Assignment Code: BCOC-137/TMA/2023-24

Course Code: BCOC -137

Assignment Name: Corporate Accounting

Year: 2023-2024

Verification Status: Verified by Professor

SECTION A

Q1) Distinguish between partnership and company forms of organizations.

Ans) The difference between partnership and company forms of organizations can be described as follows:

Q2) Can a company forfeit shares for non-payment of calls? If so, explain the

procedure of share forfeiture.

Ans) Yes, a company can forfeit shares for non-payment of calls. Share forfeiture is a process by which a company cancels shares that have not been fully paid for by the shareholders. This typically occurs when shareholders fail to pay the required amount (calls) on their shares within the specified timeframe.

The procedure of share forfeiture typically involves the following steps:

1)      Notice to Shareholder: The company issues a formal notice to the shareholder who has failed to pay the required calls on their shares. This notice usually specifies the amount due, the deadline for payment, and the consequences of non-payment, including the possibility of share forfeiture.

2)     Deadline for Payment: The shareholder is given a reasonable period to make the payment. If they fail to do so within this timeframe, the shares may be forfeited.

3)     Resolution by the Board of Directors: The board of directors of the company convenes a meeting and passes a resolution to forfeit the shares of the non-compliant shareholder. This resolution should be properly documented in the minutes of the meeting.

4)     Forfeiture Announcement: The company notifies the shareholder in writing about the forfeiture of their shares. This notification should include details such as the number of shares forfeited, the reason for forfeiture, and the date of forfeiture.

5)     Cancellation of Shares: Once the shares are forfeited, they are cancelled by the company. This means that the shareholder loses all rights associated with those shares, including voting rights and entitlement to dividends.

6)     Accounting Entries: The company makes appropriate accounting entries to reflect the forfeiture of shares. This may involve reducing the share capital account and transferring the amount paid on the forfeited shares to a forfeiture account.

7)     Disposal of Forfeited Shares: The company may choose to sell the forfeited shares to recover the unpaid amount or to issue them to new shareholders. Any proceeds from the sale of forfeited shares are typically used to offset any outstanding liabilities of the shareholder, with any surplus being returned to the shareholder.

Q3) Describe the functions of modern commercial banks.

Ans) Modern commercial banks perform a variety of functions that are essential to the functioning of the economy. These functions can be broadly categorized into primary and secondary functions. Here's a description of the main functions of modern commercial banks:

Primary Functions:

1)      Accepting deposits is one of the fundamental functions of commercial banks is to accept deposits from individuals, businesses, and other entities. These deposits can be in the form of savings accounts, current accounts, fixed deposits, recurring deposits, etc.

2)     It also provides loans and advances to commercial banks lend out a significant portion of the funds they receive as deposits to borrowers in the form of loans and advances. These loans can be for various purposes such as personal loans, business loans, home loans, agricultural loans, etc.

3)     Commercial banks have the unique ability to create credit through the process of fractional reserve banking. By keeping only a fraction of their total deposits as reserves, banks can lend out the remaining funds, effectively creating new money in the form of credit.

Secondary Functions:

1)      Agency Services: Commercial banks act as agents for their customers in various financial transactions. They facilitate services such as collection of cheques, payment of bills, transfer of funds, purchase, and sale of securities, etc.

2)     Issuing Letters of Credit: Banks issue letters of credit (LCs) to facilitate international trade transactions. An LC is a guarantee from the bank that a buyer's payment to a seller will be received on time and for the correct amount, provided certain conditions are met.

3)     Providing Overdraft Facilities: Commercial banks offer overdraft facilities to their customers, allowing them to withdraw more money from their accounts than they have. Overdrafts are typically granted to current account holders and are subject to certain terms and conditions.

4)     Investment Banking Services: Many commercial banks also offer investment banking services such as underwriting, financial advisory, mergers, and acquisitions (M&A) advisory, securities trading, and asset management.

5)     Electronic Banking Services: With the advent of technology, commercial banks have expanded their services to include electronic banking facilities such as internet banking, mobile banking, ATM services, electronic fund transfers, and online bill payment.

6)     Providing Foreign Exchange Services: Commercial banks facilitate foreign exchange transactions for their customers, including currency conversion, hedging against currency fluctuations, and providing foreign exchange risk management services.

Q4) What is a debenture? How does it differ from a share?

Ans) A debenture is a type of debt instrument issued by a company or government entity to raise capital. When an entity issues a debenture, it is essentially borrowing money from investors and promising to repay the principal amount along with interest at a specified future date. Debentures are typically backed by the general creditworthiness and assets of the issuer, rather than by specific collateral.

Here are some key characteristics of debentures:

1)      Fixed Income: Debenture holders receive a fixed rate of interest, which is usually paid periodically (e.g., annually or semi-annually) until the maturity date when the principal amount is repaid.

2)     No Ownership Stake: Unlike shares, debentures do not represent ownership in the issuing company. Instead, debenture holders are creditors of the company and have a claim on its assets in the event of bankruptcy or liquidation.

3)     Priority of Payment: In the event of bankruptcy or liquidation, debenture holders have a higher claim on the assets of the company compared to shareholders. This means that debenture holders are generally paid back before shareholders from the company's assets.

4)     Transferability: Debentures are often freely transferable between investors, allowing holders to buy and sell them on secondary markets.

5)     Maturity Date: Debentures have a specified maturity date, at which point the issuer is obligated to repay the principal amount to the debenture holders.

On the other hand, shares represent ownership stakes in a company.

Here's how shares differ from debentures:

1)      Ownership: Shares represent ownership in the issuing company, entitling shareholders to voting rights, dividends (if declared), and a share of the company's profits.

2)     Variable Returns: Unlike debentures, which offer fixed interest payments, returns on shares can vary based on the company's performance and dividend policy. Shareholders may receive dividends when the company generates profits, but these dividends are not guaranteed and can fluctuate.

3)     Risk and Reward: Shareholders bear the risk of the company's performance, as the value of shares can rise or fall based on factors such as market conditions, company earnings, and industry trends. While shareholders have the potential for higher returns through capital appreciation and dividends, they also face the risk of losing their investment if the company performs poorly.

Q5) Enumerate four items each of current assets and current liabilities.

Ans) The four examples each of current assets and current liabilities are as follows:

Current Assets:

1)      Cash and Cash Equivalents: This includes cash on hand, demand deposits, and short-term investments that are readily convertible into cash within a short period, typically within three months.

2)     Accounts Receivable: Amounts owed to the company by its customers for goods or services provided on credit. Accounts receivables are expected to be collected within a short timeframe, usually within one year.

3)     Inventory: Goods held by the company for sale in the ordinary course of business. Inventory includes raw materials, work-in-progress, and finished goods, and is expected to be converted into cash through sales within one year.

4)     Prepaid Expenses: Expenses that have been paid in advance but have not yet been consumed or used up. Examples include prepaid insurance, prepaid rent, and prepaid utilities.

Current Liabilities:

1)      Accounts Payable: Amounts owed by the company to its suppliers or vendors for goods or services purchased on credit. Accounts payable are typically short-term obligations that must be paid within a specified period, often within one year.

2)     Short-Term Borrowings: Debt obligations that are due for repayment within one year. This may include bank overdrafts, short-term loans, or lines of credit that the company has used to finance its operations.

3)     Accrued Expenses: Expenses that have been incurred but not yet paid for by the company. Examples include accrued wages, accrued interest, and accrued utilities.

4)     Income Tax Payable: Taxes owed by the company to the government based on its taxable income. Income tax payable represents the amount of income tax that the company is obligated to pay within the current fiscal year.

SECTION B

Q6) How does cash flow analysis helps the management in decision making?

Ans) Cash flow analysis is pivotal for management decision-making due to its multifaceted benefits:

1)      Cash Position Understanding: It furnishes management with a real-time snapshot of the company's liquidity, ensuring they grasp the availability of cash for operational needs and short-term obligations.

2)     Forecasting Cash Needs: By scrutinizing historical cash flows and envisaging future business scenarios, management can proactively anticipate periods of surplus or shortfall, thereby facilitating appropriate measures to address cash shortages or deploy excess funds effectively.

3)     Identifying Cash Flow Drivers: Through dissecting the sources and uses of cash within the organization, management gains insights into what propels cash inflows (e.g., sales, investments) and outflows (e.g., operational expenses, debt repayments), thus enabling them to fine-tune strategies for optimizing cash flow efficiency.

4)     Assessing Investment Opportunities: Cash flow analysis empowers management to gauge the potential returns and risks associated with investment endeavours. By analysing projected cash inflows and outflows, they can make informed decisions regarding capital allocation and prioritize investments that promise sustainable cash flow generation.

5)     Monitoring Financial Performance: By comparing actual cash flows against projected figures, management can track the company's financial health, pinpoint variances, and take timely corrective actions to ensure alignment with financial objectives and operational targets.

6)     Facilitating Strategic Planning: Cash flow analysis acts as a compass for strategic decision-making. It aids in evaluating the financial implications of strategic initiatives, such as expansion plans or market diversification, enabling management to chart a course that aligns with the company's long-term vision and objectives.

In essence, cash flow analysis empowers management to navigate the complexities of financial management, optimize resource utilization, and steer the organization towards sustainable growth and profitability.

Q7) Describe the various advantages of a Holding Company.

Ans) Certainly, here are five advantages of a holding company:

1)      Diversification of Investments: Holding companies can spread their investments across various subsidiaries, reducing risk by diversifying into different industries or geographic regions.

2)     Asset Protection: By separating ownership into subsidiaries, a holding company shields its core assets from the liabilities of individual subsidiaries, providing a layer of protection.

3)     Tax Planning: Holding companies can optimize tax strategies through structuring subsidiaries efficiently, taking advantage of tax incentives, and utilizing intercompany transactions.

4)     Centralized Management: Holding companies allow for centralized management and control over multiple subsidiaries, leading to streamlined decision-making and governance processes.

5)     Facilitates Growth: Holding companies can facilitate growth through acquisitions, mergers, and entering new markets, leveraging their resources and brand reputation for expansion.

Q8) Identify the difference between Holding Company and Subsidiary Company?

Ans) The difference between Holding Company and Subsidiary Company is as follows:

Q9) Explain the characteristics of Goodwill in detail.

Ans) Certainly, here's a more concise explanation of the characteristics of goodwill:

1)      Intangible Nature: Goodwill is intangible, representing the value of non-physical assets like reputation and brand recognition.

2)     Arises from Acquisition: It emerges when one company pays a premium over the fair value of net assets to acquire another.

3)     Non-separability: Goodwill is inseparable from the acquired business and cannot be sold independently.

4)     Indefinite Life: It is assumed to have an indefinite useful life, subject to periodic impairment testing.

5)     Subjectivity: Determination of goodwill involves subjective judgment and estimation based on fair value assessments.

6)     Disclosure Requirements: Companies must disclose goodwill amounts and impairment testing details in financial statements.

7)     Impairment Testing: Goodwill is tested for impairment annually or when events indicate its value may be impaired, with any excess written off as a loss.

Q10) Discuss various methods of valuation of shares? Explain.

Ans) Certainly! Here's a shorter explanation of various methods of share valuation:

Market Capitalization Method:

a)     Values shares based on market price per share multiplied by total shares outstanding.

b)     Simple and widely used but may not reflect true intrinsic value.

Earnings Multiple Method:

a)     Values shares by multiplying earnings per share (EPS) by a price-to-earnings (P/E) ratio.

b)     Provides relative valuation but may not suit companies with negative earnings.

Discounted Cash Flow (DCF) Method:

a)     Values shares based on present value of expected future cash flows.

b)     Comprehensive but sensitive to assumptions about future cash flows and discount rates.

Book Value Method:

a)     Values shares based on net assets per share (total assets minus total liabilities divided by shares outstanding).

b)     Provides conservative estimate but may not reflect true economic value of assets.

Comparable Transactions Method:

a)     Values shares based on sale prices of similar companies in recent mergers or acquisitions.

b)     Provides market-based valuation but finding comparable transactions can be challenging.

SECTION C

Q11) Explain the following in detail.

a) Net payment method of Purchase Consideration.

Ans) The net payment method of purchase consideration is a type of acquisition where the consideration paid by the acquiring company to the target company is net of any cash and cash equivalents held by the target company. In other words, the acquiring company pays the target company the agreed purchase price minus the target company's cash balance.

Here's how the net payment method of purchase consideration works:

1)      Agreed Purchase Price: The acquiring company and the target company negotiate and agree upon a purchase price for the acquisition.

2)     Determination of Cash and Cash Equivalents: Prior to the acquisition, the target company's cash and cash equivalents are determined. This includes any cash in hand, bank balances, and highly liquid investments that can be readily converted into cash.

3)     Calculation of Net Payment: The purchase consideration is calculated as the agreed purchase price minus the target company's cash and cash equivalents. This ensures that the acquiring company is only paying for the net assets of the target company, excluding any excess cash reserves.

4)     Payment to Target Company: The acquiring company pays the net amount of the purchase consideration to the target company upon completion of the acquisition.

5)     Impact on Financial Statements: The acquisition is recorded in the acquiring company's financial statements at the net amount paid, which reflects the actual economic cost of acquiring the target company's net assets.

6)     Impact on Dilution: If the acquiring company issues equity to finance the acquisition, using the net payment method can help mitigate dilution for existing shareholders. Since the purchase consideration is net of cash, the issuing company doesn't dilute shareholders with additional shares to cover cash on hand in the target company.

7)     Alignment of Interests: This method can align the interests of the acquiring and target company shareholders. By excluding excess cash from the purchase consideration, both parties focus on the operational assets and potential synergies driving the acquisition, rather than the target company's cash reserves.

8)     Potential Tax Considerations: The net payment method may have tax implications for both the acquiring and target companies. For the acquiring company, the purchase price allocated to assets acquired may differ from the cash paid, affecting tax basis and potential future tax deductions.

The intrinsic worth method of purchase consideration is a valuation approach used in mergers and acquisitions to determine the fair value of a target company based on its intrinsic worth or fundamental value. Unlike methods that rely solely on market prices or comparable transactions, the intrinsic worth method evaluates the target company's underlying assets, earnings potential, and future cash flows to arrive at a valuation.

b) Intrinsic worth method of Purchase Consideration

Here's how the intrinsic worth method of purchase consideration works:

1)      Assessment of Fundamental Value: The intrinsic worth method begins with a comprehensive assessment of the target company's fundamental value. This involves analysing its tangible assets, such as property, plant, and equipment, as well as intangible assets like intellectual property, brand reputation, and customer relationships.

2)     Projection of Future Cash Flows: Next, the method involves projecting the target company's future cash flows over a certain period, typically using financial models such as discounted cash flow (DCF) analysis. These projections are based on factors such as historical performance, industry trends, market dynamics, and management forecasts.

3)     Discounting Future Cash Flows: The projected future cash flows are discounted back to their present value using an appropriate discount rate. The discount rate reflects the risk associated with the investment and is typically based on factors such as the company's cost of capital, market risk premium, and prevailing interest rates.

4)     Calculation of Intrinsic Value: Once the future cash flows are discounted, the sum of the present values represents the intrinsic value or fair value of the target company. This intrinsic value serves as the basis for determining the purchase consideration in the acquisition transaction.

5)     Comparison with Market Value: Finally, the intrinsic value derived from the analysis is compared to the market price or other valuation metrics to assess whether the target company is undervalued, overvalued, or fairly valued. Discrepancies between intrinsic value and market value may indicate potential opportunities or risks for the acquiring company.

Q12) Write the short notes on the following:

a) Disposal of non-banking Assets

Ans) The disposal of non-banking assets by financial institutions is a strategic process aimed at optimizing their business focus, capital resources, and risk exposure. This strategic realignment often involves divesting assets that no longer align with the long-term objectives or core activities of the bank. By divesting from non-core investments, subsidiaries, or other holdings, banks can free up capital resources that are tied up in these assets. This capital can then be redeployed towards core banking activities, strengthening the bank's balance sheet and enhancing its overall financial position.

Additionally, disposing of non-banking assets can help mitigate risks associated with non-performing or volatile investments, improving the bank's risk profile and regulatory compliance. The asset disposal process typically involves conducting thorough assessments of the assets to be divested, engaging in negotiations or transactions with potential buyers or counterparties, and ensuring compliance with legal and regulatory requirements. Ultimately, the disposal of non-banking assets is part of a broader strategy aimed at enhancing shareholder value, improving profitability, and positioning the bank for long-term success in a dynamic and competitive financial landscape.

b) Condition for the license of Banking Company

Ans) The licensing process for a banking company involves fulfilling a set of stringent conditions mandated by regulatory authorities to ensure the stability, integrity, and reliability of the banking system. These conditions encompass various aspects critical to the functioning and oversight of banking institutions.

Firstly, capital requirements play a pivotal role, necessitating that prospective banks possess sufficient capital reserves to absorb potential losses and maintain solvency during adverse economic conditions. This ensures financial stability and mitigates systemic risks within the banking sector.

Secondly, robust governance structures and risk management frameworks are imperative. Regulatory authorities mandate that banking companies establish effective governance mechanisms, including competent boards of directors, clear lines of accountability, and comprehensive risk management policies. These measures are crucial for prudent decision-making, regulatory compliance, and safeguarding the interests of stakeholders.

Moreover, compliance with anti-money laundering (AML) and know your customer (KYC) regulations is paramount. Banking companies must implement rigorous AML and KYC procedures to prevent illicit financial activities, such as money laundering and terrorist financing, thereby upholding the integrity and credibility of the financial system.

c) Distinction between a Bank and a NBFC