MBA

SAMESTER 1

SET 1 & 2
Subject Code: MB0041
Subject: FINANCIAL Management &
Accountng
NAME: AJAY TIWARI
R!LL N!" #110$441$
Set- 1
1. What is accounting cycle? List the sequential steps involved in
Accounting cycle?
Ans. The Accounting Cycle is a series of steps which are repeated
every reporting period. The process starts with making accounting
entries for each transaction and goes through closing the books. Use
this tutorial for an overview of the accounting cycle, covering activities
required both during and at the end of the accounting period.
Accounting Cycle Steps During the Accounting Period
These accounting cycle steps occur during the accounting period, as
each transaction occurs:
Identify the transaction through an original source document
(such as an invoice, receipt , cancelled check, time card, deposit slip,
purchase order) which provides:
a)date
b)amount
c)description (account or business purpose)
d)name and address of other party (if practical)
e)Analyze the transaction determine which accounts are afected,
how (increase or decrease), and how much
f)Make Journal entries record the transaction in the journal as
both a debit and a credit
g)journals are kept in chronological order
h)journals may include sales journal, purchases journal, cash
receipts journal, cash payments journal, and the general journal
i)Post to ledger transfer the journal entries to ledger accounts
j)ledger is kept by account
k)ledger accounts may be T-account form or include balances
l)(Learn more about the Chart of Accounts.)
m)Accounting Cycle: Steps at the end of the accounting period
These accounting cycle steps occur at the end of the accounting
period:
1. Trial Balance this is a calculation to verify the sum of the debits
equals the sum of the credits. If they dont balance, you have to fx the
unbalanced trial balance before you go on to the rest of the accounting
cycle. (If they do balance you could still have a problem, but at least it
balances!)
2. Adjusting entries prepare and post accrued and deferred items to
journals and ledger T-accounts
3. Adjusted trial balance make sure the debits still equal the
credits after making the period end adjustments
4. Financial Statements prepare income statement, balance sheet,
statement of retained earnings, and statement of cash fows (this can
occur at other points in time with appropriate adjustments)
5. Closing entries prepare and post closing entries to transfer the
balances from temporary accounts (such as the revenue and expenses
from the income statement to owners equity on the balance sheet).
6. After-Closing trial balance fnal trial balance after the closing
entries to make sure debits still equal credits.
Q. 2. A. Bring out the diference between Indian GAAP and US
GAAP norms?
Ans. Some of these major diferences between US GAAP and Indian
GAAP which give rise to diferences in proft are highlighted
hereunder:
1. Underlying assumptions: Under Indian GAAP, Financial
statements are prepared in accordance with the principle of
conservatism which basically means Anticipate no profts and provide
for all possible losses. Under US GAAP conservatism is not
considered, if it leads to deliberate and consistent understatements.
2. Prudence vs. rules : The Institute of Chartered Accountants of
India (ICAI) has been structuring Accounting Standards based on the
International Accounting Standards ( IAS) , which employ concepts
and `prudence' as the principle in contrast to the US GAAP, which are
"rule oriented", detailed and complex. It is quite easy for the US
accountants to handle issues that fall within the rules, while the
International Accounting Standards provide a general framework of
accounting standards, which emphasise "substance over form" for
accounting. These rules are less descriptive and their application is
based on prudence. US GAAP has thus issued several Industry
specifc GAAP , like SFAS 51 ( Cable TV), SFAS 50 (Record and Music
Industry) , SFAS 53 ( Motion Picture Industry) etc.
3. Format/ Presentation of fnancial statements: Under Indian
GAAP, fnancial statements are prepared in accordance with the
presentation requirements of Schedule VI to the Companies Act, 1956.
On the other hand , fnancial statements prepared as per US GAAP are
not required to be prepared under any specifc format as long as they
comply with the disclosure requirements of US GAAP. Financial
statements to be fled with SEC include
4. Consolidation of subsidiary companies: Under Indian GAAP
(AS 21), Consolidation of Accounts of subsidiary companies is not
mandatory. AS 21 is mandatory if an enterprise presents consolidated
fnancial statements. In other words, the accounting standard does
not mandate an enterprise to present consolidated fnancial
statements but, if the enterprise presents consolidated fnancial
statements for complying with the requirements of any statute or
otherwise, it should prepare and present consolidated fnancial
statements in accordance with AS 21.Thus, the fnancial income of
any company taken in isolation neither reveals the quantum of
business between the group companies nor does it reveal the true
picture of the Group . Savvy promoters hive of their loss making
divisions into separate subsidiaries, so that fnancial statement of
their Flagship Company looks attractive .Under US GAAP (SFAS
94),Consolidation of results of Subsidiary Companies is mandatory ,
hence eliminating material, inter company transaction and giving a
true picture of the operations and Proftability of the various majority
owned Business of the Group.
5. Cash fow statement: Under Indian GAAP (AS 3) , inclusion of
Cash Flow statement in fnancial statements is mandatory only for
companies whose share are listed on recognized stock exchanges and
Certain enterprises whose turnover for the accounting period exceeds
Rs. 50 crore. Thus , unlisted companies escape the burden of
providing cash fow statements as part of their fnancial statements.
On the other hand, US GAAP (SFAS 95) mandates furnishing of cash
fow statements for 3 years current year and 2 immediate preceding
years irrespective of whether the company is listed or not .
6. Investments: Under Indian GAAP (AS 13), Investments are
classifed as Current and Long term. These are to be further classifed
Government or Trust securities ,Shares, debentures or bonds
Investment properties Others-specifying nature. Investments classifed
as current investments are to be carried in the fnancial statements at
the lower of cost and fair value determined either on an individual
investment basis or by category of investment, but not on an overall
(or global) basis. Investments classifed as long term investments are
carried in the fnancial statements at cost. However, provision for
diminution is to be made to recognise a decline, other than
temporary, in the value of the investments, such reduction being
determined and made for each investment individually. Under US
GAAP ( SFAS 115) , Investments are required to be segregated in 3
categories i.e. held to Maturity Security ( Primarily Debt Security) ,
Trading Security and Available for sales Security and should be
further segregated as Current or Non current on Individual basis.
Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classifed as held-to-maturity securities and
reported at amortized cost. Debt and equity securities that are bought
and held principally for the purpose of selling them in the near term
are classifed as trading securities and reported at fair value, with
unrealised gains and losses included in earnings. All Other securities
are classifed as available-for-sale securities and reported at fair value,
with unrealised gains and losses excluded from earnings and reported
in a separate component of shareholders' equity
7. Depreciation: Under the Indian GAAP, depreciation is provided
based on rates prescribed by the Companies Act, 1956. Higher
depreciation provision based on estimated useful life of the assets is
permitted, but must be disclosed in Notes to Accounts.( Guidance note
no 49) . Depreciation cannot be provided at a rate lower than
prescribed in any circumstance. Similarly , there is no compulsion to
provide depreciation at a higher rate, even if the actual wear and tear
of the equipments is higher than the rates provided in Companies Act.
Thus , an Indian Company can get away with providing with lesser
depreciation , if the same is in compliance to Companies Act 1956.
Contrary to this, under the US GAAP , depreciation has to be provided
over the estimated useful life of the asset, thus making the Accounting
more realistic and providing sufcient funds for replacement when the
asset becomes obsolete and fully worn out.
8. Foreign currency transactions: Under Indian GAAP(AS11)
Forex transactions ( Monetary items ) are recorded at the rate
prevalent on the transaction date .Year end foreign currency assets
and liabilities ( Non Monetary Items) are re-stated at the closing
exchange rates. Exchange rate diferences arising on payments or
realizations and restatements at closing exchange rates are treated as
Proft /loss in the income statement. Exchange fuctuations on
liabilities incurred for fxed assets can be capitalized. Under US GAAP
(SFAS 52), Gains and losses on foreign currency transactions are
generally included in determining net income for the period in which
exchange rates change unless the transaction hedges a foreign
currency commitment or a net investment in a foreign entity .
Capitalization of exchange fuctuation arising from foreign liabilities
incurred for acquiring fxed assets does not exist. Translation
adjustments are not included in determining net income for the period
but are disclosed and accumulated in a separate component of
consolidated equity until sale or until complete or substantially
complete liquidation of the net investment in the foreign entity takes
place . US GAAP also permits use of Average monthly Exchange rate
for Translation of Revenue, expenses and Cash fow items, whereas
under Indian GAAP, the closing exchange rate for the Transaction date
is to be taken for translation purposes.
9. Expenditure during Construction Period: As per the Indian
GAAP (Guidance note on Treatment of expenditure during
construction period' ) , all incidental expenditure on Construction of
Assets during Project stage are accumulated and allocated to the cost
of asset on completion of the project. Contrary to this, under the US
GAAP (SFAS 7) , such expenditure are divided into two heads direct
and indirect. While, Direct expenditure is accumulated and allocated
to the cost of asset, indirect expenditure are charged to revenue.
10. Research and Development expenditure: Indian GAAP ( AS 8)
requires research and development expenditure to be charged to proft
and loss account, except equipment and machinery which are
capitalized and depreciated. Under US GAAP ( SFAS 2) , all R&D costs
are expenses except intangible assets purchased from others and
Tangible assets that have alternative future uses which are capitalised
and depreciated or amortised as R&D Expense. Under US GAAP, R&D
expenditure incurred on software development are expensed until
technical feasibility is established ( SOP 81.1) . R&D Cost and software
development cost incurred under contractual arrangement are treated
as cost of revenue.
11. Revaluation reserve : Under Indian GAAP, if an enterprise
needs to revalue its asset due to increase in cost of replacement and
provide higher charge to provide for such increased cost of
replacement, then the Asset can be revalued upward and the
unrealised gain on such revaluation can be credited to Revaluation
Reserve ( Guidance note no 57). The incremental depreciation arising
out of higher book value may be adjusted against the Revaluation
Reserve by transfer to P&L Account. However for window dressing
some promoters misutilise this facility to hoodwink the shareholders
on many occasions. US GAAP does not allow revaluing upward
property, plant and equipment or investment.
12. Long term Debts: Under US GAAP , the current portion of long
term debt is classifed as current liability, whereas under the Indian
GAAP, there is no such requirement and hence the interest accrued on
such long term debt in not taken as current liability.
13. Extraordinary items, prior period items and changes in
accounting policies: Under Indian GAAP( AS 5) , extraordinary
items, prior period items and changes in accounting policies are
disclosed without netting of for tax efects . Under US GAAP (SFAS 16)
adjustments for tax efects are required to be made while reporting the
Prior period Items.
14. Goodwill: Under the Indian GAAP goodwill is capitalized and
charged to earnings over 5 to 10 years period. Under US GAAP ( SFAS
142) , Goodwill and intangible assets that have indefnite useful lives
are not amortized ,but they are tested at least annually for
impairment using a two-step process that begins with an estimation of
the fair value of a reporting unit. The frst step is a screen for potential
impairment, and the second step measures the amount of impairment,
if any. However, if certain criteria are met, the requirement to test
goodwill for impairment annually can be satisfed without a
remeasurement of the fair value of a reporting unit.
15. Capital issue expenses: Under the US GAAP, capital issue
expenses are required to be written of when incurred against proceeds
of capitals, whereas under Indian GAAP , capital issue expense can be
amortized or written of against reserves.
16. Proposed dividend: Under Indian GAAP , dividends declared
are accounted for in the year to which they relate. For example, if
dividend for the FY 1999-2000 is declared in Sep 2000 , then the
corresponding charge is made in 2000-2001 as below the line item .
Contrary to this , under US GAAP dividends are reduced from the
reserves in the year they are declared by the Board. Hence in this case
under US GAAP , it will be charged Proft and loss account of 2000-
2001 above the line.
17. Investments in Associated companies: Under the Indian
GAAP( AS 23) , investment in associate companies is initially recorded
at Cost using the Equity method whereby the investment is initially
recorded at cost, identifying any goodwill/capital reserve arising at the
time of acquisition. The carrying amount of the investment is adjusted
thereafter for the post acquisition change in the investors share of net
assets of the investee. The consolidated statement of proft and loss
refects the investors share of the results of operations of the
investee.are carried at cost . Under US GAAP ( SFAS 115) Investments
in Associates are accounted under equity method in Group accounts
but would be held at cost in the Investors own account.
18. Preoperative expenses: Under Indian GAAP, (Guidance Note
34 - Treatment of Expenditure during Construction Period), direct
Revenue expenditure during construction period like Preliminary
Expenses, Project related expenditure are allowed to be Capitalised.
Further , Indirect revenue expenditure incidental and related to
Construction are also permitted to be capitalised. Other Indirect
revenue expenditure not related to construction, but since they are
incurred during Construction period are treated as deferred revenue
expenditure and classifed as Miscellaneous Expenditure in Balance
Sheet and written of over a period of 3 to 5 years. Under US GAAP
( SFAS 7) , the concept of preoperative expenses itself doesnt exist.
SOP 98.5 also madates that all Start up Costs should be expensed.
The enterprise has to prepare its balance sheet and Proft and Loss
Account as if it were a normal running organization. Expenses have to
be charged to revenue and Assets are Capitalised as a normal
organization. The additional disclosure include reporting of cash fow,
cumulative revenues and Expenses since inception. Upon
commencement of normal operations, notes to Statement should
disclose that the Company was but is no longer is a Development
stage enterprise. Thus , due to above accounting anomaly, Accounts
prepared under Indian GAAP , contain higher charges to depreciation
which are to be adjusted suitably under US GAAP adjustments for
indirect preoperative expenses and foreign currencies.
19. Employee benefts: Under Indian GAAP, provision for leave
encashment is accounted based n actuarial valuation. Compensation
to employees who opt for voluntary retirement scheme can be
amortized over 60 months. Under US GAAP, provision for leave
encashment is accounted on actual basis. Compensation towards
voluntary retirement scheme is to be charged in the year in which the
employees accept the ofer.
20. Loss on extinguishment of debt: Under Indian GAAP, debt
extinguishment premiums are adjusted against Securities Premium
Account. Under US GAAP, premiums for early extinguishment of debt
are expensed as incurred.
Q. B. What is Matching Principle? Why should a business concern
follow this principle?
Ans. Matching Principle
The Matching principle is a culmination of accrual accounting and
the revenue recognition principle. They both determine the accounting
period, in which revenues and expenses are recognized. According to
the principle, expenses are recognized when obligations are incurred
(usually when goods are transferred or services rendered, e.g. sold),
and ofset against recognized revenues, which were generated from
those expenses (related on the cause-and-efect basis), no matter
when cash is paid out. In cash accountingin contrastexpenses are
recognized when cash is paid out, no matter when obligations are
incurred through transfer of goods or rendition of services: e.g., sale.
If no cause-and-efect relationship exists (e.g., a sale is impossible),
costs are recognized as expenses in the accounting period they
expired: i.e., when have been used up or consumed (e.g., of spoiled,
dated, or substandard goods, or not demanded services). Prepaid
expenses are not recognized as expenses, but as assets until one of the
qualifying conditions is met resulting in a recognition as expenses.
Lastly, if no connection with revenues can be established, costs are
recognized immediately as expenses (e.g., general administrative and
research and development costs).
Prepaid expenses, such as employee wages or subcontractor fees paid
out or promised, are not recognized as expenses (cost of goods sold),
but as assets (deferred expenses), until the actual products are sold.
The matching principle allows better evaluation of actual proftability
and performance (shows how much was spent to earn revenue), and
reduces noise from timing mismatch between when costs are incurred
and when revenue is realized.
Two types of balancing accounts exist to avoid fctitious profts and
losses that might otherwise occur when cash is paid out not in the
same accounting periods as expenses are recognized, because
expenses are recognized when obligations are incurred regardless
when cash is paid out according to the matching principle in accrual
accounting.
Cash can be paid out in an earlier or latter period than obligations
are incurred (when goods or services are delivered) and related
expenses are recognized that results in the following two types of
accounts:
1. Accrued expense: Expense is recognized before cash is paid out.
2. Deferred expense: Expense is recognized after cash is paid out.
Accrued expenses is a liability with an uncertain timing or amount,
but where the uncertainty is not signifcant enough to qualify it as a
provision. An example is an obligation to pay for goods or services
received FROM a counterpart, while cash for them is to be paid out in
a latter accounting period when its amount is deducted from accrued
expenses. It shares characteristics with deferred income (or deferred
revenue) with the diference that a liability to be covered latter is cash
received FROM a counterpart, while goods or services are to be
delivered in a latter period, when such income item is earned, the
related revenue item is recognized, and the same amount is deducted
from deferred revenues.
Deferred expenses (or prepaid expenses or prepayment) is an asset,
such as cash paid out TO a counterpart for goods or services to be
received in a latter accounting period when the obligation to pay is
actually incurred, the related expense item is recognized, and the
same amount is deducted from prepayments. It shares characteristics
with accrued revenue (or accrued assets) with the diference that an
asset to be covered latter are proceeds from a delivery of goods or
services, at which such income item is earned and the related revenue
item is recognized, while cash for them is to be received in a later
period, when its amount is deducted from accrued revenues.
Examples
Accrued expense allows one to match future costs of products with
the proceeds from their sales prior to paying out such costs.
Deferred expense (prepaid expense) allows one to match costs of
products paid out and not received yet.
Depreciation matches the cost of purchasing fxed assets with
revenues generated by them by spreading such costs over their
expected life.
Accrued expenses
Accrued expense is a liability usedaccording to matching principle
to enable management of future costs with an uncertain timing or
amount.
For example, supplying goods in one accounting period by a vendor,
but paying for them in a later period results in an accrued expense
that prevents a fctitious increase in the receiving company's value
equal to the increase in its inventory (assets) by the cost of the goods
received, but unpaid. Without such accrued expense, a sale of such
goods in the period they were supplied would cause that the unpaid
inventory (recognized as an expense fctitiously incurred) would
efectively ofset the sale proceeds (revenue) resulting in a fctitious
proft in the period of sale, and in a fctitious loss in the latter period
of payment, both equal to the cost of goods sold.
Period costs, such as ofce salaries or selling expenses, are
immediately recognized as expenses (and ofset against revenues of the
accounting period) also when employees are paid in the next period.
Unpaid period costs are accrued expenses (liabilities) to avoid such
costs (as expenses fctitiously incurred) to ofset period revenues that
would result in a fctitious proft. An example is a commission earned
at the moment of sale (or delivery) by a sales representative who is
compensated at the end of the following week, in the next accounting
period. The company recognizes the commission as an expense
incurred immediately in its current income statement to match the
sale proceeds (revenue), so the commission is also added to accrued
expenses in the sale period to prevent it from otherwise becoming a
fctitious proft, and it is deducted from accrued expenses in the next
period to prevent it from otherwise becoming a fctitious loss, when
the rep is compensated.
Deferred expenses
A Deferred expense (prepaid expenses or prepayment) is an asset used
to enable management of costs paid out and not recognized as
expenses according to the matching principle.
For example, when the accounting periods are monthly, an 11/12
portion of an annually paid insurance cost is added to prepaid
expenses, which are decreased by 1/12th of the cost in each
subsequent period when the same fraction is recognized as an
expense, rather than all in the month in which such cost is billed. The
not-yet-recognized portion of such costs remains as prepayments
(assets) to prevent such cost from turning into a fctitious loss in the
monthly period it is billed, and into a fctitious proft in any other
monthly period.
Similarly, cash paid out for (the cost of) goods and services not
received by the end of the accounting period is added to the
prepayments to prevent it from turning into a fctitious loss in the
period cash was paid out, and into a fctitious proft in the period of
their reception. Such cost is not recognized in the income statement
(proft and loss or P&L) as the expense incurred in the period of
payment, but in the period of their reception when such costs are
recognized as expenses in P&L and deducted from prepayments
(assets) on balance sheets.
Depreciation
Depreciation is used to distribute the cost of the asset over its
expected life span according to the matching principle. If a machine is
bought for $100,000, has a life span of 10 years, and can produce the
same amount of goods each year, then $10,000 of the cost of the
machine is matched to each year, rather than charging $100,000 in
the frst year and nothing in the next 9 years. So, the cost of the
machine is ofset against the sales in that year. This matches costs to
sales.
3. Prove that the accounting equation is satisfed in all the
following transactions of Mr. X
(a) Commence business with cash Rs.50000
(b) Paid rent in advance Rs.1000
(c) Purchased goods for cash Rs.18000 and Credit Rs.20000
(d) Sold goods for cash Rs.25000 costing Rs.22000
(e) Paid salary Rs.5000 and salary outstanding is Rs.3000
(f) Bought moped for personal use Rs.20000\
Ans.
Accounting Equation = Liabilities + Capital
Transaction
Assets
Cash + Stock
= Capabilities +
Capital
= Creditor + Salary
+ Capital
a) Commenced
Business With cash
50,000
50,000 + 0 = 0 + 0 + 50,000
c) Purchased goods
for cash 18000 and
credit 20,000
New Equation
-18000 + 38000
32000 + 32000
= 20000 + 0 + 0
= 20,000 + 0 +
50,000
d) Sold goods per
cash Rs. 25,000
Costing Rs. 22,000
New Equation
+ 25,000 22,000
57,000 + 16,000
= 0 + 0 + 3000
= 20,000 + 0 +
53,000
b) Paid Rent in
advance 1,000
New Equation
- 11,000 + 0
56,000 + 16,000
= 20,000 + 0 +
53,000
= 20,000 + 0 +
52,000
e) Paid Salary Rs.
5000 and Salary
outstand is Rs.
53,000
(-) 5000 + 0 = 0 + 0 (-) 5000
New Equation
51,000 + 16, 000 = 20,000 + 3000 +
44000
f) Bought Miper for
Personal use 20000
(-) 20,000 + 0 = 0 + 0 20,000
31,000 + 16,000 = 20,000 + 3000 +
24,000
Balance Sheet of X as at:
Liabilities Amount Assets Amount
Creditor 20,000 Cash in hand 31,000
Salary
outstanding
3000 Stock 16,000
Capital 24,000
47,000 47,000
Q. 4. Following are the extracts from the Trial Balance of a frm
as on 31
st
March 20X7
Dr Cr
Sundry Debtors 2,05,000
Provision for Doubtful Debts 10,000
Provision for Discount on
Debtors
1,800
Bad Debts 3,000
Discount 1,000
Additional Information:
1)Additional Bad Debts required Rs.4,000
2)Additional Discount allowed to Debtors Rs.1,000
3)Maintain a provision for bad debts @ 10% on debtors
4)Maintain a provision for discount @ 2% on debtors
Required: Pass the necessary journal entries and show the
relevant accounts including fnal accounts.
Ans. Journal Entry
Particular Dr. Cr.
Bad Debts A/c Dr.
Discount Allowed
Dr.
To sundry Debtors
(Being Discount
Allowed Dr.)
4000
1000
5000
Proft shares A/c
Dr.
To Bad Debts
To discount Allowed
(Being P X L for
Discount)
9000
7000
2000
P X L A/c Dr.
To provision for
Doubtful Debits
To provision for
discount on
debtors.
12,200
10,000
2200
Proft & Loss A/c
Particular Amount Particular Amount
To provision
for Doubtful
Debts
10,000
To provision
for discount
2200
To Bed dobts
3000
(+) Additional
4000
7000
To Discount
Allowed 1000
(+) Additional
1000
2000
Balance Sheet
Liabilities Amount Assets Amount
Provision for
bad debts
10,000
(+) Additional
10,000
20,000
Debtors
20,500
(-) Bad Debts
4000
(-) Discount
1000
200,000
Provision for
discount 1800
(+) Additional
2200
4000
Q.5. A. Bring out the diference between trade discount and cash
discount.
Ans. The diference between trade discount and cash discount.
Cash Discount Trade Discount
Is a reduction granted by
supplier from the invoice
price in consideration of
immediate or prompt
payment
Is a reduction granted by supplier
from the list price of goods or
services on business
consideration re: buying in bulk
for goods and longer period when
in terms of services
As an incentive in credit
management to
encourage prompt
payment
Allowed to promote the sales
Not shown in the
supplier bill or invoice
Shown by way of deduction in the
invoice itself
Cash discount account is
opened in the ledger
Trade discount account is not
opened in the ledger
Allowed on payment of
money
Allowed on purchase of goods
It may vary with the time
period within which
payment is received
It may vary with the quantity of
goods purchased or amount of
purchases made

Q. B. Explain the term (1) asset (2) liability with the help of
examples.
Ans.
(1) asset: assets are economic resources. Anything tangible or
intangible that is capable of being owned or controlled to produce
value and that is held to have positive economic value is considered an
asset. Simplistically stated, assets represent ownership of value that
can be converted into cash (although cash itself is also considered an
asset). The balance sheet of a frm records the monetary value of the
assets owned by the frm. It is money and other valuables belonging to
an individual or business. Two major asset classes are tangible assets
and intangible assets. Tangible assets contain various subclasses,
including current assets and fxed assets. Current assets include
inventory, while fxed assets include such items as buildings and
equipment. Intangible assets are nonphysical resources and rights
that have a value to the frm because they give the frm some kind of
advantage in the market place. Examples of intangible assets are
goodwill, copyrights, trademarks, patents and computer programs,
and fnancial assets, including such items as accounts receivable,
bonds and stocks.
(2) liability with the help of examples: a liability is defned as an
obligation of an entity arising from past transactions or events, the
settlement of which may result in the transfer or use of assets,
provision of services or other yielding of economic benefts in the
future.
All type of borrowing from persons or banks for improving a business
or person income which is payable during short or long time.
They embody a duty or responsibility to others that entails settlement
by future transfer or use of assets, provision of services or other
yielding of economic benefts, at a specifed or determinable date, on
occurrence of a specifed event, or on demand;
The duty or responsibility obligates the entity leaving it little or no
discretion to avoid it; and,
The transaction or event obligating the entity has already occurred.
Liabilities in fnancial accounting need not be legally enforceable; but
can be based on equitable obligations or constructive obligations. An
equitable obligation is a duty based on ethical or moral considerations.
A constructive obligation is an obligation that can be inferred from a
set of facts in a particular situation as opposed to a contractually
based obligation.
The accounting equation relates assets, liabilities, and owner's
equity:
Assets = Liabilities + Owner's Equity
The accounting equation is the mathematical structure of the balance
sheet.
The Australian Accounting Research Foundation defnes liabilities as:
"future sacrifce of economic benefts that the entity is presently
obliged to make to other entities as a result of past transactions and
other past events."
Regulations as to the recognition of liabilities are diferent all over the
world, but are roughly similar to those of the IASB.
Examples of types of liabilities include: money owing on a loan, money
owing on a mortgage, or an IOU.
Liabilities are debts and obligations of the business they represent
creditors claim on business assests. Example of Liabilities All kinds of
payable 1) Notes payable - an written promise. 2) Accounts Payable -
an oral promise. 3) Interests Payable. 4) Sales Payable.
Q. 6. A fresh MBA student joined as trainee was asked to prepare
Trial balance. He was unable to submit a correct trial balance.
You, as a senior accountant fnd out the errors and rectify them.
After redrafting the trial balance prepare trading and Proft and
loss account.
Particulars
Debit
Credit
Capital 7,670
Cash in Hand 30
Purchases 8,990
Sales 11,060
Cash at bank 885
Fixtures and Fittings 225
Freehold premises 1.500
Lighting and Heating 65
Bills Receivable 825
Return Inwards 30
Salaries 1.075
Creditors 1890
Debtors 5,700
Stock at 1
st
April 2007 3,000
Printing 225
Bills Payable 1,875
Rates, taxes and insurance 190
Discount received 445
Discount allowed 200
21,175 21,705
Adjustments:
1) Stock on hand on 31
st
March 2008 was valued at Rs.1800
2)Depreciate fxtures and fttings by Rs.25
3)Rs.35 was due and unpaid in respect of salaries
4)Rates and insurance had been paid in advance to the extent
of Rs.40
Ans.
Corrected Trial Balance as at 31
st
March 2008
Particulars Debit
Amount
Credit
Amount
Capital
7,670
Cash in Hand
30
Purchases
8,990
Sales
11,060
Cash at bank
885
Fixtures and Fittings
225
Freehold premises
1.500
Lighting and Heating
65
Bills Receivable
825
Return Inwards
30
Salaries
1.075
Creditors
1890
Debtors
5,700
Stock at 1
st
April 2007
3,000
Printing
225
Bills Payable
1,875
Rates, taxes and insurance
190
Discount received
445
Discount allowed
200
22,940 22,940
Trading And Proft and Loss Account for the year ended 31
st

March 2008
Dr. Cr.
Particular Amount Rs. Particular Amount Rs.
To Opening
Stock
3000 By Sales 11060
To Purchase 8990 Less returns 30 11030
To Gross Proft
c/d
840 By Closing
Stock
1800
12,830 12,830
To Salaries
1075
By Gross Proft
c/d
840
Add
Outstanding 35
1110 By Discount 445
To Lighting and
heating
65 By net loss
Transit and to
capital a/c
490
To Printing 225
To Rates, Taxes
and Insurance
190
Less:
Insurance
Unpaid 40
150
To Discount
Allowed
200
To Depreciation
of furniture &
Fittings
25
1775 1775
Balance Sheet as at 31
st
March 2008
Liabilities Amount Assets Amount
Current
Liabilities
Current Assets
Creditors 1890 Cash in Hands 30
Bills Payable 1875 Cash at Bank 885
Outstanding
Salary
35 Bill Receivable 825
Capital Debtors 5700
Opening
Balance 7670
Closing Stock 1800
Unexpired
Rates and
Insurance
40
Fixed Assets
Less: Net less
490
7180 Furniture and
fttings 225
Less:
Deprecation 25
200
Free hold
Promises
1500
10,980 10,980
Set- 2
Q. 1. Uncertainties inevitably surround many transactions. This
should be recognized by exercising prudence in preparing
fnancial statement. Explain this concept with the help of an
example.
Ans. The last concept is about prudence or otherwise known as
conservatism. It is the inclusion of a degree of caution in the exercise
of the judgments needed in making the estimates required under
conditions of uncertainty. Its purpose is to avoid the instances of
overstatement of assets or income and understatement of liabilities or
expenses. Although the said practice does not allow the creation of
hidden reserves or the exercise of provisions, the deliberate
understatement of assets or income, nor the deliberate overstatement
of liabilities or expenses. Otherwise, it lacks the quality of reliability
due to the lack of neutrality of the fnancial statements. The preparers
of fnancial statements need to assume the presence of inevitable
uncertainties that surround many events and circumstances.
Examples of which are the collectivity of doubtful receivables, the
probable useful life of plant and equipment, as well as the number of
warranty claims that may occur. Such uncertainties are recognized by
the disclosure of their nature and extent, as well as through the
exercise of prudence in the preparation of fnancial statements. The
four diferent non-management stakeholder groups interested in the
fnancial statements of an enterprise are the institutional shareholders
(investors or owners), the debt holders (also known as bondholders),
the government, and the employees.
The shareholders/debt holders are among the major recipients of the
fnancial statements of corporations. They range from individuals with
relatively limited resources to large, well-endowed institutions such as
insurance companies and mutual funds. The decision made by these
parties includes shares to buy, retain, or sell, and the timing of the
purchase or sale of those shares. Typically, their decisions have a
focus either on investment or on stewardship, although in some cases,
it is both. If the emphasis is on the choice of a portfolio of securities
that is consistent with the preferences of the investor for risk, return,
dividend yield, liquidity and so on, it is said to be investment focus.
Otherwise, it is stewardship focus. The required information for this
choice varies signifcantly.
Consider approaches that intend to detect the improper pricing of
securities by a fundamental analysis approach compared to a
technical analysis approach. The former approach examines frm,
industry and economy related information, where fnancial statements
play a major role. An important aspect is the prediction of the timing,
amounts, and uncertainties of the frms future cash fows. In
contrast, it is through the examination of the movement in security
prices, security trading volume, and other related variables that the
technical analysis is able to detect the improper pricing of securities.
Typically, fnancial statement information is not examined in this
approach.
When predicting the timing, amounts, and uncertainties of the frms
future cash fows, the past record of management in relation to the
resources under its control can be an important variable. The analysis
undertaken for decisions by shareholders and investors can be done
by those parties themselves or by intermediaries such as security
analysts and investment advisors. Employees, on the other hand, are
motivated by numerous factors. They might have a vested interest in
the continued proftability of their frms operations. Therefore,
fnancial statements for them serve as an important source of
information regarding the possible proftability and solvency of their
company at present, as well as in the future. They may also need them
in monitoring the viability of their pension plans.
The demand of the government or regulatory agencies can arise in a
diverse set of areas. These include revenue raising (for income tax,
sales tax, or value-added tax collection), government contracting (for
reimbursing suppliers paid on a cost-plus basis or for monitoring
whether the companies engaged in government business are earning
excess profts), rate determination (deciding the allowable rate of
return that an electric utility can earn), and regulatory intervention
(determining whether to provide a government-backed loan agreement
to a fnancially distressed frm.
However, due to the diverse interest of the said individuals to the
information contained in the fnancial statements, conficts may arise.
For the shareholders/debt holders, the interest of these parties lies in
the fact that the money invested in the frm is their own money. They
would like to ensure that they are getting a good return on their
investment. This is measured by looking at how much proft the frm is
making and whether their investment is increasing in value. For
shareholders in companies, this means they will get good dividends
and the market value of their shares will increase. They can also make
capital gains, in case these shares will be sold.
For the employees, they are part of the organization. As a part of the
organization, they also feel that their eforts contributed to the
proftability of the frm. They would therefore be delighted if they will
be given incentives to their participation to the companys
achievement. They might prefer to be given bonuses, salary increases,
and other form of monetary benefts. They might also prefer given
stock options or promotions, depending on the discretion of both
parties. However, for the frms part, it means increases in the
expenses of the frm.
For the government, various ministries and departments have
diferent interest in the frms ability to pay taxes. They also see and
review the enactment of laws for the industry and the provision of
social services to the public. The government may also want to ensure
that the frm complies with laws on, for example, wage payments and
employee benefts. These are for their beneft, as well as the beneft of
the society as a whole.
Q. 2. A. When is the change in accounting policy recommended
and what are the disclosure requirements regarding the change in
accounting policy?
Ans. Accounting Policy
Accounting policies are the specifc principles, bases, conventions,
rules and practices applied by an entity in preparing and presenting
fnancial statements. When a Standard or an Interpretation
specifcally applies to a transaction, other event or condition, the
accounting policy or policies applied to that item shall be determined
by applying the Standard or Interpretation and considering any
relevant Implementation Guidance issued by the IASB for the
Standard or Interpretation.
In the absence of a Standard or an Interpretation that specifcally
applies to a transaction, other event or condition, management shall
use its judgement in developing and applying an accounting policy
that results in information that is relevant and reliable.
In making the judgement management shall refer to, and
consider the applicability of, the following sources in descending order:
(a) the requirements and guidance in Standards and Interpretations
dealing with similar and related issues; and
(b) the defnitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the Framework.
An entity shall select and apply its accounting policies consistently for
similar transactions, other events and conditions, unless a Standard
or an Interpretation specifcally requires or permits categorisation of
items for which diferent policies may be appropriate. If a Standard or
an Interpretation requires or permits such categorisation, an
appropriate accounting policy shall be selected and applied
consistently to each category.
To ensure proper understanding of fnancial statements, it is
necessary that all signifcant accounting policies adopted in the
preparation and presentation of fnancial statements should be
disclosed.
Such disclosure should form part of the fnancial statements. It would
be helpful to the reader of fnancial statements if they are all disclosed
as such in one place instead of being scattered over several
statements, schedules and notes.
Examples of matters in respect of which disclosure of accounting
policies adopted will be required are contained in paragraph 14. This
list of examples is not, however, intended to be exhaustive.
Any change in an accounting policy which has amaterial efect should
be disclosed. The amount by which any item in the fnancial
statements is afected by such change should also be disclosed to the
extent ascertainable. Where such amount is not ascertainable, wholly
or in part, the fact should be indicated. If a change is made in the
accounting policies which has no material efect on the fnancial
statements for the current period but which is reasonably expected to
have a material efect in later periods, the fact of such change should
be appropriately disclosed in the period in which the change is
adopted.
Disclosure of accounting policies or of changes therein cannot remedy
a wrong or inappropriate treatment of the item in the accounts.
B. Explain IFRS.
International Financial Reporting Standards (IFRS) are Standards,
Interpretations and the Framework adopted by the International
Accounting Standards Board (IASB).
Many of the standards forming part of IFRS are known by the older
name of International Accounting Standards (IAS). IAS were issued
between 1973 and 2001 by the Board of the International Accounting
Standards Committee (IASC). On 1 April 2001, the new IASB took over
from the IASC the responsibility for setting International Accounting
Standards. During its frst meeting the new Board adopted existing
IAS and SICs. The IASB has continued to develop standards calling
the new standards IFRS.
IFRS are considered a "principles based" set of standards in that they
establish broad rules as well as dictating specifc treatments.
International Financial Reporting Standards comprise:
1.International Financial Reporting Standards (IFRS) -
standards issued after 2001
2.International Accounting Standards (IAS) - standards issued
before 2001 Interpretations originated from the International
Financial
3.Reporting Interpretations Committee (IFRIC) - issued after
2001
4.Standing Interpretations Committee (SIC) - issued before
2001
Framework for the Preparation and Presentation of Financial
Statements IAS 8 Par. 11
"In making the judgement described in paragraph 10,
management shall refer to, and consider the applicability of, the
following sources in descending order:
(a) the requirements and guidance in Standards and Interpretations
dealing with similar and related issues; and
(b) the defnitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the Framework."
Q. 3. Journalise the following transactions:
01.01.09 Bought goods for Rs.10,000
02.01.09 Purchased goods from X Rs.20,000
03.01.09 Bought goods from Y for Rs.30,000 against a
current dated cheque
04.01.09 Purchased goods from Z [price list price is
Rs.30,000 and trade discount is 10%]
05.01.09 Bought goods of the list prce of Rs.1,25,000 from M
less 20% trade discount and 2% cash discount.
Paid 40% of the amount by cheque
06.01.09 Returned 10% of the goods supplied by X
07.01.09 Returned 10% of the goods supplied by Y
Ans.
Q. 4. Bring out the diference between Funds Flow Statement and
Cash Flow Statement. Mention up to what point in time they are
similar and from where the diferences begin.
Ans. Cash Flow Statement :
Statement showing changes in infow & outfow of cash during the
period.
Methods of cash fow:
1.Direct Method : presenting information in Statement of
A. operating Activities
B. Investment Activities
C.Financial Activities
2.Indirect Method :uses net income as base & make adjustments to
that income(cash & non-cash)transactions.
Funds Flow Statement :Statement showing the source &
application of funds during the period.
Major Diference:
The Cash Flow S tatement allows investors to understand how a
company's operations are running, where its money is coming from,
and how it is being spent.
Fund Flow Statement is showing the fund for the future activites of
the Company.
The main diferences are as follows:
1.A cash fow statement is concerned only with the change in
cash position while a fund fow analysis/statement is concerned
the change in working capital position
2.Cash is part of working capital and an improvement in cash
position results in improvement in funds position but the reverse
is not true.
3. A cash fow statement is merely a record of cash receipts and
disbursements. It does not reveal any important changes
involving the utilization/disposition of resources.
Q. 5. A. Determine the sales of a frm with the following fnancial
data
Current Ratio 1.5
Acid test ratio 1.2
Current Liabilities 8,00,000
Inventory Turnover
ratio
5 times
Ans.
Current Assets
current Ratio
Current Liabilities
=
=
1.5
800, 000
Current Assets
=
= 1.5 x 800,000 = C.A
Current Assets = 1,200,000
=
Current Assets Stock
Acid Test Ratio
Current Liablities

=
=
1, 200, 000
1.2
800, 000
Stock
=
= 1.2 x 800,000 = 1200, 000 Stock
Stock = 240,000
Average Stock = 1,20,000
=
Cost of Goods Sold
Stock Turnover Ratio
Average Stock
=
=
Sales -Gross Profit
5
1, 20, 000
=
Sales = 600,000
Q. B. What is Du-Pont chart?
Ans. DuPont Chart calculates the key components of any business for
easy evaluation of performance.
Income Statement
Sales
0
Other Income
0
COGS
0
G&A
0
Depreciation
0
Other Expense
0
Gross Profit
Operating
Expenses
Earnings
before
interest
& taxes
(EBI!
Interest Pai"
0
axes
0
#et Profit
Sales
EBI
otal Assets
Profit
$argin
EBI on
Assets
%et&rn
on E'&it(
Assets
Cash
0
%ecei)ables
0
In)entor(
0
Other Assets
*ixe" Assets
0
C&rrent
Assets
C&rrent
Sales
otal Assets
+or,ing
Capital
Assets
&rno)er
0
-iabilities
Liabilities & Equity
Pa(ables
0
#otes Pa(ables
0
Other -iabilit(
0
C&rrent
-iabilities
#on.C&rrent
-iabilities
0
Capital
0
%etaine"
Earnings
0
otal
-iabilities
En"ing
#et +orth
otal
Beginning
#et +orth
0
-e)erage
Q. 6. From the following data calculate the:
1. Break-even point expressed in terms of sale
amount/revenue
2. Number of units that must be sold to earn a proft of
Rs.60,000 per year

Sales price (per unit) Rs.20
Variable manufacturing
cost per unit
Rs.11
Variable selling cost per
unit
Rs.3
Fixed factory overheads
(per year)
5,40,000
Fixed selling cost (per year)2,52,000
Ans.
Sales Price = 20
Variable Cost = 14
Contribution = 6
Contribution
/
Sales
P V =
=
6
/ 100 30%
20
P V = =
FixedCost
rea! "#en Point %
/ P V Ratio
&',2000
%
30%
BEP = 2,640,000
Fixed Cost ( )esired Profit
Sales in *nit at )esired Profit %
/ P V Ratio
&',2000 ( 60,000
%
30%
2,8+,0000
%
20
= 14,2000 Units