DFS (P) Limited

Prepared by Prof.(Dr.) Manaswee K Samal

Smita graduated as a chartered accountant in the year 1999 and decided to go for her own consulting firm instead of joining a company. She figured out that its far more fulfilling to be an employer rather than join as an employee in an organization though the former will mean she will have uncertain cash flow for quite some time. She also thought that, to start with, traditional accounting, audit and taxation assignments would be handy service portfolio to fall back on and stabilize in terms of creating a start-up platform. Luck favoured her and she got quite a good number of small assignments to begin with. Then slowly her client base grew and she got a slightly different kind of assignments as the same old clients grew in their business and started diversifying. It took her through some project financing assignments that were quite lucrative as compared to audit jobs in terms of margin. This called for expanding her own scale of operation with more hands, more office space and automation. She thought about limiting her liability in the new larger enterprise. But being a practicing chartered accountant with a valid Certificate of Practice (COP) from ICAI, she could not have converted her firm into a company. At this juncture of her career, she had to choose in between sticking to her CA firm and induct new Chartered Accountants as partners or abandon conventional audit jobs and surrender CoP and then start a management consulting company. She discussed with her clients, professional colleagues and friends. She decided to take the risk and created a company DFS Limited. One of her friends helped her out in promoting this company. The incidental expenses connected with promotion of the company was as under. Drafting and Printing of MOA: Rs.2,000 Drafting & Printing of AOA: Rs.3000 Statutory fee for name application and other documents: Rs.1,500 Incorporation fees: Rs.30,000 Professional charges: Rs.10,000 (Her friend did not charge this fee based on personal consideration) All these charges were borne by Smita and upon incorporation, the first board meeting of the company, inter alia, adopted these expenses on 02.04.09. Smita got the reimbursement from the company two days after. The company had to start its office in a bigger new place altogether, recruit administrative staff, invest in automation, spend on sales and induct qualified people with right experience. Smita understood that there would

be a brief gestation period though the old clients could help generate revenue to cover the operating expenses for the first two years. The other two chartered accountants also agreed to buy out the business and the firm of the erstwhile firm Smita & Co sans the audit service. Due diligence revealed that there was no contingent liability against Smita & Co. and office stationery worth Rs.3,000 could not be used by the company as it has Smita & Cos name on it. It was decided that DFS (P) Ltd. would pay a sum of Rs.5 lakhs for acquiring the business of Smita & Co. without revaluation. It was also decided that the same should be discharged by issue of deferred shares to Smita. Each share shall be of Rs.100 and would carry two votes. The other two promoters would contribute Rs.5 lakhs each in cash and get equity shares of Rs.100 each carrying one vote per share. On the date of the takeover, i.e, 1st. April, 2009, the balance sheet of Smita & Co. was as under Sources of fund Capital Retained profit Expense payable TOTAL Application of fund Office furniture Office equipment Office stationery Receivables from project financing TOTAL 1,10,000 1,80,000 10,000 1,00,000 4,00,000 Amount (Rs.) 1,00,000 2,50,000 50,000 4,00,000

The companys authorized share capital was Rs. 30 lakhs divided into Rs. 5 lakhs of deferred share capital (each share of Rs.100) and Rs. 25 lakhs of equity share capital (Rs.100 each share). Soon after this takeover, the directors of the company decided to issue 12,000 equity shares (further capital) to the existing shareholders equally at a premium of Rs.20 each in the month of April, 09. All shares were subscribed for and paid in cash. A scrutiny of the books of account of the company revealed that the transactions in the month of May, 2001 were as under: 1. DFS (P) Ltd. paid a non-interest bearing refundable security deposit of Rs.3,00,000 under a contract for an office space of 3000 square feet in a swanky tower to showcase its image.

2. It printed office stationery worth Rs.30,000 bearing companys logo, address and name. It paid 50% of this bill and stretched the balance payment by three months to enjoy cash holding. 3. Purchased IT system worth Rs.2,00,000 out of which 75% was paid and balance was to be paid after three months. Software worth Rs.1,00,000 was purchased by paying cash and installed. The estimated life span of this system was 3 years with a residual value of Rs.30,000. 4. It bought office furniture of Rs.3,00,000 by paying cash. The estimated useful life of these assets was 5 years with nil residual value. 5. As luck struk, the company got a big project financing assignment with an estimated fee income of Rs.30,00,000. The contract with the client yielded an advance of Rs.3,00,000 that was supposed to be adjusted against the final payable. The assignment was estimated to be over within three months including the current month and contract deliverables were equally spread with equal weightage. 6. It billed fee income of Rs.9,00,000 for the month of May and got cash of Rs.7,00,000 on 31st May. The related consulting expense of Rs.70,000 was incurred out of which Rs. 50,000 was paid. 7. It released an advertisement in local print media announcing establishment of the consulting company and paid Rs.50,000 as full settlement of the bill. 8. Staff welfare expenses of Rs.30,000 was paid in cash. 9. Remuneration bill of Rs.3,00,000 was outstanding on month end. This remuneration bill did not include anything for Smita. She was earning on an average one & half lakh rupees a month from her old firm. 10. The company received the electricity bill of Rs.6,000 on 4th. June for the month of May. The directors decided to close the accounts by 30th. April and 31st. May and judge the performance for the month of May. They discussed to prepare the income statement and balance sheet on these closing dates. Required: i) ii) iii) Prepare these statements for the two accounting cycles and review the performance and financial position of the company. Try to explain the change in cash in between these two dates. Comment on the performance of the enterprise for the month of May.

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