Accounting - Theory Solutions To Objective

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StudyNote:1AccountingConceptsandConventions
Question.1)Writeshortnotes 2001Dec Depreciation Answer:DepreciationisalossinvalueofAssets.Itisameasureofwearingout,consumption,orotherlossin value of a Depreciable Asset arising from use and passage of time. Depreciationis nothing but distribution of totalCostofAssetoverisusefullife. ObjectivesofprovidingDepreciation 1. Toascertaintrueresultsofoperations. 2. TopresenttrueandfairviewoftheFinancialPosition. 3. ToaccumulatefundsforthereplacementofAssets. 4. ToascertainTrueCostofproduction. Question.2)Writeshortnotes 2005Dec Revaluationmethodofdepreciations Answer: Whenever the Depreciable Assets is revalued, the depreciation should be charged on the revalued amount on the basis of the remaining estimated useful life of the asset. If there is an upward revision in the value of Asset, then the amount of appreciation is debited to Asset Account and credited to Revaluation Account. If there is downward revaluation in the value of Assets then Profit and Loss Account is debited and AssetAccountiscredited. Question.3)Distinguishbetween: 2002Dec DepreciationandReserve Answer: Depreciation is the process of allocating the cost of a Fixed Asset over its estimated useful life in rational and systematic manner. Whereas Reserve is an appropriation of profit. Due to depreciation, net profit is reduced but Reserve does not affect the net profit. Reserves are creating to strengthen financial position and to meet unforeseen losses, whereas depreciation is provided to ascertain the correct profit and correct book value of Fixed Asset. Reserves are the undistributed profits and belong to the owners equity. Depreciation is a rational estimate of a decline in the usefulness of an Asset due to consumption, use, passageoftime,technologicalchangesetc. Question.4) What are the object of charging depreciation and problem of measurement of depreciation? Explain.2009June Answer)PrimeobjectivesforprovidingDepreciationare: 1. Correct income measurement: Depreciation should be charged for proper estimating of periodic profitorloss. 2. True position statement: Value of the fixed assets should be adjusted for depreciation charged in ordertodepicttheactualfinancialposition. 3. Funds for replacement: Generation of adequate fund in the hands of the business for replacement oftheassetattheendofitsusefullife. 4. Ascertainment of true cost of production: For ascertaining the cost of the prediction, it is necessary tochargedepreciationasonitemifcostofproduction. Problemsofmeasurementofdepreciationare:
EDUCONZAnInstituteonlyforCostAccountant
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1. Estimatedusefullifemaybeincorrectandmisleading. 2. Certainuncertainfactorsaffectpredeterminedquantumofdepreciation. Question.5)ConceptualFrameworkofAccounting2004June Answer: A Conceptual Framework of Accounting prescribes the natures, functions and limits of Financial accountsandFinancialstatements.ItprovidesguidanceindevelopingAccountingStandardsandassistsusers ofaccountsininterpretinginformationinfinancialstatements. NeedforConceptualFramework: Asanaidindevelopingmoreuseful,consistentStandards. Asanaidinsolvingpracticalproblemsbyreferencetoanexistingframeworkofbasictheory. In combination with good judgments, a sound body of theory will help accountants focus on logical and consistentsolutionstoAccountingproblemsastheyarise. AccountingPrinciplesdependson: GeneralAcceptance. Relevance&Reliability Usefulness Cost/BenefitConstraints ConceptualframeworkcoherentsetofRulesandStandardsforcompatibilityandConsistency Developingofframework:norUniversallyAcceptednorstatic. Question.6)MaterialityConcepts Answer. Materiality principle permits other concepts to be ignored, if the effect is not considered material. This principle is an exception of full disclosure principle. According to materiality principle, all the items having significant economics effect on the business of the enterprise should be disclosed in the financial statement and any insignificant item which will only increase the work of the accountant but will not be relevant to the needs should not be disclosed in the financial statements. The term materiality is the subjective term. It is on the judgment, common sense and discretion of the accountant that which item is materialandwhichisnot.Forexample,stationerypurchasedbytheorganizationthoughnotfullyusedinthe accounting year purchased still shown as an expenses of that year because of the materiality concepts etc, is taken as 100% in the year of purchase though used by the company for more than one year. This is because the amount of books or calculator is very small to be shown in the balance sheetthough it isthe asset of the company. The materiality depends not only upon the amount of the item but also upn the size of the business, nature and level of information, level of the person making the decision etc. Moreover an item material to one person may be immaterial to another person. What is important is that omission of any informationshouldnotimpairthedecisionmakingofvarioususers.
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Question.7)Theaccountingtreatmentofcapitalandrevenueexpenditureisasunder: Answer: Revenue expenditures are charged as an expense against profit in the year they are incurred or recognized.Capitalexpendituresarecapitalizedaddedtoanassetaccount.
T hefollowingarethepointsofdistinctionbetweencapitalexpenditureandrevenueexpenditure: Sl. CapitalExpenditure No. 3. 4. 5. 1. Capital expenditures are incurred for morethanoneaccountingperiod. Capital expenditure are of nonrecurring nature. All capital expenditures eventually become revenue expenditures. Capital expenditures are not matched with capital receipts. Capital expenditures are incurred before or after the commencementofthebusiness. 3. 4. 5. S1. No. 1. 2. RevenueExpenditure
Revenueexpenditures are incurred for a particularaccountingperiod. Revenue expenditures are of recurringnature. Revenue expenditures are not generally capitalexpenditures. All revenue expenditures are matched with revenue receipts. Revenue expenditures are incurred always after the commencement of the business.
2.
Thefollowingarethepointsofdistinctionbetweencapitalreceiptsandrevenuereceipts: Sl. CapitalReceipts No. 2. S1. No. RevenueReceipts Revenue receipts are available for distribution as profits only after deducting revenueexpenses. Revenuereceiptscanbeutilizedfor creatingareservefundafterdeducting Revenueexpenses. The survival of a business mainly depends on therevenue Receiptsduringanaccountingperiod. Revenuereceiptsarethesourcesfor Creatingrevenuereserves.
Capital receipts are not available for 1. distributionasprofits. 2. 3. Capital receipts cannot be utilized for creatingareservefund. 3. 4. A business can survive without any capital receipts during an accounting period. 4. Capital receipts are the sources for creatingcapitalreserves.
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StudyNote2:RoyaltyandHirePurchase
Question.1)RecoupmentofshortworkinginRoyaltyAccount 2009Dec Answer: It is normally seen that in the first few years the work doesnt gather the required the momentum because of the absorption of time in the preparation for starting the production e.g. construction of houses, advertising for the engineer, collecting necessary equipments and machines. The short working thus promises to return the return the excess so charged in the first few years out of excess earned in the later years. This right of getting back the excess payment made in the pearling year is said to be fixed. Any short workingsfallingbeyondthisperiodconnotebereimbursed.Butwhenthelesserpromisestocompensatethe loss of any year then the right is said to be floating because his can be analyzed of in any year when short workingarises. Question.2)DefinetheConceptofMinimum/DeadRent. 2009June Answer:Acontractisenteredbetweenthelandlordandthelesseeforpaymentofroyalty,usuallycalculated uponthequantum of production orsaleatacertain stipulated rate.Thereisastipulationthatincaseoflow outputorlowsales,acertainsumofmoneywillbepayableinanycaseeveniftheroyaltiesbasedonoutput orsalesarelower.ItmeAnswerthatthesumpayableistheminimum amount or actual royaltieswhichever ishigher.ThusisA,thepatentee,allowsBtousehispatentonaroyaltyofRs.2perunitproducedsubjectto a minimum of Rs. 10,000, then, in case the output is 4,000 units. The amount payable will be Rs. 10,000 and in case the output is 7,000 units, it will be Rs. 14,000. The minimum sum is known as minimum rent or dead rent.Theexcessofminimumrentoveractualroyaltiesistermedasshortworking. Question.3) State the function of interest suspense account under the Installment purchase system. 2004June Answer: Interest Suspense A/c Under this method the whole interest (H.P Price Cash Price) is debited to an Account called Interest Suspense A/c and credited to Vendor A/c on date of purchase itself. When the installment becomes due, interest A/c is debited and credit is given to Interest Suspense A/c and not Hire VendorA/c.Whenthegoodsrepossessed,InterestSuspenseA/cwillalsoshowadebitbalance. Question.4)DifferencebetweenHirePurchaseandInstallmentSale.2009June,Dec Particulars HirePurchase Installmentsale Ownership Stipulates the time at which the ownership passes to the buyer. It is usually on the payment of last installment Sellercanrepossessthegoods.Inthat casetheinstallmentsofarpaidis treatedtobeHiringcharges. No right to sale or otherwise trAnswerfer the goods since the legal position of the hirerisbailee. Ownership passes at the timeofSale
Defaultinmaking payment
Right of sale or other wise
Sellerdoesnothaveany otherrightexcepttheright ofsuingthebuyerforthe Nonpaymentofprice. Right to sale or otherwise trAnswerferthegoods
Loss or damages to Any loss occurring to goods has to be Any loss occurring to goods has thegoods. borne by the seller if the buyer takes tobebornebythebuyer. reasonablecare.
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StudyNote3:AccountingforNonProfitMakingOrganisations
Question.1)HowarethefollowingitemstreatedwhilepreparingIncome&ExpenditureA/CandBalance Sheet?2002Dec Answer: While preparing the Income and Expenditure A/c and Balance Sheet the items will be treated followingmanner: 1. Legacies: Amount received by Non Profit Organization as per will of a deceased person is of non recurring nature, it is treated as Capital Receipts and recorded on Liabilities side of Balance Sheet. However,iftheamountissmall,itcanbecreditedtoIncomeandExpenditureAccount. 2. Donation for Specific Purposes: Donationreceivedforspecificpurposearecapitalizedandrecorded on Liabilities side of the Balance Sheet. These include Donation for extension of Library Hall, Donation for Library Books, Donation for Seminar Room, Donation for Sports Activities etc, when Donation is utilized for the purpose, the amount of Donation is trAnswerferred to Capital Fund. When the purpose for which the Donation is to be utilized is not mentioned, it is call General Donation and treated ad Income. Thus, Specific Donations are recorded on the Liabilities side of the Balance Sheet. On completion of the Specific Donation Fund should be trAnswerferred to Capital / GeneralFund. Question.2)In case of membership fees of club, how to tread the same in the Income & Expenditure A/c andtheBalanceSheet?2003June Answer: Fees received for Life Membership is a Capital Receipt, as it is of Capital Fund nature or General Fund nature. Sometimes, a Life Membership Fee is amortized over a period of time. In that case, separate Life Membership Fund is created. Then ,an amount either equal to the normal Annual Subscription or calculated on the basis of age and average life of members or base on same kind of Amortization Schedule given is trAnswerferred to Income and Expenditure Account every year till the total amount paid as Life Membership gets trAnswerferred to Income and Expenditure Account of different years. In case of death, unamortizedportionistrAnswerferredtoCapitalFund. Question.3)DistinctionbetweenReceipts&PaymentAccountandIncome&ExpenditureAccount. Answer: 1 2. 3. 4. Receipts&PaymentsAccount ItisasummarizedCashBook. Receipts are debited and Payments are credited. TransactionsarerecordedonCashbasis. Amounts related to previous period or future period may remain included. Outstanding amountforcurrentyearisexcluded. Income & Expenditure Account ItcloselyresemblestheProfit&Loss AccountofaTradingconcern. IncomesarecreditedandExpenditures are debited. TransactionsarerecordedonAccrual basis Transactions are recorded on accrual basis. Allamountsnotrelatedtothecurrentperiod areexcluded. Outstanding amounts of current period are added. ItrecordsofRevenueTransactionsonly.
5.
It records both Capital and Revenue Transactions.
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ItservesthepurposeofaNominal Account. Itdoesnotrecordsuchbalances,rather itsfinalbalanceshowsasurplusora deficitfortheperiod. Itconsidersallsuchexpensesfor matchingagainstrevenues. Itsclosingbalanceistransferredto CapitalFundorGeneralFundor AccumulatedFundinthesame PeriodsBalanceSheet. IthelpstoprepareaBalanceSheet.
ItservesthepurposeofaRealAccount. ItstartswithopeningCashandBank BalancesandendswithclosingCash andBankBalances. Itdoesnotrecordnotionallossornon cashexpenseslikebaddebts, depreciationsetc. Itsclosingbalanceiscarriedforwardto thesameaccountofthenextaccounting Period.
8.
9.
10. IthelpstoprepareanIncome& ExpenditureA/c.
Question.4)Writeshortnoteson (c)FeaturesofFinancialAccountsandBalanceSheetofnonprofitseekingorganisations. Answer: NonProfit making organisations such as public hospitals , public educations institutions, club etc. The intention of these organisations are not to earn profit. These organisations conventionally prepare ReceiptsandPaymentaccounttoshowperiodicperformanceandBalanceSheettoshowfinancialpositionat theenoftheperiod.Itsfinancialaccountsare: 1. Receipts & Payment Account : It is summary of cash Bank transactions this account starts with openingCash&Bankbalance. 2. Income & Expenditure Account : It is same to Profit & Loss account. Profit is called surplus and lossiscalleddeficit.AccrualSystemisusedforaccounting. 3. Balance Sheet : It is classified summary of the ledger balances left over after accounts of all the revenue items have been closed off by transfer to the revenue items have been closed off by transfer to the Income and Expenditure Account. The Balance sheet included fixed and floating assets,liabilitiesandthecapitalfundontheAccumulated.
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StudyNote4:Partnership
Question.1)Writeshortnoteson: Goodwill Answer: Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits. The implication of the term over and above is that there is always certain normal rate of profits earned by due to its location advantage, better customer or for similar other reasons .The necessityforvaluationGoodwillinafirmarisesinthefollowingcases: (a) Whentheprofitsharingamountthepartnersischanged; (b) WhenanewPartnerisadmired; (c) WhenaPartnerretiresordies;and (d) Whenthebusinessisdissolvedorsold. Goodwillisanintangibleasset.Ithasbeendefinedasthepresentvalueoftheanticipatedexcessearningofa firm.Itisthemoneyvalueofthebusinessfirmsreputation.Itisavaluablefixedasset. Question.2)Writeshortnoteson: Changeintheprofitsharingratio Answer:ChangeinProfitsharingRatiooccurwhenaPartnerisadmittedtothePartnershipBusiness NewprofitSharingRatio=OldratioSacrificingratio Where, Remainingshare=1newPartnerratio NewRatioofoldPartner=RaminginingsharexOldratio Sacrificingratio=Oldrationewratio Note:Thisformulacanbeappliedonlywhereoldratioandsacrificingaresamenow, Sacrificedsharebyoldpartner=newPartnersSharexSacrificingratio NewshareofoldPartner=oldshareSacrificedshare. Note:TheoldRatioisassumedasSacrificingRatio,iftheSacrificingratioisnotgiven. Question.3) Write notes on: 2009DecMemorandumrevaluationaccount; Answer: Memorandum Revaluation A/c: Under this method the amount of good will is first raised and the written off among all partners (including new partners) in the new profit sharing ratio. Journalentryforwritingofftheamountofgoodwillisasunder: CapitalA/cofallpartners(includingnewpartner)Dr. ToGoodwillA/c The amount required to be written off depends upon the conditions laid down in the Questiontion generally thefullamountofgoodWilliswrittenoff.
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Question.4)AsPerGarnerVsMurrayRule:2009 June Answer: (1) Thesolventpartnersbringincashequaltotheirshareofrealizationloss. (2) Deficiencyofassetsduetoinsolvencyofapartnerofsharedontheratioofthecapitalbythesolvent partners. Thus solvent partners insolvency loss in the ratio of capital contribution and the court passes decree in the favor of solvent partners against the insolvent partners for fewer amounts borne by solvent partners. Thus insolvency loss is treated as a debt due to the solvent partners individuallyandnottothefirm.
StudyNote5:BranchAccounting
Question.1) Write short notes on treatment of abnormal losses in Branch Account. 2008Dec Answer:Abnormallossesgenerallyariseduetolossofgoodsintransitortheftorpilferageatbranch.Branch stock A/c is credited with abnormal losses. This is necessary to find out of stock discrepancies for other reason profit loading of abnormal losses is debited to Branch Adjustment A/c and Cost goods sold used to ProfitandLossA/c. BranchAdjustmentA/cDr. ToBranchP/LA/c Or BranchP/LA/cDr. ToBranchAdjustmentA/c Question.2) On what basis is the allocation of electricity charges made in case of departmental Accounts? 2003June Answer: Common expenses incurred for the benefit of many departments are to be taken into Account to ascertaintheoverallprofitabilityofthevariousdepartments.Thecommonexpensesneedtobeapportioned tothevariousdepartmentsonsomeequitablebasis. Electricity Charges incurred can be allocated in Departmental Accounts among the Various Departments on the basis of kilowatt hour consumed by each Department. But if separate Meter id installed in each Department then the Electricity Charges will be apportioned directly by apportioning the total cost by power unitsconsumedbyeachdepartment. Question.3) In respect of a Dependent Branch, the Head office may follow any of the four method of accounting.Nametheseclearly.2002Dec Answer: The four methods of Accounting which the Head Office may follow in respect of Dependent Branchare: i. At Cost Debtors Method : Under this method a Branch is treated as Simple Debtors. For each Branch accountisopened.
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ii. At Cost Stock & Debtors Method : (a) Branch Stock A/c This A/c is like trading A/c and it shows (a) GrossProfit(b)BranchP&LA/c.ThisshowNetProfit. iii. At selling Price Debtor Method : Under this method there is only one difference as compared with Branch A/c maintained at Cost method. The difference is that opening stock at Branch, Closing Stock at Branch , Goods sent by H.O. to Branch &Goods Returned by Branchto H.O. will be entered Notat cost . but atInvoiceprice. Question.4)Whenmightanaccountinthedebtorsledgershowacreditbalance?2003 dec Answer:DebtorsledgershowscreditbalancewhenthesuppliersreceivesadvancePaymentfromcustomers forthegoodswhichisyettobedelivered. Question.5)OnwhatbasisistheallocationsofelectricitychargesmadeincaseofDepartmentalAccounts? Answer: Common expenses incurred for the benefit of many departments are to be taken into account to ascertaintheoverallprofitabilityofthevariousdepartments.Thecommonexpensesneedtobeapportioned tothevariousdepartmentsonsomeequitableonsomeequitablebasis. Electricity charges incurred can be allocated in Departmental Accounts among the various Departments on the basis of Kilowatt hour consumed by each Departments on the basis of kilowatt hour consumed by each Department. But if separate Meter is installed in each Department then the Electricity Charges will be apportioned directly by apportioning the total cost by power units consumed by each department.
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StudyNote6:AccountingStandard
Accounting StandardNo AS1 AS4 AS5 AS6 AS7 AS8 AS9 AS10 AS11 AS12 AS13 AS14 AS15 AS17 AS18 AS19 AS20 AS21 AS22 AS23 AS24 AS27 AS28 AS29 AS30 AS31 AS32 TitleofAccountingStandard DisclosureofAccountingPoliciesAS2 Valuation of Inventories (Revised) AS 3 CashFlowStatements(Revised) ContingenciesandEvents(OccurringaftertheBalanceSheetDate) Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies(Revised) DepreciationAccounting ConstructionContracts(Revised) AccountingforResearchandDevelopment(standswithdrawnafter introduction of AS26) RevenueRecognition AccountingforFixedAssets. TheEffectofChangesinForeignExchangeRates(Revised) AccountingforGovernmentGrants AccountingforInvestments AccountingforAmalgamations EmployeeBenefits(Revised)AS16 BorrowingCost SegmentReporting RelatedPartyDisclosures Leases EarningsPerShare ConsolidatedFinancialStatements AccountingforTaxesonIncome Accounting for Investment in Associates in Consolidated FinancialStatements DiscontinuingOperationsAS25InterimFinancialReportingAS26 IntangibleAssets FinancialReportingofInterestsinJointVenture ImpairmentofAssets Provisions,ContingentLiabilitiesandContingentAssets FinancialInstruments:RecognitionandMeasurement FinancialInstruments:Presentation FinancialInstruments:Disclosures
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Writeshortnoteson: 2003Dec Question:1)ObjectiveoftheInternationalAccountingStandardscommittee(IASC) Answer:Overaperiodoftime,diverseAccountingPoliciesandpracticeshavedevelopedaroundtheWorldin various Countries. In order to render the Financial Statements more meaning and comparable the International Accounting Standards Committee has recommended International Accounting Standards ProvidinguniformitywhichisgenerallyprescribedbytheProfessionalAccountingbodiesofCountries. Question.2)Writeshortnotesonthefollowing: 2004June MajorsourcesofU.S.GAAP Answer:ThemajorsourcesofU.SGenerallyAcceptedAccountingPrinciple(GAAP)are 1. FinancialAccountingStandardPrescribedbyFinancialAccountingStandardBoard(FASB) 2. FASBStatementofFinancialAccountingConcepts. 3. FASBInterpretations. 4. FASBTechnicalbulletins. 5. OpinionsofAccountingPrincipleboard. 6. AICPCCommitteeonAccountingProceduresResearchBulletins. 7. AICPAIndustryAuditandAccountingGuideline. 8. AICOAStatementoposition. 9. AICPAAccountingInterpretation. Question.3)Writeshortnotesonthefollowing: 2007Dec AdvantagesofsettingAccountingstandards Answer:TheFollowingaretheAdvantageofSettingupAccountingStandards: 1. Standards reduce to a reasonable extent or eliminate altogether confusing variation in the AccountingTreatmentusedtopreparetheFinancialStatements. 2. There are certain areas where important information is not required by law to be disclosed StandardmaycallforDisclosurethatarebeyondrequiredbylaw. 3. ItfacilitatescomparisonofFinancialStatementofdifferentCompaniesatdifferentplaces. Question.4)Writenoteson: 2008Dec Segmentreporting Answer: Segment Reporting: This standard requires that the accounting information should be reported on segment basis. AS 17 establishes principles for reporting financial information about different types of products and services an enterprise produces and different geographical areas in which it operates.Theinformationhelpsusersoffinancialstatements,tobetterunderstandtheperformance and assess the risks and returns of the enterprise and make more informed judgments about the enterpriseasawhole.Thestandardismorerelevantforassessingrisksandreturnersofadiversified ormultilocationenterprisewhichmaybedeterminablefromtheaggregateddata
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Question.5)Writeshortnoteson: 2009June DisclosurerequirementinacasewherethecompaniesdonotcomplywithAccountancystandard; Answer: If any Company does not comply with the Accounting Standards it must make a disclosure of the following: 1. DeviationsfromAccountingStandards. 2. ReasonsfromAccountingDeviations. 3. Thefinancialeffect,ifanyarsinefromsuchdeviations. Question.6)DifferencebetweenPriorPeriodItemsandAccountgEstimates:2006Dec Answer: Prior Period Item : Priod Priod item are income income or epense which, arise, in current period as aresultofwrrororomissioninthepreparationofFinacialStatementofonemorepriorperiods. ExamplepfPriorPeriodItemsare: Arrorincalculationinprovidingexpenditureoruncome ApplyingincorrectrarefoDepreiation. Accounting Estimate : It meAnswer tha estimate in reviseddue for change in the circumstanes /condition on whichtheestimateswasbased. Forexample: EstimationofprovisionofSundryDebtors. EstimationofprovisionforanyLiabilities. Question.7)Statetheadvantageanddisadvantagesofsettingaccountingstandars.2001Dec Answer:ThefollowingaretheadvantagesofAccountingStandards. 1. Accounting Standards reduce to a reasonable extent or eliminate altogether confusing variation in theAccountingTreatmentusedtopreparetheFinancialStatements. 2. There are certain areas where important information are not required by law to be disclosed, StandardsmaycallfordisclosurebeyondthatrequiredbyLaw. 3. ItfacilitatescomparisonoffinancialstatementsofdifferentCompaniessituatedatdifferentplaces. SomeofthedisadvantagesofAccountingStandardsare: 1. TheremaybeatrendoftowardrigidityandfromflexibilityinapplyingAccountingStandards. 2. Difference in Accounting Standards is bound to because of differences in the tradition and legal systemfromoneCountrytoanother. 3. Accounting Standards cannot override the Law. The Standards are required to be farmed within the ambitofPrevailingstatusevenitisnotanacceptableStandard. 2004June SomeoftheAccountingstandardsissuesduring200002,are: 1. AS17.SegmentReportingMandatoryfromdate 142001. 2. AS18.RelatedpartyDisclosures. 142001. 3. AS19.AccountingforLeases. 142001. 4. AS20.Earningspershare. 142001. 5. AS21.ConsolidateFinancialStatements 142001.
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AS17SegmentReporting: An Enterprise deals in many products/services operates in different Geographical Areas. There Products/services which operate in different Geographical Areas are exposed to different risk and return. Information about multiple products service and its operations in different Geographical Areas is called Segment Information. Such Information is used to assess the risk and of multiple products/service and its operations in different Geographical Areas. Return Disclosure of such information is called Segment Reporting. It helps to better understand the performance of the more informed judgments about the Enterpriseasawhole. The three categories into which Cash Flow Transactions should be classified as per AS 3 Case Flow Statementare: 1. Cash Flow from Investing Activities: The Activities of acquisition and disposal of Long Term Assets and other Investments not included in Case Equivalents are Investing Activities. They include making and collecting Loans, acquiring Long and disposal and Debt and Equity disposal of Fixed Assets (including Intangibles). 2. Cash Flow Financing Activities: These are those Activities which results in change in size and owners Capital and Borrowing of the Organization. It includes Receipts from issuing Shares, Debentures, Bonds, Borrowings and Payment of Borrowed Amount, Loans etc. e.g. Sale of Shares, Buy Back of Shares. The followingitemsalongwiththeirappropriatecashflowcategoryare: 1. ProposedDividendCashFlowFromFinancingofBorrowed. 2. PaymenttoCreditorsforPurchaseofMachineryCashFlowfromInvestingActivities. 3. PaymentforBuyBackofSharesCashFlowfromFinancingActivities. 4. LoanstoGroupCompaniesCashFlowfromInvestingActivities. ASPerAS2 Valuation of Inventories FIFO & Weighted Average Cast methods are allowed for valuation of Cost of InventionsandLIFOmethodofInventoriesValuationisnotadoptedasperAS2. As per AS2 Valuation of Inventories, Inventories are valued at Cost or Net Realizable Value whichever is lower. IFIFO method of valuation Inventories are Value at Current Cost; as the Stock which is bought First are LIFO method of Stock Valuation what is bought in the last is considered to be sold first. Hence the InventorywhichisleftwholevaluingClosingstockisvaluedatarateinwhichtheInventorywasboughtfirst. Hence it is an inappropriate method of Valuation of Closing Stock; and ills very much unrealistic; since in inflationarysituationtheClosingStock;isvaluedataverylowerratei.e.Undervalued.Itleadstheleadsthe Gross Profit also to be undervalued hence leading to inappropriate presentation of Financi8at Statements. But the main Objective of the Financial Statements. And Fair view Objective of Statement which will is to discloseaTrueofStockValuationisfollowed. Question.8)DescribewithreferencetoAccountingStandard7onAccountingforconstructioncontracts,the methodswhichmaybeusedforconstructioncontracts.2002Dec Answer: As per 7 Construction Contracts the Contract Revenue and Contract Cost associated with the Construction Contract should recognize and Expenses with reference to STAGE of COMPLETION of the Contractactivityatthereportingdate. Recognition of Revenue and Expenses by reference to the Stage of Completion of Contracts generally referred to as Percentage of Completion Method. Under this method Revenue is recognized as Revenue in the Statement of Profit /Loss in the Accounting Period in which work is performed. Stage of Completion can bedeterminedinavarietyways:
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(1) Cost to Cost Method: Here, the Percentage of Completion would be estimated by comparing Total CostincludedtodatewithTotalCostexpectedfortheentirecontact. Costtodate PercentageofCompletion= CumulativeCostincurred+EstimateCosttoCompletetheContract CurrentRevenuefromControl=ContractPricexPercentageofCompletionRevenuePreviouslyRecognized. (2) BysurveyofWorkPerformed. (3) CompletionofphysicalproportionoftheContractWork. Question.9) Briefly explain the objective and scope of Accounting for the effects of changes in Foreign ExchangeratesA.S.11.2002Dec Answer: Objectives of AS11: In Indian Financial Statements are prepared in Rupee which is the Reporting Currency. However if Enterprises is has the transactions in another Currency say in U.S $ because the Enterprise is making Export Sale of importing Material, Plant of taking loan from abroad in these case transactionsshallbeForeignCurrencybutrecordingandreportinghavetobedoneinRupeetheQuestionof TranslationofForeignanEnterprisetransactionsinIndianRupeearises.Furthertheremaybeacasethatan EnterprisedomiciledinIndianhastheForeignOperationintheformof BranchinForeignCountry SubsidiaryinForeignCounty The transactions Foreign Branch has to be incorporate in Head Office books as the Financial Statements arepresentedforthewholeEnterpriseincludingBranches,DomesticaswellasForeign. InAssociate/JointVentureonForeignCountry. InAccountingfortransactionsinForeignCurrencies. IntranslatingtheFinancialStatementofForeignOperationIntegralaswellNonIntegral. TheAccountingStandardalsoprescribestheAccountingforForwardExchangeContract. Question.10)In case the Profit and Account and Balance Sheet of a company do not comply with the requirementoftheaccountingstandards,whatdisclosuresaremandatory?2003June Answer: If the Profit and Loss Account and Balance Sheet of a Company do comply with the requirement of the Accounting Standard, there is need to discoed the reason of non compliance with Accounting Standard. If any Fundamental Accounting Assumption has been followed, then this fact must be disclosed in Financial Statements. Question.11)StatethemainfunctionofAccountingStandardBoard. 2003Dec Answer:ThemainfunctionofAccountingStandardBoardisasunder: (1) The ASB may consider any issue requiring interpretation on any Accounting Standard. InterpretationswithbeissuedundertheauthorityoftheControl. (2) The ASB determines the broad areas in which Accounting Standards need to e formulated and the priorityinregardtotheselectiont Question.12)Whenisanassetjudgedtohavesufferedanimpairmentloss? 2004June Answer: An Asset is judged to have suffered an impairment loss when its Recoverable Value falls short of its BookValue.RecoverableValue=ValueinUseoNetSellingPricewhicheverisHigher.
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Question.13)HowshouldbasicearningspersharebecalculatedunderAs20? Answer: Basic Earnings per Share should be calculated by dividing the Nit Profit or Loss for the period attributable to Equity Shareholders by the Weighted Average number of Equity outstanding during the period. Question.14)ShouldtherebeanyspecificdisclosureunderA.S1inrespectofcompaniesunderliquidation? 2004Dec Answer: Yes, Accounting to AS 1, if the Fundamental Accounting Assumptions, i.e., going Concern, ConsistencyandAccrualarefollowedinFinancialStatementsspecificdisclosureisnotrequired.Inthecaseof a Company under Liquidation, the Principle of Going Concern is inapplicable; hence a specific disclose is calledfor. Question.15)CanproceedsfromsaleofFixedAssetsinexcessoforiginalcostbedirectlycreditedtoCapital Reserve? Answer: No, As per AS10 Gains or Losses arising on disposal of a Fixed Assets are generally recognized in Profit and Loss Account. If, however, the Asset had been previously revalued and Revaluation Reserve AccounttocreditinthateventalossrelatedtotheRevaluationissetoffbydebittotheRevaluationReserve. TheamountstandingtotheRevaluationReserve. Question.16)What is the primary reason for nonacceptability of International Accounting Standards (IAS) throughouttheworld?2005June AccountingPracticesindifferentCountriesvaryduedivergentLegislativeRequirements,SocialandEconomic Countries, long Standing Practices, Tax Structure and Organized Professional Accounting; often Multinational Companies have a different view point than National Companies. World Wide conflict of view has been noticed in the National Standards setting bodies and International bodies. There is a glaring diversity in AccountingPractices.WesterncountrieshavecomparativelygreateraccesstoInternationalStandardssetting agencies. These factors are primary reason for nonacceptability of Intentional Accounting Standards though outtheworld. Question.17) What is the legal status of accounting standard s issued by the Institute of Chartered Accountingpoliciesmaybeadoptedbydifferententerprises? (f)AsperSection211(3A,3Band3C)oftherecommendedbytheInstituteofCharteredAccountingofIndia andprescribedbytheCentralGovernmentaremandatoryandapplicabletoacompanydoesnotcomplywith the requirements it must disclose the Deviation , reason for deviation and the financial effect arising due to thedeviation. Question.18)WhataretheprincipalsourcesofIndianGAAP?2005Dec Answer:ThePrincipalSourcesofIndianGAAPare (1) CompanyLaw (2) Accountingrequirement (3) SEBIrequirement (4) EstablishedConventions.
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(e) There areas in respect of which different Accounting Policies may be adopted by different Enterprisesareasfollows: i. MethodofDepreciation: StraightLineMethod WDVMethod ii. TreatmentofExpenditureduringconstruction: Writtenoff Capitalization Deferment iii. ConversionorTranslationofForeignCurrencyItem Averageate TTBuyingRate (f) Fin acing Activities as suggested in Accounting Standard 3 are those Activities which result in change in size and composition of Owners Capital and borrowing of the organization. It includes Receipts from issuingShares,Debentures,BorrowingandpaymentofborrowedamountLoanetc. (g) Objective of Accounting Standards is standardize the diverse Accounting Policies a with a view to eliminatetotheextentpossibletheNonComparabilityofFinancialStatementsandaddtheReliabilitytothe FinancialStatements. Question.19)How should rentals payable under operating leases be accounted for in accordance with AS 19?2006June Answer:LeasepaymentshouldberecognizedasanExpenseintheProfitandLossA/conaStraightLineBasis ownerthetimepatternoftheusesoftheusesbenefit,suchmethodcanbeused. Question.20)Briefly state the three major characteristics which should be considered for the purpose of selectionandapplicationofaccountingpolicies. Answer:(e)ThemajorconsiderationforthepurposeofSelectionandApplicationofAccountingPoliciesare: a. Prudence: Generally maker of financial statements has to face uncertainties at the time of preparation of preparation of preparation of Financial Statements. These uncertainties may be regarding collectability of receivables, number of warranty claims that may occur. PrudencemeansmakingofEstimates,whichisrequiredangerconditionsofuncertainty. b. SubstanceOverform:ItmeansthattransactionshouldbeAccountingforisaccordancewith actual happening and economic Purchase if he Assets are purchased on Hire purchaser in spite of the fact that the Hire of the fact that the Hire Purchase the purchaser, become the Owner only of the transaction is ignored and the transaction is Accounted as per its substance. c. Materiality: Financial Statement should disclose all the items and facts which are sufficient enoughtoinfluencethedecisionsofuserofFinancialStatement. Question.21)State four items which are not to be include in determining the cost of inventories in accordancewithparagraph6AS2(Revised) Answer:(h)FollowingcostisexcludedfromtheCostofInventories: (1)AabnormalAmountofwastedmaterials,labourandotherproductioncost. (2)StorageCost
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(3)AdministrativeOverhead. (4)SellingandDistributionCost. (5) InterestandBorrowingCosthowever,ifAS16allowssuchCosttobeincludeitcanform part if thecost. Question.22) What is meant by global convergence accounting standards? Discuss the benefits of convergence.Whataretheimpedimentstoconvergence?2006June Answer: Global convergence of Accounting Standards is the process by which standard setters around the world discuss accounting issues and combine their experiences in order to arrive at the most appropriate solution. Convergence in fact, is a step towards developing a universally accepted common language to communicate financial information. Having a universally accepted common language of financial reporting means that similar financial transaction and evens are accounted for in a similar financial world such transaction and events are encountered. The rapid globalization of business and the dramatic increase in crossborderinvestingandfundsrisingareamongtheimportancefactorshaveexertedtremendouspressure for the adoption of a single set of high quality worldwide accounting standards. Much convergence among notional Accounting Standards. The most influential organization in this respect is he International Accounting Board (IASB). The IASB is working with Accounting Standard setters around the world to end inconsistencies in financial reporting requirements that exist amount the among countries. It has already developed a comprehensive set of Accounting Standards covering are now being used expensively all over the world. There are a large number of countries that have adopted these standards as their domestic requirements.Inmanycounties,IASBStandardsareusedasthebasisofFormulationofdomesticAccounting Standards. BENEFITSOFCONVERGENCE: The benefits of convergence are many and varied. Some of the important benefits of convergence are mentionedbelow: (1) Itwillimprovethequalityoffinancialreportingaroundtheworld. (2) It will enable companies to have access to foreign capital markets without having a prepare sets of financialstatements, (3) Multinational companies will derive substantial benefits from of their Consolidated Financial Statements, (4) Itwillcreateincreasedopportunitiesforinvestorstoconstructefficientglobalinvestmentportfolios, (5) Itwillimproveglobalcaporalallocationandwilltherebyexpandthecapitalacrossborders, (6) If accounting standards are conversed, it will significantly lessen the border of those of those involvedinseveralsecuritiesmarks. Impediments: There are several impediments to achieving global convergence of Accounting Standards have been developed in different counties under different legal, economic , political, social and cultural conditions. This is why there exists a great deal of diversity in financial reporting requirements among countries. Countries that have taxdriven Accounting Standards experience a lot of difficulties in convergence with IASB which are oriented to capital markets. Achieving convergence of domestic standards with IASB standardsalso appears to be a difficult task for those developing courtiers that do nothavethenecessaryfinancialreportinginfrastructure.
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Convergence requires the active cooperation of all the parties that have a stake in the process. If the parties so not pursue the issue hard enough, convergence will difficult to achieve. However; the recent events tend to suggest that most couriers throughout the world are actively pursuing the goal of oneglobalaccountinglanguage.Infact,AccountingStandardstodayaremoreconvergedthantheywere evenfiveyearsago. Question.23)Define cash and cash equivalent as suggested in accounting standard 3 to be used for preparingcashflowstatement.2006Dec Answer:AsperAS3,Case&EquivalentusedforpreparingaCashflowStatementare: (1) CashItconsistsofCashinhandandDemanddeposits. (2) Cash Equivalents: It consists of Short Term Highly Liquid Investments having maturity less than maturity less than three months, which can be readily converted, into Cash without decline of its value.Inotherwords,theseInvestmentscanbeconvertedintoCashwithoutanyrisk. Question.24)State the disclosure requirement in a case where the Profit and Loss Account and Balance Sheetofacompanydonotcomplywiththeaccountingstandard. Answer:(g) If the Profit and Loss Account and balance sheet of a Company do not comply with the equipmentofAccountingStandardsthefollowingdisclosuresaremandatory: (1)TheAccountingPoliciesusedforpreparationofBalanceSheetandProfitandLossA/c. (2) If any fundamental Accounting Assumptions have not been followed, then this fact must be disclosedinFinancialStatements. Question.25)Whencanrevenueberecognizedinthecaseofatransactionofsaleofgood? Answer:(h)Revenuecanberecognizedwhenallthefollowingconditionsarefulfilled: (1)Sellerhastransferredtheownershipofgoodstobuyerforasprice, Or AllsignificantRisksandRewardsofownershipofthetransferredgoods. (2)SellerdoesnotretainanyeffectivecontrolofownershipofhetrAnswerferredgoods. (3) There is no significant uncertainty in collection of the amount of Consideration (Cash receivable etc.) Question.26)Canacompanychangethemethodofprovidingdepreciation? Answer:(i) Yes, the Company can change the Method of providing Depreciation provided following conditionsaresatisfied. (1)ForComplianceofStatue. (2)ForComplianceofAccountingStandard (3)FormoreappropriatepresentationoftheFinancialStatement. Question.27)State the accounting treatment regarding valuation of fixed assets where several assets are purchasedforaconsolidatedprice.2007June Answer: When Fixed Assets are acquired at a Consolidated Price cost of each Fixed Assets should be determinedonaFairBasisasperValuationbycompetentValues. Question.28)StatewithreasonswhetherthefollowingstatementsareTrueorFalse:
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Answer: The inventory under As2 is valued on the basis of cost price or current replacement cost whicheverislower. (e) False, As per AS2, Inventory is to be valued on the basis of Cost or Net Realizable Value whichever is lower. Inventory Prudence is not to be values at Cost Price or Current Replacement Cost but at lower of Cost orNetRealizableValue. Question.29)What are the disclosure requirements pertaining to events occurring after the Balance Sheet dateundertheAccountingStandards?2007Dec Answer: (c) The following requirements pertaining to Events Occurring after the Balance Sheet under the Accounting standaed5, Net Profit or Loss for the period, Period Item and Change in Accounting Policies, natureandamountofPriorPeriodItemshouldseparatelydisclosedprofitorLosscanbeperceived. Question.30)Whencananitemqualifytobeapriorperioditem? Answer: (d) Prior Period items are income or expenses, which arise, in current period of as a result of error oomissioninthepreparationofFinancialStatementofoneormorepriorperiods. Question31)Whatistheobjectiveofaccountingstandards? Answer:(f)TheprincipalObjectivesofsettingAccountingStandardsare: 1. To Standardize the Diverse Accounting Policies and Practices with a view to eliminate to the extentpossiblethenonComparabilityofFinancialStatements. 2. TopresentareliableviewofFinancialStatements. 3. TopresentaTrueandFairviewoftheFinancialStatement. 4. It facilitates Comparison of Financial Statement of different Companies situated at different places. 5. There are certain areas where important information are not required by Law to be disclosed, StandardsmaycallforDisclosurebeyondthatrequiredbylaw. The principles Objectives of Accounting Standards are to standardize the Diverse Accounting Policies and Practices with a view to eliminate to the extent possible the non comparabilityofFinancialStatementsandaddreliabilitytoFinancialStatements. Question.32) Under which Accounting standard cash flow statement is prepared? How do you treat Profit &LossonsaleofFixedAssetsforcalculatingcashflowsfromoperatingactivities?2008June Answer: Cash Flow Statement is prepared and Accounting Standard 3 When we calculate Cash Flow from OperatingActivitieswetreatprofitorLossonSaleofFixedAssets,asfollows: IfthereProfitonSaleofFixedAssets,subtractitfromOperatingActivities. IfisLossonSaleofFixedAssets,AddtoOperatingActivities. Question.33)State the disclosure requirement in case of accounting for the effects of change in foreign exchangerates. Answer: (e) The following are the disclosure requirement in case of Accounting for the Effects of Change in ForeignExchangeRate: 1. AmountofExchangedifferenceisincludedintheNetProfitorLoss. 2. AmountaccumulatedinForeignExchangeTrAnswerlationReserve.
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3. ReconciliationofOpeningandClosingbalanceofForeignExchangeTrAnswerlationReserve. 4. If the reporting currency is different from the currency of the country in which entity is domiciled,thereasonforsuchdifference. 5. AchangeinclassificationofsignificantForeignOperationneedsfollowingDisclosures. NatureofchangesinClassification. ThereasonforthechangeinClassification. EffectofsuchchangeonShareholdersFund. ImpactofchangeonNetProfitorLossforeachpriorPeriodpresented. TheDisclosureisalsoencouragedofanenterprisesForeignCurrencyManagementPolicy. Question.34)State the advantages and disadvantages of Weighted Average method of valuation of inventory.2009June Answer:WeightedAveragemethodusestheweightedaveragevalueforallissue.Thisisdonebydividingthe totalcostofmaterialsbymaterialsbytheirquantities.Anewissuepriceiscalculatedeachtimenewmaterial isreceived. Advantaged: Smoothenoutfluctuationsinpurchaseprice ComparedtoFIFOorLIFO,thismethodislesscumbersome. Seemsalogicalmethodasitassumesthevaluesofidenticalitemswillbeequal Disadvantages: Issuesmaynotbeatcurrenteconomicvalue Asitbasedonaveragemethod,theissuepriceayruntoanumberofdecimalplaces Question.35)State clearly the provisions contained in the Accounting Standard in respect if Revaluation of FixedAssets.2009June RevaluationofFixedAssetsshouldtotheNetRecoverableAmountofFixedasset. AccountingtreatmentofrevaluationTreatmentinaccountingunderdifferentsituationsisasunder: Firsttimerevaluation(upward) IncreaseinnetbookvalueiscreditedtoownersinterestundertheheadRevaluationReserve. Firsttimerevaluation(downward) Decreaseinnetbookvalueischargedtotheprofit&lossaccount. Firstrevaluation(downward)subsequentrevaluation(upward) Decrease in net book value is charged to the Profit & Loss Account in the year in which downward revaluationwasdone. Amount of revaluation that can be credited to Profit & Loss Account restricted to the amount of devaluation earlier written off. Balance amount of revaluation should be credited to revaluation reserve. Firstrevaluation(upward)subsequentrevaluation(downward) IncreaseinthenetbookvalueiscreditedtoownersinterestheadRevaluationReserve. Amountofdevaluationcanbechargedtorevaluationreserveotheextentthedevaluationischarged toProfitandLossAccount.
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Question.36)Whatissale&leaseback?Enumerateaccountingtreatmentofsale&leasebackunderAS19. 2009Dec Answer: If lease back is finance lease: Any profit or loss on sale proceeds over the carrying amount should not be immediately recognized as profit or loss in the financial statement of a seller lessee. It should be deferredandamortizedoverleaseterminproportiontobedepreciationofleasedasset. The financial statement of Constructions Limited for the year ended 31March 2001 were considered and approvedbytheboardofdirectorson20May2001.2001Dec ThecompanywasengagedinconstructionworkinvolvingRs.10crores.Inthecourseofexecutionofwork, aportionoffactoryshedundercontractioncamecrashingdownon30May2001.Fortunatelytherewasno loss of life, but the company will have to rebuild the structure at an additional cost of Rs. 2 crores which cannotberecoveredfromthecontractee.Howshouldthiseventbereported? AsperAS4,EventsOccurringaftertheBalanceSheetdateandalsoafterapprovalofAccountsbyAccountby Board of Directors of a Company such events should be disclosed in the Directors Report of material. When an uncertainty arises about the collectability of an amount already included in Contract Revenue and already recognized in Profit and Loss Statement it amounts to expense. This uncollectible amount of which recovery has ceased to be probable is recognized as an expense rather than as an adjustment to Contract Revenue. Hence in the given case Rs.2 Crores additional cost rebuild the structure which cannot be recovered from the Contracted, as per AS7 Construction should be recognized as an expense rather than doing adjustment toContractRevenue. Question.37)FundamentalAccountingAssumptions. Answer:Certainbasicassumptions,inthepreparationoffinancial statementsareacceptedandtheiruseare assumed,noseparatedisclosureisrequiredexceptfornoncomplianceinrespectof: a. Going Concern: continuing operation in the foreseeable future and no interim necessity of liquidationorwindinguporreducingscaleofoperation. b. Consistency:Accountingpoliciesareconsistentfromoneperiodtoanother. c. Accrual I.Revenuesandcostsareaccruedi.e.theyareearnedorincurred(notactuallyreceivedorpaid)and recordedinthefinancialstatements II.Extendstomatchingrevenueagainstrelevantcosts. Question.38)AdvantagesofAccountingStandards: 1. Itprovidestheaccountancyprofessionwithusefulworkingrules. 2. Itassistsinimprovingqualityofworkperformedbyaccountant. 3. It strengthens the accountants resistance against the pressure from directors to use accounting policywhichmaybesuspectinthesituationinwhichtheyperformtheirwork. 4. It ensures the various users of financial statements of two or more organizations engaged in same typeofbusinessoperation. 5. Ithelpstheuserstocomparethefinancialstatementsoftwoormoreorganizationsengagedinsame typeofbusinessoperation.
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Question.39)DisadvantagesofAccountingStandards: 1. 2. 3. 4. Usersarelikelytothinkthatsaidstatementspreparedusingaccountingstandardareinfallible. Theyhavebeenderivedfromsocialpressureswhichmayreducedfreedom. Theworkingrulesmayberigidorbureaucratictosomeuseroffinancialstatement. Themorestandardsthereare,themorecostlythefinancialstatementsaretoproduce.
StudyNote7:JointStockCompanies
Question.1)Writeshortnoteson:2002June EquityandEquityParticipants Answer: (d) Equity and Equity participants: Equity is the residual interest in the Assets of the Enterprises after deducting its Liabilities. The term Equity participants meAnswer Share holders in case of a Company, ProprietorincaseofSoleProprietorshiporPartnersincaseofPartnershipbusiness. Question.2)SweatEquityShares. Answer: (b) Sweat Equity Share: Sweat Equity Share meAnswer Equity Share issued by a Company to its Employees or Directors at a Discount or for Consideration other that Cash for providing at a Discount or for additionsbywhatevernamecalled. Section79A permits issue of such Equity Shares to Employees or Directors in recognition of their contributionforprovidingknowhowetc. Question.3)Writeshortnoteson:2003Dec BonusIssue Answer: Bonus Share: Bonus Share is shares issued to existing Share holder fee of Cost by Capitalizing Free Reserve. But Company can issue Bonus Shares when an Article of Association authorized the same. In case the Company issuing Bonus Share is a Listed Company, the Guideline issued by SEBI must be complied with. Only exiting Share holders are entitled to receive Bonus Shares. Bonus Shares are be issued to only those Shareholdersexpiryof12monthfromthedateofPublicIssueorRightIssuebytheCompany. Question.4)Writeshortnoteson:2009June EscrowAccount Answer: Escrow Account:AnEscrowAccountisanAccountestablishedbyabroker,undertheprovisionsof licenselaw,forthepurposeofholdingfundsonbehalfofthebrokersprincipalorsomeotherpersonuntilhe consummation or termination of a trAnsweraction, or a trust Account held in the borrowers name to pay obligation such as property taxes and insurance premiums. An escrow Account is the money held by the mortgagecompanytopayyouryearlypropertytaxesandinsurancepremiums.
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Question.5)ReserveCapital. Answer: (e) Materiality Concept: Reserve Capital isthat part of Share Capital which is not called up and will be called up only in the event of Liquidation of a Company. It adds to the credibility of the Company and LendersandCreditorsmayfeelcomfortablewithsuchCompany. Question.6)Writenoteson:2009Dec Answer:Issueofsharesforconsiderationotherthancash Sometimes company issues fully paid share to the vendors from whom it buys assets. This type of issue is called issue of share then it must be clearly stated in Balance sheet; and must be distinguished from theissuemadeforcash.Thismaybefurtherissuedeitheratpar;Journalentriesare: (1) AssetsA/cDr.7,00,000 ToVendorsA/c 7,00,000 (Forpurchaseofassets.) (2) VendorsA/cDr.7,00,000 ToSharecapitalA/c 7,00,000 (Forissueofshares) Oftenthecompanyassetsfullypaidsharesforconsiderationotherthancasetopromotersornayotherparty for furnishing technical information engineering services, plant layout , drawings and specification ; when sharesallottedinsuchawaythejournalentryisasunder: GoodwillA/cDr. ToShareCapitalA/c Question.7)WhatismeantbyReversionaryBonus?2008Dec Answer: In life policies with profits, holders are given a right to participate in the profits of the business . After nationalization policyholder are given95% of prots of LIC by way of bonus. Bonus can be paid in cash adjusted against the future premium due from the policyholders or it can be paid on maturity of the policy amountiscalledreversionarybonus. Question.8)Mentionanyfivepurposesforwhichsharepremiumaccountcanbeutilised.2008 Dec Answer: As per section 78 of Companies Act 1956, the Share premium Account of tax be utilized for the followingpurposes. (1) ForwritingoffpreliminaryexpensesoftheCompany. (2) Forprovidingforpremiumpayableorredemptionofredeemablepreferencesharesordebenturesto thememberoftheCompany. (3) ForissuingfullypaidbonussharestothemembersoftheCompany. (4) For writing off expenses of commission paid or discount allowed on issue of share or debentures of thecompany. Question.9) State the prerequisites to be complied with by a company for issue of shares at a discount. 2008Dec
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Answer: As per Section 79, a company is permitted to issue shares at a discount provided the following conditionsaresatisfied. a. Theissueofsharesatadiscountisauthorizedbyanordinaryresolutionpassedbythecompanyatits generalmeetingandsanctionedbytheCompanyLawBoard. b. The resolution must specify the maximum rate of discount at which the shares are to be issued but therateofdiscountmustnotexceed10percentofthenominalvalueofshares.Therateofdiscount can be more than 10 per cent of the board is convicted that a higher rate is called for under special circumstancesofthecase. c. Atleastoneyearmusthaveelapsedsincethecompanywasentitledtocommencethebusiness. d. Thesharesareofaclass,whichhasalreadybeenissue. e. The shares are issued within two month from the date of receiving sanction for the same from the Government. Question.10) Discuss the conditions of Companies Act with regard to buyback of shares. 2009 June Answer:Followingaretheconditionofbuyback: a. BuybackshouldbeauthorizedbyArticles.IfArticlesaresilenttheywillhavetoamend. b. ACompanyshouldpassresolutioningeneralingeneralmeetingauthorizingbuyback. c. Thebuybackshouldnotexceed15%ofpaidupCapitalandFreeReservesoftheCompany. d. TheDevEquityRatioshouldnotexceed2:1aftersuchbuyback. e. Onlyfullypaidsharescanback. f. Buybackmustbecompletedwhether12monthsfromthedateofSpecialResolution. g. Securitiesboughtbackmustbedestroyedwithin7daysofbuyback. h. ACompanycanbuyfromanyofthefollowing (1) Fromopenmarket. (2) FromexistingShareholdersonproportionatebasis. (3) Fromoddlots. (4) Fromexitingemployees. i. Moneyborrowedfrombanks,financialinstitutionscannotbeutilizedforbuyback. j. Afterbuybackcompanycantissuesamekindofsharessecuritieswithin24months. Question.11)Candividendbedeclaredoutofprofiton:2009Dec Answer:RevaluationofFixedAssets,and (1) No, dividend cannot be declared out of Profit o n revaluation of fixed assets since its a nation profit whichisnotresizedincashandisobtainedfromrevaluationofcapitalassets. Onreissueofforfeitedshares? (2) Yes, Dividend can be declared out of profits on reissue of reissue of forfeited shares only when the following3conditionsaresatisfied. a. Theyhavetoberealizedincashand b. Theyremainasprofitsevenafterrevolutionofallassetsandliabilities.
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AOAdoesnotprohibitcompanyforthepurpose.
Question.12)EnumeratetheobjectiveofBuybackofshares.2009Dec Thefollowingaretheobjectivesofbuybackofshares: 1. To return surplus cash to investors. Companies want to have back since it facilitates them to manage their surplus cash. If it is paid as dividend companies will have to pay dividend tax on the distribution on the other hand; if cash is distributed through buy back, the tax burden shifts to shareholderwhohastopaycapitalgainstax. 2. To increase underlying share value. Buy back reduces equity and enables the company o increase earnings per share, which would result on enhancing the share value. A share buyback may also be announcedwhensharepricesaredepressedinthemarket. 3. To prevent hostile takeover bids. By eliminating surplus cash through buy back such a bid can be avoided. 4. Buybacksalsofacilitateacompanytomaintain a target capital structure.Buybackaidacompany toachieveanoptimaldebtequityratio. 5. To profit from treasury operations. Companies can buy share when the prices are low and reissue lateratattractivepricethusmakingprofit.InIndia,treasuryoperationisnotpossible.Thisisbecause sharesboughtwillhavetobeextinguished. 2008June (1) Reserve&Surplus (2) FixedAssets (3) CurrentLiability&SecuredLoan (4) MiscellaneousExpenditure 2009Dec (1) RespectiveheadsoffollowingitemsinBalanceSheet. (2) LeaseTools:CurrentAssets,loAnswerandadvances(A)CurrentAssets. (3) Discountonissueofshare:MiscellaneousExpenditure. (4) Mortgageloan:SecuredloAnswer (5) InterestAccruedbutnotdueonCurrentliabilitiesandprovisions:(A)CurrentLiabilities. (6) Publicdeposits:UnsecuredloAnswer. Question.13)DifferencesbetweenSharesandDebenture. Answer: DEBENTURES SHARES Definition Aninstrumentto acknowledgethe Aninstrumenttoacknowledgethe ownershipofthecompany creditorsofthecompany Status Ashareholderistheowneranda Adebentureholderisnotamember Memberofthecompany. Butacreditor.
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Adebentureholderhasarightto interestevenifthecompanydoesnot Makeprofit. Debenturecarriesafixedrateof Interest. Debentureinterestischargeableto ProfitandLossaccount.
Ashareholdermayreceive dividendonlywhenacompany Makesaprofit. Dividendratecanvarydepending Ontheprofitposition. Dividendisgivenoutof appropriableprofitandnot chargeabletoProfitandLoss Account. Inthecaseofshares,theconceptof Redemptiondoesnotapply. Howeveraspertherecentchange intheCompanies Act, a company canbuybacksharesinaccordance WiththeprovisionsintheAct. Ashareholderhasvotingrights.
Rateof return Accounting treatment
Redemption
Debenturesarenormallyredeemable althoughacompanycanissue perpetualdebentures
Voting rights Statusatthe timeof windingup
Adebentureholdercannothave Votingrights. Atthetimeofwindingupdebenture holdershaveapriorityovertheshare holdersregardingthereturnof amountduetothem
Atthetimeofwindingupshare holdershavetheleastpriority regardingthereturnofamountdue tothem.
Question.14)BonusIssueVs.RightIssue. Answer: RightIssue 1 When Right Shares are Allotted, the Company receivestheissuepriceofShare. 2 The existing Share holder has right to renounce theSharesofferedtohim. 3 Money received by issue of Right Shares must be keptinaSeparateBankAccount.
BonusIssue When Bonus Issue are Allotted the Company does notreceiveanythingfromtheShareholder. No existingShareholderhasarighttorenouncesthe BonusShares. Since no money is received by the Company by issue of Bonus Shares, there is no requirement of keeping moneyinrequirementBankA/c. 4 For issue of Right Shares it is not a pre condition For issue of Bonus Share, it is pre condition that the that the Shares held by should by the exiting Shareholdershouldbefullypaidup. Shareholderbefullypaidup. Question.15)Sharesvs.Stock. Answer: Shares 1 Sharesmaybefullyorpartlypaidup. 2 Sharesareseriallynumbered. 3 Shares are always registered and non
Stock Stocksarefullypaidup. Stocksarenotnumbered. Stocksnominalmayberegisteredorunregistered.
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trAnswerferablebymeredelivery. 4 Sharesareofequalnominalvalue. Stocksmaybedividedintonominalamount. 5 Shares are issued when a company is Stocks are not issued when companies are incorporated. incorporated.Onlyfullypaidsharescanbeconverted intostock.
StudyNote8:PreparationofFinalaccountsUnderCompaniesAct, 1956
Question.1)DistinctionbetweenProvisionandReserve Answer:Aprovisioncanbedistinguishedfromareservefromareserveasunder: BasisofDistinction Provision Reserve 1. Charge VS. It is a charge against the profit It is an appropriation out of Appropriation and is required to be created profit and can be created only if irrespective of the amount of profitshavebeenearned. profit. 2. Purpose It is created for a particular It need not necessarily be purpose and can only be used created for a particular purpose. forthatparticularpurpose E.g., General reserve is not for anyparticularpurpose. 3. Disclosure in Income It is shown on the debit side of It is shown on the debit side of Statement P&LA/c. P&LAppropriationA/c 4. Disclosure in Balance Usually a provision is shown by Reserve is shown as a separate Sheet way of deduction from the item under the head Reserves amount of the items for which it and Surplus on the liabilities is created. E.g. Provision for sideoftheBalanceSheet. DoubtfulDebts. 5. Investment outside There is no Questiontion of The amount of a reserve can be business investment of the amount of investedoutsidethebusiness. provisions. 6. Utilization It cannot be utilized for It can be utilized for distribution distributionbywayofdividends. bywayofdividends. 7. LegalNecessity It is made mainly because of It is a matter of financial legalnecessity. Prudence. Question.2)ModeofPaymentofremunerationpayabletoDirectors. In case of director other than whole time In case of Whole Time Director and Managing DirectororManagingDirector[Sec.309(4)] Director[Sec.309(3)] A director other than whole time director or a A whole time director or a managing director may managingdirectormaybepaidremuneration bepaidremuneration 1. By way of a month , quarterly or annual 1. Bywayofamonthlypayment,or payment with the approvalof the Central 2. At a specifiedpercentage of the netprofits Government;or ofthecompany,or 2. By way of commission, if the company by 3. Partlybyonewayandpartlybytheother. special resolution authorizes such payments.
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Question.3)MaximumLimitofRemunerationPayabletoDirectors. Answer:Themaximumlimitofremunerationpayabletodirectorsisgivenbelow: Case Maximum limit as percentage of Net Profit without approvalofCentralGovernment 1. For Whole Time Director or Managing Director a. Ifthereisonesuchdirector 5% b. Ifthereismorethanonesuchdirector 10%forallofthemtogether. 2. For directors other than whole time directorormanagingdirector a. If there is a managing director or whole timedirectorormanager 1%forallofthemtogether. b. Inanyothercase 3%forallofthemtogether. Question.4)Liabilitiesvs.Provision Liabilities Provision 1. Ifanamountispayableinfutureisexactitis 1. Provision is also a liability but the amount is aliability measured by using a substantial degree of 2. E.g.: Purchasing an asset and payment in estimation. installmentcreatesaliability. 2. E.g.: For doubtful debts provision is requiredtobeprovidedfor.
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StudyNote9:AccountinginServiceOrganisation
ConstructionContract
Question.1)Mention the several ways in which the percentage of completion of a longteam construction maybearrivedat.2003Dec Answer: The various method in which the Percentage of Completion of a Long Term Construction Contract maybearrivedatare: (1) CostofCompletionmethod:ThePercentageofCompletionwouldbeestimatedbycomparingTotal CostincurredtodatewithTotalCostexpectedfortheentireContract Costtodate Percentage of completion =_________________________________________________________________ CumulativeCostincurred+EstimatedCosttoCompile Current Revenue from Contract: Contract price x Percentage of Completion Revenue previously recognized (2) BySurveyofworkperformed (3) CompletionofphysicalProportionoftheContractWork. Question.2)Statethedisclosurerequirementsinthefinancialstatementsofacontractor.2007June Answer:FollowingaretheDisclosurerequirementsintheFinanceStatementsofaContractor. AnEnterprise(Contractor)shouldDisclosethefollowingPolicy: (1) TheMethodusedtodeterminetheStageofCompletionofContractinProgress. (2) TheMethodusedtoContractRevenuerecognizedintheperiod. (3) TheAmountofContractRevenuerecognizedintheperiod. (4) ContractCostincurredandrecognizedProfit(Lossrecognizedlosses)uptothereportingperiod. (5) AdvanceReceived. (6) Gross Amount due from Customers for Contract Work (Cost incurred recognized Profit ) (Some of recognizedLosses+ProgressBilling) (7) Gross Amount due to Customer for Contract work (some of recognized Losses +Progress Billing) (Costincurred+recognizedProfits)
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BankingandElectricityCompany
Question.1)WriteShortnoteson: StatutoryReserveincaseofBank; Answer: Statutory Reserves : It is compulsory for every Banking Company to make a trAnswerfer of 20% of profit before declaring any dividend every year to Reserves called Statutory Reserve . As a further prudential measures, banks have been asked to trAnswerfer 25% of Net profit to Statutory Reserves and Share Premium Account is not less, than the Paid up Capital, a Company may be exempted from this restrictiononlyonheleavegrantedbytheCentralGovernment. Question.2) Distinguish between Statutory Reserve and Cash Reserve in respect of Banking Companies. 2008Dec CashReserveandStatutoryLiquidityRatio: Answer: Section 18 of the Banking Regulation Act requires that every banking company, not being a scheduledbank,shallmaintaininIndiabywayofcashreservewithitselforbywayofbalanceinoneormore of the Bank, or by way, of net balance in current account, or in one or more of the aforesaid ways, a sum equivalenttoatleastthreepercentofthetotalofitsdemandandtimeliabilitiesinIndiaasinthelastFriday ofthesecondprecedingfortnight. iv. Every, scheduled Bank is required, by virtue of the provision of section42 (1) of the Reserve Bank of IndiaAct,tomaintainwiththeReserveBankanaveragedailybalancetheamountofwhichshallnotbe lessthanthreepercentofthetotalofdemandandtimeliabilitiesinIndia.Thesaidratemay,however, be increased by the Reserve Bank of India by notification up to 15% of the total of demand and time liabilitiesinIndia. Section 24 of the Banking Regulation Act requires that every banking company shall maintain in India in cash, gold or unencumbered approved securities an amount which shall not, at the close of business on any day, be less than thirty five per cent, or such other percentage not exceeding forty, be less than thirty five per cent, or such other percentage not exceeding forty, as the Reserve Bank of India may from time to time specify, of the total of its demand and time liabilities in India as on the last Friday of the second precedingfortnight.ThisisknownasStatutoryLiquidityRatio(SLR). The term demand liabilities meAnswer liabilities which must be met on demand, The term time liabilitiesThetermliabilitiesmeAnswerliabilitieswhicharenotdemandliabilities. Question.3)Whenisabankingcompanyallowedtofromsubsidiarycompanies?2004June Answer:InthefollowingareasBankingCompanyisallowedtoformsubsidiarycompanies: i. Undertakingandexecutingtrust. ii. UndertakingiftheAdministrationofestatesasexecutorsorotherwise. iii. ProvidingofSafeDepositvaultsand iv. SuchotherproposalsasareincidentaltothebusinessofBankingwiththepermissionofRBI. Non Banking Assets are Immovable Properties Tangible Assets acquired by a Bank in satisfaction of debts due.Theseitemsareheldwiththeintentionofbeingdisposedofagainstclaims.
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Question.4)StatutoryLiquidityRatio(SLR) Answer: Statutory Liquidity Ratio (SRL) : According to the RBI Act 1934, ( Sec. 42) and Banking Regulation Act, 1949(Section 18 and 24) every Banking Company should maintain in India in Cash Gold and Unencumbered Approved Securities an amount equal to 31.5% on Domestic demand and Time Liabilities up tolevelOutstandingasofSeptemberasonSeptember30,1994. The Liabilities for this purpose include Liabilities to Banking System (inter Bank Liabilities) computed as provide in clause (d) of this explanation to Section 18 (1) of the Banking Regulation Act, 1949. It has been decide that with effect from the fortnight beginning or April, 26, 1997, these inter Bank Liabilities shall be excluded from the maintenance of SLR. Further Rationalization was effected on October, 1997; when multiple SLR prescription were replaced by a single uniform SLR of 25% for entire Demand and Time Liabilities.ItistobenotethatSLRFrequentlychargeasperRBIpolicy. Question.5) Explain the accounting treatment to be made with regard to Interest on Doubtful Debts regardingBankingCompanies.2009Dec Answer: Interest on doubtful debts regarding banking companies is ignored as per the new RBI guidelines. Whenitisreceivedincashitwillbeincluded/discountreceived,i.e.;itisrecognizedonrealizationbasis. Question.6) Write short notes on Contingency Reserve in respect of Electricity Company Accounts. 2003 Dec Answer: As per the Provision of the Act, Electricity Companies shall trAnswerfer to Contingency Reserve Account a amount equal to % to % is of the Original Cost of Fixed Assets until the Aggregate balance in theAccountisequaltoatleast5%oftheOriginalCostoftheFixedAssets.AnyLossorProfitonSaleofFixed AssetsisalsotrAnswerferredtothisAccountofContingencyReserveshallbekeptinvestedinSecurities. TheContingencyReservecanbeutilizedforanyofthefollowingpurposes: (a) FormeetingExpensesorLossarisingoutofAccident,StrikesorcircumstancesbeyondtheControlof Management. (b) For meeting Expenses of replacement or removal of Plant or works other than the Expenses necessaryfornormalmaintenanceorRenewaland, (c) Lastly,formeetingpaymentofCompensationPayableforwhichonotherProvisionhasbeenmade. TheStatementofContingencyReserveisshownasperStatementNo.4. Question.7)Writenoteson: DoubleAccountingSystem: Answer: Every business trAnsweraction has a twofold effect and it is referred to as dual aspect or double aspect or duality of a trAnsweraction. The sat lf records based on this duality are called double Accounting System of bookkeeping. For example, when Rs. 50,000 cash is contributes by owner (s) it results in increase inbusinessresourcesintheformofincreaseincashbyRs.50,000.TheissobecauseforAccounting,entityof business is distinguished from the entity of its owner(s). As every business trAnsweraction has two fold effects (duality), introduction of funds by the owner also creates a corresponding obligation for heir repayment, which is recorded as capital. Further, if bank loAnswer of Rs. 40,000 are arranged, it results in increaseinresourcesintheform!ofbankbalanceofRs.40,000andcorrespondingobligationtorepayRs.40, 000to bank. In accounting parlance, resources are called Assets; obligation to parties external to business is
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termedliabilitiesandobligationtowardsownerisrecordedascapital.Sumofassetsononehandandsumof obligationsontheotherhand,mustagree. Question.8)Whatdoyoumeanbyclearprofit?2004June Answer: Clear Profit means the Difference between the Total Income and the Total Expenditure together withspecificappropriations. Question.9) State how fixed assets when discarded and sold are recognized in the Accounts of Electricity Companies.2005June Answer: Electricity Company formed by a Special Act of Parliament for Public Utility Companies adopts Double Account System, under System when an old Fixed Asset is sold and replaced by a New Asset; the OriginalCostoftheAssettobereplacedisnotdistributed.ThepresentCostofreplacementisreducedbythe sale proceeds by the Revenue A/c. he difference to Replacement A/c and is written off from the Revenuer A/c. The difference between the Total Cost of replaces Asset and estimated Replacement Cost of the old Asset(beforereductionbySaleproceeds)isCapitalized. Question.10) For what purposes contingency reserve may be utilized by an electrify undertaking? 2005 Dec Answer:ContingencyReserveofElectricityUndertakingmaybeutilizedforthefollowingpurposes: (1) ExpensesorLossesduetoAccidents/StrikeswhichcannotbeavertedbytheManagement. (2) ExpenseonReplacementorRenewalofPlantorworksotherthannormalMaintenanceoRenewal. (3) CompensationPayableunderanyLawforwhichonotherprovisionismade. Question.11)TariffanddividendControlReservesofanElectricityundertakingcanneverbeutilized.2008 June Answer: False: This Reserve can be used to meet the Deficit of Clear Profit as compared to Reasonable Return. InsuranceCompany Question.1)Writenoteson: Reinsurance Answer: Reinsurance: Reinsurances mean insurance affected by an insurance company in order to cover itself against a large risk. Suppose a building is insured with company A for Rs, 50,000. Company A, in order reduce its risk; can get the same building insured with company B. The contract between company A and company B will be reinsurance. If company A wants to reduce its risk, it can get the same building insured with company C; in this case it will be called retrocession. Reinsurance can be for par of the amount or for some of the risks. The reinsurance company will pay a commission on the premium received. In the above example, company B will pay commission to company A. For company B it will be commission on reinsurance accepted it will be a debit balance and an expense. For company A it will be a gain and will be calledcommissiononreinsuranceceded.
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Question.2)ValuationBalanceSheet Answer:AccounttoSection 28oflifeinsurancecorporationAct1956, 95% of the profit oflifebusinessmust be distributed to the policyholders by way of Bonus on with profits policies and the remaining 5% has to beutilizedforsuchpurposesastheGovt.maydetermine. The profit or Loss of Life insurance business is ascertained by preparing a statement called Valuation BalanceSheetwhichisreproducedbelow:
StudyNote10:AccountingAndInterpretationofFinancial Statements
Question.1)LiquidityRatio:2003Dec Answer: These Ratios judge a firms ability to meet Shortterm Obligations. These Ratios give a good insight intoafirmstermresourcesarecomparedwithShorttermobligations. PurposeofLiquidityratios 1. ItmayrelateCurrentAssetstoCurrentLiability 2. ItmayrelateCurrentAssetstoLiquidLiability. 3. ItmayrelateWorkingCapitaltoCurrentAssets. 4. ItmayrelateStocktoCurrentAssets. 5. ItmayrelateLiquidresourcestoCurrentAssets Question.2)UsesofRatioAnalysis:2004Dec Answer: Ratio Analysis is apowerful tool if the Financial Analysis. The significance of Ratio Analysis lies inthe fact that it presents facts on a comparative basis and enables the drawings of inference regarding the performance of the firm. Ratio Analysis is relevant in assessing the performance of a firm in respect of the followingaspects: 1. Liquidity Position: With the help of Ratio Analysis, conclusion can be drawn regarding the Liabilities Position of the firm. The liquidity Position of a firm would be satisfactory if it is able to meet its current obligations when they become due. A firm can be said to have the ability to meet its Short Term Liabilities, if it has sufficient liquid funds to pay the interest on its short maturing debt usually withinayearaswellastheprincipals. 2. Operating Efficiency: Yet another dimension of the usefulness of the Ratio Analysis, relevant from theviewpointofManagement,isthatitthrowslightonthedegreeofefficiencyinthemanagement andutilizationofitsAsses. 3. Over all Profitability:UnliketheoutsidepartieswhichareinterestedinoneaspectoftheFinancial Position of a firm, the management is constantly concerned about the overall profitability of the Enterprises. 4. Inter form Comparison: A single figure of a particulars Ratio is meaningless unless it is related to some standard or norms. One of the popular techniQuestion is to compare the Ratio with the industry average. It should be reasonable expected that the performance of a firm should be in conformitywithoftheindustrytoindustrytowhichitsbelongs.
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Dec:2007 Question.3)EarningsperShare: Answer:Thisiscalculatedasfollows: NetProfitafterTaxGrossPreferenceDividend =__________________________________________________________ NumberofEquityShares It is an index of profitability from Share holder point of view EPS is important consideration in Investment Decisions.ThehighertheEarningperShare,themoreattractivewillbeInvestmentPlanandviceversa. Question.4)SolvencyRatio2009June Answer: Liquidity or Short terms Solvency meAnswer ability of the business to pay its short term Liabilities. Inability to pay off Short term Liabilities consistently will hamper the companys credit rating. Following are theimportantSolvencyRatios. CurrentAssetsCA 1. CurrentRatio=__________________= CurrentLiabilitiesCL QuickAssetsQA 2. QuickRatio________________=___ QuickLiabilitiesQL QA=CAInventories QL=CLBankOverdraftCashcredit Cash+MarketableSecurities 3. CashRatio= CurrentLiabilities CreditSales 4. DebtorsTurnoverRatio= AverageAccountsReceivable CreditPurchases 5. CreditorsTurnoverRatio= AverageAccount 6.InventoryTurnoverRatio:CostofSales/AverageStock Question.4)LimitationofRatioAnalysis:2002June Answer:(1)IfCommunicatesonlyarelativepicture,everyOrganisationinonewayortheotherisuniqueand comparison may not be valid. For example: Company A may be working in manufacture of heavy electrical goodsasaGovernmentCompanyinIndia.ItissubjecttoanumerousAuditsandmanagementmaynotenjoy the full freedom of Decision making due to Accountability of Parliaments. Its comparison with Siemens is an International giant with the different type of management. Ratios dont depict the circumstances, in which theOrganizationsworking. (1) Ratio only a tool, its ultimate use depends as the craftsman who uses it. The background and understandingleveloftheinterpretersveryimportantinmakinginferences.
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(2) Sometimes, attempts are made to window dress the Accounts, i.e. effort are made to manipulate the Accountsinamannerthatthepicturebeingpresentedisbetterhenwhatactuallyitis. (3) Inflation distorts Financial Ratio Analysis; changes in the reported performances of the Company may be entirely due to inflation and not due to management. For this reason Company may have used to differentiatetheimpactofinflation. Question.5)2009Dec Answer: The analysis and interpretation of financial statements are an attempt to determine the significance and meaningof financial statements data so thatthe forecast may be made of prospects for future earnings, ability to pay interest and debt maturities (both current and long term) and profitability and sound dividend policy. Thus analysis of Financial Statements me Answer such a treatment of information in Financial Statements to afford full diagnosis of profitability and financial position of the firm concerned. Hence, LimitationsoffinancialstatementsalsobecomethelimitationsofAnalysisofFinancialStatements.

Accounting - Theory Solutions To Objective

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Right of sale or other wise

Sellerdoesnothaveany otherrightexcepttheright ofsuingthebuyerforthe Nonpaymentofprice. Right to sale or otherwise trAnswerferthegoods

It records both Capital and Revenue Transactions.

10. IthelpstoprepareanIncome& ExpenditureA/c.

Rateof return Accounting treatment

Debenturesarenormallyredeemable althoughacompanycanissue perpetualdebentures

Voting rights Statusatthe timeof windingup

Adebentureholdercannothave Votingrights. Atthetimeofwindingupdebenture holdershaveapriorityovertheshare holdersregardingthereturnof amountduetothem

Atthetimeofwindingupshare holdershavetheleastpriority regardingthereturnofamountdue tothem.

Stock Stocksarefullypaidup. Stocksarenotnumbered. Stocksnominalmayberegisteredorunregistered.

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