Fall 2010

Bachelor of Business Administration-BBA Semester 4

BB0017 – Financial Reporting - 2 Credits

(Book ID : B0097)
Assignment Set- 1 (30 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q1. What is the statutory requirement of schedule VI of company Act, 1956, in regard to
Secured Loans and provision?

Ans Schedule VI of the Companies Act 1956 requires “Secured Loan” should be disclosed in the following
manner:
1. Debentures
2. Loan and Advances from Bank
3. Loans and Advances from Subsidiaries
4. Other Loan and Advances

Under each of the above items the following information is required to be disclosed.
a. Loan from Directors, Managers should be shown separately.
b. Interest accrued and due on Secured Loans should be included under the appropriate sub- heads under the
“Secured Loans”
c. The nature of security to be specified in each case.
d. Where loans have been guaranteed by managers and/or directors, discloser thereof shall also be made and
also the aggregate amount of such loans under each head.
e. Terms of redemption or conversion (if any) of debenture issued to be stated together with earliest date of
redemption or conversion.
f. When any of the company debentures are held by a nominee of a trustee for the company, the nominal
amount of the debentures and the amount at which they are stated in the books of the company shall be
stated.
Q2. From the following balance sheets of A ltd. Make out Cash Flow Statement as on March 31, 2010
Balance Sheet
2009 2010 2009 2010
Liabilities Assets
Rs. Rs. Rs. Rs.
Equity Share Capital 2,00,000 2,00,000 Cash 8,000 10,000
Profit and Loss A/c 50,000 90,000 Bank 22,000 20,000
Bank Loan 10,000 --- Debtors 10,000 20,000
Creditors 15,000 20,000 Stock 25,000 15,000
Outstanding Expenses 5,000 5,000 Fixed Assets 2,35000 2,75,000
Provision of Taxation 20,000 25,000

3,00,000 3,40,000 3,00,000 3,40,000

Depreciation on fixed assets was Rs. 60,000. During the year, company declared equity dividend @10%,
and paid Rs. 15,000 as income tax.
Ans:
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Q3. What is the statutory requirement of schedule VI of company Act, 1956, in regard to Capital Reserve and
Revenue Reserve?

Ans: Capital Reserve:

It includes amount which are not earned during normal operation of business, therefore the amount of such
reserve is not available for distribution as dividend, e.g., profit prior to incorporation of a company, profit on
acquisition of business, profit on sale of fixed assets, profit remaining on re-issue of forfeited shares, profit on
redemption of shares and debentures, profit on revaluation of fixed assets and liabilities, premium of issue of
shares and debentures.
Revenue Reserve:
It is an amount set aside out of profit or surplus of a business to provide additional working
capital or to strengthen the liquid resources of the business so that they may be available for
any unforeseen contingencies or to equalize the dividend or for expansion of business. It is
appropriation of profit and accumulated over a period.

Bachelor of Business Administration-BBA Semester 4

BB0017 – Financial Reporting - 2 Credits
 Fall 2010

(Book ID :)
Assignment Set- 2 (30 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q1. What are the various Amendments to Clause 32 of Equity Listing Agreement made by SEBI?

Ans: Amendments to Clause 32 of Equity Listing Agreement

I. The extant Clause 32 of the Equity Listing Agreement requires listed companies to supply a copy of the
complete and full Balance Sheet, Profit and Loss Account and Directors’ report to each shareholder and
upon application to any member of the Exchange. This requirement was stipulated at a time when
information dissemination was at the barest minimum and the Annual Report of the company containing the
Balance Sheet and the Profit and Loss Account was the only mean through which the shareholders of the
company could keep themselves informed about the affairs of the company.

II. In the context of changes brought about in the market scenario, SEBI reviewed the existing provisions of
Clause 32 of the Equity Listing Agreement, particularly in the light of (i) the need to contain rising cost of
compliance and (ii) the measures taken to enhance disclosures which has enabled availability of information
about listed companies in public domain such as the website of the company, of the stock exchanges, of the
Common Filing Platform website jointly maintained by BSE and NSE i.e www.corpfiling.co.in etc.

III. Having regard to the above, SEBI has decided to amend Clause 32 of the Equity Listing Agreement to align
it with the provisions of Section 219(iv) of the Companies Act i.e. to permit listed companies to send a
statement containing the salient features of the (i) Balance Sheet, (ii) the Profit and Loss Account and (iii) the
Auditors’ Report instead of sending full Balance Sheet and Annual Report.

IV. Accordingly, the first and second paragraphs of Clause 32 of the Equity Listing Agreement relating to
sending of annual reports by listed companies to their shareholders shall stand amended as given in the
Annexure.

V. The other provisions of Clause 32 of the Equity Listing Agreement pertaining to turnover and income etc.
from new activities, cash flow statement to be given along with the Profit and Loss Account shall remain
unchanged.

VI. Applicability: The revised Clause 32 of Equity Listing Agreement shall come into force with immediate
effect.
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VII. Direction to Stock Exchanges: All Stock Exchanges are advised to do the following:

(i) Give effect to the above mentioned policy and appropriately amend Clause 32 of Equity Listing
Agreement in line with the text of the amendment specified in Annexure.

(ii) Make consequential changes, if any, in other Clauses of Equity Listing Agreement.

VIII. This circular is issued in exercise of powers conferred by sub-section (1) of Section 11, read with sub-
section (2) of Section 11A, of the Securities and Exchange Board of India Act, 1992, to protect the interests
of investors in securities and to promote the development of, and to regulate the securities market.

Q2. How expenses during the construction period are capitalized and cost of fixed assets are
determined?

Ans In case of a new company that has undertaken a capital project, it is important to understand the length of
the construction period for at least two reasons. One reason is that of the construction may not prepare Profit
and Loss Account during the construction period; it may prepare “Development Account” or “Expenditure
During Construction Account” or an account using any other suitable nomenclature showing the revenue
expenditure and income earned during the construction period. Of course, such revenue expenditure may be
directly or indirectly related to capital project and they may be either charged to project or to be treated cost.
Second reason is that indirect expenses and financial expenses are charged to project up to the date when
the project is completed and commissioned.

Here, Cost of a capital project normally include-

(a) Direct Capital Expenditure-
Direct capital expenditure includes expenditure on account of:
• Land;
• Building;
• Plant and Machinery;
• Electrical Installation; etc.

(b) Indirect expenditure-

Indirect expenditure includes expenditure on account of-
• Issue of shares and debentures;
• Preliminary expenses relating to project;
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• Financial expenses;
• Administrative expenses;
• Expenses for start up and commissioning.

Q3. Write short note on followings:-

• Financial Reporting in India

Final accounts are the final product of accounting work done during the accounting period i.e. quarterly, half
yearly or annually. By this the accounting information is communicated to the external users. It includes two
basic financial statements namely:

(i) Profit and Loss Account

(ii) Balance Sheet.

Although the general principles of preparing the final accounts of joint stock companies are the same as in
the case of the sole proprietorship or partnership firms, but in addition to these principles, a joint stock
company must confirm to certain legal provisions as given in the Indian Companies Act 1956.

Every company must prepare final accounts every year. At every annual general meeting of a company, the
Board of Directors of the company shall lay before the company (a) a Balance Sheet as at the end of period
(b) a Profit and Loss Account for that period. In case, a company is not carrying on business for profit, an
Income and Expenditure Account shall be laid before the company at its annual general meeting instead
Profit and Loss Account. The report of Auditor and Board of Directors should be attached to every Profit and
Loss Account and Balance Sheet. Enterprises having a turnover in excess of Rs. 50 crores have to attach
Cash Flow Statement and Segment Report with the annual accounts.

A Balance Sheet is a statement of assets and liabilities indication the financial position of an enterprise at a
given date.
A Profit and Loss Account shows the net result of business operations during an accounting period. A Profit
and Loss Appropriation Account shows how the profit for the year has been distributed or appropriated.
Schedules have the details of amounts in the Balance Sheet and Profit and Loss Account, while the notes
are the statements of accounting policies adopted and explanation of material information.

• Capital Work in Progress

Capitals WIP is referred to as Assets under Construction and are represented by a specific Asset class.

It is an asset on the balance sheet that is not considered to be a final product, but must still be accounted for
because funds have been invested toward its production. It is thus a work that has not been completed but
has already incurred a capital investment

Usually depreciation is not charged on Capital WIP.

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Following are some examples of capital WIP:

- A machinery under installation
- A building under construction

Capital WIP is referred to as Assets under Construction in SAP and is represented by a specific Asset class.
Usually depreciation is not charged on Capital WIP.

All costs incurred on building a capital asset can be booked to an Internal Order and through the settlement
procedure can be posted onto an Asset Under Construction. Subsequently on the actual readiness of the
asset for commercial production, the Asset Under Construction gets capitalized to an actual asset.

• Capitalization of expenses

Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is
incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed
asset with a useful life that extends beyond the taxable year. Capex are used by a company to acquire or
upgrade physical assets such as equipment, property, or industrial buildings. In accounting, a capital
expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value
of an asset as adjusted for tax purposes). Capex is commonly found on the cash flow statement as
"Investment in Plant Property and Equipment" or something similar in the Investing subsection.

For tax purposes, capital expenditures are costs that cannot be deducted in the year in which they are paid
or incurred and must be capitalized. The general rule is that if the property acquired has a useful life longer
than the taxable year, the cost must be capitalized. The capital expenditure costs are then amortized or
depreciated over the life of the asset in question. As stated above, capital expenditures create or add basis
to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the
US, Internal Revenue Code §§263 and 263A deal extensively with capitalization requirements and
exceptions.

Included in capital expenditures are amounts spent on:

1. acquiring fixed assets

2. fixing problems with an asset that existed prior to acquisition if it results in a superior fixture
3. preparing an asset to be used in business
4. restoring property or adapting it to a new or different use
5. starting a new business

An ongoing question of the accounting of any company is whether certain expenses should be capitalized or
expensed. Costs that are expensed in a particular month simply appear on the financial statement as a cost that
was incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized
expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expansible or
capitalizable, but some expenses could be treated either way, according to the preference of the company.
Capitalized interest if applicable is also spread out over the life of the asset.

• Accounting Standards

Sets of rules governing how accounts are drawn up....more on accounting standards .The role of the
Accounting Standards Board (ASB) is to issue accounting standards in the United Kingdom. It is recognised
for that purpose under the Companies Act 1985. It took over the task of setting accounting standards from
the Accounting Standards Committee (ASC) in 1990. Accounting Standards Board (ASB) The recognized
body for setting accounting standards in the UK. It was established in 1990 to replace the Accounting
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Standards Committee (ASC) following the recommendations contained in the Dearing Report. Under the
Companies Act (1985), companies (except small companies and medium-sized companies