Category: Accounting & Finance

Cost of Goods Sold (COGS) refers to those costs which are directly associated with production of goods or services. For manufacturing companies, amount of raw materials used in the manufacturing of goods is the cost of goods sold. It does not include any indirect cost like rent, wages, utilities etc.

The value of cost of goods sold is used in the calculation of gross profit, operating profit and net profit.

Formula for the calculation of Cost of Goods Sold (COGS)

Cost of goods sold is calculated by adding opening stock and purchases made during the financial year and then subtracting the amount of closing stock.

 Cost of goods sold = (Opening stock + Purchases) – Closing stock

Example:

ABC ltd has total stock of INR 1,00,000 on 1st April 2016. During the financial year 2016 to 2017, the company purchased raw material of INR 90,000 and ended up with stock worth of INR 1,10,000 on 31st March 2017.

COGS (for the financial year 2016 – 17) = (1,00,000 + 90,000) – 1,10,000 = INR 80,000

Return on assets (ROA) is one of the profitability ratios used to gauge the efficiency of firm to generate income from its assets. ROA shows the relationship between net income and total assets of a company.

Higher degree of this ratio is always considered favorable and shows the strength of management to generate profit by utilizing its assets.

Formula for the calculation of return on assets (ROA):

Return on assets is calculated by dividing the net income by total assets. Therefore, the formula which can be used in performing the calculation is

Return on assets = Net Income/ Total assets

For better picture, total average assets is used instead of total assets.

Return on assets = Net Income / Average assets

Average assets is calculated by taking the average of assets at the beginning and assets at the end of the period.

Average assets = (Assets at the beginning + Assets at the end) / 2

Balance sheet is one of the important financial statements which a joint stock company has to prepare at the end of every financial year. It is a summarized report of assets, liabilities and shareholders’s funds of a company. The balance sheet is used to access the current position of a company.

It is mandatory for every public (limited) company in India to disclose its balance sheet to general public but not for private companies to do so.

A balance sheet has two sides – Liability and asset.

On the left hand side i.e. liability side, a company lists all of its liabilities including share capital, reserve and surplus, secured & unsecured loans and current liabilities & provisions.

On the right hand side i.e. asset side, a company lists all of its assets including fixed assets, investments, current assets, loan & advances and miscellaneous expenditures.

Format of a horizontal balance sheet:

 

Balance sheet of XYZ Ltd.

As on 31/03/20..

Liabilities	Figure for the current year (Rs.)	Assets	Figure for the current year (Rs.)
Share Capital: Authorized … shares of Rs … each Preference Equity Less: Calls unpaid Add: Forfeited shares		Fixed Assets: Goodwill Land & Building Leasehold premises Railway sidings Plant and machinery Furniture Patents and trademark Live stock Vehicles
Reserve and Surplus: Capital reserve Capital redemption reserve Securities premium Other reserves P&L A/c		Investments: Government or trust securities, shares, debentures, bonds etc.
Secured Loans: Debentures Loans and advances from banks Loan and advances from subsidiaries Other loan and advances		Current Assets, Loans and Advances: Current Assets: Cash and bank balance Accrued interest Stores and spare parts Loose tools Stock in trade WIP Accounts receivable Loans and Advances: Advances and loans to subsidiaries Bills receivables Advance payments and unexpired discounts
Unsecured Loans: Fixed deposits Loan and advances from subsidiaries Short term loans and advances Other loans and advances		Miscellaneous – Expenditure: Preliminary expenses Discount on issue of shares Other deferred expenses
Current Liabilities and Provisions: Current Liabilities: Accounts payable Accrued expenses Short term notes Current portion of long term notes Provisions: For taxation For dividends For contingencies For PF Schemes For insurance, pension and other such benefits		P & L A/c (debit balance: If any)
Total		Total

 

It should be noted that the “total” of both the sides always remains equal.

Click here to download a PDF of this file.

Definition:

Debt instrument is a document by which an issuing party raises funds and promises to repay the same as per the terms of the contract. A debt instrument is basically a medium of raising ‘borrower’s capital’ by a company.

It serves as an enforceable document for the lender of the fund in case of any dispute between lender and borrower.

These instruments are mainly used to generate some income by investors. The borrower (issuer) has to pay some kind of interest on these instruments which becomes the yield for investors.

Types of debt instruments:

Debt instruments normally include all types of loan fund raised by a company. Some of them are:

Debenture: A debenture is a document that either creates a debt or acknowledges it.

Bond: Bonds are instruments of indebtedness of the issuer to the holder. These are long term source of raising funds by a company. A fixed rate of interest called coupon is paid on these instruments.

Mortgage: A legal agreement between two parties wherein one party owns some debt from the other party in exchange of title of some property. The lender of money is known as mortgagee and borrower of money is known as mortgagor.

Lease: An agreement by which owner of a property (lessor) grants permission to other party (lessee) to use his/her property for a specific time period. The permission is grant only when the lessee agrees to pay some rent to the owner of that property.

Certificate of deposits: A certificate of deposit (CD) entitles its bearer to receive interest on the amount deposited by the bearer.

Liquid assets are thought of as current assets, but in practical the two terms are different. Yes, it would be wise to say that all liquid assets are part of current assets too.

Now the question arises:

What is the difference between current assets and liquid assets?

The main difference between these two arises on the basis of liquidity period. Subsequent paragraph can be refer for the same:

Current assets: These are the assets which can be converted into cash within a period of one year.

Example:

Cash, bank balance, accounts receivable, inventory, prepaid expenses etc.

Liquid assets: These assets are considered more liquid than current assets in sense that they can be converted into cash within a very short time (90 days).

Example:

Cash, bank balance, accounts receivable etc. and excludes inventory and prepaid expenses.

Liquid assets are assumed to be converted into cash at any point of time. That’s the reason why inventory (as it is difficult to convert, when needed) and prepaid expenses (cannot be converted into cash at all) are not considered as liquid assets.