Professional Documents
Culture Documents
Topics For Preparation
Topics For Preparation
Derivative
Hedging
What do we mean by the term Interest and how is it different from Dividend?
Depreciation
Balance Sheet
NOMINAL ACCOUNTS:
DEBIT ALL EXPENSES AND LOSSES & CREDIT ALL INCOMES AND GAINS
Difference between Accounts Payable & Accounts Receivable with suitable examples?
Accounts Payable
An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The
accounts payable entry is found on a balance sheet under the heading current liabilities.
Accounts payable are often referred to as "payables".
Another common usage of AP refers to a business department or division that is responsible for making
payments owed by the company to suppliers and other creditors.
Accounts payable are debts that must be paid off within a given period of time in order to avoid default.
For example, at the corporate level, AP refers to short-term debt payments to suppliers and banks.
Payables are not limited to corporations. At the household level, people are also subject to bill payment
for goods or services provided to them by creditors. For example, the phone company, the gas company
and the cable company are types of creditors. Each one of these creditors provides a service first and then
bills the customer after the fact. The payable is essentially a short-term IOU from a customer to the
creditor.
Each demands payment for goods or services rendered and must be paid accordingly. If people or
companies don't pay their bills, they are considered to be in default.
Accounts Receivable
Money owed by customers (individuals or corporations) to another entity in exchange for goods or services
that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating
lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.
On a public company's balance sheet, accounts receivable is often recorded as an asset because this
represents a legal obligation for the customer to remit cash for its short-term debts
If a company has receivables, this means it has made a sale but has yet to collect the money from the
purchaser. Most companies operate by allowing some portion of their sales to be on credit. These types of
sales are usually made to frequent or special customers who are invoiced periodically, and allow them to
avoid the hassle of physically making payments as each transaction occurs. In other words, this is when a
customer gives a company an IOU for goods or services already received or rendered.
Accounts receivable are not limited to businesses - individuals have them as well. People get receivables
from their employers in the form of a monthly or bi-weekly paycheck. They are legally owed this money for
services (work) already provided.
When a company owes debts to its suppliers or other parties, these are known as accounts payable.
Explain Derivatives?
A security whose price is dependent upon or derived from one or more underlying assets. The derivative
itself is merely a contract between two or more parties. Its value is determined by fluctuations in the
underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies,
interest rates and market indexes. Most derivatives are characterized by high leverage.
Futures contracts, forward contracts, options and swaps are the most common types of derivatives.
Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on
weather data, such as the amount of rain or the number of sunny days in a particular region.
Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative
purposes. For example, a European investor purchasing shares of an American company off of an American
exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To
hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the
future stock sale and currency conversion back into Euros.
What is Hedging?
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists
of taking an offsetting position in a related security, such as a futures contract.
An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell
your stock at a set price, therefore avoiding market fluctuations.
Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your
risk to nothing (except for the cost of the hedge).
What is the difference between hedging and speculation?
Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the
underlying asset. Hedging attempts to eliminate the volatility associated with the price of an asset by
taking offsetting positions contrary to what the investor currently has. The main purpose of speculation, on
the other hand, is to profit from betting on the direction in which an asset will be moving.
Hedgers reduce their risk by taking an opposite position in the market to what they are trying to hedge.
The ideal situation in hedging would be to cause one effect to cancel out another. For example, assume
that a company specializes in producing jewelry and it has a major contract due in six months, for which
gold is one of the company's main inputs. The company is worried about the volatility of the gold market
and believes that gold prices may increase substantially in the near future. In order to protect itself from
this uncertainty, the company could buy a six-month futures contract in gold. This way, if gold experiences
a 10% price increase, the futures contract will lock in a price that will offset this gain. As you can see,
although hedgers are protected from any losses, they are also restricted from any gains. Depending on a
company's policies and the type of business it runs, it may choose to hedge against certain business
operations to reduce fluctuations in its profit and protect itself from any downside risk.
Speculators make bets or guesses on where they believe the market is headed. For example, if a
speculator believes that a stock is overpriced, he or she may short sell the stock and wait for the price of
the stock to decline, at which point he or she will buy back the stock and receive a profit. Speculators are
vulnerable to both the downside and upside of the market; therefore, speculation can be extremely risky.
Overall, hedgers are seen as risk averse and speculators are typically seen as risk lovers. Hedgers try to
reduce the risks associated with uncertainty, while speculators bet against the movements of the market to
try to profit from fluctuations in the price of securities.
Cash Book
On the cash book you see opening cash balance at the beginning of January. On the left side you have cash
inflows, i.e. cash received by the company in January, on the left side you can see cash payments made by
ABC in January. Final cash book closing balance is $2348.
Bank Statement
On the bank statement you can see details of each transaction. In the Outflow column you can see
payments from ABC bank account cleared by the bank, each such payment if supported by cheque has a
reference number. In the column Inflow you can see payments received into the bank account of ABC based
on the cheques received. Some payments could be received directly to the bank account.
So how we adjust cash book? We take non-adjusted cash book balance at the end of month, add payments
received directly to the bank account (from BC Way amounting to $1000) and deduct payments made
directly from bank account (to British way amounting to $100) and get adjusted cash book balance
amounting to $3338.
On January 31 $1566 was received from Koala, but not yet cleared by the bank and included into the bank
statement. On January 28 and 31 accordingly ABC company paid to Logypol and Dizzy amounting
accordingly to $234 and $540, which were also not included into the bank statement. These items will be
included into the bank reconciliation.
So finally in this bank reconciliation sample we have adjusted cash book and reconciles adjusted cash book
balance with the bank statement explaining differences which are due to different timing of payments
recorded on the cash book and bank statement.
The market for long-term funds where securities such as common stock, preferred stock, and bonds are
traded. Both the primary market for new issues and the secondary market for existing securities are part of
the capital market. Any market in which securities are traded. Capital markets include the stock and bond
markets. Companies and governments use capital markets to raise funds for their operations; for example,
a company may issue an IPO while a government may issue a bond in order to conduct new or expand
ongoing activities. Investors purchase securities in the capital markets in order to extract a return and earn
profit on the securities. Capital markets include primary markets, such as IPOs that are placed with
investors through underwriters, and secondary markets, in which all subsequent trading takes place.
Government agencies in different countries regulate local capital markets, though some, especially
exchanges, play some role in regulating themselves.
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a
company that brings together a group of people and invests their money in stocks, bonds, and other
securities. Each investor owns shares, which represent a portion of the holdings of the fund.
2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass
on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in
price. You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a check for distributions or to reinvest the
earnings and get more shares.
Professional Management - The primary advantage of funds is the professional management of your money.
Investors purchase funds because they do not have the time or the expertise to manage their own
portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to
make and monitor investments.
Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk
is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any
particular investment is minimized by gains in others. In other words, the more stocks and bonds you own,
the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of
different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a
portfolio with a small amount of money.
Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its
transaction costs are lower than what an individual would pay for securities transactions.
Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted
into cash at any time.
Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the
minimum investment is small. Most companies also have automatic purchase plans whereby as little as $100
can be invested on a monthly basis.
What is Depreciation?
A noncash expense that reduces the value of an assetas a result of wear and tear, age, or obsolescence.
Most assets lose their value over time (in other words, they depreciate), and must be replaced once the
end of theiruseful life is reached. There are several accounting methods that are used in order to write
off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense,
depreciation lowers the company's reported earnings while increasing free cash flow.
Basing on the nature of the asset the depreciation will be calculated. There are different methods of
depreciations. They are:
1) Straight line method,
2) Diminishing value method,
3) Sinking fund method,
4) Annuity method,
5) Depletion method. etc.
There are two types of depreciation the straight line method and the written down value method. The
rates of depreciation under the two methods vary as the useful life of the asset remains the same
irrespective of the method of depreciation used. Under straight line method, a fixed percentage is applied
on the original cost of the asset, thereby ensuring that the depreciation per annum over the useful life is
constant. Under written down value method, a fixed percentage is applied on the written down value
(original cost less depreciation charged till the end of the previous year) of the asset. This results in higher
depreciation in the earlier years and lesser depreciation in the later years.
Normally the depreciation rate under written down value is higher than the rate under straight line
method. This ensures creation of depreciation provision over the useful life of the asset.
Accounting Questionnaire
1. Financial position of the business is ascertained on the basis of:
a. Records prepared under book-keeping process
b. Trial balance
c. Accounting reports
d. None of the above
2. A businessman purchased goods for $2,500,000 and sold 80% of such goods during the
accounting year ended 31st March, 2005.The market value of the remaining goods was
$400,000.He valued the closing stick at cost. He violated the concept of:
a. Money measurement
b. Conservatism
c. Cost
d.Periodicity
3. Assets are held in the business for the purpose of:
a.
b.
c.
d.
Resale
Conversion into cash
Earning revenue
None of the above
1,000,000
Installation charges
Market value as on 31st
March,2006
100,000
1,200,000
While finalizing the annual accounts, if the company values the machinery at $1,100,000.Which of
the following concepts is followed by the Alpha Ltd?
a.
b.
c.
d.
Cost
Matching
Realization
Periodicity
Income statement
Statement of Cash flows
Balance Sheet
None of the above
9. At the end of the accounting year all the nominal accounts of the ledger book are:
a.
b.
c.
d.
11. A second hand motor car was purchased on credit from B Brothers for $10,000
a.
b.
c.
d.
13. A debit note for $2,000 issued to Mr.F for goods returned by us is to be accounted for:
a. Bills Receivable Book
b. Purchases Book
c. Journal Proper(General Journal)
d. Purchases Return
14. The Sales Returns Book records
a. The return of goods purchased
b. Return of anything purchased
c. Return of goods sold
15. The weekly or monthly total of the purchase book is:
a. Posted to the debit of the purchases Account
b. Posted to the debit of the Sales Account
c. Posted to the credit of the Purchases Account
16. Contra entries are passed only when
a.
b.
c.
d.
An expenses
A profit
An asset
A liability
18. Amount received from IDBI as a medium term loan for augmenting working capital:
a.
b.
c.
d.
Capital expenditure
Revenue expenditure
Capital receipt
Revenue receipt
19. A second hand car is purchased for $10,000 the amount of $1,000 is spent on its repairs, $500
is incurred to get the car registered in owners name and $200 is paid as dealers commission.
The amount debited to car account will be
a.
b.
c.
d.
$10,000
$10,500
$11,500
$11,700
20. If the amount is posted in the wrong account or it is written on the wrong side of the account,
it is called
a.
b.
c.
d.
Error of omission
Error of commission
Error of principle
Compensating error
21. If a purchase return of $1,000 has been wrongly posted to the debit of the sales returns
account, but has been correctly entered in the suppliers account, the total of the
a.
b.
c.
d.
Trial balance would show the debit side to be $1,000 more than the credit
Trial balance would show the credit side to be $1,000 more than the debit
The debit side of the trial balance will be $2,000 more than the credit side
The credit side of the trial balance will be $2,000 more than the debit side
22. $200 received from Smith whose account, was written off as a bad debt should be credited to:
a.
b.
c.
d.
23. If a purchase return of $24 has been wrongly posted to the debit of the sales return account,
but had been correctly entered in the suppliers account, the total of the trial balance would
show:
a.
b.
c.
d.
(10,000)
10,000
19,643
8,000
26. The total cost of goods available for sale with a company during the current year is
$1,200,000 and the total sales during the period are $1,300,000.If the gross profit margin of
the company is 33 1/3% on cost, the closing inventory during the current year is
a.
b.
c.
d.
$400,000
$300,000
$225,000
$260,000
27. Ascertain the amount of purchase if Cost of goods sold is $80, 700, Opening stock $800,
closing stock $6,000
a.
b.
c.
d.
$80,500
$74,900
$74,700
$85,900
28. Under inflationary conditions, which of the methods will not show lowest value of the
closing stock?
a.
b.
c.
d.
FIFO
LIFO
None of the options are correct
All of the options are correct
29. On April 07, 2005, i.e., a week after the end of the accounting year 2004-2005, a company
undertook physical stock verification. The value of stock as per physical stock verification
was found to be $35,000.The following details pertaining to the period April 01,2005 to April
07, 2005 are given:
(i)
(ii)
(iii)
(iv)
$27,000
$19,000
$43,000
$51,000
30. Consider the following data pertaining to N Ltd. For the month of March 2005:
Purchases
Issues
Balance
Quantity
Rate
Quantity
Quantity
Rate
(kg.)
($)
(kg.)
()kg.
($)
500
22.8
Date
01-03-2005
02-03-2005
400
24
10-03-2005
600
25
25-03-2005
1,000
If the company uses weighted average method for inventory valuation, the value of inventory as on March
31, 2005 is
a. $11967
b. $12000
c. $12500
d. $11400
31. Which of the following is False?
1. The value of ending inventory under simple average price method is realistic.
2. Usually profit or loss will not arise out of pricing the issues on the basis of simple average
price method.
3. The value of stock is shown on the assets side of the balance sheet as fixed assets.
4. Opening stock plus purchases minus cost of goods sold is the value of closing stock.
32. If a cocern proposes to discontinue its business from March 2005 and decides to dispose off all its
assets within a period of 4 months, the balance sheet as on March 31, 2005 should indicate the assets at
their
1. Historical cost.
2. Net realizable value.
3. Cost less depreciation.
4. Cost price or market value, whichever is lower.
33. Amit Ltd. purchased a machine on 01.01.2003 for $120,000. Installation expenses were $10,000. On
01.07.2003, expenses for repairs were incurred to the extent of $2000. Depreciation is provided under
straight line method. Depreciation rate = 15%. Annual depreciation =
1. $13000
2. $19500
3. $21000
4. $25000
34. Fixed assets are:
1.
2.
3.
4.
Kept in the business for use over a long time for earning income.
Meant for resale.
Meant for conversion into cash as quickly as possible.
All of the above.
$36000
$45000
$50000
$59000
a.
b.
c.
d.
$1,000,000
2,000,000
$1,500,000
$1,200,000
45. Using the data given in the problem, the value of issues in the month of December 2005 using simple
average method
a. $15,385
b. $21,675
c. $19,750
d. $28,125
Based on the following para answer Q46 48
In the year 2004-2005, C Ltd purchased a new machine and made the following payments in relation to it:
Particulars
$
$
Cost as per suppliers list
520,000
Less: agreed discount
50,000
470,000
Delivery charges
10,000
Erection charges
20,000
Annual maintenance charges
30,000
Additional components to increase capacity of the
4,000
Machine
Annual insurance premium
5,000
46. The cost of the machine is
a. $540,000
b. $545,000
c. $504,000
d. $550,000
47. If depreciation is provided @ 10% p.a. SLM, depreciation for 3rd year is
a. $54,000
b. $54,500
c. $47,000
d. $50,400
48. If depreciation is provided @ 10% p.a. under declining balance method, depreciation for 3rd year is
a. $43,740
b. $44,145
c. $40,824
d. $44,550
49. Original cost = $126,000. Salvage value = $6,000. Useful life = 3 years. Annual depreciation under
SLM =
a. $21,000
b. $20,000
c. $15,000
d. $40,000
50. Below some errors are mentioned. State which of these will not be revealed by the Trial Balance:
a. Compensating errors
b. Errors of principle
c.Wrong balancing of an account
d. Both a and b.
LIABLITIES
Current Liabilities:
Commercial Paper
Accounts Payable
Accured Liablities
Accured Income Taxes
Long-Term Debt Due
Obligations Under Capital Leases
Total Current Liabilites
Long Term Debt
Long Term Obligations Under Capital
Leases
Deffered Income Taxes and Other
Minority Interest
Shareholder's Equity:
Preffered Stock
Common Stock
Capital in Excess of Par Value
Accumulated Other Comprehensive
Income
Retained Earnings
Total Shareholder's Equity
Total Liabilities
Amount
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ASSET
Current Assets:
Cash and Cash Equipments
Receivables
Inventories
Prepaid Expenses and Other
Fixed Assets
Property and Equipments, at cost
Land
Buildings and Improvements
Amount
Amount
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