Question

PVR Cinemas decide to continue screening a super hit film released on 17 March 2020 for the next two month till 15 May 2020 as they expect the revenue to increase in the month of April & May due to school vacation. The management opened advance booking for the tickets and all the tickets got sold. The cinemas received ₹ 60 lacs in total revenue for this 60-day screening of the movie. How should the cinema’s accountant treat this revenue? Explain the accounting concept that will aid the accountant in this treatment.
(a) What is Accrual Accounting? How does it differ from the Cash basis of Accounting?

(b) “The matching principle poses major challenges to the accountant.” Do you agree?
(a) How are common size statements useful to the analyst?

(b) Identify three financial ratios on which the management of a retail store should focus.

Answer 1

Part A ) Accrual and Cash Accounting

These are two commonly used accounting method. Both are different in their own way and each has its own advantages and dis advantages. Its an option given to accountant to follow either Accrual or Cash Accounting.

"Accrual Accounting" is method of accounting wherein transactions are accounted when it is accounted rather payment for that transaction is received or not during the period.

Thereby expenses and income accrued in a period is accounted in that period itself by creating receivable or payable accounts in balance sheet.

"Cash Accounting" is method of accounting wherein transactions are accounted when payment for that transaction is recived.

Thereby expenses and income received or paid in a period is only accounted in that period.

"Accrual Accounting" gives more accurate picture of income of the entity.

"Cash Accounting" is easiet to follow and implement in an entity.

Part B ) Matching principle

"Matching Principle" requires entity to recognise all expense that related to income of that period.

If any expense is providing benefit over the periods then expense has to be deffered over those periods.

Example : Insurance Expense which has period more than one year

Advertisement Expense which gives benfit to the company over more than one year.

Accountant has to keep the track of all expenses and has to segrate whether it belong to this period or it is related to current period income.

If any expense is not relate to this period the he has to take to outstanding expense account or prepaid expense account.

By following " Matching Principle " entity able to get accurate picture of profit of the entity.

But for an accountant this will be difficult as he has to keep the track period of expense that it belongs.  

Part C ) Common size statements

Common-sized financial statements allow for easier comparisons across groups of companies. Analysts can quickly identify which companies in the group are the most efficient, profitable and/or financially sound. Analysts convert the dollar amount of each line item into a percentage of a common amount.

Common size financial statements help to analyze and compare a company's performance over several periods with varying sales figures.

One of the benefits of using common size analysis is that it allows investors to identify drastic changes in a company's financial statement. This mainly applies when the financials are compared over a period of two or three years

But even it has its own disadvantsge also,that common size financial statements may give the appearance of fair comparisons across companies, but can't take into account that companies may be using different accounting methods or fiscal year-ends. Another drawback of common size financial statements is that they can't be used to compare companies across different industries. What may be considered a favorable ratio in one industry may indicate poor performance in another.

Part D- Financial ratios of Retailor

1. Gross Profit Margin = ( Gross profit / Sales )* 100

Gross profit is calculated by reducing cost of good sold from revenue.

Company should allocate more resources and care to product hacing Higher Gross Profit Margin as it gives more contribution to the company.

2. Current Ratio = Current Asset / Current Liability

It measures the ability of a company to pay off its short-term obligations. A current ratio greater than one indicates that a company can cover its short-term debt with its most liquid assets.

3. Quick Ratio = Quick Asset / Current Liability.

Examples of quick assets are Cash A/C an Account Receivables etc.

It is similart to current ration but more accurate than current ratio to measure immediate liquidity of a company.