Accounting-Financial Statements of Companies-1653399167327513

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100 IMPORTANT
QUESTIONS
Practice questions
QUESTIONS
CHAPTER 2
Financial Statements of Companies
Unit-1: Preparation of Financial Statements of Companies
Question 1
A company lodged a claim to insurance company for ₹ 5,00,000 in September, 2006. The
claim was settled in February, 2007 for ₹ 3,50,000. How will you record the short fall in claim
settlement in the books of the company.
Answer
Journal Entry
₹ ₹
Profit and Loss A/c Dr. 1,50,000

1,50,000
To Insurance Claim A/c
[Being the shortfall in settlement of insurance claim charged to

Profit and Loss A/c]
Question 2
The Articles of Association of S Ltd. provide the following:
i. That 20% of the net profit of each year shall be transferred to reserve fund.
ii. That an amount equal to 10% of equity dividend shall be set aside for staff
bonus.
That the balance available for distribution shall be applied:
a) in paying 14% on cumulative preference shares.
b) in paying 20% dividend on equity shares.
one-third of the balance available as additional dividend on preference shares and
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2/3 as additional equity dividend.
A further condition was imposed by the articles viz. that the balance carried forward shall be
equal to 12% on preference shares after making provisions (i), (ii) and (iii) mentioned above.
The company has issued 13,000, 14% cumulative participating preference shares of ₹ 100
each fully paid and 70,000 equity shares of ₹ 10 each fully paid up
The profit for the year 2008 was ₹ 10,00,000 and balance brought from previous
year ₹ 80,000. Provide ₹ 31,200 for depreciation and ₹ 80,000 for taxation before making
other appropriations. Prepare Profit and Loss Account –below the line.
Answer
Statement of Profit and Loss* for the year ended 2008
Particulars ₹
a Profit 10,00,000
b Expenses:
Depreciation and amortization expense (31,200)
Total expenses (31,200)
c Profit before tax (a-b) 9,68,800
d Provision for tax (80,000)
e
Profit (Loss) for the period 8,88,800
Balance of Profit and Loss account brought forward 80,000
f
Total 9,68,800
g
Appropriations (made in Notes to Accounts)
Transfers to Reserves (1,77,760)
Proposed preference dividend (1,82,000 + 93,450) (2,75,450)
Proposed equity dividend (1,40,000 + 1,86,900) (3,26,900)
Bonus to employees (14,000 + 18,690) (32,690)
h Total (8,12,800)
Balance carried to Balance sheet (f-g) 1,56,000
Question 3
The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his remuneration,
subject to a minimum of ₹25,000 per month. The net profits, for this purpose, are to be taken
without charging income-tax and his remuneration itself. During the year, A Ltd. made net
profit of ₹ 43,00,000 before charging MD’s remuneration, but after charging provision for
taxation of ₹ 17,20,000. Compute remuneration payable to the Managing Director.
Answer
Calculation of remuneration of the Managing Director ₹ in Lacs
Net profit as per books 43.00
Add: Provision for taxation 17.20
Annual profit for the purpose of managerial remuneration 60.20
Managing Director’s Remuneration @ 5% of above 3.01
Minimum remuneration to be paid to the Managing Director

= ₹ 25,000 per month ×12 3.00
Hence, in this case, remuneration to be paid to the Managing Director of A Ltd.

= ₹ 3, 01,000.in the year.
Question 4
I. What are the basic characteristics of a Private Ltd. Company?
II. Sumo Ltd. has a profit of ₹ 25 lakhs before charging depreciation for financial year
2008-09. Depreciation in the books was ₹ 11 lakhs and depreciation chargeable
under Section 205* comes to ₹ 17 lakhs. Compute divisible profit for the year.
III. The Companies Act, 1956 limits the payment of managerial remuneration. What is
the maximum managerial remuneration, which can be paid in case of a company
consistently earning profits and has more than one managerial person?
Answer
(i) According to Section 2 (68) of the Companies Act 2013, a private company means a
company which has a minimum paid-up capital of one lakh rupees or such higher
paid- up capital as may be prescribed, and which by its articles:
(a) Restricts the rights of members to transfer its shares.
(b) Except in the case of a one man company, limits the number of its member to
200 excluding: (i) persons who are in employment of the company; and (ii)
persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased. For the purpose of determining the
number of members joint holders of shares will be counted as single members.
(c) Prohibits any invitation to the public to subscribe to any securities of, the company.
(ii)
Computation of divisible profit (₹ in lakhs)
Profit for the year 2008-09. 25.00
Less: Depreciation chargeable under Section 205 of the (17.00)
Companies Act, 1956 (Refer note)
Divisible profit for the year 8.00
Note: Under section 123 (2) of the Companies Act 2013, depreciation has to be provided
in accordance with schedule II.
(iii) Under section 197(1) of the Companies Act 2013, the managerial remuneration payable
by a public company, to its directors, including managing director or whole time director and
its manager in respect of any financial year shall not exceed eleven percent of the net
profits of that company for that financial year computed in accordance with the provisions of
section 198 of the Companies Act 2013 provided that the remuneration of the directors
shall not be deducted from the gross profits.
Provided that the company may in a general meeting may, with the approval of the Central
Govt., authorize the payment of managerial remuneration exceeding eleven percent of the
net profits subject to the provisions of schedule V of the Act.
Provided further that, except with the approval of the company in a general meeting:
(a) the remuneration payable to one managing director or a whole time director or a
manager shall not exceed 5% of its net profits, and if there is more than one such
director the maximum remuneration payable to all such directors and manager
taken together cannot exceed 10% of its net profits
(b) the remuneration payable to directors who are neither the managing director or
whole time director shall not exceed 1% of the net profits if there is a managing
director or a whole time director and 3% of the net profits in any other case.
Note: Since the question does not specify the nature of the managerial person
an elaborate answer as above is required.
Question 5
A company provided ₹ 10,00,000 for dividend payment. Is the Corporate Dividend Tax
payable in this case? If yes, please compute Corporate Dividend Tax assuming rate of 15%
plus surcharge of 10% and disclose as it would appear in profit and loss account of the
company.
Answer
Note: Though current surcharge rate on DDT is 12% the question is solved on the basis of the
information given in the question. However, education cess of 3% is applied though not
given in the question. Therefore, total DDT arrives of 16.995%.
Yes, Corporate Dividend Tax (CDT)* is payable by the company which has provided for the
payment of dividend. CDT is payable even if no income tax is payable. This is payable by a
domestic company on distribution of profits to its shareholders.
In the given case Corporate Dividend Tax would be worked out as under:
(i) Grossing up of dividend:
10,00,000 x 100/85 = 11,76,470
(ii) CDT = 11,76,470 x 16.995 = 1,99,941
The liability in respect of CDT arises only if the profits are distributed as dividends whereas
the normal income-tax liability arises on the earning of the taxable profits.
Since the CDT liability relates to distribution of profits as dividends which are adjusted as
appropriation /allocation of profit in the ‘Notes to Accounts’ of ‘Reserves and Surplus’, it is
appropriate that the liability in respect of DDT should also be adjusted therein.
CDT liability should be presented separately in the ‘Notes to Accounts’ of ‘Reserves and
Surplus’, as follows:
Dividend xxxxx
Dividend Corporate tax thereon xxxxx xxxxx
Question 6
Calculate the maximum remuneration payable to the Managing Director based on effective
capital of a non-investment company for the year, from the information given below:
(₹ in ‘000)
(i) Profit for the year (calculated as per Section 349, 350 & 351 of 3,000
the Companies Act, 1956)
(ii) Paid up capital 18,000
(iii) Reserves & surplus 7,200
(iv) Securities premium 1,200
(v) Long term loans 6,000
(vi) Investment 3,600
(vii) Preliminary expenses not written off 3,000
(viii) Remuneration paid to the Managing Director during the year 600
Answer
Note: Under the Companies Act, 2013, the Profits for the purposes of determining managerial
remuneration are computed in accordance with Section 198. Further, there is no provision for
computation of managerial remuneration on the basis of effective capital except in the case of
loss or inadequacy of profits in a financial year, hence this question is irrelevant in the new
context as there is no inadequacy of profits. Please refer to Sec 197, 198 and Schedule V of the
Companies Act 2013.
Question 7
What are the maximum limits of managerial remuneration for companies having
adequate profits?
Answer
For companies having adequate profits, maximum limits of managerial remuneration in

different circumstances are as under:
(i) Overall (excluding fee for attending meetings) 11% of net profit
(ii) If there is one managing director or whole time director or manager 5% of net
profit
(iii) If there is more than one managing director, whole time director or manager
10% of net profit
(iv) Remuneration of directors who are neither managing directors nor whole time
directors:
(a) If there is no managing or whole-time director 3% of net profit
(b) If there is a managing or whole-time director 1% of net profit
However, the above limits can be exceeded by the company approval at general
meetings with the Central Govt. approval.
Question 8
On 31st March, 2013 Bose and Sen Ltd. provides to you the following ledger balances after
preparing its Profit and Loss Account for the year ended 31st March, 2013:
Credit Balances:
₹
Equity shares capital, fully paid shares of ₹ 10 each 70,00,000
General Reserve 15,49,100
Loan from State Finance Corporation 10,50,000
(Secured by hypothecation of Plant & Machinery Repayable
within one year ₹ 2,00,000)
Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods & expenses 14,00,000
(Payable within 6 months)
Profit & Loss Account 7,00,000
Provision for Taxation 3,25,500
Proposed Dividend 4,20,000
Provision for Dividend Distribution Tax 71,400
1,33,63,000
Debit Balances:
₹
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture & Fixture 3,50,000
Stocks : Finished goods 14,00,000
Raw Materials 3,50,000
Sundry Debtors 14,00,000
Advances: Short-term 2,98,900
Cash in hand 2,10,000
Balances with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trade marks 4,00,000
1,33,63,000
The following additional information is also provided:
(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.
(ii) Cost of Building ₹ 28,00,000
Cost of Plant & Machinery ₹ 49,00,000
Cost of Furniture & Fixture ₹ 4,37,500

(iii) Sundry Debtors for ₹ 3,80,000 are due for more than 6 months.
(iv) The amount of Balances with Bank includes ₹ 18,000 with a bank which is not a
scheduled Bank and the deposits of ₹ 5 lakhs are for a period of 9 months.
(v) Unsecured loan includes ₹ 2,00,000 from a Bank and ₹ 1,00,000 from related
parties.
You are not required to give previous year figures. You are required to prepare the
Balance Sheet of the Company as on 31st March, 2013 as required under Revised
Schedule VI of the Companies Act, 1956.
Answer
Bose and Sen Ltd.

Balance Sheet as on 31st March, 2013
Particulars Figures at the end of
current reporting
Notes
period
₹
Equity and Liabilities

1 Shareholders' funds
a Share capital 1 69,93,000
b Reserves and Surplus 2 21,56,000

2 Non-current liabilities
a Long-term borrowings 3 16,97,000
3 Current liabilities
a Trade Payables 14,00,000
b Other current liabilities 4 2,00,000
c Short-term provisions 8,16,900

5
Total 1,32,62,900
Assets
Non-current assets
1
Fixed assets
a
Tangible assets
74,75,000
Intangible assets ( Patents & Trade Marks)
6
Current assets 4,00,000
2 Inventories
17,50,000
a Trade receivables 14,00,000
7
b Cash and cash equivalents Short- 19,39,000
c 8
term loans and advances
2,98,900
d Total 9
1,32,62,900
Question 9
The Articles of Association of Samson Ltd. provide the following:
(i) That 25 % of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
(iii) That the balance available for distribution shall be applied:
(1) in paying 15% on cumulative preference shares.
(2) in paying 20% dividend on equity shares.
(3) one-third of the balance available as additional dividend on preference

shares and two-third as additional equity dividend.
(iv) A further condition was imposed by the articles viz. that the balance carried
forward shall be equal to 14% on preference shares after making provision (i),
(ii) and (iii) mentioned above. The company has issued 12,000, 15% cumulative
participating preference shares of ₹ 100 each fully paid and 75,000 equity
shares of ₹ 10 each fully paid up.
(v) The profit for the year 2013-2014, was ₹ 10,00,000 and balance brought from
previous year
(vi) ₹ 1,50,000. Provide ₹ 37,500 for depreciation and ₹ 1,20,000 for taxation
before making other appropriations.
(vii) Show net balance of Profit and Loss Account after making above adjustments.
Answer
Statement of Profit and Loss for the year ended 31st March, 2014
Particulars Amount ₹
a Profit 10,00,000
b Expenses: Depreciation and amortization (37,500)
Total expenses (37,500)
c Profit before tax (a-b) 9,62,500
d Provision for tax (1,20,000)
e Profit (Loss) for the period 8,42,500
Notes to Accounts
Profit (Loss) for the period 8,42,500
Balance of Profit and Loss account brought forward 1,50,000
Total 9,92,500
Appropriations (made in Notes to Accounts)

Transfers to Reserves (2,10,625)
Proposed preference dividend (1,80,000 + 84,023) (2,64,023)
Proposed equity dividend (1,50,000 + 1,68,047) (3,18,047)

Bonus to employees (15,000 + 16,805) (31,805)
Total 8,24,500
Balance carried to Balance sheet (9,92,500 – 8,24,500) 1,68,000
Question 10
From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31 st
March 2014 as required by Part I, revised Schedule VI of the Companies Act.
Particulars Debit ₹ Credit ₹
Equity Share Capital (Face value of ₹ 100 each) 50,00,000

Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000

Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000

Stock:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 3,40,000
Sundry Debtors 10,00,000

Advances 2,13,500
Proposed Dividend 3,00,000
Profit & Loss Account 5,00,000
Cash in Hand 1,50,000

Cash at Bank 12,35,000
Preliminary expenses 66,500
Unsecured Loan 6,05,000

Sundry Creditors (for Goods and Expenses) 10,00,000
The following additional information is also provided:
(i) Preliminary expenses included ₹ 25,000 Audit Fees and ₹ 3,500 for out of pocket
expenses paid to the Auditors.
(ii) 10000 Equity shares were issued for consideration other than cash.
(iii) Debtors of ₹ 2,60,000 are due for more than 6 months.
(iv) The cost of the Assets were:
Building ₹ 30,00,000, Plant & Machinery ₹ 35,00,000 and Furniture ₹ 3,12,500
(v) The balance of ₹ 7,50,000 in the Loan Account with State Finance Corporation is
inclusive of ₹ 37,500 for Interest Accrued but not Due. The loan is secured by
hypothecation of Plant & Machinery.
(vi) Balance at Bank includes ₹ 10,000 with Global Bank Ltd., which is not a Scheduled
Bank.
Answer
Elegant Ltd.
Balance Sheet as on 31st March, 2014
Particulars Notes ₹
Equity and Liabilities

1 Shareholders' funds
a Share capital Reserves 1 49,95,000
b and Surplus 2 14,83,500
2 Non-current liabilities
13,17,500
Long-term borrowings 3
3 Current liabilities Trade 10,00,000
a Payables 37,500
b Other current liabilities 4 6,40,000
c Short-term provisions 94,73,500
5
Total
Assets
1 Non-current assets
56,25,000
Fixed assets Tangible
12,50,000
assets 6
2 10,00,000
Current assets
7 13,85,000
a Inventories
Trade receivables 8 2,13,500
b
c Cash and cash equivalents Short- 9 94,73,500
d term loans and advances
Total
Unit-2: Cash Flow Statements
Question 1
ABC Ltd. gives you the following informations. You are required to prepare Cash Flow
Statement by using indirect methods as per AS 3 for the year ended 31.03.2004:
Balance Sheet as on
Liabilities 31st 31st March Assets 31st 31st March
March 2004 March 2004
2003 2003
₹ ₹ ₹ ₹
Capital 50,00,000 50,00,000 Plant & Machinery 27,30,000 40,70,000
Retained Earnings 26,50,000 36,90,000 Less: Depreciation 6,10,000 7,90,000
Debentures ― 9,00,000 21,20,000 32,80,000
Current Liabilities Current Assets

Debtors
Creditors 8,80,000 8,20,000 23,90,000 28,30,000
Less: Provision
Bank Loan 1,50,000 3,00,000 1,50,000 1,90,000
Liability for expenses 3,30,000 2,70,000 22,40,000 26,40,000
Cash
Dividend payable 1,50,000 3,00,000 15,20,000 18,20,000
Marketable
11,80,000 15,00,000
securities
Inventories 20,10,000 19,20,000
Prepaid Expenses 90,000 1,20,000

91,60,000 1,12,80,000 91,60,000 1,12,80,000
Additional Information:
i. Net profit for the year ended 31st March, 2004, after charging depreciation ₹
1,80,000 is ₹ 22,40,000.
ii. Debtors of ₹ 2,30,000 were determined to be worthless and were written off against
the provisions for doubtful debts account during the year.
iii. ABC Ltd. declared dividend of ₹ 12,00,000 for the year 2003-2004.
Answer
Cash flow Statement of ABC Ltd. for the year ended 31.3.2004
Cash flows from Operating activities ₹ ₹
Net Profit 22,40,000
Add :Adjustment for Depreciation (₹7,90,000 – ₹6,10,000) 1,80,000

Operating profit before working capital changes 24,20,000
Add: Decrease in Inventories (₹20,10,000 – ₹19,20,000) 90,000
Increase in provision for doubtful debts 2,70,000

(₹ 4,20,000 – ₹1,50,000) 27,80,000
Less: Increase in Current Assets:
Debtors (₹ 30,60,000 – ₹23,90,000) 6,70,000
Prepaid expenses (₹ 1,20,000 – ₹90,000) 30,000
Decrease in current liabilities:

8,20,000
Creditors (₹ 8,80,000 – ₹ 8,20,000) 60,000
19,60,000
Expenses outstanding
(₹ 3,30,000 – ₹2,70,000) 60,000
13,40,000
Net cash from operating activities
(13,40,000)
Cash flows from Investing activities
Purchase of Plant & Equipment (₹ 1,50,000

40,70,000 – ₹ 27,30,000) 9,00,000
Net cash used in investing activities (10,50,000)
Cash flows from Financing Activities Bank NIL
loan raised (₹ 3,00,000 – ₹ 1,50,000) Issue 6,20,000
of debentures
27,00,000
Payment of Dividend (₹ 12,00,000 – ₹ 1,50,000)
33,20,000
Net cash used in financing activities
Net increase in cash during the year
Add: Cash and cash equivalents as on 1.4.2003 (₹

15,20,000 + ₹11,80,000)
Cash and cash equivalents as on 31.3.2004 (₹
18,20,000 + ₹15,00,000)
Note: Bad debts amounting ₹ 2,30,000 were written off against provision for doubtful debts
account during the year. In the above solution, Bad debts have been added back in the
balances of provision for doubtful debts and debtors as on 31.3.2004. Alternatively, the
adjustment of writing off bad debts may be ignored and the solution can be given on the
basis of figures of debtors and provision for doubtful debts as appearing in the balance sheet
on 31.3.2004.
Question 2
The following figures have been extracted from the Books of X Limited for the year ended on
31.3.2004. You are required to prepare a cash flow statement.
(i) Net profit before taking into account income tax and income from law suits but
after taking into account the following items was ₹ 20 lakhs:
(a) Depreciation on Fixed Assets ₹ 5 lakhs.
(b) Discount on issue of Debentures written off ₹ 30,000.
(c) Interest on Debentures paid ₹ 3,50,000.
(d) Book value of investments ₹ 3 lakhs (Sale of Investments for ₹ 3,20,000).
(e) Interest received on investments ₹ 60,000.
(f) Compensation received ₹ 90,000 by the company in a suit filed.
(ii) Income tax paid during the year ₹ 10,50,000.
(iii) 15,000, 10% preference shares of ₹ 100 each were redeemed on 31.3.2004 at a
premium of 5%. Further the company issued 50,000 equity shares of ₹ 10 each at a
premium of 20% on 2.4.2003. Dividend on preference shares were paid at the time
of redemption.
(iv) Dividends paid for the year 2002-2003 ₹ 5 lakhs and interim dividend paid ₹ 3
lakhs for the year 2003-2004.
(v) Land was purchased on 2.4.2003 for ₹ 2,40,000 for which the company issued
20,000 equity shares of ₹ 10 each at a premium of 20% to the land owner as
consideration.
(vi) Current assets and current liabilities in the beginning and at the end of the years
were as detailed below:
As on 31.3.2003 As on 31.3.2004
₹ ₹
Stock 12,00,000 13,18,000
Sundry Debtors 2,08,000 2,13,100
Cash in hand 1,96,300 35,300
Bills receivable 50,000 40,000
Bills payable 45,000 40,000
Sundry Creditors 1,66,000 1,71,300
Outstanding expenses 75,000 81,800
Answer
X Ltd.
Cash Flow Statement
for the year ended 31st March, 2004

₹ ₹
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on fixed assets 5,00,000
Discount on issue of debentures (Non cash charge to P/L) 30,000
Interest on debentures paid 3,50,000
Interest on investments received (60,000)
Profit on sale of investments (20,000) 8,00,000

Operating profit before working capital changes 28,00,000
Adjustments for:
Increase in stock (1,18,000)
Increase in sundry debtors (5,100)
Decrease in bills receivable 10,000
Decrease in bills payable (5,000)
Increase in sundry creditors 5,300
Increase in outstanding expenses 6,800 (1,06,000)

Cash generated from operations 26,94,000
Income tax paid (10,50,000)
16,44,000
Cash flow from extraordinary items:
Compensation received in a suit filed 90,000
Net cash flow from operating activities 17,34,000
Cash flow from Investing Activities
Sale proceeds of investments 3,20,000
Interest received on investments 60,000
Net cash flow from investing activities 3,80,000
Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium 6,00,000
Redemption of 10% preference shares at 5% premium (15,75,000)
Preference dividend paid (1,50,000)
Interest on debentures paid (3,50,000)
Dividend paid (5,00,000 + 3,00,000) (8,00,000)
Net cash used in financing activities (22,75,000)

Net decrease in cash and cash equivalents during the year (1,61,000)
Add: Cash and cash equivalents as on 31.3.2003 1,96,300
Cash and cash equivalents as on 31.3.2004 35,300
Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been
considered in the cash flow statement as it does not involve any cash transaction.
Question 3
(a) Raj Ltd. gives you the following information for the year ended 31st March, 2006:
(i) Sales for the year ₹ 48,00,000. The Company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than opening inventory by ₹ 50,000.
(i) Trade creditors on 31.3.2006 exceed the outstanding on 31.3.2005 by ₹ 1,00,000.
(ii) Tax paid during the year amounts to ₹ 1,50,000.
(iii) Amounts paid to Trade creditors during the year ₹ 35,50,000.
(iv) Administrative and Selling expenses paid ₹ 3,60,000.
(v) One new machinery was acquired in December, 2005 for ₹ 6,00,000.
(vi) Dividend paid during the year ₹ 1,20,000.
(vii) Cash in hand and at Bank on 31.3.2006 ₹ 70,000.
(viii) Cash in hand and at Bank on 1.4.2005 ₹ 50,000.
Prepare Cash Flow Statement for the year ended 31.3.2006 as per the prescribed
Accounting standard.
(b) What all are the differences between Cash Flow statement and Fund Flow statement?
Answer
(a) Cash flow statement of Raj Limited for the year ended 31.3.2006
Direct Method
₹ ₹
Cash flow from operating activities:
Cash receipt from customers (sales) 48,00,000
Cash paid to suppliers and expenses 39,10,000

(₹35,50,000 + ₹3,60,000)
Cash flow from operation 8,90,000
Less: Tax paid 1,50,000
Net cash from operating activities 7,40,000

Cash flow from investing activities:
Purchase of fixed assets (6,00,000)
Net cash used in investing activities (6,00,000)

Cash flow from financing activities:
Dividend Paid (1,20,000)
Net cash from financing activities (1,20,000)

20,000
Add: Opening balance of Cash in Hand and at Bank 50,000
Cash in Hand and at Bank on 31.3.2006 70,000
(b) The fund flow statement is no more included in the syllabus therefore the question is
not relevant.
Question 4
The following are the summarized Balance Sheets of ‘X’ Ltd. as on March 31, 2005 and 2006:
Liabilities As on 31.3.2005 As on 31.3.2006

(₹) (₹)
Equity share capital 10,00,000 12,50,000
Capital Reserve --- 10,000

General Reserve 2,50,000 3,00,000
Profit and Loss A/c 1,50,000 1,80,000
Long-term loan from the Bank 5,00,000 4,00,000

Sundry Creditors 5,00,000 4,00,000
Provision for Taxation 50,000 60,000
Proposed Dividends 1,00,000 1,25,000

25,50,000 27,25,000
Assets Year 2005 Year 2006

(₹) (₹)
Land and Building 5,00,000 4,80,000
Machinery 7,50,000 9,20,000
Investment 1,00,000 50,000
Stock 3,00,000 2,80,000
Sundry Debtors 4,00,000 4,20,000
Cash in Hand 2,00,000 1,65,000
Cash at Bank 3,00,000 4,10,000
25,50,000 27,25,000
Additional Information:
(i) Dividend of ₹ 1,00,000 was paid during the year ended March 31, 2006.
(ii) Machinery during the year purchased for ₹ 1,25,000.
(iii) Machinery of another company was purchased for a consideration of ₹
1,00,000 payable in equity shares.
(iv) Income-tax provided during the year ₹ 55,000.
(v) Company sold some investment at a profit of ₹ 10,000, which was credited to
Capital reserve.
(vi) There was no sale of machinery during the year.
(vii) Depreciation written off on Land and Building ₹ 20,000.
From the above particulars, prepare a cash flow statement for the year ended March, 2006
as per AS 3 (Indirect method).
Answer
Cash Flow Statement for the year ending on March 31, 2006
₹ ₹
I. Cash flows from Operating Activities
Net profit made during the year (W.N.1) 2,60,000
Adjustment for depreciation on Machinery (W.N.2) 55,000

Adjustment for depreciation on Land & Building 20,000
Operating profit before change in Working Capital 3,35,000
Decrease in Stock 20,000

Increase in Sundry Debtors (20,000)
Decrease in Sundry Creditors (1,00,000)
Income-tax paid (45,000)

II. Cash flows from Investing Activities
Purchase on Machinery (1,25,000)
Sale of Investments 60,000 (65,000)
III. Cash flows from Financing Activities
Issue of equity shares (2,50,000-1,00,000) 1,50,000

Repayment of Long term loan (1,00,000)
Dividend paid (1,00,000) (50,000)
Net increase in cash and cash equivalent 75,000

Cash and cash equivalents at the beginning of the 5,00,000
period
Cash and cash equivalents at the end of the period 5,75,000
Working Notes:
Note: Amount received on issue of equity shares is net of the shares issued in consideration
of purchase of machinery for ₹ 1,00,000
Net Profit made during the year ended 31.3.2006
Increase in P & L (Cr.) Balance 30,000

Add: Transfer to general reserve 50,000
Add: Provision for taxation made during the year 55,000
Add: Provided for proposed dividend during the year 1,25,000
2,60,000
Note: The increase in General Reserve balance is attributed to transfer from P/L A/c. However,
the increase in Capital Reserve is independent of the P/L A/c and hence is not shown in the
profit for the year.
Machinery Account
₹ ₹
To Balance b/d Bank 7,50,000 By Depreciation (Bal. Fig.) 55,000

To Equity share capital 1,25,000 By Balance c/d 9,20,000
To
1,00,000
9,75,000 9,75,000
Provision for Taxation Account
₹ ₹
To Cash (Bal. Fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By P & L A/c 55,000

1,05,000 1,05,000
Proposed Dividend Account
₹ ₹
To Bank 1,00,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By P & L A/c (Bal. Fig.) 1,25,000
2,25,000 2,25,000
Investment Account
₹ ₹
To Balance b/d 1,00,000 By Bank A/c 60,000
To Capital Reserve A/c (Profit on (Balancing figure for

sale of investment) 10,000 investment sold)
By Balance c/d 50,000
1,10,000 1,10,000
Question 5
What is meant by ‘Cash’ and ‘Cash equivalents’ as per AS 3?
Answer
As per AS 3 ‘Cash Flow Statements’, the term ‘Cash’ and ‘Cash equivalents’ mean the following:
Cash: It includes cash on hand and demand deposits with banks.
Cash Equivalents: It means short-term, highly liquid investments that are readily convertible
into known amounts of cash and which are subject to insignificant risk of changes in value.
Cash equivalents are held for the purpose of meeting short-term cash commitments rather
than for investment or other similar purposes. For an investment to qualify as a cash
equivalent, it must be readily convertible into a determinable amount of cash and is subject
to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a
cash equivalent only when it has a short maturity of, say, three months or less from the date
of acquisition and is virtually risk free. A short term investment in a highly risky asset will not
qualify as Cash Equivalent.
Question 6
J Ltd. presents you the following information for the year ended 31st March, 2007:
(₹ in lacs)
(i) Net profit before tax provision 36,000
(ii) Dividend paid 10,202
(iii) Income-tax paid 5,100
(iv) Book value of assets sold 222

Loss on sale of asset 48
(v) Depreciation debited in P & L account 24,000
(vi) Capital grant received - amortized in P & L A/c 10
(vii) Book value of investment sold 33,318

Profit on sale of investment 120
(viii) Interest income from investment credited in P & L A/c 3,000
(ix) Interest expenditure debited in P & L A/c 12,000
(x) Interest actually paid (Financing activity) 13,042
(xi) Increase in working capital 67,290
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 22,092
(xiii) Expenditure on construction work 41,688
(xiv) Grant received for capital projects 18
(xv) Long term borrowings from banks 55,866
(xvi) Provision for Income-tax debited in P & L A/c 6,000
Cash and bank balance on 1.4.2006 6,000
Cash and bank balance on 31.3.2007 8,000
You are required to prepare a cash flow statement as per AS-3 (Revised).
Answer
Cash Flow Statement as per AS 3
Cash flows from operating activities: ₹ in lacs
Net profit before tax provision 36,000
Add: Non cash expenditures:
Depreciation 24,000
Loss on sale of assets 48
Interest expenditure (non operating activity) 12,000 36,048
72,048
Less: Non cash income
Amortisation of capital grant received (10)

Profit on sale of investments (non operating income) (120)
Interest income from investments (non op income) (3,000) 3,130
Operating profit 68,918

Less: Increase in working capital (67,290)
Cash from operations 1,628
Less: Income tax paid (5,100)
Net cash generated from operating activities (3,472)

Cash flows from investing activities:
Sale of assets (222 – 48) 174
Sale of investments (33,318+120) 33,438
Interest income from investments 3,000
Purchase of fixed assets (22,092)
Expenditure on construction work (41,688)
Net cash used in investing activities (27,168)
Cash flows from financing activities:
Grants for capital projects 18
Long term borrowings 55,866
Interest paid (13,042)
Dividend paid (10,202)
Net cash from financing activities 32,640
Net increase in cash 2,000
Add: Cash and bank balance as on 1.4.2006 6,000

Cash and bank balance as on 31.3.2007 8,000
Question 7
From the following summarised Cash account of S Ltd., prepare cash flow statement for the
year ended 31st March, 2009 in accordance with AS 3 (revised) using direct method.
Summarised Cash Account

(₹ 000) (₹ 000)
Opening balance 50 Payment to suppliers 2,000
Issue of share capital 300 Purchase of fixed assets 200
Received from customers 2,800 Overhead expenses 200
Sale of fixed assets 100 Wages and salaries 100
Tax paid 250
Dividend paid 50
Bank loan 300
Closing balance 150
3,250 3,250
Answer
Cash Flow Statement for the year ended 31.3.2009

₹ in ‘000
Cash flow from Operating Activities
Cash received from customers 2,800
Less: Cash paid to suppliers 2,000
Cash paid for overhead expenses 200
Cash paid for wages and salaries 100 2,300
500
Less: Income tax paid 250
Net cash generated from Operating Activities 250
Cash flow from Investing Activities
Sale of fixed assets 100
Less: Purchase of fixed assets 200
Net cash used in Investing Activities (100)
Cash flow from Financing Activities
Received from issue of share capital 300
Less: Repayment of bank loan 300
Payment of dividend 50 350
Net cash used in Financing Activities (50)
Net increase in cash and equivalents 100
Add: Cash and equivalents at the beginning of the year 50
Cash and equivalents at the end of the year 150
Question 8
On the basis of the following information prepare a Cash Flow Statement for the year ended
31st March, 2013:
(i) Total sales for the year were ₹ 199 crore out of which cash sales amounted to
₹ 131 crore.
(ii) Cash collections from credit customers during the year, totalled ₹ 67 crore.
(iii) Cash paid to suppliers of goods and services and to the employees of the enterprise
amounted to ₹ 159 crore.
(iv) Fully paid preference shares of the face value of ₹ 16 crore were redeemed and equity
shares of the face value of ₹ 16 crore were allotted as fully paid up at a premium of
25%.
(v) ₹ 13 crore were paid by way of income tax.
(vi) Machine of the book value of ₹ 21 crore was sold at a loss of ₹ 30 lakhs and a new
machine was installed at a total cost of ₹ 40 crore.
(vii) Debenture interest amounting ₹ 1 crore was paid.
(viii) Dividends totalling ₹ 10 crore was paid on equity and preference shares. Corporate
dividend tax @ 17% was also paid.
(ix) On 31st March, 2012 balance with bank and cash on hand totalled ₹ 9 crore.
Answer
Cash flow statement for the year ended 31st March, 2013
(₹ in crores) (₹ in crores)
Cash flow from operating activities
Cash sales 131
Cash collected from credit customers 67
Less: Cash paid to suppliers for goods & services and to (159)
employees
Cash from operations 39
Less: Income tax paid (13)
Net cash generated from operating activities 26.00
Cash flow from investing activities
Payment for purchase of Machine (40.00)
Proceeds from sale of Machine 20.70
Net cash used in investing activities (19.30)
Cash flow from financing activities
Redemption of Preference shares (16.00)
Proceeds from issue of Equity shares 20.00
Debenture interest paid (1.00)
Dividend Paid (11.70)
Net cash used in financing activities (8.70)
Net decrease in cash and cash equivalent (2.00)
Add: Cash and cash equivalents as on 1.04.2012 9.00
Cash and cash equivalents as on 31.3.2013 7.00
Question 9
Intelligent Ltd., a non financial company has the following entries in its Bank Account. It has
sought your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers
(vi) Insurance claim received against loss of fixed asset by fire

Discuss in the context of AS 3 Cash Flow Statement
Answer
(i) Loans and advances given and interest earned
(1) to suppliers Operating Cash flow
(2) to employees Operating Cash flow
(3) to its subsidiary companies Investing Cash flow
(ii) Investment made in subsidiary company and dividend received
Investing Cash flow
(iii) Dividend paid for the year
Financing Cash Outflow
(iv) TDS on interest income earned on investments made
Investing Cash Outflow
(v) TDS on interest earned on advance given to suppliers
Operating Cash Outflow
(vi) Insurance claim received of amount loss of fixed asset by fire
Extraordinary item to be shown under a separate heading as ‘Cash inflow from
operating activities’.
Question 10
Balance Sheet of Raman Ltd. is given below:

(₹ in ‘000)
Liabilities 31.3.08 31.3.09 Assets 31.3.08 31.3.09
Share capital 500 500 Land & building 300 300
9% Debentures 200 160 Machinery 164 180
Sundry creditors 230 216 Stock-in-trade 200 228
Profit and Loss A/c 40 54 Sundry debtors 170 162
Depreciation fund 80 88 Cash and bank 120 110
balances
Contingency reserve 140 110 190
Current Investment
Outstanding expenses 30 48 262 6
Pre-paid expenses
4
1,220 1,176 1,220 1,176
The following information is furnished:
(i) One old machinery which has original cost of ₹ 30,000 was sold for ₹ 10,000.
The accumulated depreciation in respect of the said machinery amounts to ₹
16,000.
(ii) One new machinery was acquired for ₹ 46,000.
(iii) 9% Debentures were redeemed at a discount of 4% of their face value.
(iv) Dividend at 12% was declared and paid in cash.
(v) Income-tax liability of ₹ 30,000 paid was debited to contingency reserve.

You are required to prepare Cash Flow Statement in accordance with the Accounting
Standard 3.
Answer
Cash Flow Statement of Raman Ltd. for the year ended 31st March, 2009
₹ ₹
A. Cash flow from Operating Activities
Net profit before tax (₹ 54,000 – ₹ 40,000 + ₹ 60,000) 74,000
Add: Adjustment for depreciation (W.N.1) Interest 24,000
on debentures (₹1,60,000 x 9%) Loss on sale 14,400
of machinery (W.N.2) 4,000

1,16,400
Less: Profit on redemption of debentures (Non
Operating Income) (1,600)
1,14,800
Less :Income tax paid (30,000)
Operating profit before changes in Working Capital 84,800
Add: Increase in outstanding expenses 18,000

Decrease in sundry debtors 8,000
Decrease in current investment 72,000 98,000
1,82,800
Less: Decrease in sundry creditors 14,000
Increase in stock in trade 28,000
Increase in prepaid expenses 2,000 (44,000)
B. Cash flow from Investing Activities
Sale of old machinery 10,000
Purchase of machinery (46,000)
Net cash used in investing activities (36,000)
C. Cash flow from Financing Activities
Redemption of debentures (₹ 40,000 – ₹1,600) (38,400)
Payment of dividend (60,000)
Payment of interest on debentures (14,400)

Net cash used financing activities (1,12,800)
Net decrease in cash and cash equivalents during the year (10,000)
Cash and cash equivalents at the beginning of the year 1,20,000
Cash and cash equivalents at the end of the year 1,10,000
Working Notes:
Depreciation Fund
₹ ₹
To Machinery A/c 16,000 By Balance b/d 80,000
To Balance c/d 88,000 By Profit and Loss A/c 24,000
(Current year depreciation)
1,04,000 1,04,000
Machinery A/c
₹ ₹
To Balance b/d 1,64,000 By Depreciation Fund old 16,000
To Bank (Purchased) 46,000 By Bank (realized on sale of on
machinery 10,000
By Profit and loss A/c (loss 4,000
sale) – Balancing Fig

By Balance c/d 1,80,000
2,10,000 2,10,000

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Accounting-Financial Statements of Companies-1653399167327513

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FINAL

Unit-1: Preparation of Financial Statements of Companies

Profit and Loss A/c Dr. 1,50,000

[Being the shortfall in settlement of insurance claim charged to

The Articles of Association of S Ltd. provide the following:

That the balance available for distribution shall be applied:

a) in paying 14% on cumulative preference shares.

b) in paying 20% dividend on equity shares.

one-third of the balance available as additional dividend on preference shares and

Bonus to employees (14,000 + 18,690) (32,690)

Calculation of remuneration of the Managing Director ₹ in Lacs

Net profit as per books 43.00

Add: Provision for taxation 17.20

Annual profit for the purpose of managerial remuneration 60.20

Managing Director’s Remuneration @ 5% of above 3.01

Minimum remuneration to be paid to the Managing Director

Hence, in this case, remuneration to be paid to the Managing Director of A Ltd.

I. What are the basic characteristics of a Private Ltd. Company?

(a) Restricts the rights of members to transfer its shares.

(i) Grossing up of dividend:

10,00,000 x 100/85 = 11,76,470

(ii) CDT = 11,76,470 x 16.995 = 1,99,941

Dividend Corporate tax thereon xxxxx xxxxx

For companies having adequate profits, maximum limits of managerial remuneration in

(a) If there is no managing or whole-time director 3% of net profit

(b) If there is a managing or whole-time director 1% of net profit

(ii) Cost of Building ₹ 28,00,000

Cost of Plant & Machinery ₹ 49,00,000

Cost of Furniture & Fixture ₹ 4,37,500

Bose and Sen Ltd.

Equity and Liabilities

a Share capital 1 69,93,000

b Reserves and Surplus 2 21,56,000

a Long-term borrowings 3 16,97,000

a Trade Payables 14,00,000

b Other current liabilities 4 2,00,000

c Short-term provisions 8,16,900

The Articles of Association of Samson Ltd. provide the following:

(iii) That the balance available for distribution shall be applied:

(1) in paying 15% on cumulative preference shares.

(2) in paying 20% dividend on equity shares.

(3) one-third of the balance available as additional dividend on preference

b Expenses: Depreciation and amortization (37,500)

Total expenses (37,500)

d Provision for tax (1,20,000)

e Profit (Loss) for the period 8,42,500

Profit (Loss) for the period 8,42,500

Balance of Profit and Loss account brought forward 1,50,000

Appropriations (made in Notes to Accounts)

Proposed preference dividend (1,80,000 + 84,023) (2,64,023)

Proposed equity dividend (1,50,000 + 1,68,047) (3,18,047)

Balance carried to Balance sheet (9,92,500 – 8,24,500) 1,68,000

Particulars Debit ₹ Credit ₹

Equity Share Capital (Face value of ₹ 100 each) 50,00,000

Land & Building 27,50,000

Plant & Machinery 26,25,000

Loan from State Financial Corporation 7,50,000

Sundry Debtors 10,00,000

Proposed Dividend 3,00,000

Profit & Loss Account 5,00,000

Cash in Hand 1,50,000

Preliminary expenses 66,500

Unsecured Loan 6,05,000