Derivatives Market in Nepal

2011-04-30T06:58:00.001-07:00

CONTENTS:

INTRODUCTION TO DERVATIVE MARKET IN NEPAL

HISTORY OF DERIVATIVE MARKET

TYPES OF DERIVATIVE CONTRACTS IN NEPAL

BENEFITS OF DERIVATIVE MARKET

DRAWBACKS OF DERIVATIVE MARKET

THE PRESENT SITUATION OF DERIVATIVE MARKET IN NEPAL

CONCLUSION

INTRODUCTION TO DERIVATIVE MARKET:

Derivatives are financial contracts or financial instruments whose prices are derived from the price of something else (known as the underlying). The underlying price on which a derivative is based can be that of an asset (e.g., commodities, equities (stock), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index (CPI) i.e. inflation derivatives), or other items. Credit derivatives are based on loans, bonds or other forms of credit. Derivatives allow risk about the price of the underlying asset to be transferred from one party to another. The main types of derivatives are forward, futures, options and swaps.

The word “Derivative” is a magic word. There can be derivative of everything e.g., commodities, equities (stock), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index (CPI) i.e. inflation derivatives), or other items. So there is scope for every one and every sector like growers, traders, exporters, importers, financial institutions, industrialists, investors and end users.

HISTORY OF DERIVATIVE MARKET (IN NEPAL):

Markets for futures trading were developed initially to help agricultural producers and consumers manage the price risks they faced harvesting, marketing and processing food crops each year. Today, futures exist not only on agricultural products, but also a wide array of financial, stock and forex markets.

The world's oldest established futures exchange, the Chicago Board of Trade, was founded in 1848 by 82 Chicago merchants. The first of what were then called "to arrive" contracts were flour, timothy seed and hay, which came into use in 1849.

Meanwhile, what is now the USA's largest futures exchange, the Chicago Mercantile Exchange, was founded as the Chicago Butter and Egg Board in 1898.
In 2007, CME and CBOT officially merged, and are now collectively known as CME group Inc., the worlds largest and most diverse derivatives exchange.

In the 21st century, online commodity trading has become increasingly popular, and commodity brokers offer front-end interfaces to trade these electronic-based markets. A commodities broker may also continue to offer access to the traditional pit-traded, or open-outcry, markets that established the commodity exchanges.

In Nepal, three commodities exchanges — Commodities & Metal Exchange Nepal Ltd (COMEN), Mercantile Exchange Nepal Ltd (MEX) and NDEX — are working to provide investment opportunities to around 2,000-3,000 people. The majority of transactions of community exchange are in gold and crude oil, products not produced in Nepal.

In Nepal, commodity market is introduced by Commodities Exchange Nepal Ltd (COMEN). COMEN have been providing trade services in agriculture goods. It will build warehouses to improve services. It also applied to Securities Board of Nepal (SEBON) on November 11, 2009 for starting a new stock exchange.

Now with new vision and new technology Mercantile Exchange Nepal Ltd. (MEX) has been established. MEX has also made immense contribution in raising awareness about and catalyzing implementation of policy reforms in the commodity sector. MEX is the first Exchange to take up the issue of differential treatment of speculative loss. It is also the first Exchange to enroll participation of high net-worth corporate securities members in commodity derivatives market.

Nepal Derivative Exchange (NDEX) is an Electronic Commodity and derivative Market which provides online state-of-the-art platform for traders to buy and sell Commodities and derivatives products efficiently and at a justified price. NDEX aims to facilitate trading on commodities, metals, energies, currencies and others.NDEX was developed considering all the sophisticated needs of traders. It contains tools and information that a trader needs to successfully engage in trading and investment. Here one will find the easy-to-use and pioneering trading software that gives fast and accurate prices of various products. At NDEX, people can trade in its products through its software and fulfill their respective needs.NDEX is a professionally managed on-line multi commodities and derivatives exchange. NDEX is a public limited company incorporated on November 20, 2008 under the Companies Act, 2063.

TYPES OF DERIVATIVE CONTRACTS IN NEPAL:

There are two distinct groups of derivative contracts, which are distinguished by the way that they are traded in market:

1. Over-the-counter (OTC) derivatives

These derivative contracts are traded directly between two parties, without going through an intermediary product. For example, forward rate agreements or exotic options.

2. Exchange-traded derivatives

These derivative contracts are traded via derivatives exchanges. Here the exchange acts as an intermediary and takes initial margins from both sides of the trade.

The difference to OTC is that there is no direct link between the parties, but the exchange is playing the counterpart role.

The most used derivatives are:

· Economic derivatives

They pay off according to economic reports as measured and reported by national statistical agencies.

· Energy derivatives

They pay off according to a wide variety of indexed energy prices. They are classified as either physical or financial. Physical derivatives include the obligation to actual delivery of the underlying energy commodity, whatever this may be

· Freight derivatives

They represent trading in future levels of freight rates, primarily for dry bulk carriers and tankers. They include exchange traded futures and options as well as freight forward contracts. They are used by ship owners and operators, oil companies, trading companies and grain houses as tools for managing freight market risks

· Insurance derivatives

· Weather derivatives

They can be used by organizations or individuals as part of a risk management strategy to reduce risk associated with adverse or unexpected weather conditions. Here the underlying asset rain/temperature/snow has no direct value. Farmers can use weather derivatives to hedge against poor harvests caused by drought or frost, theme parks may want to insure against rainy weekends during peak summer seasons, and gas and power companies may use heating (HDD) or cooling degree days (CDD) contracts to smooth earnings.

· Credit derivatives

They transfer credit risk from a protection buyer to a credit protection seller. Credit derivative products can take many forms, such as credit default options, credit limited notes and total return swaps.

BENEFITS OF THE DERIVATIVE MARKET (OF NEPAL)

Growers, traders, exporters, importers can insure their risk from the fluctuating product prices by taking futures position in the derivative market.

Financial institutions can mitigate or even eliminate the interest rate risk by locking their interest rate with derivative exchange.

Investors can invest in the products and can get attractive returns.

End users can buy the goods at a pre-determined price so that they can get away from the risk of increase in price.

Utilizing this market, investors have the advantage to determine the conditions of the contract they wish to enter, develop tailor-made contracts, while they secure a certain degree of confidentiality in respect to their transactions.

DRAWBACKS OF THE DERIVATIVE MARKET(OF NEPAL)

Different kinds of risks are faced by participants in derivatives market:

credit risk

Credit risk on account of default by counter party: This is very low or almost zeros because the Exchange takes on the responsibility for the performance of contracts

market risk

Market risk is the risk of loss on account of adverse movement of price.

liquidity risk

Liquidity risks are the risk that unwinding of transactions may be difficult, if the market is illiquid.

legal risk

Legal risk is that legal objections might be raised; regulatory framework might not allow some activities.

operational risk

Operational risk is the risk arising out of some operational difficulties like, failure of electricity, due to which it becomes difficult to operate in the market.

THE PRESENT SITUATION OF THE NEPALESE DERIVATIVE MARKET

The Nepalese Derivative Market is very young. The investors haven’t been able to analyze the situation properly. They are not smart enough to study the situation and take good judgments. There is no regulating body in the Nepalese derivative market. Most of the investors find the derivative market as some sorts of gambling place where people gather together for gambling purpose and try to make out high returns with least investments. But it is very important that one must realize that there is a difference between gambling and speculation and the future markets are not like “Satta” markets.

Participants in physical markets use futures market for price discovery and price risk management. In fact, in the absence of futures market, they would be compelled to speculate on prices. Futures market helps them to avoid speculation by entering into hedge contracts. It is however extremely unlikely for every hedger to find a hedger counterparty with matching requirements. The hedgers intend to shift price risk, which they can only if there are participants willing to accept the risk. Speculators are such participants who are willing to take risk of hedgers in the expectation of making profit. Speculators provide liquidity to the market; therefore, it is difficult to imagine a futures market functioning without speculators.

So there comes a question like what is the difference between a speculator and a gambler. Speculators are not gamblers, since they do not create risk, but merely accept the risk, which already exists in the market. The speculators are the persons who try to assimilate all the possible price-sensitive information, on the basis of which they can expect to make profit. The speculators therefore contribute in improving the efficiency of price discovery function of the futures market.

But it doesn’t mean that the speculation is always good for the economy of a country. Over-speculation needs to be curbed because it can lead to distortion of price signals. For this in case of the Nepalese Derivative Market, the positions held by speculators are subject to certain margins.

In the Nepal’s economy, there are various factors that are having a real negative impact on the overall performance of the Nepalese markets. First comes is the power supply problem. With the increasing temperature and drought in the country, the power supply is getting poor. Till the month of Magh-2066, the country is facing 11 hrs of load shedding. Because of this, the manufacturing and other industries are suffering a heavy loss everyday. Also, the global economic crisis has forced the industries to cut off the number of employees and thus prevent them from the probable future crisis. The continuous political instability has also hit hard to the market.

CONCLUSION:

All in all the derivatives market in Nepal does not have a longer history and thus seems to be still underdeveloped. Government has prepared some concepts on the derivatives market for risk minimizing for farmers but still the investors are motivated towards earning abnormal profits from speculation. Even though the focus is for agricultural risk management the overall utilisation of the market is for speculation. People are utilizing the derivative market for speculating rather than risk hedging. Existing commodities exchanges and the people who take part in the market phenomena should be aware to keep the future of the derivatives market bright. The derivatives market needs to focus on variery of commodities that can manage the risks of that particular commodity. The derivative market on the resources available locally can help develop the derivatives market as well the infrastructrures making people as well as the country resourceful. The people should be aware of these markets and the role it can play in their economic elevation. It can bring the stability in the market condition of derivatives in nepal. It’s solely the effect of role that people can play to balance the derivatives economy. How fast and with what level of ease does the economy overcome the imbalance is what determines the future of the Nepalese Derivative Market

Management Information System

2011-04-27T02:07:00.000-07:00

There is no universally accepted definition of MIS and those that exist reflect the emphasis and prejudices of particular writer.

Gordon B. Davis

"MIS is an integrated user machine system, which provides information to support the operations, management analysis and decision making functions. This system utilizes:

- Computer H/W and S/W

- Manual procedures

- Models for analyzing, planning, control and decision making

- A database

Jerome Kanter

"A system that aids management in making, carrying out and controlling the decisions".

James O'Brien

"An information system that can be any organized combination of people, hardware, software, communication networks and a data resource that collects, transforms, and disseminates (distribute) information in an organization."

Some other definition are:

The MIS is defined as a system which provided information support for decision making in the organization.
The MIS is defined as an integrated system of man and machined for providing the information to support the operation, the management and the decision making function in the organization.
The MIS is defined as a system based on the database of the organization evolved for the purpose of providing information to the people in the organization.
The MIS is defined as a computer-based information system.

“The MIS is a system to support the decision making function in the organization. In today’s world, the MIS is a computerized business processing system generating information needs for decision making to achieve the corporate objectives of the organization.”

An information system generates information using data. If the information system generates information useful for managers in planning and control, the whole system is called management information system.

The management information system uses computers and communication technology to deal with these points of supreme importance:

- Handling of a voluminous data.

- Confirmation of the validity of data and transaction.

- Complex processing of data and multidimensional analysis.

- Quick search and retrieval.

- Mass storage.

- Communication of the information system to the user on time.

- Fulfilling the changing needs of the information.

The Subject of MIS is broader than the words Management information system imply. This subject includes managers, but it also includes all of the other people in an organization and the structure and design of the organization as well.

MIS is not new; only its computerization is new. Before computers, MIS techniques exited to supply managers with the information that would permit them to plan and control operations. The computer has added one or more dimensions, such as speed, accuracy, and increased volumes of data, that permit the consideration of more alternatives in a decision.

The Scope and Purpose of MIS is better understood if each part of the term is defined. Thus,

Management

Management comprises the processes or activities that describe what managers do in the operation of their organization: Plan, Organize, Initiate and control operations.

Because of decision making is such a fundamental prerequisite to each of the foregoing processes, the job of an MIS becomes that of facilitating decisions necessary for planning, organizing and controlling the work and functions of the business.

Information

Information consists of data that have been retrieved, processed, or otherwise used for informative or inference purpose, argument, or as a basis for forecasting or decision making.

System

A system can be described simply as a set of elements joined together for a common objective. A subsystem is part of a larger system with which we are concerned. For our purpose the organization is the system, and the parts (divisions, department, functions, units etc.) are the subsystems.

The system concept of MIS is optimizing the output of the organization by connecting the operating subsystems through the medium of information exchange. (The concept of synergy applied in the integration of subsystem)

Characteristic of Management Information System:

Jerome Kanter in his work titled "Management Information System" mentioned several characteristics of management information system, which are:

Management information system is management oriented:

The design of management information system takes care of the managers, who need information to make decision. The development of the system starts after deciding the management needs and keeping in view the overall objectives of the management.

Management Directed:

Since management information system requires heavy planning and investment, management is deeply involved in the design, implementation and the maintenance of system.

Integrated system

Five Ms- Men, Machine, Money, Materials and Methods are recognized as an important factor and its effective use contributed to the success of the management. Management information system is the 'catalyst and the never center' of the organization. It has a number of subsystems. In order to make these subsystem effective; It becomes necessary that they have to be viewed as an integrated system, so that the result may be gained. It binds together database of all the subsystem of the business system and through information sharing integrates the organization.

Avoid redundancy in Data Storage:

Since management information system is an integrated system it avoids unnecessary, duplication and redundancy in data gathering and storing.

Common data flow:

To achieve the objectives of integration and to avoid duplication and redundancy in data gathering, storage and retrieval, data capturing is usually confined to original sources and it is done only once. Common data flow tries to utilize minimum data processing efforts and strives (attempt) to minimize the number of output documents and reports.

Heavy planning element:

Design and implementation of management information system requires detailed planning of activities such as acquisition and deployment (use) of hardware, software, data processing operations, information presentation and feedback.

Subsystem Concept:

Management information system gives provision for breaking into various subsystems based on the activity as well as the function of the organization, so that effective implementation of each subsystem is possible in time.

Common database:

It acts as the master that holds the functional subsystem together. It achieves this aim by allowing access to different master files of data to several functional subsystems.

Flexibility and the ease of use:

Management information system has to be designed flexible enough to accommodate new requirements. The system is easy to operate so that not much computer skill is required on the part of the user to access the database for information or for carrying out special analysis of data.

Importance of MIS in Business

Why study information systems and information technology? That's the same as asking why anyone should study accounting, finance, operations management, marketing, human resource management, or any other major business function. Information systems and technologies (including E-business and E-commerce technologies and applications) have become vital component of successful businesses and organizations. They thus constitute an essential field of study in business administration and management. That's why most business majors must take a course in information systems. Since you probably intend to be a manager, entrepreneur, or business professional, it is just as important to have a basic understanding of information systems as it is to understand any other functional area in business.

MIS is viewed and used at many levels by management.

MIS helps business to:

- Enhance communication among employees.

- Deliver complex material throughout the institution.

- Provide an objective system for recording and aggregating information.

- Reduce expenses related to labor-intensive manual activities.

- Support the organization's strategic goals and direction.

- Because MIS supplies decision makers with facts, it supports and enhances the overall decision making process.

- MIS also enhances job performance throughout an institution. At the most senior levels, it provides the data and information to help the board and management make strategic decisions. At other levels, MIS provides the means through which the institution's activities are monitored and information is distributed to management, employees, and customers.

- MIS is a critical component of the institution's overall risk management. MIS is used to recognize, monitor, measure, limit, and manage risks.

- Management can use MIS to measure performance and manage resources.

Importance of MIS can be further summarized in following Points:

1. Meeting global challenges

2. Taking advantages of opportunities in market

3. Linking groups whose functions are different.

4. Enhancing the productivity of worker and quality of goods.

1. Meeting Global Challenges:

From the initial age when person started doing business, the size, complexity and cost of the business has increased many folds (times). Initially the businesses were done in some small geographical area with very less complexity. There was no need of keeping records and be aware of the situations because they were not changing frequently. There were no big challenges but in current scenario when the technology is so advanced and the changes are so frequent it is essential for every business house to be aware of the changes which are taking place globally.

The whole world is now treated as global village. Due to of this every business house which are expanded globally have to tackle some challenges which may arise globally or locally.

MIS works as assistance to finding out the solution of the challenges. MIS have different capabilities of problem recognition, analysis and finding a solution.

2. Taking Advances of opportunities in market:

The current market has become ready for several changes either conventional or unconventional and these changes are so fast that if any business house is dealing in it then the chances of expansion or taking advantages from situation will be abolish. So to take full advantage of opportunities which are available in market two things are very critical (a) identification of opportunity and (b) taking decision very quickly by communicating the information to the right person and these works are perform very effectively by the MIS.

3. Linking groups where the function are different:

Due to the diversity of the current days business every business houses have their different groups which are designed for encountering different types of situation and the demand of the market. The major problem in this situation arises due to the lack of some common point between those groups. To coordinate them, a very quick and effective communication medium is required which is provided by any MIS by analyzing the groups effectively.

4. Enhancing the productivity of worker and quality of goods:

Business can be run very effectively if right person is selected for right job and timely information is supplied to them for doing this. MIS is a tool which can analyze the capabilities of the person, which can also identify the circumstances in which the productivity can be enhanced.

The most important aspect is how to coordinate between the quality, cost and the expectation and demands of the user. An appropriate blend of the production, cost and demand of the users increase the quality of the goods. For doing this the information about the strategies of the competitors is also required and a carefully designed MIS can take care of all these aspects.

q Data: raw facts

q Information: collection of facts organized in such a way that they have value beyond the facts themselves

Types of Data

Information Concepts

The process of transferring data into information

Information:

• Data that have been shaped into a form that is meaningful and useful to human beings.

– Data are:

» Stored Facts

» Inactive (they exist)

» Technology-based

» Gathered from various sources

– Information is:

» Presented facts

» Active (it enables doing)

» Business-based

» Transformed from data

Data Vs. Information

Attributes/Characteristics of Information

Information and Management:

· Improves presentation of an entity.

· Updates the level of knowledge.

· Has a surprise value.

· Reduce uncertainty.

· Aids in decision making.

Information Classifications:

Information may be classified in many ways including:

By Source	eg. Internal, external, primary, secondary etc.
By Nature	eg. Quantitative, qualitative
By Level	eg. Strategic, Tactical, Operational
By Time	eg. Historical, Present, Future
By Frequency	eg. Continuous, Hourly, Daily etc
By Use	eg. Planning, Control, Decision Making etc
By Form	eg. Written, Visual, Oral
By Occurrence	eg. at planned intervals, occasional etc.
By Type	eg. Detailed, Summarized etc.

Cost of Information Vs. Value of Information

- The cost of information means the expenses on taking information from informants. Example: Telephone calls, meeting expenses, survey expenses etc.

- The value of information means that how much information is useful in its purpose. The example is that the information which is taken from telephone calls or meeting is how much success for achieving the goal.

- Cost of information = mainly valued in monetary term.

- Value of information = not always expressed in monetary term.

- What we have loss for getting the information is cost of information

- What we have gain from the information is value of information.

Redundancy and Inconsistency

- Redundancy: more than the need.

- If anything is over than the need than it is called redundancy.

- Duplication copy is redundancy.

- Inconsistency: no fixed state

- If there is change or if there is no fixed state then it is said to be inconsistence.

Redundancy and Inconsistency both are bad for quality information. A good information must be consistence and must sufficient enough (conciseness).

IS Strategies

Cost Leadership (low cost producer)

– Reduce inventory (JIT)

– Reduce manpower costs per sale

– Help suppliers or customers reduce costs

– Reduce manufacturing costs (process control)

Differentiation

– Create a positive difference between your products/services & the competition.

– May allow you to reduce a competitor’s differentiation advantage.

– May allow you to serve a niche market.

Innovation

– New ways of doing business

– Unique products or services

– New ways to better serve customers

– Reduce time to market

– New distribution models

Growth

– Expand production capacity

– Expand into global markets

– Diversify

– Integrate into related products and services.

Alliance

– Broaden your base of support

• New linkages

– Mergers, acquisitions, joint ventures, “virtual companies”

– Marketing, manufacturing, or distribution agreements.

Value chain Analysis

ð The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customer's value.

ð Value chain analysis views the organization as a sequential process of value-creating activities, and attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value.

System Concepts

- System is defined as a set of elements arranged in an orderly manner to accomplish an objective.

- More simply, it is a group of interrelated or interacting elements forming a unified whole.

Examples:

Systems	Elements	Objective
Computer	Input, process and output devices. OS, packages, DBMS	Process the data and provide information.
Business Organization	People, plant and machinery, product and services, transport	produce goods and services to achieve the business objectives-profits

- It is to be noted that a system is not a randomly arranged set. It is arranged with some logic governed by rules, regulations, principles and policies.

- If a system in any field is analyzed, then you will find three basic parts:

Input:

Input involves capturing and assembling elements that enter the system to be processed. For example, raw materials, energy, data, human effort etc.

Processing:

It involves transformation processes that covert input into output. Examples are manufacturing process, the human breathing process or mathematical calculation.

Output:

Output involves transferring elements that have been produced by a transformation process to their ultimate destination. For example, finished products, human services, management information etc.

The system concept becomes even more useful by including two additional components: Feedback and control. A system with feedback and control component is sometimes called a cybernetic system, that is self monitoring, self-regulating system.

A system may have single input and multiple outputs or may have several inputs and outputs.

- For example, a business organization system has several inputs and multiple objectives such as sales, profit, service and growth.

Output 1

Output 2

Output 3

System with many inputs and outputs

System Classification

Some system examples:

- Information system

- Computer based information system

- Transaction processing system

- Workflow system

- Management information system

- Artificial intelligence (AI) systems

- Virtual reality systems

- Geographic Information Systems (GIS)

- Decision support system etc

System Performance

q Efficiency: output/input

q Effectiveness: extent to which system attains its goals

General model of System

- The general model of system consist input, process and output.

- All the systems operate in an environment. The environment may influence the system in its design and performance.

- When a system is designed to achieve certain objectives, it automatically sets the boundaries for itself. System works inside the boundary. The environment is outside the boundary.

- In some cases, it is fairly simple to define what is part of the system and what is not. In other, the person studying the system may have to define the boundaries. Some example of boundaries are:

o Human system = Skin, hair, nail etc

o Automobile system = Automobile body, tire

The environment influences the choice of inputs, the method of processing and the nature and contents of the outputs.

- Since the system is designed for specific objectives/outputs, the designer provides a filter around the system to control the influence on the system.

Subsystem concept

System is an arrangement of smaller systems in a logical order. When many smaller systems together make a larger system, the smaller systems are called the subsystems of the larger system.

- A large system can be decomposed into smaller subsystems.

- The decomposition of a system into subsystems can be a serial form of it could be in a matrix form as illustrated in the following figure:

- In any system, the inputs are transformed into the output by a process.

- We say that the process is transparent to us when we are able to understand the system. But, if the process of input transformation is not visible and understandable then we say that the system is a black box.

Open Vs. Closed System

- If a system is functioning in isolation from the environment, then the system does not have any exchange with the environment nor is it influenced by the environmental changes. Such a system is called a closed system.

- If the system has exchange with the environment and is influenced by the environment then it is called an open system.

- All kinds of accounting systems such as cash, stocks, attendance of employees are closed systems. Most of the systems based on rules and principles are closed system. The system of manufacturing are also closed system.

- The system which are required to respond to changes in the environment, such as marketing, communication and forecasting are open systems.

Components of Information System

People Resources:

F Specialist - System Analysts, Software developers, system operators.

F End users - anyone else who uses information systems.

Hardware Resources

F Machines - computers, video monitors, magnetic disk drives, printers, optical scanners.

F Media - floppy disks, magnetic tape, optical disks, plastic cards, paper forms.

Software Resources

F Programs - operating system programs, spreadsheet programs, word processing programs, payroll programs

F Procedures - data entry procedures, error correction procedures, paycheck distribution procedures.

Data Resources

F Databases - that hold processed and organized data

F Knowledge bases - that hold knowledge in variety of forms such as facts, rules and case examples about successful business practices.

Network Resources

F Communication media - Twisted pair wire, coaxial cable and fiber-optic cable; and microwave, cellular and satellite wireless technologies

F Network support - modems, network operating systems and internet browser packages.

Types of Information System

Trends in Information System

Inflation in Nepal

2009-12-14T06:34:00.000-08:00

Introduction:
Inflation has been quite a matter to be addressed in the present economic scenario. Inflation is simply the increase in prices of goods and services in economy or decrease in the value of money. It is said that when the quantity of money used as the medium of exchange in the economy is more than quantity of goods and services, inflation is most probable. This can be caused due to some direct causes such as increase of income or some indirect cause such as political forces in an economy.

Inflation has been a global issue and so is the case of Nepal. In the present scenario, the y-o-y consumer price inflation rate for the year 2009 has been 9.7% as calculated by Nepal Ratra Bank (NRB) in mid September 2009. While the consumer price inflation rate same period, last year was 13.5%. Similarly the inflation rate of food and beverage group is 16.3% while that of non-food and services group is 2.1%. Of the food and beverage items, the inflation rate of vegetables and fruits has been 43.5%. Similarly that of sugar and sugar related products increased by 40.5%. Similarly price indices of meat, fish and eggs as well as pulses sub-groups increased in the review period by 29.0% and 25.6% respectively. The index of the grains and cereal products subgroup also witnessed an increment of 5.8%.Within the group of non-food and services, the index of tobacco and related products rose up by 17.0% in the review period. In the review period, the y-o-y core inflation rose to 10.9%.

Cause:
Inflation is caused by an excessive increase in effective demand and production cost in the economy. Normally, it is caused due to the disequilibrium caused in aggregate demand and aggregate supply. Nepal is currently under transition phase and thus several factors contribute for the increasing price rate. Increase in income of consumers, credit policy, natural causes, lack of raw materials, techniques of productions, industrial disputes and political factors are some of the causes of inflation in Nepal.
The political instability has caused several social problems such as strikes, social insecurity, etc. As such the investors have been highly discouraged. Similarly the increases in social problems like these tend to decrease the productivity as the production is stopped. Similarly the disputes between industries and some of the so called revolutionary trade unions or political bodies can force industries to increase the amount of money to be segregated for wages and public welfare that would increase the production cost or unproductive expenditure and thus increasing the price of goods. Similarly several natural causes such as floods and drought have been affecting the production of Nepal adversely. Change in the global climate has brought larger scale catastrophes those have swept away the production recently. This decrease in productivity must be another vital reason behind inflation. Nepal has been implementing the conventional techniques of production methods while the demand has been quite higher than the production so that the investment done does not yield larger profit so that the price is increasing. Another factor causing inflation is the credit policy. The demand for credit has been in quite an amount and thus commercial banks have only a smaller amount of money in their cash-fund so that large amount of money is circulated in society. So the increase in use of money in society creates inflation. Similarly the budget policy of government is another cause for inflation. The expected amount of expenditure has been more than expected income thus bank takes loan from NRB and the excess amount of money when is invested in various sectors increases the monetary expansion. This also increases the flow of money in nation thus increasing demand and thus causing inflation. Similarly the increase in the income of government employees has increased the demand of consumption goods and investments thus causing inflation. Another reason behind inflation in Nepal is lack of raw materials. This decreases production or increases production cost both of which cause inflation. Sometimes to create artificial scarcity, black marketers increase the stock illegally and thus increase the price to earn more profit commonly called hoarding.

Effect:
Inflation is usually supposed to have negative effect in an economy but sometimes the inflation of smaller rates can provide some motion to the economy. This sort of motion increases the employment and leads economy towards development. But when the inflation rate is high this will affect the economy negatively such as it creates hindrances in capital formation and creation of black market (artificial scarcity). So inflation is not necessarily bad.

Some contemporary effects of inflation in our case are the increase in the gap between haves and have-nots, discouragement of foreign capital, decrease in quality of goods, etc. Due to inflation some class of society will face benefit while some class will face loss. The increase in inflation rate benefits industrialists and businessmen and makes them richer than the class having fixed income. Inflation changes the distribution of wealth in economy. Debtor will be benefited while the creditors will suffer a loss, business community will earn more, and fixed salary earner will be at a loss due to inflation.

Similarly inflation has some effects on production as well. Inflation devaluates the value of money and thus the capital accumulation is hampered. It discourages foreign investments and less capital is funded thus production decreases. Due to change in normal economic circumstance businessmen instead of earning normal profit through ordinary course of business, shift to easy and fast profit making activities often called speculating activities. Such activities are suspected to reduce the quality of goods. Increase in price influences some people to increase the stock and create artificial scarcity that increases their profit and price even more. Heavy inflation also have political effect as the people start to get dissatisfied with government and thus opposition parties get a way to criticize the government and remove the ruling party.

Conclusion:
Viewing overall inflation rate this year has increased by a value 9.7% (lesser than that of last year). while the price of food and beverage is raising sharp by about 43.5% and that of sugar and sugar related goods at about 40.5% which is quite a value as compared to last years inflation rate. Some of the main causes of the inflation are political instability, natural calamities, budget policy, industrial disputes, etc. This inflation has had negative effect upon the lifestyle of daily wagers and those having fixed income while has benefited the businessmen and industrialists thus increasing the financial gap between them

some programs in C

2009-10-24T22:23:00.001-07:00

program to find out if an alphabet entered is uppercase or not

#include
#include
void main (void)
{
char a;
printf("enter an alphabet:\n");
scanf("%c",&a);

if((a>='A')&&(a<='Z'))
printf("the character is uppercase\n");
else if((a>='a')&&(a<='z'))
printf("the character is lowercase");
getch();
}

Program to print even numbers up to 400:

# include
# include
void main (void)
{
int a;
for(a=2;a<=400;a=a+2)
{
printf("%d\t",a);
}
getch();
}

program to find out if a number is even or odd

#include
#include
void main (void)
{
int a,b;
printf("enter a number : ");
scanf("%d",&a);
b=a%2;
if(b==0)
{
printf("%d is an even number",a);
}
else if(b==1)
{
printf("%d is an odd number",a);
}
getch();
}

Program to find out if an entered number is prime or not

#include
#include
void main (void)
{
int a,b,c;
printf("enter a number : ");
scanf("%d",&a);
for(b=2;b<=a;b++)
{
c=a%b;
if(c==0)
break;
}
if(a==b||a==1)
printf("the numbr is prime");
else
printf("the number isn't prime");
getch();
}

Program to find the factorial of a number:

#include
#include

int fact (int);
int fact (int n)
{
int a;
if (n==0)
return 1;
else
a= n*fact(n-1);
return (a);
}

void main (void)
{
int a;
printf("enter a number: ");
scanf("%d", &a);
printf("\nthe factorial of %d is %d", a,fact(a));
getch();
}

all the best

some assignments and solutions of the bonds, debentures and leases

2009-10-16T21:21:00.000-07:00

questions
9-41 Q. No. 1 On December 31, 2000, Alaska Fisheries, Inc . issued $ 16 million of 10-year, 10% debentures at par ( face value)
Required:
1. Compute the proceeds from issuing the debentures.
2. Journal entries for the issuer concerning i) issuance, ii) first semiannual interest payment and iii) payment of maturity value

9-42 Q. No. 2 On December 31 2000, Ruzuinski Construction issued $ 20 million of 10-year, 10% debentures. The market interest rate at issuance was 14%
Required:
1. Compute the proceeds from issuing the debentures
2. Journal entries concerning i) issuance ii) first semiannual interest payment and discount amortization, and iii) payment of maturity value ( Round all amounts to the nearest thousand)

9-44 Q. No. 3 On January 1st 2001 Metro Bus issued $ million of 5-year 11% debentures. The market interest rate at issuance was 12%
Required:
1. Compute the proceeds from the issuance of debentures
2. Journal entries concerning i) issuance ii) first semiannual interest payment and discount amortization, and iii) payment of maturity value ( Round all amounts to the nearest thousand)

9-46 Q. No. 4 On December 2000 Sayers Toyota Issued $ 3 million of 10 year , 12 debentures. The market interest rate at issuance was 10%.
Required:
1. Compute the proceeds from issuing the debentures.
2. Journal entries concerning i) issuance ii) first semiannual interest payment and discount amortization, and iii) payment of maturity value ( Round all amounts to the nearest thousand)

9-47 Q. No. 5 On January 1st 2001, Melbourne Travel issued $ 4 million of 5-year 10% debentures. The market interest rate at issuance was 8%.
Required:
1. Compute the proceeds from issuing the debentures.
2. Journal entries concerning i) issuance ii) first semiannual interest payment and discount amortization, and iii) payment of maturity value ( Round all amounts to the nearest thousand)

9-49 Q. No. 6 On December 1, 2000 Caribbean Cruise issued $ 20 million of 10-year, 12% debentures. The market interest rate at issuance was 14%. On December 31, 2001 (after all interest payments and amortization had been recorded for 2001), the company purchased all the debentures for $ 19 million. Throughout their life, the debentures had been by a large insurance company.

Required:
1. Compute the gain or loss on early retirement.
2. Show the appropriate journal entry
3. At what price on December 31, 2001 could Caribbean Cruise redeem the bonds and realize a $ 500000 gain?
9-50 Q. No. 7 On December 31, 2005, real estate holding company issued $ 10 million of 10-year, 12% debentures. The market interest rate at issuance was 12%. Suppose that on December 31 2006 (after all interest payments and amortization had been recorded for 2006), the company purchased all the debentures for $ 9 million. The debentures had been held by a large insurance company throughout their life.
Show all amount in thousands of dollars.
Required:
1. Compute the gain or loss on early retirement (extinguishment).
2. By using the balance sheet equation, present an analysis of the transactions on the issuer's books.
3. Show the appropriate journal entry4.
9-57 Q. No. 8 The Chicago Packing Company acquired packaging equipment on a capital lease. There were annual lease payments of $ 40,000 at the end of each of 3 years. The implicit interest rate was 18% compounded annually.
Required:
1. Compute the present value of capital lease.
2. Prepare journal entries at the inception of the lease and for each of the 3 years. Distinguish between the short term and long term classifications of the lease.

ans

Q. No. 1

1. $16 million. Proceeds equal face amount when issued at par.

Interest expense equals interest payment.

Interest payment = 1/2 x 10% x $16,000,000 = $800,000

2. Sample Journal Entries
Bond Transactions
(In Thousands of Dollars)

Issuer's Records

a. Cash 16,000
Bonds payable 16,000
To record proceeds upon issuance
of 10% bonds maturing on
December 31, 2010.

b. Interest expense 800
Cash 800
To record payment of interest.

c. Bonds payable 16,000
Cash 16,000
To record payment of maturity
value of bonds and their retirement.

Q. No. 2
1. Proceeds equal the present values of interest and maturity payments at the market rate:
Interest payment = 1/2 x 10% x $20,000,000 =
$1,000,000
PV of interest payments, $1,000,000 x 10.5940* $10,594,000
PV of maturity payment, $20,000,000 x .2584** 5,168,000
Proceeds $15,762,000
* From Table 9-3, 7% column, 20-period row
** From Table 9-2, 7% column, 20-period row

First semi-annual interest expense,
7% x $15,762,000 $1,103,340
Semi-annual interest payment, 5% x $20,000,000 1,000,000
Amortization of bond discount $ 103,340

2. Journal Entries
(In Thousands of Dollars)

Issuer's Records
a. Cash 15,762
Discount on bonds payable 4,238
Bonds payable 20,000
To record proceeds upon issuance
of 10% bonds maturing on
December 31, 2010.
b. Interest expense 1,103
Discount on bonds payable 103
Cash 1,000
To record payment of interest and
amortization of discount.
c. Bonds payable 20,000
Cash 20,000
To record payment of maturity
value of bonds and their retirement.

Q. No. 3

1. Proceeds equal the present values of interest and maturity payments at the market rate:

Interest payment = 1/2 x 11% x $10,000,000 = $550,000

PV of interest payments, $550,000 x 7.3601* $4,048,055
PV of maturity payment, $10,000,000 x .5584** 5,584,000
Proceeds $9,632,055

* From Table 9-3, 6% column, 10-period row
** From Table 9-2, 6% column, 10-period row

2. First semi-annual interest expense,
6% x $9,632,055 $577,923
Semi-annual interest payment 550,000
Amortization of bond discount $ 27,923

2. a. Cash 9,632,055
Discount of bonds payable 367,945
Bonds payable 10,000,000
To record proceeds upon issuance
of 11% bonds maturing on
January 1, 2006.

b. Interest expense 577,923
Discount on bonds payable 27,923
Cash 550,000
To record amortization of discount
and payment of interest.

c. Bonds payable 10,000,000
Cash 10,000,000
To record payment of maturity
value of bonds and their retirement.

Q. No. 4

1. Proceeds equal the present values of interest and maturity payments at the market rate:

Interest payment = 1/2 x 12% x $3,000,000
= $180,000
PV of interest payments, $180,000 x 12.4622* $2,243,196
PV of maturity payment, $3,000,000 x .3769** 1,130,700
Proceeds $3,373,896
* From Table 9-3, 5% column, 20-period row
** From Table 9-2, 5% column, 20-period row

First semi-annual interest expense,
5% x $3,373,896 $168,695
Semi-annual interest payment,
6% x $3,000,000 180,000
Amortization of bond premium $ 11,305

2. Journal Entries
(In Thousands of Dollars)

Issuer's Records

a. Cash 3,374
Premium on bonds payable 374
Bonds payable 3,000
To record proceeds upon issuance
of 12%bonds maturing on
December 31, 2008.

b. Interest expense 169
Premium on bonds payable 11
Cash 180
To record payment of interest
and amortization of premium.

c. Bonds payable 3,000
Cash 3,000
To record payment of maturity
value of bonds and their retirement.

9-47 (25-40 min.)

1. Proceeds equal the present values of interest and maturity payments at the market interest rate.

Interest payment = 1/2 x 10% x $4,000,000 = $ 200,000

PV of interest payments, $200,000 x 8.1109* $1,622,180
PV of maturity payment, $4,000,000 x .6756** 2,702,400
Proceeds $4,324,580
* From Table 9-3, 4% column, 10-period row
** From Table 9-2, 4% column, 10-period row

First semi-annual interest expense, 4% x $4,324,580 $172,983
Semi-annual interest payment 200,000
Amortization of bond premium $ 27,017

2.
a. Cash 4,324,580
Bonds payable 4,000,000
Premium on bonds payable 324,580
To record proceeds upon issuance
of 10% bonds maturing on
January 1, 2006.

b. Interest expense 172,983
Premium on bonds payable 27,017
Cash 200,000
To record amortization of premium
and payment of interest.

c. Bonds payable 4,000,000
Cash 4,000,000
To record payment of maturity value
of bonds and their retirement.

Q. No. 6.

1. To compute the gain or loss, first calculate the net liability at December 31, 2001:

Face amount $20,000,000
Proceeds 17,880,800 *
Discount at issuance 2,119,200
6/30/01 discount amortization (51,656) **
12/31/01 discount amortization (55,272) †
Bond discount at 12/31/01 $ 2,012,272

* ($1,200,000 x 10.5940) + ($20,000,000 x .2584)
** (7% x $17,880,800) – (6% x $20,000,000)
† (7% x ($17,880,800 + $51,656)] - (6% x $20,000,000)

The net liability is the face amount less the discount:
Face amount $20,000,000
Bond discount at 12/31/01 2,012,272
Net liability at 12/31/01 $17,987,728

The amount by which the cash payment for the debentures exceeds the net liability is the loss on early extinguishment. Amounts are in thousands:

Cash payment $19,000
Net liability at 12/31/01 17,988
Loss on early extinguishment of debt $ 1,012

2. Journal Entry
(In Thousands)
Issuer's Records
December 31, 2001
Bonds payable 20,000
Loss on early extinguishment of debt 1,012
Discount on bonds payable 2,012
Cash 19,000
To record open-market acquisition of
entire issue of 12% bonds for $19 million.

3. A gain arises if the bond is extinguished for less than the carrying value, $17,987,728 – $500,000 gives a price of $17,487,728.

Q. No. 7. Amounts are in thousands of dollars.

1. Net liability equals face or par value $10,000
Cash received 9,000
Difference, gain on early extinguishment of debt $ 1,000

2.
Analysis of Early Extinguishment of Debt
(In Thousands of Dollars)

A = L + SE

Issuer's Records
Cash
= Bonds Payable
Retained Income

a. Redemption,
December 31, 2006 –9,000 = –10,000 +1,000

Journal Entry

Issuer's Records

December 31, 2006
Bonds payable 10,000
Gain on early extinguishment of debt 1,000
Cash 9,000
To record open-market acquisition of entire
issue of 12% bonds for $9.0 million.

Q. No. 8

1. PVA = $40,000 x Annuity Factor for 3 years at 18%
= $40,000 x 2.1743
= $86,972

2. Equipment leasehold 86,972
Lease liability, current* 24,345
Lease liability, long-term 62,627
To record capital lease.

Analysis of first installment:
Total amount $40,000
Interest, .18 x $86,972 15,655
Principal portion, current liability $24,345

Total liability $86,972
Current liability 24,345
Long-term liability $62,627

Entry for straight-line amortization of the asset for each of three years:

Amortization of equipment leasehold 28,991
Equipment leasehold 28,991
To record straight-line amortization:
$86,972 ÷ 3 = $28,991.

Lease Payments and Liability Reclassifications

Year One

Interest expense 15,655
Lease liability, current 24,345
Cash 40,000
To record interest expense and
reduction of liability.

Lease liability, long term 28,727
Lease liability, current 28,727
To reclassify next installment of
long-term debt as short-term debt.

Analysis of second installment:

Total $40,000
Interest portion:
.18 x ($86,972 – $24,345)
= .18 x $62,627 = 11,273
Principal portion, current liability $28,727

Total liability $62,627
Current liability 28,727
Long-term liability $33,900

Year Two

Interest expense 11,273
Lease liability, current 28,727
Cash 40,000
To record interest expense and
reduction of liability.

Lease liability, long-term 33,900
Lease liability, current 33,900
To reclassify next installment
of long-term debt as short-term debt.

Year Three
Interest expense 6,100
Lease liability, current 33,900
Cash 40,000

Analysis of third installment:

Total amount $40,000
Interest, .18 x $33,900 6,102
Principal $33,898*

* Rounding causes this amount to differ from the $33,900 liability. These rounding errors occur because the present value tables are carried to four places only rather than to five or more places. This rounding causes the present value of the lease to be rounded at its inception.

all the best

unit 4 Accounting of Liabilities

2009-10-15T21:43:00.000-07:00

Accounting of Current liabilities

In general a current liability is an obligation that will be satisfied within one year or one accounting period. A/C payable, Notes payable, Salary & Tax payable are the common example of current liability.

Account payable: - It represents current liability towards suppliers form whom the firm has purchased goods or service on credit. It is also known as sundry creditors.

Journals
When goods are purchased on credit/ account
Inventory / purchased a/c Dr.
To A/c payable a/c

When a/c payable is paid
A/c payable a/c Dr.
To cash a/c

Notes payable:- Notes payable , also called promissory notes is a written promise to a person or organization to pay a specific sum of money at a specified future date is called Notes payable. To the maker of the note it is a note payable. To the payee of the note it is a note receivable.

Accounting for notes payable

When interest is paid on the notes due date:-

When interest is deducted in advanced:-

Current maturities of long-term debt
Actually, this type of liabilities is long term but when payments of liabilities are partial and it may appear as short –term or current liability.

Example:- 2002 , January 1, a business house obtained a Rs. 2,00,000 loan form national bank. The term of the loan require to make payment to reduce the principle in the equal amount over 5 years, payable each January 1.
Journals
When the liabilities is classified as a current liability

When that portion is paid

Taxes payable

Other accrued liabilities
It includes any amount that has been incurred due to the passage of time but has not been paid as of the balance sheet date i.e. Wages, salary, interest payable.

Contingent liabilities: - The existence of the liability is uncertain and usually the amount is uncertain because contingent liabilities liabilities depend on some future event occurring or not occurring. The actual amount of liability must be estimated because we cannot clearly predict for future. Examples include liabilities arising form warranty and guaranty, lawsuits, income tax disputes etc.

Journals
Warranty expenses a/c Dr.
To estimated liability a/c
Balance sheet presentation

Leases

A lease is a contractual arrangement between the owner of an asset (called lessor) and the user of the assets (called lessee). Under the contract the lesser grants the lessee the right to use the assets for an agreed period of time; in turn the lessee agrees to make a series of periodic payment, called lease rent, to the lessor.

Leasing simultaneously provides for the use of assets and their financing. A common example of lease arrangement is the rental of apartment. The tenant is the lessee and the property owner is the lessor.

Types of Lease

From the viewpoint of the lessee there are two types of lease agreements, operating lease and capital lease.

Operating lease
In an operating lease, the lessee acquires the right to use an asset for a specified period of time. The lessee is not required to record the right to use the property as an asset or to record the rental obligations as liability. Therefore, operating lease is an off-balance-sheet financing but requires to mention in the financial statement as footnotes about the lease rental obligation. By escaping the balance sheet, the lease does not add to debt or impair the debt-to-equity ratio

Capital lease
The Capital Lease sometime also called Financial Lease under which the lessee acquires sufficient right of ownership and control of the property to be considered its owner. This lease is called capital lease because it is fully capitalized over the life of the lease agreement recorded on the balance sheet.

In typical Capital Lease arrangement the following procedure are undertaken.

In the first stage the firm that requires the assets selects the specific item and negotiates for price and delivery term with supplier (or manufacturer) of the assets and then negotiates with a leasing company for financing. Once the leasing terms are set, the leasing company purchased the selected item of assets from the manufacturer or distributor. When the equipment is purchased, the user firm simultaneously executes the lease agreement

To be a lease agreement, a capital lease, it should meet one or more of the following criteria:
• The lease transfers ownership of the property to the lessee at the end of the lease term.
• The lease contains a bargain purchase option to purchase the assets at an amount lower than its fair market value.
• The lease term (period) is 75% or more of the property’s economic life.
• The present value of the minimum lease payment (lease rental payments) is 90% or more of the fair market value of the property at the inception of the lease.
However, if none of the criteria is met, the lease agreement is considered to be a operating lease.

Features Operating Lease Capital Lease
1 Ownership Does not transfer to the lessee at the end of the lease term. Transfers to the lessee at the end of the lease term
2 Amortization Do not amortize the asset value fully by the payments of the lease rent over one lease term. Amortized the asset fully over one lease term by the lease rent
3 Repair and maintenance service Provided by the lessor. Does not provide by the lessor.
4 Cancelable It gives the lessee the right to cancel the lease contact before expiring the leases date if it does not require the assets more.
Does not cancelable
5 Accounting Record It is a off-balance-sheet item and do not required to record in the balance sheet It is balance sheet item and reported in balance sheet.

Capital lease and its accounting treatments
In capital lease:
 The lease assets simultaneously presented in the balance sheet as lease assets and the same amount is presented as lease obligation in liabilities section.
 The Lease Assets Account is a long-term asset similar to plant and equipment and therefore it is depreciable over the life of the asset.
 The lease obligation is amortized over the lease period similar as to bond amortization with effective interest method.
 The periodic lease payment includes both repayment of lease obligation (or principal) and interest on the obligation. And reported in income statement.

Illustration
Assume that on January 1, 1998, lessee signs a lease agreement with lessor Dealer to lease a car. The term of the agreement, specify that lessee will make annual lease payment of Rs 4000 per year for five years payable each December 31. Assume also that the lease specifies that at the end of the lease agreement, the title of the car is transferred to lessee firm.

It is a capital lease because it meets the criteria of capital lease of transferring the ownership of asset at the end of lease agreement. Now the lessee should report the lease in financial statement as;

It should report the present value of lease payments as asset and as lease obligation simultaneously. Assume that the interest rate is 8% then, the present value of lease payment is Rs 15972 (Rs 4000 * 3.993). Now, the accounting effect of capital lease on lessee firm will be as,

Transaction Assets = Liabilities + Owners’ equity
Acquired car as capital lease Rs 15,972
leased asset = Rs 15,972
lease obligation + -

The leased asset account is a long-term asset similar to plant and equipment and represents the fact that lessee has acquired the right to use and retain the asset. Thus, it is to be depreciated over the life. While depreciating the car depreciation expenses a/c is debited and accumulated depreciation-leased asset is credited.

Transaction Assets = Liab. + O.E Revenue - expenses
Charge of annual depreciation on leased asset i.e. car (15972/5) (Rs 3194)
accumulated dep.- car = - + - (Rs 3194)
depreciation expenses

On each December 31, the lessee company must make a lease rental payment of Rs 4000 to lessor Dealer. This lease payment involves both repayment of a portion of principal and interest expenses on the principal. This should be separated for each year. For this purpose the effective interest method is used as bond amortization. And this process is known as lease amortization.

Lease Amortization Schedule: Effective Interest Method.

Date (I)
Lease
Payment (II)
Interest
Expenses
(8%) (III) = I - II
Amortization
of lease obligation (IV)
Lease obligation
Jan 1, 1998 - - - Rs 15,972
Dec 31, 1998 Rs 4,000 Rs 1,278 Rs 2,722 Rs 13,250
Dec 31, 1999 Rs 4,000 Rs 1,060 Rs 2,940 Rs 10,310
Dec 31. 2000 Rs 4,000 Rs 825 Rs 3,175 Rs 7,135
Dec 31, 2001 Rs 4,000 Rs 571 Rs 3,429 Rs 3,706
Dec 31, 2002 Rs 4,000 Rs 294 Rs 3,706 Rs 0

At the end of each year (i.e. 31), the following accounting treatment is made on the book of lessee firm.

For Dec 31, 1998; similarly for other years
Transaction Assets = Liab. + O.E Revenue - expenses
For the payment of annual lease rental (Rs 4,000)
cash = (Rs 2,722)
Lease obligation + - (Rs 1,278)
Interest expenses

Balance sheet presentation as on 31 December 1998

Plant equipment and machinery:
Leased Car Rs 15,972
Less: accumulated dep. – leased Car Rs 3,194
Rs 12,778

Current liabilities:
Lease obligation
(To be met within one year) Rs 2,940
Long-term liabilities:
Lease obligation
(To be met in after one year in future) Rs 10310

unit 3 Accounting of Assets

2009-10-14T22:41:00.001-07:00

Accounting for Non-current Assets

Capital expenditure: - A Capital expenditure is a cost that is added to the acquisition cost of the assets.
Or
Capital expenditure is that type of expenditure that has been incurred for the purpose of obtaining a long-term advantage for the business.

Purchases of fixed assets (Building, furniture, Plant), acquisition cost such as transportation cost custom duty, erection charge are also treated as capital expenditure.

Revenue expenditure: - A Revenue expenditure is not treated as part of the cost of the assets but as an expense on the income statement. For example, manufacturing cost, administrative cost repair cost. An item of expenditure whose benefit expires within a year or expenditure that merely seeks to maintain in the business or keep asset in good working condition is called revenue expenditure. Such expenditure does not increase the efficiency of the firm, nor does it result in the acquisition of something permanent.

Note: Treatment of expenditure on existing manufacturing facilities depends on the benefits accrued. If the expenditure results in an increase in capacity, it is capitalized. Otherwise, it is treated as revenue expenditure.

Deferred revenue expenditure: - It is that class of revenue expenditure, which is incurred during an accounting period, but is applicable either wholly or in part to future period.

Type of operating assets

Operating assets also known as fixed or long-lived, are the major productive assets of the company. Normally operating assets are used to produce the goods or services for sales. Company has been invested their capital to the operating assets, which is a significant value of company.

Operating assets are normally presented on the balance sheet in one category for property, plant, and equipment and a second category for intangibles.

Operating assets should be presented at original acquisition cost less accumulated depreciation or amortization.

Generally we can classify on 5 types of operating assets.
Property: - Land and building, furniture, computer
Plant: - Machine, transportation equipment
Equipment: - Small, machine, tools etc.
Natural resources: - Coal, electricity oil
Intangible assets: - Goodwill, patent, right, Trademark

Acquisition cost of operating assets

Acquisition cost also known as original cost should include all of the cost that are normal and necessary to acquire the assets and prepare it for its intend use. But unrelated cost should not include in acquisition process.

Acquisition cost for Property, Plant, Equipment =

Purchase price
Add, Taxes paid at time of purchase (sales taxes)
Add, Transportation charge
Add, Installation costs.

Acquisition cost for Property, Plant, Equipment on Group purchase.

Capitalization of interest

Depreciation

Depreciation is the allocation of the cost of an asset to the periods that are expected to benefit from its use. So Depreciation is a process of allocation, not valuation. All property, plant and equipotent, except land have a limited life and declined in usefulness over time.

Therefore accountant must estimate the estimate the decline in usefulness of operating asset and allocate the acquisition cost over their useful lives. This allocation process is called depreciation.

Major Causes of depreciation are: -

1) Physical deterioration: - Wear and tear
2) Inadequacy for future needs:-It refers inability to produce enough products or provide enough services to meet current demands.
3) Obsolescence: - It refers decline in usefulness brought about by inventions and technological process.

Steps of depreciation process

1) Estimating the depreciable base/depreciable amount.
2) Estimating the useful service life.
3) Choosing an appropriative cost allocation method.

# Residual value/Salvage value/scrape value: - It is that type of value which the assets can be disposed of at the end of its useful life.

# Book value: - It is defined as its acquisition cost – total amount of accumulated depreciation

Methods of depreciation

1) Straight-line method
According to this method the depreciable amount of the asset is distributed equally over the life of asset.
Depreciation expenses = Acquisition cost – Residual value/Life

When depreciation is charged: -

Depreciation Expenses-. …(Name of the asset) a/c
To Accumulated depreciation
(………………………………)

Units –of production method
According to this method, the depreciable amount of an assets is divided by the total estimated output during its useful life to obtain the unit depreciation rate.

Annual depreciation Expenses = Depreciation per unit * units produced in current year.

Accelerated deprecation method

According to this method, depreciation is provided high amount in early yeas than in the later ones.

Double declining –balance method: -
If rate is not given
Step 1- 100%/ No. of life
Step 2 – Rate *2
Depreciation + Beginning book value * Rate

Sum of the year's digits method
Sum of digits = N* (N+1)/2
Where N= Life of the asset
Depreciation = (Acquisition cost- Residual value)* Rate

Intangible Assets
Intangible assets have no physical features, and it is not non-current asset. It is appear in separate long-Term assets section of the balance sheet, entitled" Intangible assets".
Generally Intangible assets are created form government authority or by legal contract such as, patents copyright, Trademark, and another form Management know-how, such as goodwill.

Some important Intangible Assets

Acquisition cost of intangible asset Page no. 379

Amortization of intangible assets
Intangible assets should be amortized over its legal life or useful, whichever is shorter.

When intangible asset are amortized:-
Name of the intangible asset expenses a/c Dr.
To Accumulated amortization exp. A/c
(………………………………………………)
When intangible assets are worth less before its life
Loss on –Name of intangible asset a/c Dr.
Accumulated amortization - Name of intangible asset Dr.
To Name of intangible asset a/c

Operating Assets: Natural Resources

Mines oil, gas and forest are natural resources classified as fixed assets in the balance sheet. Natural Resource has one major feature that is: the resource is consumed as it is used.

Acquisition cost of Natural Resources should be carried in the property, plant and equipment categories of the balance sheet as an operating asset.

Acquisition cost should include the cost of acquiring the natural resource and the costs necessary to prepare the assets for use.

When a natural resource is used or consumed, it should be treated as an expense. The process of recording the expenses is called depletion.

Acquisition cost- Residual Value
Depletion Per unit= ____________________________
Total unit in asst's life

Depletion Expenses= Depletion Per unit x unit produced or consumed in a year

unit 2 cash and cash equivalents

2009-10-13T22:00:00.000-07:00

Bank Reconciliation Statement (BRS)

A Bank Reconciliation Statement is a statement reconciling the balance as shown by the balance per bank statement and balance per book.
The main objectives of preparing such a statement is to known the causes of difference between the two balances. Difference between the two accounts are investigated and, if necessary journal entries are passed.

Some important term that used in BRS

Outstanding check /canceled check: Check issued but not presented for payment
Deposit in transit: - Check paid in to bank but not credited by bank.
NSF check: Not Sufficient Fund

Service charge: Service Charged by Bank

Notes and interest collected by bank on
behalf of customers directly credited in
account

Interest earned: Interest earned in bank

Bank Reconciliation Statement

Balance per Bank statement Balance per the book
# If bank a/c is debited than Balance is decrease
# If bank a/c is credited than Balance is increase

• If company's cash book is debited than balance increase
• If company's cash book is credited than balance decrease

• Some time, payment by check is non-practical.
• So payment is made in the form of currency.
• Hence a small amount of fund set aside for this purpose is called petty cash Book.

*When petty cash fund is established: -

Petty cash a/c Dr.
To Cash
(To established a petty cash fund)

*When expenses are disbursed and cash over and short
All expenses a/c Dr.
Cash over or short a/c Dr.
To Cash a/c
(To replenish a petty cash fund, record expenses and Rs. ……, Cash shortage or over)

Example:

Assignment
Page no. 344,7-3
Page no.348, 7-2

Account Receivable

The current asset resulting from a sale on credit with an oral promise from the customer to pay within a specified period of time is called an account receivable.

Or Amount owed to the business by its customers for goods and services sold to them on credit, that is called account receivable. It is also called debtors. In other word we can say assets created by selling goods and services on credit. Generally there is no charge interest in A/c receivable and often gives the customers a discount for early payment.

Example: 2/10net30

Valuation of Accounts Receivable: -

1 Direct write-off method: - (or Direct method)

-When credit sales are made: -
Account Receivable- (Name of the person)Dr.
To Sales revenue
(To record sales on credit)

- When credit sales amount is not collected and write off: -
Bad debt expenses Dr.
To Account receivable- (Name of the person or ` company)
(To write off- - - -Account.)

2 Allowance Method: - According to this method, it is estimated amount of bad debts before they actually occur.

Bad debts expense Dr.
To Allowance for doubtful Accounts
(To record estimated bad debts for the year.)

Account receivable - - - - - -
Less, allowance for doubtful account – - - - - -
Net account receivable --------

Methods to account for uncollectible amount or Estimating Bad debt

1) Percentage of net credit sales method: -

In this method uncollectible amount is estimated as % of the credit sales of an accounting period

At the end of accounting period the following journal entry has been passed.

Bad debts expenses Dr.
To Allowance for doubtful account
(To record estimated bad debts)

2 Percentage of account receivable method:-

According this method uncollectible account are estimated as a percentage of debts appearing on a firms balance sheet

Bad debts expenses ……*
Allowance for doubtful account …….*
(To record estimated bad debts)

*Amount for bad debts expense =
Calculated estimated bad debt – credit balance in allowance for doubtful a/c

Balance sheet presentation

Total account receivable ……….
Less, Allowance for doubtful account ……….
(Estimated bad debts)
Net realizable value ………

Aging of account receivable: -
It is an alternative method of % of account receivable method. According to this method it categorizes the various accounts by length of time outstanding.

See, page no. 331

Note Receivable

A note (also called a promissory note) is a written promise to repay a definite sum of money on demand or at a fixed or determinable date in the future.

Promissory notes normally require the payment of interest for the use of someone else's money.

The bill/ note is addressed to the buyer (debtor), who is known as the drawee or maker. And the person to whom the bill is payable is the payee.

Some important terms under promissory notes

Principal: - The amount of cash received by the maker when a promissory note is issued.

Maturity date: - The date that the promissory note is due.

Term:- The period of time between the date is issued and the date is matures.

Maturity Value: - The total amount of cash the maker is to pay the payee on the maturity date of the note.

Interest: - Difference value between principal and maturity value.

Interest bearing notes

Notes in which an interest rate is explicit stated are called interest-bearing notes.
Journals

#When promissory notes is signed or received; -
Notes receivable a/c Dr…
To sales revenue

#When interest is earned before at the end of accounting period:-
Interest receivable A/c Dr…
To Interest revenue…

#When principal and interest are collected; -
Cash a/c Dr…………….
To Notes receivable …
Interest revenue..
Interest receivable..
(To record collection of promissory note)

Non-interest bearing notes (Discounted note)
Notes in which interest is implicit in the agreement are called non- interest bearing notes or discounted note.
Journals:-
#When notes is signed;-
Cash a/c Dr…
Notes receivable a/c Dr………..
To discounted on notes receivable..
To sales revenue ……
(To record sales in exchange for note)

# When interest is earned before maturity date and fiscal year.
Discount on notes receivable a/c Dr..
To interest revenue….
(To record interest earned for …months)

#When maturity value and interest earned is collected:-
Cash a/c Dr…
Discount on notes receivable a/c Dr..
To Notes Receivable..
To interest revenue ……
(To record collection of note)

account unit 1

2009-10-13T04:32:00.000-07:00

.The Nature of Inventory

also called stock
Tangible Assets
Current Assets that carried in the balance sheet after valuation.
It is use for sale in the ordinary course of action
Or in the process of production such for sales
Or for consumption in the production of goods or services for sale.

Relationship between Types of Businesses and Inventory Costs

Type of Business Inventory Costs included Inventory

tailer/ Merchandise Cost to purchase

Wholesaler Inventory

Raw Materials Cost of materials before

entered

in to production

Cost of direct materials used,

Manufacturer Work- in –Process Direct labor, and overhead in

unfinished items.

Finished Goods Cost of completed, but unsold, items

The Cost of good sold Model

Cost of goods sold is recognized as an expense under the matching principle.

It represents the cost associated with the merchandise with revenue of the period.

Beginning inventory what is on hand to start the period

+Purchasewhat was acquired for resale during the period

= Cost of goods available for sale The "pool" of cost to be distributed

- Ending InventoryWhat was not sold during the period and therefore is on hand to start the next period

= Cost of goods soldWhat was sold during the period

Description Item

Merchandise on hand Beginning Inventory

to start the period

Acquisitions of merchandise of + Cost of goods purchased

merchandise during the period

The pool of merchandise = Cost of goods

available for sales available for sale

during the period

Merchandise on hand - Ending inventory

at end of period

The expense recognized on

the income statement = Cost of goods sold

Inventory Errors

· The importance of inventory valuation to the measurement of income can be illustrated by considering errors.

· Many different types of inventory errors exist.

- Incorrectly adding a column total

- Wrong count of physical inventory at the end of year.

- Cutoff problems at year end

- Good are held on consignment

Effect of inventory error on the income statement.

Reported

Sales Rs.500

Cost of good sold:

Beginning inventory 100

Add, Purchase 200

Cost of good available for sale 300

Less, ending inventory 50

Cost of good sold 250

Gross Margin 250

Operating Expenses 100

Net income 150

But correct ending inventory was Rs. 25, calculate the corrected Net Income.

( Refer to Page No. 267)

Inventory costs include

· Any freight costs incurred by buyer

· Cost of insurance for inventory in transit

· Cost of storing inventory before selling

· Excise and sales taxes

Problem-1

From the following information of Tabor Hardware

Stores, Calculate the cost of goods sold for dec.1998.

Inventory, January 1, 1998 $ 15,000/

Inventory, December 31, 1998 $ 18,000

Purchases $ 65,000

Purchase returns and allowances $ 1,800

Purchase discounts $ 3,700

Transportation-in $ 3,500

Inventory costing Method

Inventory costing methods with periodic system:

Ø Periodic inventory System (PIS) is that a system of accounting for inventories in which the ending inventories is determined at the end of an accounting period by taking a physical inventory.

- The PIS relies on a count of inventory on hand at the end of the year to allocate costs between ending inventory and cost of goods sold.

- It is easy to record and calculate

- It has lack of information about the number of items of inventory during the year.

Example:

February 4 200 units purchased @ $1 =$200

October 13 200 units purchased @ $1.5 =$300

Suppose the wholesaler sells 200 units during the year.

Which 200 units did the wholesaler sell?

#The $1 units

#Or The $1.5 units

#Or some combination of each.

Units Units cost Total cost

Beginning Inventory 500 $10 $5,000

Purchases

January 20 300 11 3,300

April 400 12 4,800

September5 200 13 2,600

December 12 100 14 1,400

Total Purchases 1,000 units $ 12,100

Available for sales 1,500 Units $17,100

Units sold 900 Units ?

Units in ending inventory 600 units ?

Ø What portion of the cost of goods available for sales of $ 17,100 should be assigned to the 900 units sold?

Ø What portion should be assigned to the 600 units remaining in the ending inventory?

a) Specific Identification Method

· This method assigns specific costs to each units sold and each unit on hand.

· This method is suited to inventories of high-value items such as jewellery, diamond and automobile.

b) Weighted Average Cost Method

· This method assumes that the goods available for sale are homogeneous or same unit cost.

Cost of goods sold for Sales

Weighted Average =

Units Available for Sales

Value of ending inventory = Weighted Average x Number of units on hand

c) First –in, First out (FIFO) Method

FIFO method assumes that the first units acquired are the first units sold. Thus the ending inventory consists of the most recent purchases of the period.
This method is suitable for maintaining a fresh stock of product.
In last times of rising prices, FIFO method provided highest Net profit so, it does not match properly costs with revenues.

d) Last–in, First out (LIFO) Method

· It assumes that the last units acquired are the first units sold. Therefore the cost of the units in the ending inventory is that of the earliest purchases.

· Generally, This method provides realistic profits than FIFO method.

· According to the LIFO method the balance sheet value of inventories may be outdated and unrealistic.

Methods of inventory estimation

1) - Gross profit Method: -

*Determine the gross profit: -

Net sales x Gross profit ratio

* Determine cost of goods sold: -

Net sales – Gross profit

* Determine cost of goods available for sale at time of accident

Beginning inventory + purchase.

* Determine inventory at time of the accident

Cost of goods available for sales- Cost of goods sold

* Determine amount of inventory destroyed:

Inventory at time of accident- Inventory not destroyed

When amount received form insurance company:

Loss on insurance settlement a/c Dr.

Cash (from insurance company) a/c Dr.

Inventory a/c Cr.

(To record the insurance settlement form accident)

2) Retail Inventory Method (For interim statement)

Cost Retail

Inventory, January1 …… ……

Add: Net purchases January …… …….

Goods available for sale …… …….

Ratio of cost to retail:…………..

Less Net sales in January …….

Inventory, January 31, at retail ……..

Times: Cost to retail ratio ……

Inventory, January 31, at cost ……

Retail Inventory Method (For year end statement)

Cost Retail

Inventory, January1 …… ……

Add: Net purchases during the ye ar … …….

Goods available for sale …… …….

Ratio of cost to retail:…………..

Inventory, December 31, at retail value,

per a physical count ……..

Times: Cost to retail ratio x ……

Inventory, December 31, at cost ……

*Honeycomb, a retailer hired a temporary services to count year-end inventory at the retail price marked on the goods. The following information is available.

Cost Retail

Sales $12,78,0000

Beginning inventory $ 80,000 1,60,000

Purchase 64,00,000 1,28,00,000

Ending inventory (per count) 1,50,000

Required

a) Ignoring the inventory count at retail value, estimate the amount of ending inventory you would expect Honeycomb to report on its year end balance sheet.

* The same company count inventory at January 31 The following information is available.

Cost Retail

Inventory, January 1 $ 7,500 9,750

Purchase January 40,500 50,250

Net sales in January 43,000

Lower of Cost or Market Rule Method (LCM)

The lower of the total cost or the total market value for the entire inventory could be reported.
The lower of the cost or market value for each individual product or item could be reported.
A group approach could be used.

# A company is free to choose any one of these approaches in applying the lower of cost or market (LCM) rule.

Problem

Trendy, a clothing retailer sells three product lines. Due to a decline in popularity of the purple line, its replacement price has decreased, and Trendy anticipated declines in its selling price. Trendy's year-end inventory count provides the following data:

Product line original cost cost to replace units on hand

Black $4.5 $6 2,000

Purple 6 2.88 1,000

Red 7.5 9 500

Compute the ending inventory, applying the lower of cost or market rule

a) On a total basis.

b) On an item-by item basis.

Page no. 287

Journal Entries for the two systems

Periodic system Perpetual system

*When goods purchased

Purchase a/c Inventory a/c

Account payable Account payable

*When goods returned

Account payable Account payable

Purchase return Inventory

and allowance

*When goods sold

Account receivable Account Receivable

Sales revenue Sales revenue

Cost of goods sold

Inventory