Question 1. What is the primary objective of Financial Accounting? Answer : The primary objective of the Financial Accounting is to communicate and Provide information to the investors and creditors on the economic activities of the firm enterprise that will help them in their investment decisions.

Question 2. What are financial statements? Name the major financial statements. Answer: The Financial statements are the reports that result from the process of accounting which allow the interested parties to evaluate the profitability and the solvency of the business. The major financial statements are • • • Profit and Loss Account Balance sheet Cash Flow statement

Question 3. What is the difference between balance sheet and profit & loss account? Answer: The balance sheet is one of the most important financial statements of a company. It is reported to investors at least once per year. It may also be presented quarterly, semiannually or monthly. The balance sheet provides information on what the company owns (its assets), what it owes (its liabilities), and the value of the business to its stockholders (the shareholders' equity). The name, balance sheet, is derived from the fact that these accounts must always be in balance. Assets must always equal the sum of liabilities and shareholders' equity. A company's income statement/profit and loss account statement is a record of its earnings or losses for a given period. It shows all of the money a company earned (revenues) and all of the money a company spent (expenses) during this period. It also accounts for the effects of some basic accounting principles such as depreciation. The income statement is important for investors because it's the basic measuring stick of profitability. A company with little or no income has little or no money to pass on to its investors in the form of dividends. If a company continues to record losses for a sustained period, it could go bankrupt. In such a case, both bond and stock investors could lose some or all of their investment. On the other hand, a company that realizes large profits will have more money to pass on to its investors. Question 4. What are the principal qualitative characteristics of financial statements? Answer: The principle characteristics of financial statements are the attributes that make the information provided in the financial statements useful to the users. The principle qualitative characteristics are Understandability: They should be readily understandable to the users. For this purpose users are deemed to have reasonable knowledge of business and economic activities. Relevance: To be useful information must be relevant to the decision-making needs of the users.

Jaideep Jadhav

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the higher will be the quality of financial reporting. What is Fundamental Accounting equation? Answer: Accounting equation is a mathematical expression used to describe the relationship between the assets. Question 6. Question 9. liabilities and owner's equity of the business model. Jaideep Jadhav Page 2 of 14 . True and fair view presentation: There is no clarity in the term 'true and fair view' as required by the Companies Act. Balance between the various qualitative characteristics: In practice it has become necessary to achieve an appropriate balance between the qualitative characteristics. the higher is the quality of financial reporting.Finance Reliability: Information is said to be reliable when it is free from errors.Liabilities = Owner's Equity (The accounting equation) Question 8. The less that management uses discretionary means to manipulate earnings. What are the golden rules of Accounting? Answer: The golden Rules of Accounting are: • • • Debits always equal Credits Increases do not necessarily equal Decreases Assets . What are the major constraints on relevant and reliable financial statements? Answer: 1 the major constraints are Timeliness: If there is undue delay information becomes irrelevant. the higher the quality of financial reporting.. The conceptual framework does not discuss this. Question 5. assets minus liabilities equal owner's equity. Question 7. Balance between cost and benefit: The benefits derived from information should exceed the cost of providing it. What is meant by the quality of financial reporting? What is conservatism. The basic accounting equation states that assets equal liabilities and owner's equity. What are Accounting Standards? List few advantages. but can be modified by operations applied to both sides of the equation. which it purports to represent. e. bias and can be depended upon by the users to represent faithfully. Conservatism means that management should take great care not to overstate assets and revenues and not to understate liabilities and expenses. The more conservative management IS in making accounting judgments. and how does it affect the quality of earnings? Answer: The quality of financial reporting refers to how close the financial statements are to economic reality. Answer: Accounting Standards are rules and criteria of accounting measurement evolved by several accounting standard setting bodies established in developing and developed countries. The closer the financial statements are to economic reality. Comparability: Users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance.g.

normally abbreviated as AIR. these are the basic costs of doing business that a company. To a limited extent facilitates comparison of financial statements globally. which is why both terms are similarly structured. One company's accounts payable is another company's accounts receivable. Examples of such estimates include. for whatever reason. as adopted consistently by the company. Lays down disclosure requirements beyond that required by law. The reason why the customers owe money is that the product has been delivered but has not been paid for yet. Discuss the GAAP measures used in India.Frequently Asked Questions in Financial and Management Accounting • • • International Accounting Standard Board (IASB) . its partners and its employees. This is why you will see something called allowance for bad debt in parentheses beside the accounts receivable number. m. future obligations under employee retirement benefit plans and the useful lives of fixed assets. provision for doubtful debts. Accounts Payable is the money that the company currently owes to its suppliers. reported balances of assets and liabilities and disclosures relating to contingent assets and liabilities as of the date of the financial statements. Reduces to a reasonable extent eliminates confusing variations in the accounting treatment. there are instances where a company will be forced to take a write-off for bad accounts receivable if it has given credit to someone who cannot or will not pay. In India . expected contract costs to be incurred to complete software development. Tell me something about Accounting for goodwill. Basically. Financial Accounting Standards Board (F ASB) . that the management of the company ("Management") make estimates and assumptions. is the money that is currently owed to a company by its customers. has not paid off yet. which often produces a short-term increase in earnings and current assets. Companies routinely buy goods and services from other companies using credit.International Accounting Standards.Accounting Standards. Answer : The financial statements are prepared under the historical cost convention. that affect the reported amounts of revenue and expenses of the period. Jaideep Jadhav Page 3 of 14 . All income and expenditure having a material bearing on the financial statements are recognized on the accrual basis. Question I. The advantages 1.US Generally Acceptable Accounting Practices (specifically Statements on Financial Accounting Standards). The preparation of the financial statements in conformity with GAAP requires. Question 12.Institute of Chartered accountants of India . 1956. Tell us what you know about Accounts Receivables and Payables? Answer : Accounts Receivable. Question 10. Actual results could differ from those estimates. A company has the power to push out some of its accounts payable. 2. Although typically AIR is almost always turned into cash within a short amount of time. m accordance with Indian Generally Accepted Accounting Principles ("GAAP") comprising of the accounting standards issued by the Institute of Chartered Accountants of India and the provisions of the Companies Act.

which materialize on the happening or non-happening of an event. Due to uncertainty of future earnings. What is depreciation? List few methods of providing depreciation. as it is an unidentifiable intangible asset. Question 14. If we charge the whole expenditure during the current. poses many challenges for accountants. to overcome this only a part of the expenditure is charged current year and the balance carried forward and written off gradually during the future periods. goodwill is taken to be the difference between the purchase price and the fair market value of an acquired company's assets. What is deferred revenue expenditure? Answer: Deferred revenue expenditures represent types of assets whose usefulness do not expire in the year of their occurrence but generally expires in the near future. we make some revenues expenditure but it eventually becomes a capital asset (generally of an intangible nature). • Excess profits approach Under this method. Contingent liabilities are not real liabilities and as such do not appear in the liability side of balance sheet. if we undertake substantial repairs to the existing building. it looses its value. Question 13. Sometimes. the current year expenses are affected. But are disclosed by way of a note in the balance sheet. Pickles defines it as "the permanent and continuing diminution in the quality. the deterioration of the premises may be avoided. Question 15. Question 17. However. Few method of depreciation are Jaideep Jadhav Page 4 of 14 . the present value of the projected future excess earrings over normal earnings for similar businesses is recorded as goodwill. valuing goodwill using this method is difficult. the value of which companies want to reflect correctly in their financial statements. What are contingent liabilities? Answer: These are liabilities. What is debenture redemption reserve? Answer: The companies (Amendment) Act 2000 require every company to create debenture redemption reserve for redemption of debentures out of appropriation of profits every year until redemption. Question 16. This reserve cannot be utilized by the company except for the purpose of redemption. Can you provide us a suitable definition of goodwill? Answer: Goodwill as an intangible asset can be defined from two approaches: • Residuum approach Under this method. Answer : It is common knowledge that when an asset is used over a period of time. This loss in value is called depreciation. These types of expenditures are carried forward and are written off in future accounting periods. since the benefit of this expenditure is enjoyed over a number of years. quantity or value of an asset" Depreciation is the continuous shrinkage of book value of an asset.Finance Answer: Goodwill is considered to be one of the largest intangible assets. So. Example. Accounting for this asset.

Even more severe. Explain what effects that FIFO and LIFO have on the balance sheet during a period of rising prices and during a period of falling prices? Jaideep Jadhav Page 5 of 14 . Please tell how you can analyze a balance sheet vis-à-vis the performance of the company in the capital market? Give examples with reference to some specific parameters. Reducing Balance Method: A fixed percentage of the diminishing value of the asset is written off each year so as to reduce to its break up value at the end of its life. Answer The analysis of a balance sheet can identify potential liquidity problems. which are helpful in the analysis of balance sheet. there are certain very important benchmarks and aspects. Define FIFO and LIFO. • • • • • • • • • • • Revenues/Sales growth Bottom line growth ROI . Question 19.Return on Investment Volume Market Capitalization Company management PSR (Price-to-Sales Ratio) Return on Equity Debt-to-Equity Ratio Beta Earnings Per Share (EPS) Question 20. An investor could also spot the degree to which a company is leveraged. An overly leveraged company may have difficulties raising future capital. Beyond liquidity and leverage. Question 18. depreciation may be calculated on the basis of the hours for which the concerned machine worked.Frequently Asked Questions in Financial and Management Accounting Straight line Method: An equal amount is written off every year during the working life of an asset so as to reduce the cost of the asset to nil or its residual value at the end of its useful life. Machine hour method: If it is practicable to keep a record of the actual running hours of each machine. What do you understand by "contract account"? Answer : Account in which posting data for contracts or contract items are processed for which the same collection/payment agreements apply. These are just a few of the danger signs that can be detected with careful analysis of a balance sheet. or indebted. they may be headed towards bankruptcy. These may signify : the company's inability to meet financial obligations. Contract accounts are managed on an open item basis within contract accounts receivable/payable.

and Commercial Paper. What are marketable securities? Answer: Marketable securities are cash substitutes. A financial accounting system provides information for external decision makers and a management accounting system provides information for a firm's internal decision makers. and recorded. Deferred tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise. the information needs of internal and external users generally overlap somewhat. they need information that is itself comparable. separately from current assets and current liabilities. year-end bonuses might be based on the company's performance relative to other companies in the same industry. meaning that standardization of accounting practice is not as important. internal users will have some decisions that require information that is comparable between companies. Negotiable Certificates of Deposit. However. Accordingly. This requires financial accounting information to be fairly standardized in terms of not only its basic manner of presentation. inter company comparability is less of a concern in managerial accounting. FIFO values inventory at current costs. the financial and management accounting systems are not two completely separate systems. Accordingly. The analyst should take the LIFO cost flow assumption into account and consider adjusting the inventory of a company using LIFO upward to account for inflation. What is the entry for Deferred Tax liability according to AS22? Answer : Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. LIFO would value inventory at costs that the company could have incurred years ago. Examples of marketable securities include Treasury Bills. but also in terms of how economic events are identified. measured. The break-up of deferred tax assets and deferred tax liabilities into major components of the respective balances should be disclosed in the notes to accounts. like external users. but rather are partially overlapping subsystems within the overall accounting system.e.Finance Answer : FIFO is the inventory cost flow assumption that treats the first goods in as the first goods sold. Consider the general information needs of these two categories of decision makers. LIFO is the inventory cost flow assumption that treats the last goods in as the first goods sold. Question 23. Question 21. However. Jaideep Jadhav Page 6 of 14 . For example. How are their information needs different? How are their information needs similar? What does your consideration of these differences and similarities suggest about the relationship between the financial accounting system and the management accounting system as components of the overall accounting system? Answer: The primary external users of accounting information are investors and creditors whose decisions often require them to make comparisons between companies. To support these inter company comparisons. Question 22. managers) are generally more focused on their single firm as they seek to plan and control its operations. Marketable securities are investments with shortterm maturities with little risk due to interest rate fluctuations. Therefore. The information needs of internal users (i. In a period of rising prices..

10. viz.a. that it should have been engaged in the business for at least 3 years during which the accumulated loss has occurred or the unabsorbed depreciation has accumulated and it has held continuously as on the date of amalgamation at least 3/ 4ths of the book value of fixed assets held by it two years prior to the date of amalgamation. Under this section "Jeevan Suraksha' Pension Plan of LIC of lndia is most popular option. What is Sec 72A of Income Tax Act? Answer: Incentive for amalgamation extended to hotels and certain banks . if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.10.3.Frequently Asked Questions in Financial and Management Accounting The nature of the evidence supporting the recognition of deferred tax assets should be disclosed. Accordingly a person who is in 31.5% tax bracket can save income tax of Rs. 72A. Question 24.p. The benefit of carry forward and set off of accumulated losses and unabsorbed depreciation would be extended in the case of amalgamation of a company owning a hotel with another company or an amalgamation of a banking company with the State Bank of India or its subsidiary or other specified banks. 000/. What is Section 80CCC (I)? Answer: Deduction under section 80CCC (I) This section was introduced with effect from Annual Year 1997-98. Question 25.000/towards Jeevan Suraksha' Pension Plan in a year. Jaideep Jadhav Page 7 of 14 .(including surcharge) by contributing Rs. 'Jeevan Suraksha' Pension Plan is a contributory Pension Plan and contributions paid to LIC of India can be reduced from taxable income subject to maximum of Rs.Sec. Two additional conditions for amalgamating a company will have to be fulfilled. 150/.

What is a Cost? What do you mean by cost unit? Answer: A Cost is a resource consumed to accomplish a specified objective. their comparison with actual costs. Question 10. Question 6. Question 3. Question 5. Question 7. What is a standard costing? Answer: It is the preparation and use of standard costs. Cost center is a smaller segment of activity or area of responsibility for which costs can be accumulated. What is EOQ? Answer : Economic Order Quantity-It represents the quantity of goods ordered which minimizes the sum of inventory ordering costs and carrying costs Question 11. Question 4. Question 8.Finance MANAGEMENT ACCOUNTING Question 1. How does standard costing affect performance? Answer: A control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance. How do you calculate opportunity cost? Answer: The value of a benefit sacrificed in favor of an alternative course of action. Responsibility in a cost center is restricted to costs only. and analysis of variances to their causes & points of incidence. What is Budget? Answer: Budget is a quantitative representation of the policy to be pursued during a specified period of time for purpose of attaining predefined objectives. A Cost Unit is a unit of output in the production of which the costs are incurred. during a specific immediate future unit of a product. How do the financial experts use "cost sheet" Jaideep Jadhav Page 8 of 14 . What do you understand by cost center? Answer: It is a smaller segment of activity or area of responsibility for which costs can be accumulated. Question 2. Responsibility in a cost center is restricted to costs only. Question 9. What is Standard cost? Answer: It is a predetermined or forecast estimate of cost to manufacture a single unit. or a number of units of a product. How is investment center different from cost center? Answer: Investment center is a profit center whose performance is measured by its return on capital employed. What is a direct cost? Answer: A cost which can be economically identified with a specific saleable cost unit.

Question 13. Contribution Margin Ratio = Sales . its fixed cost increases due to increase in payment by way of interest. For example. How do you calculate contribution margin? Answer : The difference between the selling price and the variable cost of a product or service. direct and indirect.Frequently Asked Questions in Financial and Management Accounting Answer : Through the use of a "cost sheet". profits and sales. In such a situation. when a firm acquires loan. contribution margin is the difference between total sales and total variable costs. The Break-Even Point (BEP) represents the level of sales at which the operating income and operating costs are equal so that profit is zero. Can you identify the two basic tools used for CVP analysis? Answer : • • Contribution margin analysis Break-even analysis Question 15. fixed and variable. How do you identify direct labor? Answer : Labor that is directly identifiable with a specific product or activity. are included in the cost of products. How do you calculate absorption costing? Answer : A product costing method in which all costs of production. What is the importance of Cost-Volume-Profit Analysis? Answer : Managing cost is one of the most important aspects of a successful business. by manipulating cost and sales of the firm. Question 16. financial experts estimate the detailed cost in respect of a cost center or a cost unit and also makes inter-firm comparison by including cost data of different firms. a firm should be able to analyze sales volume required to cover the additional cost incurred. In aggregate. It is the level at which there is neither profit nor loss. variable costs. Question 18.Variable Costs / Sales Question 17. Here the total revenue equals the total costs. Question 12. Cost-Volume-Profit (CVP) Analysis evaluates various business decisions and helps the finance manager to account for any deviation caused in the profits. What is budgeting process and its various forms? Jaideep Jadhav Page 9 of 14 . What is BEP analysis? Answer : Break-Even analysis is an analytical technique to study the relationship between fixed assets. CVP analysis can also be stated as the relationship between cost (fixed and variable). volume (in units or in rupees) and profit. A firm should have a clear understanding of the financial impact of every decision it takes. Both the per-unit manufacturing and non-manufacturing variable costs are deducted from the selling price to determine the contribution margin. Question 19. Question 14. Also called full costing. What is break-even point for a company? Answer : The activity level that yields zero profit.

Question 21. which maybe divided into the following phases: Identification of potential investment opportunities: The planning body develops estimates of future sales. Can you define flexible budget? Jaideep Jadhav Page 10 of 14 . timeconsuming and risk fraught task. Question 20. It is a means of comparing actual performance with projected performance. Each project starts the budget evaluation process without a resource commitment even if it is an ongoing project. which serve as the basis for setting production targets. Increases staff motivation by providing greater initiative and responsibility m decisionmaking communication and coordination within the organization and eliminates wastage and obsolete operations VI. Performance Review: This is a feedback device. What do you understand by Zero-based Budgeting? Answer : A method of budget review and evaluation that requires all projects and programs. How a company can be benefited by Zero-Based Budgeting? Answer : There are plenty of reasons. Assembling of Investment Proposals: Investment proposals are defined by production department and other departments are usually submitted in a standardized capital investment proposal form. which are common. Investment proposals are usually classified into various categories for facilitating decision-making. This information is in turn helpful in identifying required investments in plant and equipments. The existence of every budgeting unit and every budget period. The main idea behind ZBB is to challenge. budgeting and control. Projects involving larger outlays are included in the capital budget after necessary approvals. Implementation: Translating an investment proposal into concrete project is a complex. Preparation of Capital Budget and Appropriations: . Delays in implementation. can lead to substantial cost overruns. Under this system executives are vested with the power to okay investment proposals up to certain limits. Decision-Making: A system of rupee gateways usually characterizes capital investment decision-making. new and old. Identifies Question 22. Detects inflated budgets IV. It may be conducted most appropriately when operations of the project are stabilized. Increases V11. Such as: 1. Results in efficient allocation of resources as it is based on needs and 11. Useful for service department where the output is difficult to identify v.Projects involving smaller outlays and which can be decided by executives at lower levels are often covered by a blanket appropriation for expeditious action.Finance Answer: Budgeting is a complex process. Drives benefits managers to find out cost effective ways to improve operations m. to justify all resources.

In ABC. i. Question 25. Activity-based costing (also called activity accounting) emphasizes links between performance of particular activities and the demands that those activities make on the organization's resources. Why is it important to calculate variance for a company? Answer: Variances represent deviations of actual performance from standard performance. ordering. Why is activity-based costing. There can be cost variances.e. Question 23. ABC reveals the linkages amongst activities in different departments The underlying principle of ABC is to trace the product cost whereas traditional by the need to value stocks. so important? Answer : Cost attribution to cost units on the basis of benefits received from indirect activities. • • Unlike traditional costing. Question 24. is designed to change as volume of output changes. profit variances and sales value variances. In what way Activity Based Costing differs with the Traditional Methods of Costing? Answer : Activity Based Costing (ABC) captures costs and affects accounting practices which traditional costing fail to do so as explained below. setting-up. costs are accumulated for each activity as a separate cost object while m traditional costing costs is allocated based on various departments and functions. Variances can be favorable or unfavorable depending upon their impact on the profits of the organization. etc.Frequently Asked Questions in Financial and Management Accounting Answer : A flexible budget is a budget. Jaideep Jadhav Page 11 of 14 . assuring quality. which by recognizing different cost behavior patterns.

What kind of capital structure should a newly floated company adopt? Answer: The capital structure of a newly floated company is dependent upon the management of the company. Question 2. According to the guidelines issued by SEBI. Thus the correct measure in evaluating a project is the overall cost of capital. the bankruptcy costs also increase. What are agency costs? Answer: Creditors insist on certain restrictions in the form of restrictive covenants in the contract and they entail certain legal and enforcement costs. It is often measured as the weighted arithmetic average of the cost of various sources of finance tapped by the firm. a newly floated company should bear in mind the rules and regulation regarding SEBI guidelines and norms of the financial institutions.5: 1. According to financial institutions normally the debt-equity norm for medium and large-scale projects is 1. These are called Bankruptcy costs. But they can be sold at a discount and the firm has to incur certain legal and administrative costs. before deciding an appropriate capital structure. Question 3. This entails significant costs in the form of sharply impaired operational efficiency. Question 4. The weight is the proportion of each source of funds in the capital structure. Tell us something about negative capital and its worth? Answer: Upon any liquidation of partnership interest. it tries to maintain its capital structure intact. assets of a bankrupt firm cannot be sold at their economic value. the agreement requires partner having negative working capital that the partner whose accumulated losses and drawing are more than his capital contribution is required to pay to the partnership in cash the amount of any negative balance in her capital account. This is the weighted average cost of capital from various sources. These costs impair the operating efficiency of the firm. a newly established company with no previous track record can issue equity only at par unlike that of well established companies who can issue their equity capital at premium to par value. As the Debt equity ratio increases.Finance CAPITAL STRUCTURE Question 1. What are bankruptcy costs? Answer: In the real world. Question 6. Such costs are called agency costs. What do you understand by cost of capital? Answer: The minimum rate of return a firm must earn on its investment in order to satisfy the expectations of investors who provide the funds to the firm. the company wants a balanced capital structure (the right mix of debt and equity) and for financing any investment project. Jaideep Jadhav Page 12 of 14 . Question 5. What is Weighted Average Cost of Capital (WACC)? Answer: In the long run. The average cost of capital will change if the capital structure changes. However.

Question 8. Deferred Credit: Facility under which suppliers of plant and machinery offer to make the payment over a period of time. If IRR were less than the cost of capital of capital what would you do? Answer: While evaluating the feasibility of a project we compare the internal rate of return and cost of capital. then the project is not viable and cannot be accepted as the cost is less than the return. one-time costs facing the buyer of switching from one supplier's product to another's. The means of project finance are: Share Capital. cost of new ancillary equipments. cost and time in testing and quantifying a new source. and Debenture Capital. Switching cost may include employee retraining costs. leading to loss in implementing the project. Other Sources: These include public deposits. If these switching costs are high then new entrant must offer a major improvement in cost or performance in order for the buyer to switch from an incumbent. Incentive Sources: The aid given by goverment and its agencies like seed capital assistance. Jaideep Jadhav Page 13 of 14 . What is switching cost? Which industry has the lowest switching cost? Answer: A barrier to entry is created by the presence of switching costs.Finance Question 7. that is. leasing and hire purchase. What is project finance? Answer: The amount required to meet the cost of the project is called project finance. If IRR is less than the cost of capital. Question 9. Term Loans. capital subsidy and tax deferment or exemption.

Jaideep Jadhav Page 14 of 14 .

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