ACCOUNTING CONCEPTS

1. Mr. Smith started his restaurant as a sole proprietorship firm. At the end of the month, he received a telephone bill
for his restaurant and residence for Rs.3,000 and Rs.1,000, respectively. Smith took out Rs.4,000 from the cash box
of the restaurant and gave it to his staff to pay the bills. Has he done the right thing? Can he treat Rs.4,000 as
expenses of the business?

2. Mr. Ravi started a travel agency which provides outstation cab services to its clients. At the initiation, Mr. Ravi
purchased four Rangemax cars to constitute the taxi fleet. Each vehicle costs Rs.7,00,000, including all the taxes,
insurance, and accessories fittings. The useful life of each car is expected to be 7 years, after which they will be
scrapped at a negligible value. Within 15 days of Mr. Ravi buying the taxis, the automobile company launched a
new advanced version of Rangemax car at an attractive price. The previous model (which Ravi bought) is now
available at Rs.6,40,000 apiece. What is the amount Mr. Ravi should record as the value of the cars in the books -
Rs.28,00,000 or Rs.25,60,000?

3. Continuing with case # 2 above, suppose at the end of the first year, Mr. Ravi decides to dispose of one of the cars
to buy a new luxury sedan car. He sells the car for Rs.5,80,000 and buys a new car to expand the business in a new
lucrative segment. Should he revalue all the other remaining cars at Rs.5,80,000? Should your answer differ if you
know that Mr. Ravi has sold the car because of severe financial distress as his business has not performed well?
There exists a significant probability that the firm might close down due to this financial distress shortly?

4. Jonathan started a business as a construction contractor. He invested his capital in purchasing and furnishing an
office. He has been awarded a few contracts by the local civic body, which may take 2 – 3 years to complete. He
has heard about the going concern assumption that accounting is done with the belief that business will have an
infinite economic life. Following this assumption, he decides to do the accounting from the year as and when the
first few contracts are complete. Is he right in doing so?

5. Electromax ltd. is in the business of selling commercial generator sets usually installed in large establishments. The
generator sets are typically sold on credit, and payment is received after one month. The company is responsible for
installing the generator at the customer’s premises and usually gets payment one month after that. The generator
also carries a 3-year manufacturer warranty which includes a replacement guarantee in case of irreparable problems.
Experience of the past few years indicates that 0.5% of generators required replacements, and almost 5% of
generators developed some major technical fault that was required to be repaired at the company’s cost. The average
cost per generator incurred by the company in rectifying these problems was approximately 20% of the original
costs of the generators. No issues are reported in other generators. Following are the details of one of the transactions
for generators sold to a long-standing corporate client:

15.02.2015 : Order Received

15.03.2015 : Assembling Started
30.03.2015 : Installation Done
28.04.2015 : Payment Received

The company ends its financial year on 31.03 every year. Should the above transaction be treated as a sale of the
year 2014-15 or 2015-16?

6. Austrade is an upmarket retail store that deals in FMCG products and groceries. It usually purchases goods on credit
from suppliers and sells the goods in cash to its customers. There is a 14-day return policy available to the customers
and suppliers advance credit for 1 month. On 12th March 2015, the store purchased the bulk of small bathing bars
for Rs.25,000 from a local wholesaler. Due to the wedding season, a customer purchased the whole lot on 13th March

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 for Rs.28,000 at the regular selling price. The supplier of bathing bars was paid on 11th April 2015. The financial
year of the company ends on 31.03.2015. What will be the sales and expense figures for the year 2014-15?

7. Wantmart has taken telephone and internet services from Netfast Ltd. The service provider charges the company
every month, and the usage of the billing month is to be paid for in the next month. In the month ending on 31 st
March, the company has been billed for Rs.1.20 crore, which is to be paid by 15th April. Similarly, the company has
also taken store insurance for a period of one year beginning from 1st January. The annual insurance premium paid
is Rs.30,00,000, and insurance will be effective till 31st December. How many expenses shall Wantmart book in the
year ending 31.03.2015?

8. Suave Technologies is into the development of enterprise solutions for banking companies. It has a separate
workforce for development and to provide technical support for the software platforms. It paid salaries of Rs.792
crores to the development team and Rs.584 crores to support the team in the financial year ending 31.03.2014. It
deducted all the salary from the revenues for the year 2013-14. In the financial year, 2014-15 the figures for both
the salaries were Rs.812 crores and Rs.686 crores, respectively. However, instead of assuming both the salary as
expenses, the company added salary paid to the development team (Rs.812 crores) to the cost of software being
developed, which has increased the profits significantly as the expenses are lesser. Has the company done the right
thing?

9. Zenstar Ltd. is into the manufacturing of cables and wires. Copper and Aluminum are the primary conductors used
in wires and cables. It keeps stock of Copper and Aluminum sufficient to support production for a period of one
month. At present, it has stock worth Rs.30 crores of Copper and Rs.12 crores of Aluminum. Suddenly there is a
spike in Copper prices due to some global factors. The stock, if valued at current prices, will be worth Rs.38 crores.
The price of Aluminum, on the other hand, has fallen. The inventory of Aluminum at current prices is worth Rs.10
crores. The company decided to book the anticipated profit of Rs.8 crores and anticipated loss of Rs.2 crores on
Copper and Aluminum, respectively. Will you support the decision?

10. Altius ltd. Specializes in the production of customized audio systems. It gets the production done at a high-tech
plant facility near its corporate office. The broad expense heads for the company in the year 2014-15 are as follows:
• Material and Components : Rs.46 Crores
• Labour Charges : Rs.10 Crores
• Other Factory Charges : Rs.16 Crores
• Corporate Office Expenses : Rs.1.00 Crores
• Legal Charges : Rs.0.25 Crores
• Office Salaries : Rs.1.20 Crores
• Audit Fees : Rs.0.20 Crores
• Sales and Support Charges : Rs.6.00 Crores

Can the company choose to ignore the disclosure of relatively minor expenses?

11. Xpress Cabs runs a fleet of taxis that specifically caters to the need of intra-city commuters. The drivers of the cabs
are employees of the company and are responsible for refueling and maintaining the cabs. The drivers are required
to intimate the information regarding refueling bills, repair costs, parking costs, and kilometers run at the end of
each day to the accounts office through SMS. The accountant enters the amount spent on refueling and repairs based
on the SMS received. Comment about the effectiveness of the process adopted by the company?

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