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StudyNote:1AccountingConceptsandConventions

Question.1)Writeshortnotes

2001Dec
Depreciation
Answer:DepreciationisalossinvalueofAssets.Itisameasureofwearingout,consumption,orotherlossin
valueofaDepreciableAssetarisingfromuseandpassageoftime.Depreciationisnothingbutdistributionof
totalCostofAssetoverisusefullife.
ObjectivesofprovidingDepreciation
1. Toascertaintrueresultsofoperations.
2. TopresenttrueandfairviewoftheFinancialPosition.
3. ToaccumulatefundsforthereplacementofAssets.
4. ToascertainTrueCostofproduction.

Question.2)Writeshortnotes

2005Dec
Revaluationmethodofdepreciations
Answer:WhenevertheDepreciableAssetsisrevalued,thedepreciationshouldbechargedontherevalued
amountonthebasisoftheremainingestimatedusefullifeoftheasset.Ifthereisanupwardrevisioninthe
value of Asset, then the amount of appreciation is debited to Asset Account and credited to Revaluation
Account.IfthereisdownwardrevaluationinthevalueofAssetsthenProfitandLossAccountisdebitedand
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
positionandtomeetunforeseenlosses,whereasdepreciationisprovidedtoascertainthecorrectprofitand
correctbookvalueofFixedAsset.Reservesaretheundistributedprofitsandbelongtotheownersequity.
Depreciation is a rational estimate of a decline in the usefulness of an Asset due to consumption, use,
passageoftime,technologicalchangesetc.

Question.4)Whataretheobjectofchargingdepreciationandproblemofmeasurementofdepreciation?
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. Fundsforreplacement:Generationofadequatefundinthehandsofthebusinessforreplacement
oftheassetattheendofitsusefullife.
4. Ascertainmentoftruecostofproduction:Forascertainingthecostoftheprediction,itisnecessary
tochargedepreciationasonitemifcostofproduction.
Problemsofmeasurementofdepreciationare:

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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.Materialityprinciplepermitsotherconceptstobeignored,iftheeffectisnotconsideredmaterial.
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
accountingyearpurchasedstillshownasanexpensesofthatyearbecauseofthematerialityconceptsetc,is
takenas100%intheyearofpurchasethoughusedbythecompanyformorethanoneyear.Thisisbecause
theamountofbooksorcalculatorisverysmalltobeshowninthebalancesheetthoughitistheassetofthe
company.
Thematerialitydependsnotonlyupontheamountoftheitembutalsoupnthesizeofthe
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: Revenueexpendituresarechargedasanexpenseagainstprofitintheyeartheyareincurredor
recognized.Capitalexpendituresarecapitalizedaddedtoanassetaccount.

T hefollowingarethepointsofdistinctionbetweencapitalexpenditureandrevenueexpenditure:
Sl. CapitalExpenditure
No.

1.

2.

3.

4.

5.

Capital expenditures are incurred for


morethanoneaccountingperiod.
Capital expenditure are of
nonrecurringnature.
All capital expenditures eventually
become revenue expenditures. Capital
expenditures are not matched with
capital receipts. Capital expenditures
are incurred before or after the
commencementofthebusiness.

S1.
No.

RevenueExpenditure

1.

Revenueexpendituresareincurredfora
particularaccountingperiod.

2.

3.

4.

5.

Revenue expenditures are of


recurringnature.
Revenue expenditures are not generally
capitalexpenditures.
Allrevenue expenditures are matchedwith
revenuereceipts.
Revenue expenditures are incurred
always after the commencement ofthe
business.

Thefollowingarethepointsofdistinctionbetweencapitalreceiptsandrevenuereceipts:
Sl. CapitalReceipts
No.

S1.
No.

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.
2.

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.

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StudyNote2:RoyaltyandHirePurchase
Question.1)RecoupmentofshortworkinginRoyaltyAccount

2009Dec
Answer:Itisnormallyseenthatinthefirstfewyearstheworkdoesntgathertherequiredthemomentum
becauseoftheabsorptionoftimeinthepreparationforstartingtheproductione.g.constructionofhouses,
advertising for the engineer, collecting necessary equipments and machines. The short working thus
promisestoreturnthereturntheexcesssochargedinthefirstfewyearsoutofexcessearnedinthelater
years.Thisrightofgettingbacktheexcesspaymentmadeinthepearlingyearissaidtobefixed.Anyshort
workingsfallingbeyondthisperiodconnotebereimbursed.Butwhenthelesserpromisestocompensatethe
lossofanyyearthentherightissaidtobe floatingbecausehiscanbeanalyzedofinanyyearwhenshort
workingarises.
Question.2)DefinetheConceptofMinimum/DeadRent.

2009June
Answer:Acontractisenteredbetweenthelandlordandthelesseeforpaymentofroyalty,usuallycalculated
uponthequantumofproductionorsaleatacertainstipulatedrate.Thereisastipulationthatincaseoflow
outputorlowsales,acertainsumofmoneywillbepayableinanycaseeveniftheroyaltiesbasedonoutput
orsalesarelower.ItmeAnswerthatthesumpayableistheminimumamountoractualroyaltieswhichever
ishigher.ThusisA,thepatentee,allowsBtousehispatentonaroyaltyofRs.2perunitproducedsubjectto
aminimumofRs.10,000,then,incasetheoutputis4,000units.TheamountpayablewillbeRs.10,000and
incasetheoutputis7,000units,itwillbeRs.14,000.Theminimumsumisknownasminimumrentordead
rent.Theexcessofminimumrentoveractualroyaltiesistermedasshortworking.
Question.3) State the function of interest suspense account under the Installment purchase system.
2004June
Answer:InterestSuspenseA/cUnderthismethodthewholeinterest(H.PPriceCashPrice)isdebitedto
an Account called Interest Suspense A/c and credited to Vendor A/c on date of purchase itself. When the
installmentbecomesdue,interest A/cisdebitedandcreditisgivento Interest Suspense A/candnotHire
VendorA/c.Whenthegoodsrepossessed,InterestSuspenseA/cwillalsoshowadebitbalance.

Question.4)DifferencebetweenHirePurchaseandInstallmentSale.2009June,Dec
Particulars
HirePurchase
Installmentsale
Ownership

Defaultinmaking
payment

Right of sale or
otherwise

Stipulates the time at which the


ownership passes to the buyer. It is
usually on the payment of last
installment
Sellercanrepossessthegoods.Inthat
casetheinstallmentsofarpaidis
treatedtobeHiringcharges.
Norighttosale or otherwise trAnswerfer
the goods since the legal position of the
hirerisbailee.

Ownership passes at the


timeofSale

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:AmountreceivedbyNonProfitOrganizationasperwillofadeceasedpersonisofnon
recurringnature,itistreatedasCapital ReceiptsandrecordedonLiabilitiessideofBalanceSheet.
However,iftheamountissmall,itcanbecreditedtoIncomeandExpenditureAccount.
2. DonationforSpecificPurposes: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
DonationandtreatedadIncome.Thus,SpecificDonationsarerecordedontheLiabilitiessideofthe
BalanceSheet.OncompletionoftheSpecificDonationFundshouldbetrAnswerferredtoCapital/
GeneralFund.

Question.2)Incaseofmembershipfeesofclub,howtotreadthesameintheIncome&ExpenditureA/c
andtheBalanceSheet?2003June
Answer: Fees received for Life Membership is a Capital Receipt, as it is of Capital Fund nature or General
Fundnature.Sometimes, a Life Membership Fee is amortized overa period oftime. In that case, separate
Life Membership Fund is created. Then ,an amount either equal to the normal Annual Subscription or
calculatedonthebasisofageandaveragelifeofmembersorbaseonsamekindofAmortizationSchedule
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:

Receipts&PaymentsAccount
Income & Expenditure Account
1 ItisasummarizedCashBook.
ItcloselyresemblestheProfit&Loss
AccountofaTradingconcern.
2. Receipts are debited and Payments are
IncomesarecreditedandExpenditures
are debited.
credited.
3. TransactionsarerecordedonCashbasis.
TransactionsarerecordedonAccrual
basis
4. Amountsrelatedtopreviousperiodorfuture
Transactions are recorded on accrual basis.
period may remain included. Outstanding
Allamountsnotrelatedtothecurrentperiod
amountforcurrentyearisexcluded.
areexcluded.
Outstanding amounts of current period are
added.
5. It records both Capital and Revenue
ItrecordsofRevenueTransactionsonly.
Transactions.

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6.

ItservesthepurposeofaRealAccount.

7.

ItstartswithopeningCashandBank
BalancesandendswithclosingCash
andBankBalances.
Itdoesnotrecordnotionallossornon
cashexpenseslikebaddebts,
depreciationsetc.
Itsclosingbalanceiscarriedforwardto
thesameaccountofthenextaccounting
Period.

8.

9.

ItservesthepurposeofaNominal
Account.
Itdoesnotrecordsuchbalances,rather
itsfinalbalanceshowsasurplusora
deficitfortheperiod.
Itconsidersallsuchexpensesfor
matchingagainstrevenues.
Itsclosingbalanceistransferredto
CapitalFundorGeneralFundor
AccumulatedFundinthesame
PeriodsBalanceSheet.
IthelpstoprepareaBalanceSheet.

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&ExpenditureAccount:ItissametoProfit&Lossaccount.Profitiscalledsurplusand
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:Goodwillisthevalueofreputationofafirminrespectofprofitsexpectedinfutureoverandabove
thenormalrateofprofits.Theimplicationofthetermoverandaboveisthatthereisalwayscertainnormal
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:MemorandumRevaluationA/c:Underthismethodtheamountofgoodwillisfirstraisedandthe
written off among all partners (including new partners) in the new profit sharing ratio.
Journalentryforwritingofftheamountofgoodwillisasunder:
CapitalA/cofallpartners(includingnewpartner)Dr.
ToGoodwillA/c
TheamountrequiredtobewrittenoffdependsupontheconditionslaiddownintheQuestiontiongenerally
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
reasonprofit loading ofabnormal losses is debited to Branch Adjustment A/c andCost goods sold usedto
ProfitandLossA/c.

BranchAdjustmentA/cDr.
ToBranchP/LA/c
Or
BranchP/LA/cDr.
ToBranchAdjustmentA/c

Question.2)OnwhatbasisistheallocationofelectricitychargesmadeincaseofdepartmentalAccounts?
2003June
Answer: Common expenses incurred for the benefit of many departments are to be taken into Accountto
ascertaintheoverallprofitabilityofthevariousdepartments.Thecommonexpensesneedtobeapportioned
tothevariousdepartmentsonsomeequitablebasis.
ElectricityChargesincurredcanbeallocatedinDepartmentalAccountsamongtheVariousDepartments
on the basis of kilowatt hour consumed by each Department. But if separate Meter id installed in each
DepartmentthentheElectricityChargeswillbeapportioneddirectlybyapportioningthetotalcostbypower
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.AtCost Stock& Debtors Method: (a)BranchStockA/cThisA/cisliketradingA/canditshows(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,GoodssentbyH.O.toBranch&GoodsReturnedbyBranchtoH.O.willbeenteredNotatcost.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

TitleofAccountingStandard

StandardNo
AS1

AS4
AS5

AS9
AS10
AS11
AS12

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(standswithdrawnafterintroductionof
AS26)
RevenueRecognition
AccountingforFixedAssets.
TheEffectofChangesinForeignExchangeRates(Revised)
AccountingforGovernmentGrants

AS13
AS14
AS15
AS17
AS18
AS19
AS20
AS21
AS22
AS23
AS24

AccountingforInvestments
AccountingforAmalgamations
EmployeeBenefits(Revised)AS16
BorrowingCost
SegmentReporting
RelatedPartyDisclosures
Leases
EarningsPerShare
ConsolidatedFinancialStatements
AccountingforTaxesonIncome
AccountingforInvestmentinAssociatesinConsolidatedFinancialStatements
DiscontinuingOperationsAS25InterimFinancialReportingAS26 IntangibleAssets

AS27

FinancialReportingofInterestsinJointVenture

AS28
AS29
AS30
AS31
AS32

ImpairmentofAssets
Provisions,ContingentLiabilitiesandContingentAssets
FinancialInstruments:RecognitionandMeasurement
FinancialInstruments:Presentation
FinancialInstruments:Disclosures

AS6
AS7
AS8

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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:SegmentReporting:Thisstandardrequiresthattheaccountinginformationshouldbereportedon
segmentbasis.AS17establishesprinciplesforreportingfinancialinformationaboutdifferenttypes
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:PriorPeriodItem:PriodPrioditemareincomeincomeorepensewhich,arise,incurrentperiodas
aresultofwrrororomissioninthepreparationofFinacialStatementofonemorepriorperiods.
ExamplepfPriorPeriodItemsare:
Arrorincalculationinprovidingexpenditureoruncome
ApplyingincorrectrarefoDepreiation.
AccountingEstimate:ItmeAnswerthaestimateinreviseddueforchangeinthecircumstanes/conditionon
whichtheestimateswasbased.
Forexample:
EstimationofprovisionofSundryDebtors.
EstimationofprovisionforanyLiabilities.

Question.7)Statetheadvantageanddisadvantagesofsettingaccountingstandars.2001Dec
Answer:ThefollowingaretheadvantagesofAccountingStandards.
1. AccountingStandardsreducetoareasonableextentoreliminatealtogetherconfusingvariationin
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. AccountingStandardscannotoverridetheLaw.TheStandardsarerequiredtobefarmedwithinthe
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.CashFlowfromInvestingActivities:TheActivitiesofacquisitionanddisposalofLongTermAssetsand
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.
AsperAS2ValuationofInventories,InventoriesarevaluedatCostorNetRealizableValuewhichever
islower.IFIFOmethodofvaluationInventoriesareValueatCurrentCost;astheStockwhichisboughtFirst
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.
RecognitionofRevenueandExpensesbyreferencetotheStageofCompletionofContractsgenerally
referredtoas Percentageof CompletionMethod. Under this methodRevenue isrecognized as Revenuein
theStatementofProfit/LossintheAccountingPeriodinwhichworkisperformed.StageofCompletioncan
bedeterminedinavarietyways:

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(1) CosttoCostMethod:Here,thePercentageofCompletionwouldbeestimatedbycomparingTotal
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 Rupeewhich 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
ThetransactionsForeignBranchhastobeincorporateinHeadOfficebooksastheFinancialStatements
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:IftheProfitandLossAccountandBalanceSheetofaCompanydocomplywiththerequirementof
theAccountingStandard,thereisneedtodiscoedthereasonofnoncompliancewithAccountingStandard.
IfanyFundamentalAccountingAssumptionhasbeenfollowed,thenthisfactmustbedisclosedinFinancial
Statements.

Question.11)StatethemainfunctionofAccountingStandardBoard.

2003Dec
Answer:ThemainfunctionofAccountingStandardBoardisasunder:
(1) The ASB may consider any issue requiring interpretation on any Accounting Standard.
InterpretationswithbeissuedundertheauthorityoftheControl.
(2) TheASBdeterminesthebroadareasinwhichAccountingStandardsneedtoeformulatedandthe
priorityinregardtotheselectiont

Question.12)Whenisanassetjudgedtohavesufferedanimpairmentloss?
2004June
Answer:AnAssetisjudgedtohavesufferedanimpairmentlosswhenitsRecoverableValuefallsshortofits
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)WhatistheprimaryreasonfornonacceptabilityofInternationalAccountingStandards(IAS)
throughouttheworld?2005June
AccountingPracticesindifferentCountriesvaryduedivergentLegislativeRequirements,SocialandEconomic
Countries,longStandingPractices,TaxStructureandOrganizedProfessionalAccounting;oftenMultinational
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.ThesefactorsareprimaryreasonfornonacceptabilityofIntentionalAccountingStandardsthough
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
therequirementsitmustdisclosetheDeviation,reasonfordeviationandthefinancialeffectarisingdueto
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:Generallymakeroffinancialstatementshastofaceuncertaintiesatthetimeof
preparationofpreparationofpreparationofFinancialStatements.Theseuncertaintiesmay
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
spiteofthefactthattheHireofthefactthattheHirePurchasethepurchaser,becomethe
Owner only of the transaction is ignored and the transaction is Accounted as per its
substance.
c. Materiality:FinancialStatementshoulddisclosealltheitemsandfactswhicharesufficient
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
fortheadoptionofasinglesetofhighqualityworldwideaccountingstandards.Muchconvergenceamong
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) Itwillenablecompaniestohaveaccesstoforeigncapitalmarketswithouthavingapreparesetsof
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:ThereareseveralimpedimentstoachievingglobalconvergenceofAccountingStandards
havebeendevelopedindifferentcountiesunderdifferentlegal,economic,political,socialandcultural
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
standardswithIASBstandardsalsoappearstobeadifficulttaskforthosedevelopingcourtiersthatdo
nothavethenecessaryfinancialreportinginfrastructure.

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Convergencerequirestheactivecooperationofallthepartiesthathaveastakeintheprocess.
If the parties so not pursue the issue hard enough, convergence will difficult to achieve. However; the
recenteventstendtosuggestthatmostcouriersthroughouttheworldareactivelypursuingthegoalof
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)ThereisnosignificantuncertaintyincollectionoftheamountofConsideration(Cashreceivable
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,AsperAS2,InventoryistobevaluedonthebasisofCostorNetRealizableValuewhicheveris
lower.InventoryPrudenceisnottobevaluesatCostPriceorCurrentReplacementCostbutatlowerofCost
orNetRealizableValue.

Question.29)WhatarethedisclosurerequirementspertainingtoeventsoccurringaftertheBalanceSheet
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)PriorPerioditemsareincomeorexpenses,whicharise,incurrentperiodofasaresultoferror
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)UnderwhichAccountingstandardcashflowstatementisprepared?HowdoyoutreatProfit
&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)ThefollowingarethedisclosurerequirementincaseofAccountingfortheEffectsofChangein
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)StateclearlytheprovisionscontainedintheAccountingStandardinrespectifRevaluationof
FixedAssets.2009June
RevaluationofFixedAssetsshouldtotheNetRecoverableAmountofFixedasset.
AccountingtreatmentofrevaluationTreatmentinaccountingunderdifferentsituationsisasunder:
Firsttimerevaluation(upward)
IncreaseinnetbookvalueiscreditedtoownersinterestundertheheadRevaluationReserve.
Firsttimerevaluation(downward)
Decreaseinnetbookvalueischargedtotheprofit&lossaccount.
Firstrevaluation(downward)subsequentrevaluation(upward)
DecreaseinnetbookvalueischargedtotheProfit&LossAccountintheyearinwhichdownward
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:Ifleasebackisfinancelease:Anyprofitorlossonsaleproceedsoverthecarryingamountshould
not be immediately recognized as profit or loss in the financial statement of a seller lessee. It should be
deferredandamortizedoverleaseterminproportiontobedepreciationofleasedasset.

Thefinancial statement ofConstructions Limitedfor the year ended 31March 2001 were consideredand
approvedbytheboardofdirectorson20May2001.2001Dec
ThecompanywasengagedinconstructionworkinvolvingRs.10crores.Inthecourseofexecutionofwork,
aportionoffactoryshedundercontractioncamecrashingdownon30May2001.Fortunatelytherewasno
lossoflife,butthecompanywillhavetorebuildthestructureatanadditionalcostofRs.2croreswhich
cannotberecoveredfromthecontractee.Howshouldthiseventbereported?
AsperAS4,EventsOccurringaftertheBalanceSheetdateandalsoafterapprovalofAccountsbyAccountby
BoardofDirectorsofaCompanysucheventsshouldbedisclosedintheDirectorsReportofmaterial.When
anuncertaintyarisesaboutthecollectabilityofanamountalreadyincludedinContractRevenueandalready
recognizedinProfitandLossStatementitamountstoexpense.Thisuncollectibleamountofwhichrecovery
hasceasedtobeprobableisrecognizedasanexpenseratherthanasanadjustmenttoContractRevenue.
HenceinthegivencaseRs.2Croresadditionalcostrebuildthestructurewhichcannotberecoveredfrom
theContracted,asperAS7Constructionshouldberecognizedasanexpenseratherthandoingadjustment
toContractRevenue.

Question.37)FundamentalAccountingAssumptions.
Answer:Certainbasicassumptions,inthepreparationoffinancialstatementsareacceptedandtheiruseare
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. Itensuresthevarioususersoffinancialstatementsoftwoormoreorganizationsengagedinsame
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
EmployeesorDirectorsataDiscountorforConsiderationotherthatCashforprovidingataDiscountorfor
additionsbywhatevernamecalled.
Section79A permits issue of such Equity Shares to Employees or Directors in recognition of their
contributionforprovidingknowhowetc.

Question.3)Writeshortnoteson:2003Dec
BonusIssue
Answer:BonusShare:BonusShareissharesissuedtoexistingShareholderfeeofCostbyCapitalizingFree
Reserve.ButCompanycanissueBonusShareswhenanArticleofAssociationauthorizedthesame.Incase
theCompanyissuingBonusShareisaListedCompany,theGuidelineissuedbySEBImustbecompliedwith.
OnlyexitingShare holders are entitled to receive Bonus Shares.Bonus Shares are be issued to onlythose
Shareholdersexpiryof12monthfromthedateofPublicIssueorRightIssuebytheCompany.

Question.4)Writeshortnoteson:2009June
EscrowAccount
Answer:EscrowAccount: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)MaterialityConcept:ReserveCapitalisthatpartofShareCapitalwhichisnotcalledupandwill
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
Sometimescompanyissuesfullypaidsharetothevendorsfromwhomitbuysassets.Thistypeofissue
iscalledissueofsharethenitmustbeclearlystatedinBalancesheet;andmustbedistinguishedfrom
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 .
Afternationalizationpolicyholderaregiven95%ofprofitsofLICbywayofbonus.Bonuscanbepaidincash
adjustedagainstthefuturepremiumduefromthepolicyholdersoritcanbepaidonmaturityofthepolicy
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) Forwritingoffexpensesofcommissionpaidordiscountallowedonissueofshareordebenturesof
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. Theresolutionmustspecifythemaximumrateofdiscountatwhichthesharesaretobeissuedbut
therateofdiscountmustnotexceed10percentofthenominalvalueofshares.Therateofdiscount
canbemorethan10percentoftheboardisconvictedthatahigherrateiscalledforunderspecial
circumstancesofthecase.
c. Atleastoneyearmusthaveelapsedsincethecompanywasentitledtocommencethebusiness.
d. Thesharesareofaclass,whichhasalreadybeenissue.
e. Thesharesareissuedwithintwomonthfromthedateofreceivingsanctionforthesamefromthe
Government.

Question.10)DiscusstheconditionsofCompaniesActwithregardtobuybackofshares.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,dividendcannotbedeclaredoutofProfitonrevaluationoffixedassetssinceitsanationprofit
whichisnotresizedincashandisobtainedfromrevaluationofcapitalassets.

Onreissueofforfeitedshares?
(2) Yes,Dividendcanbedeclaredoutofprofitsonreissueofreissueofforfeitedsharesonlywhenthe
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 theirsurplus cash. If it ispaid as dividend companies will have to pay dividend taxonthe
distribution on the other hand; if cash is distributed through buy back, the tax burden shifts to
shareholderwhohastopaycapitalgainstax.
2. Toincrease underlying share value. Buy back reduces equity and enables the company o increase
earningspershare,whichwouldresultonenhancingthesharevalue.Asharebuybackmayalsobe
announcedwhensharepricesaredepressedinthemarket.
3. To prevent hostile takeover bids. By eliminating surplus cash through buy back such a bid can be
avoided.
4. Buybacksalsofacilitateacompanytomaintainatargetcapitalstructure.Buybackaidacompany
toachieveanoptimaldebtequityratio.
5. Toprofitfromtreasuryoperations.Companiescanbuysharewhenthepricesarelowandreissue
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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Return

Ashareholdermayreceive
dividendonlywhenacompany
Makesaprofit.

Adebentureholderhasarightto
interestevenifthecompanydoesnot
Makeprofit.

Rateof
return
Accounting
treatment

Dividendratecanvarydepending
Ontheprofitposition.
Dividendisgivenoutof
appropriableprofitandnot
chargeabletoProfitandLoss
Account.
Inthecaseofshares,theconceptof
Redemptiondoesnotapply.
Howeveraspertherecentchange
intheCompanies Act, a company
canbuybacksharesinaccordance
WiththeprovisionsintheAct.

Debenturecarriesafixedrateof
Interest.
Debentureinterestischargeableto
ProfitandLossaccount.

Redemption

Debenturesarenormallyredeemable
althoughacompanycanissue
perpetualdebentures

Voting
rights

Ashareholderhasvotingrights.

Adebentureholdercannothave
Votingrights.

Statusatthe
timeof
windingup

Atthetimeofwindingupshare
holdershavetheleastpriority
regardingthereturnofamountdue
tothem.

Atthetimeofwindingupdebenture
holdershaveapriorityovertheshare
holdersregardingthereturnof
amountduetothem

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 MoneyreceivedbyissueofRightSharesmustbe
keptinaSeparateBankAccount.

BonusIssue
When Bonus Issue are Allotted the Company does
notreceiveanythingfromtheShareholder.
NoexistingShareholderhasarighttorenouncesthe
BonusShares.
SincenomoneyisreceivedbytheCompanybyissue
ofBonusShares,thereisnorequirementofkeeping
moneyinrequirementBankA/c.
4 ForissueofRightSharesitisnotaprecondition ForissueofBonusShare,itispreconditionthatthe
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 andcanbe createdonlyif
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 createdforaparticularpurpose.
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
amountoftheitemsforwhichit 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 utilizedfordistribution
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 Awholetimedirectororamanagingdirectormay
managingdirectormaybepaidremuneration
bepaidremuneration
1. By way of a month , quarterly or annual
1. Bywayofamonthlypayment,or
paymentwiththeapprovaloftheCentral
2. Ataspecifiedpercentageofthenetprofits
Government;or
ofthecompany,or
2. Bywayofcommission,ifthecompanyby
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. Ifthereisamanagingdirectororwhole
timedirectorormanager
1%forallofthemtogether.
b. Inanyothercase

3%forallofthemtogether.

Question.4)Liabilitiesvs.Provision
Liabilities
Provision
1. Ifanamountispayableinfutureisexactitis
1. Provisionisalsoaliabilitybuttheamountis
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)Mentiontheseveralwaysinwhichthepercentageofcompletionofalongteamconstruction
maybearrivedat.2003Dec
Answer:ThevariousmethodinwhichthePercentageofCompletionofaLongTermConstructionContract
maybearrivedatare:
(1) CostofCompletionmethod:ThePercentageofCompletionwouldbeestimatedbycomparingTotal
CostincurredtodatewithTotalCostexpectedfortheentireContract
Costtodate
Percentage
of
completion
=_________________________________________________________________
CumulativeCostincurred+EstimatedCosttoCompile
CurrentRevenuefromContract:ContractpricexPercentageofCompletionRevenuepreviously
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 duefrom Customers for Contract Work (Cost incurred recognized Profit )(Someof
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:StatutoryReserves:ItiscompulsoryforeveryBankingCompanytomakeatrAnswerferof20%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
oftheBank,or by way, of net balance incurrent account, or in one or more ofthe aforesaid ways, asum
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,
beincreasedbytheReserveBankofIndiabynotificationupto15%ofthetotalofdemandandtime
liabilitiesinIndia.
Section24oftheBankingRegulationActrequiresthateverybankingcompanyshallmaintaininIndia
incash,goldor unencumbered approved securities an amount which shall not,atthe close ofbusinesson
anyday,belessthanthirtyfivepercent,orsuchotherpercentagenotexceedingforty,belessthanthirty
fivepercent,orsuchotherpercentagenotexceedingforty,astheReserveBankofIndiamayfromtimeto
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) :AccordingtotheRBIAct1934,(Sec.42)andBankingRegulation
Act, 1949(Section 18 and 24) every Banking Company should maintain in India in Cash Gold and
UnencumberedApprovedSecuritiesanamountequalto31.5%onDomesticdemandandTimeLiabilitiesup
tolevelOutstandingasofSeptemberasonSeptember30,1994.
TheLiabilitiesforthispurposeincludeLiabilitiestoBankingSystem(interBankLiabilities)computedas
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)WriteshortnotesonContingencyReserveinrespectofElectricityCompanyAccounts.2003
Dec
Answer: As per the Provision of the Act, Electricity Companies shall trAnswerfer to Contingency Reserve
Accountaamountequalto%to%isoftheOriginalCostofFixedAssetsuntiltheAggregatebalancein
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
aspectordualityofatrAnsweraction.ThesatlfrecordsbasedonthisdualityarecalleddoubleAccounting
Systemofbookkeeping.Forexample,whenRs.50,000cashiscontributesbyowner(s)itresultsinincrease
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,
000tobank.Inaccountingparlance,resourcesarecalledAssets;obligationtopartiesexternaltobusinessis

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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)StatehowfixedassetswhendiscardedandsoldarerecognizedintheAccountsofElectricity
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
saleproceedsbythe Revenue A/c. he differenceto Replacement A/c and is written off fromthe 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
itselfagainstalargerisk.SupposeabuildingisinsuredwithcompanyAforRs,50,000.CompanyA,inorder
reduce its risk; can get the same building insured with company B. The contract between company A and
companyBwillbereinsurance.IfcompanyAwantstoreduceitsrisk,itcangetthesamebuildinginsured
withcompanyC;inthiscaseitwillbecalledretrocession.Reinsurancecanbeforparoftheamountorfor
someoftherisks.Thereinsurancecompanywillpayacommission onthepremiumreceived.Intheabove
example, company B will pay commission to company A. For company B it will be commission on
reinsuranceaccepteditwillbeadebitbalanceandanexpense.ForcompanyAitwillbeagainandwillbe
calledcommissiononreinsuranceceded.

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Question.2)ValuationBalanceSheet
Answer:AccounttoSection28oflifeinsurancecorporationAct1956,95%oftheprofitoflifebusinessmust
bedistributedtothepolicyholdersbywayofBonusonwithprofitspoliciesandtheremaining5%hasto
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:TheseRatiosjudgeafirmsabilitytomeetShorttermObligations.TheseRatiosgiveagoodinsight
intoafirmstermresourcesarecomparedwithShorttermobligations.
PurposeofLiquidityratios
1. ItmayrelateCurrentAssetstoCurrentLiability
2. ItmayrelateCurrentAssetstoLiquidLiability.
3. ItmayrelateWorkingCapitaltoCurrentAssets.
4. ItmayrelateStocktoCurrentAssets.
5. ItmayrelateLiquidresourcestoCurrentAssets

Question.2)UsesofRatioAnalysis:2004Dec
Answer:RatioAnalysisisapowerfultooliftheFinancialAnalysis.ThesignificanceofRatioAnalysisliesinthe
fact that it presents facts on a comparative basis and enables the drawings of inference regarding the
performanceofthefirm.RatioAnalysisisrelevantinassessingtheperformanceofafirminrespectofthe
followingaspects:
1. LiquidityPosition:WiththehelpofRatioAnalysis,conclusioncanbedrawnregardingtheLiabilities
Position of the firm. The liquidity Position of a firm would be satisfactory if it is able to meet its
currentobligationswhentheybecomedue.AfirmcanbesaidtohavetheabilitytomeetitsShort
TermLiabilities,ifithassufficientliquidfundstopaytheinterestonitsshortmaturingdebtusually
withinayearaswellastheprincipals.
2. Operating Efficiency: Yet another dimension of the usefulness of the Ratio Analysis, relevant from
theviewpointofManagement,isthatitthrowslightonthedegreeofefficiencyinthemanagement
andutilizationofitsAsses.
3. OverallProfitability: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:LiquidityorShorttermsSolvencymeAnswerabilityofthebusinesstopayitsshorttermLiabilities.
InabilitytopayoffShorttermLiabilitiesconsistentlywillhamperthecompanyscreditrating.Followingare
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
comparisonmaynotbevalid.Forexample:CompanyAmaybeworkinginmanufactureofheavyelectrical
goodsasaGovernmentCompanyinIndia.ItissubjecttoanumerousAuditsandmanagementmaynotenjoy
thefullfreedomofDecisionmakingduetoAccountabilityofParliaments.ItscomparisonwithSiemensisan
Internationalgiantwiththedifferenttypeofmanagement.Ratiosdontdepictthecircumstances,inwhich
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) InflationdistortsFinancialRatioAnalysis;changesinthereportedperformancesoftheCompanymaybe
entirely due to inflation and not due to management. For this reason Company may have used to
differentiatetheimpactofinflation.

Question.5)2009Dec
Answer:Theanalysisandinterpretationoffinancialstatementsareanattempttodeterminethesignificance
andmeaningoffinancialstatementsdatasothattheforecastmaybemadeofprospectsforfutureearnings,
abilitytopayinterestanddebtmaturities(bothcurrentandlongterm)andprofitabilityandsounddividend
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.

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