Where does the purchase of equipment show up on a profit and loss statement?

The purchase of equipment that will be used in a business is not reported on the profit and loss statement. However, the depreciation of the equipment will be reported as depreciation expense on the profit and loss statements during the years that the equipment is used. For example, if a company buys equipment for $100,000 and it is expected to be used for 10 years, the companys profit and loss statements will report depreciation expense of $10,000 in each of the 10 years (assuming the straight-line method of depreciation is used). The purchase of equipment is shown on the statement of cash flows for the period in which the purchase took place. The equipment will also be reported on the companys balance sheets at its cost minus its accumulated depreciation. The profit and loss statements are also known as income statements, statements of operations, and statements of earnings. What is the Personal Income Tax rate? Income tax slabs for individual taxpayers to be as follows Income upto Rs 1.8 lakh Nil Income above Rs 1.8 lakh and upto Rs. 5 lakh 10 per cent Income above Rs.5 lakh and upto Rs. 8 lakh 20 per cent Income above Rs. 8 lakh 30 per cent Income tax slabs 2011-2012 for Women Income upto Rs 1.9 lakh Nil Income above Rs 1.9 lakh and upto Rs. 5 lakh 10 per cent Income above Rs.5 lakh and upto Rs. 8 lakh 20 per cent Income above Rs. 8 lakh 30 per cent Income tax slabs 2011-2012 for Senior citizen (Aged 60 years but less than 80 years) Income upto Rs 2.5 lakh Nil Income above Rs 2.5 lakh and upto Rs. 5 lakh 10 per cent Income above Rs.5 lakh and upto Rs. 8 lakh 20 per cent Income above Rs. 8 lakh 30 per cent Income tax slabs 2011-2012 for Very Senior citizen (Above 80 years) Income upto Rs 5 lakh Nil Income above Rs.5 lakh and upto Rs. 8 lakh 20 per cent Income above Rs. 8 lakh 30 per cent What are Direct and Indirect Taxes? Give examples.

Direct Taxes: Personal Income Tax. Indirect Taxes: Excise Duty, Value Added Tax(VAT). Why does a Balance Sheet balance? Balance sheet is a Financial Statement of an Firm. The Two sides of Balance sheet consist of Assets and Liabilities; the amount which is invested in the way of Capital is used for procurement of Assets. Assets = Liabilities + Shareholders Equity The company has to pay for buying assets by either borrowing (liabilities) or getting it from shareholders (shareholders' equity). So that make sense that both sides get equals. Is loss an asset or a liability? A loss to the firm is considered as an Asset not as a Liability, because there is no need to pay or return the money to anyone. It is assumed as amount to be recovered back(or Expenses) in the concern soon, so it is considered to be an Asset. What are LIFO & FIFO? What are they used for? LIFO stands for Last in, First Out, and FIFO as First in, First Out. These concepts are used in accounting concern dealing with Inventories or Stocks mainly. Usually this process is used in the warehouse department, where the stock which comes First and those stocks are used to produce or to sell it that is called as FIFO method and when the product or good, which arrives last and sent out the process is called LIFO. LIFO and FIFO is based on the Time when it arrives and sent out. What are Quick Assets? Quick Assets are those assets which are in Cash, or which can be easily convertible to cash. Stocks are an example for Quick Assets, as it can be convertible easily. In accounting terms, Quick Assets = Current Assets - Inventories. What is Quick Assets Ratio? To Payoff the Current Liabilities (Debts), the firm make an ratio to know the current liquidity ratio, that is called as Quick Assets Ratio or Acid Test Ratio or Liquidity Ratio. This is an commonly used tests for knowing short term financial stability. Quick Assets Ratio = Cash + Securities + Accounts Receivable / Current Liabilities Or Quick Assets Ratio = Current Assets Stock / Current Liabilities. What is Amortization? Amortization is an charge made on the assets, which works same as Depreciation. Basically Amortization is charged on the Intangible assets or writing off of loans. For Example, if the company purchases Equipment by taking the Loan, the Equipment is depreciated while the Loan amount is amortized.

What is Depreciation? What are the different methods of Depreciation? Which method is better and why? Click Here: What is Depreciation? Reasons for Calculating Depreciation? Click Here: What is the Need of Providing Depreciation? Diminishing Balance Method is better than the Straight line Method, because it reduces the value of the assets more than the SLM and helps to make a provision from the profits before distributing it, instead of calling the money back again after distributing the profits to shareholders. Do you know what N.P.V. discounting is? N.P.V stands for Net Present Value, which deals with the cash inflow and outflow. The difference between the present value of cash inflows and the present value of cash outflows. This is used for capital budgeting for profit analyzing for the future project which is to be undertaken now.
What is Depreciation? Depreciation, means a decline in the net value of the assets. A certain percentage of Fixed asset is charged as depreciation in the every accounting period by the the business concern for the purpose of knowing the exact value of the asset holding. The another main emphasis of the depreciation process is to match up the expenses with the revenues reported in each period. Depreciation is a permanent, continuously diminishes in the book value of a Fixed Asset. It is only charged on the book value of the asset, it has nothing to do with Current Market Value of the asset. Depreciation will reduces the value of the asset. Why Depreciation is Charged? Let say in example, A machinery is purchased at $100,000 and it is used for 5 years and now if I want to sell the machinery I get only $10,000, Why? Because it been used (Wear and Tear applies). So If the machinery broke down, I have no funds to repair of purchase a new machinery, I am left with no option except closure of my business. For this reason only, a part of money is charged from the profit in the way of depreciation in the view of any uncertainty or Expiry of machinery. Depreciation is charged as an Indirect expense on the end Goods produced. Why Depreciation is charged only on Fixed Assets not on Current Assets? Current assets are never depreciated because it is never valued in the books of accounts since they are Direct expenses whereas depreciation is Indirect expenses. So depreciation is only charged on the Fixed assets.

What are the causes of Depreciation? Few of the causes of depreciation are. Physical Deterioration: It is caused mainly from wear and tear when the asset is in use and from erosion, rust, rot, and decay from being exposed to wind, rain, sun and other elements of nature. Economic Factors: The problem on Obsolescence and Inadequacy. Obsolescence means the process of becoming obsolete or out dated. An old machinery though in good physical condition may be rendered obsolete by the introduction of new model which produces more than the old machinery. Inadequacy refers to the termination of the use of an asset because of growth and changes in the size of the firm. But obsolescence and inadequacy do not necessarily mean that the asset is scrapped. Time Factors: There are certain assets with a fixed point of legal life such as lease, patents, and copyrights. For instance, a lease can be entered into for any period while a patents legal life is for some years but on certain grounds this can be extended. Provision for the consumption of these assets is called amortization rather than depreciation. Deletion: Some assets are of wasting characters perhaps due to the extraction of raw materials from them. These materials are then either used by the firm to make something else or are sold in their raw state to other firms. Natural resources such as mines, quarries, and old wells come under this heading. To provide for the consumption of an assets of wasting character is called provision for depletion. Accident: An asset may reduce in value because of meeting of an accident.

Whats Intangible Assets? Accounting Treatment in Balance Sheet.

Intangible assets are rights, privileges, and competitive advantages that result from ownership of long live assets that do not posses any physical substance. Many companies most valuable assets are intangible. Some widely known intangibles are Microsoft's patents. McDonald's franchises, the trade name Ipod, and Nike's trademark "swoosh". How to do accounting for Intangible assets? Intangible assets are recorded at cost. Its of two types, Limited life and indefinite life. In Limited life, the company allocated its cost over the useful life of the assets which is similar to depreciation. the process of allocation of such intangible assets is called as Amortization. Indefinite life of intangible assets should not be amortized. How Amortization is different from depreciation?

In Depreciation a separate account is opened called Accumulated depreciation Account and every year the amount depreciated is credited to that account and it is deducted to the Historical cost of the Gross block of the asset. Whereas in Amortization every year the cost of the assets get reduced and the Book value is shown in the Balance sheet.

Example: In depreciation, let say the cost of asset is $10000 and depreciation in $1000 /yr Every year the Accumulate Depreciation Account is credited with $1000/yr. ie., 1st year - $1000 2nd year - $2000 3rs year - $3000 and so on till 10th year - $10000. Which means the cost of asset become Zero and a replacement is needed. Depreciation and Amortization Treatment in Balance Sheet: In Fixed Assets: Every year the Gross Block of the Asset is shown the Historical Cost ie,. the cost at which the Asset has been purchased and to that the Accumulated depreciation is deducted. So every successive year the Accumulated depreciation account increases and the Book value of the asset Decreases. Example: 1st year: Gross Block: $10000 Less: Acc Dep: $1000 ----------$9000 ----------2nd year: Gross Block: $10000 Less: Acc Dep: $2000 ----------$8000 ----------Journal Entry for Depreciation: Date | Depreciation - (Asset Name) | Dr. Amount | (To) Accumulate Dep A/c | Cr. Amount| Amortization: In amortization, the balance sheet is shown directly the Book value of the asset instead of opening an new account unlike in depreciation. Journal Entry for Amortization: Date | Amortization Expense - (Asset Name) | Dr. Amount | (To) Asset Name A/c | Cr. Amount|

Does dividend reduce profits? No, only the operating and adminstartive expenses reduces the profit margin so as the bottom line(profit). Paying Dividend decision is taken(at the time of appropriation of funds) after knowing what the profit is and based on which either part/whole profit can be declared as divideds to its shareholders or it can be retain same partially/whole in the company and reinvested in the company itself. Paying dividends only reduces the amount carried forwarded to reserves and surplus. What is the highest rate of Depreciation under Income Tax and for what items? Few of them are, 100% depreciation is allowed for machinery acquired for water supply project or water treatment system and used for infrastructure facilities. Air, water pollution control equipments, Books. Does depreciation reduce profit? Yes, the Net profit gets reduced since the law allows the depreciation amount can be considered as an expenses and charged in expenses column of income statement, because of which the profit reduces though there is no cash outflow from the company. What is Current Ratio? What is the ideal Current Ratio? Why? In simple, its the assets available with the company to meets its future short term obligations(liabilities) It is calculated by CURRENT ASSETS/CURRENT LIABILITIES, Ideally it should be 2:1 ratio. It means the company has assets twice its liabilities, it should be twice because the assets cannot be turned into liquid cash immediately, so if the assets are twice the chances of converting few assets are higher than another. What is Capital and Revenue Expenditure? Any expenses which are incurred for short term gain is Revenue expenditure(example., stationery, or any item which the gain can be obtained for less than an year) and expenditure which sustains for longer period of time let say more than 2-3 is capital expenditure(example., Machinery, Building) What would happen if a company pays a lower dividend? Company perspective: It can retain the profits and reinvest and increase the shareholder value(market price) Investors Perspective: It discourages the new investors to invest in that particular stock/company. Both are applicable in different scenario. What is Fiscal Deficit? What is Budget Deficit?This link should answer this question: Meaning and Difference between Budget and Fiscal Deficit with Examples?

Where does Goodwill appear in a Balance Sheet? Why? Goodwill is an Intabgible asset gained by the company throught its operation over an period of time. In other words its the monetary figure what the company has earned as Brand Value/Equity from its customers. It is shown in the Asset side of the Balancesheet. Can the captain of the vessel dump the goods in the middle of the sea? Yes, the captain can dump it when he feels than the ship is overweighed and its can be sunked. The sales of goods act and Indian contact act permits it. What is the difference between Excise Duty and Customs Duty? Excise Duty Can depreciation be on fixed assets only? Yes. As depreciation is to fixed assets, what is the same analogous to debtors? Provision for Bad Debts.

Meaning and Difference between Budget and Fiscal Deficit with Examples? The government, every year prepares budget which shows the expected receipts and expenditures of the government in the coming financial year. Receipts of the government come form taxes (both direct and indirect taxes), profits from various financial institutions, government commercial undertakings, interest from loans given to other governments, local bodies, etc and expenditure of the government are on developmental projects such as construction of roads, railways, production of energy and non-developmental expenditure on a large number of activities such as defence, subsidies, police, law and order etc. If receipts are equal to expenditure, the budget is said to balanced one. If receipts are higher than the expenditure the budget is said to be surplus one, and If receipts are lower then the expenditure, the budget is said to be deficit one. The estimates included in the budget are simply estimates; the actual may not conform to the original estimates. The budget must, however, estimate revenues and expenditures as accurately as possible. Accuracy becomes essential if equilibrium established in the estimates is to be maintained to the end and realised in actual. The Budget comprises data for three years; a) Actual Figures for the Preceding Year; b) Budget estimates for the Current Year; c) Revised estimates for the Current Year, and d) Budget estimates for the Following Year.

What is Budget Deficit and Fiscal Deficit? Budget deficit = Total Receipt - Total Expenditure. Fiscal Deficit: a) the difference between total expenditure and total revenue receipts and capital receipts but excluding borrowings and other liabilities, or b) it is the Sum of Budget deficit plus Borrowings and other Liabilities. Budget deficit is the difference between total receipts and total expenditure. If borrowings and other liabilities are added to budget deficit, we get Fiscal deficits. Since budget does not show the true pictures of government liabilities and hence a true picture of the financial health of the economy, the practice of showing budget deficit is not in use, Budgets now show fiscal deficits to show the overall shortfalls in the public revenues, Over the years fiscal deficits have grown rapidly and have become the cause of concern. To meet the challenge, many reforms have been carried out but still the problem of high fiscal deficit remains. Example showing Calculation of Budget Deficit and Fiscal Deficit. In Crores. 1. Revenue Receipts 3,50,200 2. Capital Receipts of which 1,63, 144 a) Loan recoveries + other receipts 12,000 b) Borrowings & Other liabilities 1,51,144 3. Total Receipts (1 +2) 5,14,344 4. Revenue Expenditure 1,14,982 5. Capital Expenditure 67,832 6. Total Expenditure (4+5) 5,14,344 7. Budgetary Deficit (3-6) NIL 8. Fiscal Deficit [1+2(a) - 6 = 7 + 2 (b)] 1,50,144 Budget Deficit: $5,14,344 Crores - $5,14,344 Crores = Nil

What is the Need of Providing Depreciation? The need for depreciation arises because of the following reasons: Objects of Providing Depreciation: a) To Calculate the True Profits: Depreciation is an expense and becomes an important element of the cost of production. Though it is not visible like other expenses and never paid to the outside party yet it is desirable to charge depreciation on fixed assets as these are used for earning purposes; so their depreciation must be deducted out of the income earned from their use in order to calculate true profit net or loss.

b) To show true Financial Position: Financial position can be studied from the balance sheet and for the preparation of balance sheet fixed assets are required to be shown at their true value. If assets are shown in the balance sheet without any charge made for their use or depreciation, then their value must have been overstated in the balance sheet and will not reflect the true financial position of he business. So, for the purpose of reflecting true financial position, it is necessary that depreciation must be deducted from the assets and then at such reduced value these may be shown in the balance sheet. c) To make Provision for replacement of assets: If depreciation is not provided, the profits of the concern will be overstated and can be distributed to the shareholders as dividend. After the end of the working life of the asset, there will be no provision or funds at the disposal of the concern and hos to borrow for purchasing new assets. Provision for depreciation is a charge to profits and loss account though depreciation is not paid. The amount of depreciation accumulated during the working life of the asset provides additional working capital besides providing sum at the end of the working life of the asset for its replacement. Other reasons are d) To have some Incidental advantage e) To have Tax advantage f) To maintain the original monetary investment of the asset intact. Internal Reasons: i) Wear and Tear purpose ii) Not using iii) Lack of proper Maintainence iv) Change in production formal v) Restriction of production by government vi) Reduction to demand of the product produced by the asset vii) Technical progress viii) Depletion External Reasons: i) Obsolescence ii) Effluxion of Time

Q: Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings? A: Capital expenditures are capitalized because of the timing of their estimated benefits the lemonade stand will benefit the firm for many years. The employees work, on the other hand,

benefits the period in which the wages are generated only and should be expensed then. This is what differentiates an asset from an expense. Q: Walk me through a cash flow statement. A. Start with net income, go line by line through major adjustments (depreciation, changes in working capital and deferred taxes) to arrive at cash flows from operating activities.
y y y y

Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of investment securities to arrive at cash flow from investing activities. Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow from financing activities. Adding cash flows from operations, cash flows from investments, and cash flows from financing gets you to total change of cash. Beginning-of-period cash balance plus change in cash allows you to arrive at end-ofperiod cash balance.

Q: What is working capital? A: Working capital is defined as current assets minus current liabilities; it tells the financial statement user how much cash is tied up in the business through items such as receivables and inventories and also how much cash is going to be needed to pay off short term obligations in the next 12 months. Q: Is it possible for a company to show positive cash flows but be in grave trouble? A: Absolutely. Two examples involve unsustainable improvements in working capital (a company is selling off inventory and delaying payables), and another example involves lack of revenues going forward.in the pipeline Q: How is it possible for a company to show positive net income but go bankrupt? A: Two examples include deterioration of working capital (i.e. increasing accounts receivable, lowering accounts payable), and financial shenanigans. Q: I buy a piece of equipment, walk me through the impact on the 3 financial statements A: Initially, there is no impact (income statement); cash goes down, while PP&E goes up (balance sheet), and the purchase of PP&E is a cash outflow (cash flow statement) Over the life of the asset: depreciation reduces net income (income statement); PP&E goes down by depreciation, while retained earnings go down (balance sheet); and depreciation is added back (because it is a non-cash expense that reduced net income) in the cash from operations section (cash flow statement). Q: Why are increases in accounts receivable a cash reduction on the cash flow statement?

A: Since our cash flow statement starts with net income, an increase in accounts receivable is an adjustment to net income to reflect the fact that the company never actually received those funds. Q: How is the income statement linked to the balance sheet? A: Net income flows into retained earnings. Q: What is goodwill? A: Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business. Lets walk through the following example: Acquirer buys Target for $500m in cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m.
y y y y

Acquirer records cash decline of $500 to finance acquisition Acquirers PP&E increases by $100m Acquirers debt increases by $50m Acquirer records goodwill of $450m

Q: What is a deferred tax liability and why might one be created?

A: Deferred tax liability is a tax expense amount reported on a companys income statement that is not actually paid to the IRS in that time period, but is expected to be paid in the future. It arises because when a company actually pays less in taxes to the IRS than they show as an expense on their income statement in a reporting period. Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to differences in income between the two, which ultimately leads to differences in tax expense reported in the financial statements and taxes payable to the IRS. Q: What is a deferred tax asset and why might one be created? A: Deferred tax asset arises when a company actually pays more in taxes to the IRS than they show as an expense on their income statement in a reporting period.
y

Differences in revenue recognition, expense recognition (such as warranty expense), and net operating losses (NOLs) can create deferred tax assets.

Q 1. What is difference between VAT and Sales Tax? Answer: VAT is levied on goods and services while sales tax is imposed generally on goods. Contrary to sales tax VAT has no cascading effect. VAT is a multistage tax, levied only on the value added at each stage in the chain of supply of goods and services with

the provision of a set-off for the tax paid at earlier stages in the chain. Thus, VAT eventually becomes a single point tax. Q 2. What will be scope of VAT? Answer: VAT will cover supply (including import) of both goods and services at uniform rate of 15 percent unless exempted under the VAT law. The businesses whose annual turnover is less than Rs.7.5 million will be out of VAT net. Q 3. How VAT will be helpful in documentation of economy and improve revenue collection? Answer: Generally, all the commercial activities involving production and distribution of goods and provision of services are brought under tax net giving tolerance for a pre-fixed registration threshold level. This results in documentation of every body in the supply chain. Those who are not registered in the chain are not in a position to claim or deduct tax paid at purchase levels. VAT promotes economic documentation with the help of its in-built invoice-based credit mechanism. Tax invoice is blood line of VAT-induced documentation. VAT has self-enforcing features and documents business transactions through tax invoicing. Q 4.What will be impact of VAT on food prices? Answer: In Pakistan, most of the processed packaged/branded food items are already chargeable to sales tax. Basic food items being out of VAT net, there will be no tangible price increase in food items usually sold in processed packaged/branded form. Consumer prices of the food items which are currently being charged to sales tax on retail price basis are likely to fall because VAT will be charged on actual sale or open market price, not on printed retail price basis. Retailers will be in position to discount their prices to attract consumers. Q 5. What is difference between goods and services? Answer: Goods are tangible supplies (materials, commodities and articles) and services are intangible supplies. VAT will regulate mixed supplies on the basis of their contractual character. Under VAT, services means anything that is not goods, immoveable property or money. However, actionable claims, money, stocks and securities are not included in goods.

What is the difference between the excise duty and the sales tax ? This is a very tricky question and you will have to answer accordingly. The exact answer is that when a goods move from one state to the another then you will have to pay the sales tax and when the goods come out of the industry then you will have to pay the excise duty. Do not try to go more deep. Just give this answer and keep your mouth shut. Otherwise you will have to face a

series of questions which will be very difficult to answer. However if you have guts then I would definitely advice you to answer in detail. These are some of the questions which can be asked from you. So prepare hard and once you will clear this interview your life will be assured.

Depreciation method Different companies calculate and account for depreciation in different ways. Since depreciation is taken as an expense in the income statement, indicating higher depreciation reduces the income before taxes and thus the taxes to be paid can be reduced. However, the taxes are not eliminated, but deferred for a later period, since larger depreciation in current period would mean lower depreciation later. Methods of depreciation can be broadly grouped in 2 categories: Straight Line Method and Reducing/Declining Balance Method. Straight Line Method: In this method, the asset is depreciated over its life in a linear fashion, i.e. by equal amounts every year. In general, the asset is assigned a salvage value which is the expected value obtained by disposing the asset at the time of its disposal. The formula for calculating the depreciation expense every period is as follows:

Example: Calculate the depreciation of an asset with Original Value - $10,000. The useful life of the asset is 5 years and the salvage value at the end of 5 years is 0. Solution: Depreciation = (Original Value - Salvage Value)/Time = (10,000 - 0)/5 = $2000. Reducing Balance Method: In this method, the depreciation in a period is equal to a percentage of the Written Down Value (WDV) of the asset at the beginning of the period. The WDV at the beginning of a period is equal to the original value of the asset minus cumulative depreciation. Thus the formulas for calculating the depreciation would be:

where

are the WDV and Cumulative Depreciation at end

of period i respectively, and is Depreciation Expense during period i. Depreciation Factor is the rate at which the asset is depreciated.

Investopedia explains 'Salvage Value'

The salvage value is used in conjunction with the purchase price and accounting method to determine the amount by which an asset depreciates each period. For example, with a straightline basis, an asset that cost $5,000 and has a salvage value of $1,000 and a useful life of five years would be depreciated at $800 ($5,000-$1,000/5 years) each year. Within the tax system, when a person donates a car he or she receives a tax deduction. The value of this deduction depends on the salvage value of the car. This salvage value is determined to be the current fair market value that could be obtained had the car been sold on that day rather than donated.

Definition of 'Salvage Value'

The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting to determine depreciation amounts and in the tax system to determine deductions. The value can be a best guess of the end value or can be determined by a regulatory body such as the IRS.