dividends Payable and will debit either 1) Retained Earnings, or 2)Cash Dividends Declared. Cash Dividends Declared is a balance sheet account, but it is a temporary account.

The cash dividend affects primarily cash and shareholders' equity accounts. There is no separate balance sheet account for dividends after they are paid. However, after the dividend declaration and before the actual payment, the company records a liability to its shareholders in the dividend payable account.

For Companies, Dividends Are Liabilities. Conversely, the assets of the issuing company are reduced by the payment of a dividend. ... When a dividend is declared, the total value is deducted from the company's retained earnings and transferred to a temporary liability sub-account called dividends payable.

Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period of time.The formula is given below:--

Stock Turnover=[Cost of sales / Average stock Held]

If a company has a high ratio (anywhere above 1) then they are capable of paying their short-term obligations. The higher the ratio, the more capable the company. On the other hand, if the company's current ratio is below 1, this suggests that the company is not able to pay off their short-term liabilities with cash.

Inventory Turnover Ratio is the ratio of Cost of Goods Sold / Average Inventory during the same time period. The higher the Inventory Turnover Ratio, the more likely it is that a business is carrying too much inventory. Overstocking means that cash is being tied up in inventory assets for a prolonged period.

A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits.

A country's fiscal deficit is usually communicated as a percentage of its gross domestic product (GDP).

Deficits are also caused from a decline in revenue due to an economic contraction such as a recession or depression. Unplanned events, such as natural disasters and war, can also cause deficits.

A deficit is the amount by which a sum falls short of some reference amount. Ineconomics, a deficit is an excess of expenditures over revenue in a given time period; in more specific cases it may refer to: Balance of payments deficit, when the balance of payments is negative. Government budget deficit.

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included. Primary deficit is one of the parts of fiscal deficit.

Government spending, inflation and lower revenue are among some of the main factors that point to fiscal deficit. But when there is an increase in fiscal deficit it means that the government is spending too much while it is earning less. Hence, it isimportant that the government keeps its expenses under control.

Dependent Branch: A branch which is dependent upon Head Office mainly for “Goods and Cash”.  Books of accounts relating to such branch also will be maintained by Head Office.

Features of Dependent Branch:

1. Branch receives goods from Head Office. Only those goods supplied by Head office will be dealt (sold) by branch. However, in case of need/emergency, the branch may be allowed to make local purchase after getting consent from Head Office. For those purchases, payments may be directly made by Head office or funds transferred to branch.
2. Goods may be supplied to Head office at Cost price / Invoice price
3. Branch normally makes cash sales. In some cases, branch is allowed to make credit sales also to regular/approved customers (with the consent of Head office).
4. Cash sales and collection from debtors are periodically remitted to Head office.
5. Branch accounts will be maintained by Head Office. However Branch maintains memorandum books like petty cash, debtors etc.
6. Branch expenses like salary, rent etc. are paid/met by Head office. For this purpose there can be two alternatives.
7. Head office separately sends cash to branch for meeting expenses
8. Branch while remitting cash to head office, deducts some portion (towards expenses) and balance will be remitted.

Accounting is the language of business. The objective of such language is to communicate information which is useful for varied category of people. Collectively we call them as “Users of financial statements”. Day by day, users of financial statement getting expanded, here is the list of “Users” which can be remembered in our Traditional “A,B, C, D .. Format.

What are the Statutory Provisions relating to the Transfer of Profits to Reserves?

Answer:

As per companies Act, 2013 there is no requirement of minimum transfer of profits to reserves. The company can transfer any amount of profits to reserves as per its own judgement before paying dividends.

 Depreciation is calculated from the period when the asset is put to use as per INCOME TAX Act.

Managerial Remuneration: Section 197 AND SCHEDULE V prescribes overall maximum managerial remuneration. Managerial personnel means directors on the board of directors.

Summary of different limits based on net profit of the company is :