MBA

(SEM I) THEORY EXAMINATION 2017-18

BUSINESS ACCOUNTIN

Paper ID: 7 0 3 7 Subject Code: NMBA013

Section A

Answer 1

a. Book keeping is an art of recording in books of accounts the monetary aspect of commercial or
financial transaction. It includes the following activities:
i) Identifying the transaction of financial nature
ii) Measuring the identified transactions in terms of money.
iii) Recoding the identified transaction in the books of original entry.
iv) Classifying them in to ledger.
b. Posting is the act of moving debit and credit account balances from individual journals to their
corresponding ledgers. These ledgers are later used to create a trial balance used to generate the
income statement, balance sheet, and other financial statements.
As business transactions occur during the year, they are recorded by the bookkeeper with journal
entries. After an entry is made, the debit and credit are added to a T-account in the categorized journal.
At the end of a period, the T-account balances are transferred to the ledger where the data can be used
to create accounting reports.
c. The profit and loss appropriation account is an extension of the profit and loss account. The main
intension of preparing a profit and loss account is to show the distribution of profits among the
partners. It is debited with the interest on capital and remuneration to partners and credited with the net
profit b/d from the profit and loss account and interest on drawings. The balance of profit and loss
appropriation account is transferred to the capital account of the partners.
d. GAAP (generally accepted accounting principles) is a collection of commonly-followed accounting
rules and standards for financial reporting. GAAP specifications include definitions of concepts and
principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting
is transparentand consistent from one organization to another.
e. The double entry system of accounting or bookkeeping means that every business transaction will
involve two accounts (or more). For example, when a company borrows money from its bank, the
company's Cash account will increase and its liability account Loans Payable will increase. If a
company pays Rs. 200 for an advertisement, its Cash account will decrease and its account Advertising
Expense will increase.
Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always
be in balance. In our example involving Advertising Expense, the accounting equation remained in
balance because expenses cause owner's equity to decrease. In that example, the asset Cash decreased
and the owner's capital account within owner's equity also decreased.
f. A common size financial statement displays all items as percentages of a common base figure. This
type of financial statement allows for easy analysis between companies or between time periods of a
company. The values on the common size statement are expressed as percentages of a statement
component, such as revenue.
g. The capital of a business which is used in its day-to-day trading operations, known as working capital.
It is calculated as the current assets minus the current liabilities.
Working Capital=Current Assets –Current Liabilities
h. A trade discount is one that is allowed by the wholesaler to the retailer, calculated on the list price of
the product, whereas cash discount is allowed to stimulate instant payment of the goods purchased.
 The main difference between trade discount and cash discount is that ledger account is opened for a
cash discount, but not for a trade discount.
i. An intangible asset is an asset that is not physical in nature. Corporate intellectual property, including
items such as patents, trademarks, copyrights and business methodologies, are intangible assets, as
are goodwill and brand recognition.
j. A Balance Sheet is a statement of the financial position of a business which states the assets, liabilities,
and owners' equity at a particular point in time. In other words, the balance sheet illustrates your
business's net worth.
Section B
Answer 2
a. International Financial Reporting: International financial reporting standards (IFRS) represent a set
of generally accepted accounting principles (GAAP) used by companies to prepare financial
statements, a critical source of information published annually, at a minimum, and useful to various
stakeholders (shareholders, debtors, clients, employees and governments) in understanding a
company's financial performance and management’s stewardship of the company’s resources.
Objective of Accounting Standards or GAAP
 To improve the reliability and credibility of financial statements
 To ensure the consistency and comparability of financial statements
 To provide help in resolving conflict of financial interests among various groups
 To reduce significantly the chance of manipulations and fraud
 To provide help to Auditors
b. Accounting principle are described by various terms such as assumptions, conventions, concepts,
doctrines, postulates etc. These principles can be classified mainly in to two categories:
(I) Accounting Concepts or Assumptions
 Separate entity concept
 Money measurement concept
 Going concern concept
 Cost concept
 Accounting period concept
 Realization concept
 Matching concept
 Dual aspect concept
(II) Accounting Conventions

Separate entity concept:

This concept assumes that, for accounting purposes, the business enterprise and its owners are two
separate independent entities. Thus, the business and personal transactions of its owner are separate.
For example, when the owner invests money in the business, it is recorded as liability of the business to
the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it
is not treated as business expense
Money Measurement concept:
This concept assumes that all business transactions must be in terms of money. In our country such
transactions are in terms of rupees. Thus, as per the money measurement concept, transactions which can
be expressed in terms of money are recorded in the books of accounts
Going concern concept:
This concept states that a business firm will continue to carry on its activities for an indefinite period of
time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be
dissolved in the near future. This is an important assumption of accounting, as it provides a basis for
showing the value of assets in the balance sheet.
Accounting period concept:
 The life of an entity is divided into short economic time periods on which reporting statements are
fashioned. All the transactions are recorded in the books of accounts on the assumption that profits on
these transactions are to be ascertained for a specified period. This is known as accounting period
concept.
ACCOUNTING CONVENTION
The term ‘conventions’ includes those customs or traditions which guide the accountant while preparing
the accounting statements
Conservatism:
This convention is based on the principle that “Anticipate no profit, but provide for all possible losses”. It
provides guidance for recording transactions in the books of accounts. It is based on the policy of playing
safe in regard to showing profit. The main objective of this convention is to show minimum profit. Profit
should not be overstated. If profit shows more than actual, it may lead to distribution of dividend out of
capital. This is not a fair policy and it will lead to the reduction in the capital of the enterprise
Full Disclosure
Convention of full disclosure requires that all material and relevant facts concerning financial statements
should be fully disclosed. Full disclosure means that there should be full, fair and adequate disclosure of
accounting information.
Consistency
The convention of consistency means that same accounting principles should be used for preparing
financial statements year after year. For example: if a stock is valued at “cost or market price whichever is
less”, this principle should be followed year after year.
Materiality
The convention of materiality states that, to make financial statements meaningful, only material fact i.e.
important and relevant information should be supplied to the users of
accounting information. The question that arises here is what is a material fact. The materiality of a fact
depends on its nature and the amount involved. Material fact means the information of which will
influence the decision of its user
c. Trail Balance: Trail Balance is the list of debit and credit balances taken out from ledger. It also includes
the balances of cash and bank taken from Cash Book. All the businessmen after the completion of posting
from Journal or Subsidiary Books to the Ledger want to verify accuracy of the posting. For this purpose a
statement is prepared where in the balances of all accounts in the Ledger are incorporated. The statement
so prepared is called Trail Balance.

Characteristics of Trail Balance:

 It is just statement and not an account.
 It is a list of balances of all ledger accounts
 It is neither a part of double entry system nor does it appears in the actual books.
 Tallied trail balance is not a conclusive proof of accuracy
 It is always prepare on a particular date and not for a particular period.
Methods of Preparing Trial Balance:
There are three methods for the preparation of trial balance. These methods are:
1. Total or gross trial balance
2. Balance or net trial balance
3. Total - cum - balance trial balance
1. Total or Gross Trial Balance:
Under this method the two sides of all the ledger accounts are totaled up. Thereafter, a list of all the
accounts is prepared in a separate sheet of paper with two "amount" columns on the right hand side. The
first one for debit amounts and the second one for credit amounts. The total of debit side and credit side of
each account is then placed on "debit amount" column and "credit amount" column respectively of the
 list. Finally the two columns are added separately to see whether they agree of not. This method is
generally not followed in practice.
2. Balance or Net Trial Balance:
Under this method, first of all the balances of all ledger accounts are drawn. Thereafter, the debit balances
and credit balances are recorded in "debit amount" and "credit amount" column respectively and the two
columns are added separately to see whether they agree or not. This is the most popular method and
generally followed.

d. Subsidiary Books: Subsidiary Books are those books of original entry in which transactions of similar
nature are recorded at one place and in chronological order. In a big concern, recording of all transactions
in one Journal and posting them into various ledger accounts will be very difficult and involve a lot of
clerical work.
This is avoided by sub-dividing the journal into various subsidiary journals or books. The subdivisions of
journal into various subsidiary journals for recording transactions of similar nature are called as
‘Subsidiary Books.
The different subsidiary books and their purpose are shown below:
1. Purchases Day Book – for recording credit purchase of goods only. Cash purchase or assets purchased
on credit are not entered in this book.
Date Name of Suppliers Invoice L. F. Details Total
(Account to be credited) No. Amount

2. Sales Day Book – for recording credit sales of goods only. Assets sold or cash sales are not recorded in
this book.
Date Name of Customers Invoice L. F. Details Total
(Account to be debited) No. Amount

3. Purchases Returns Book – for recording the goods returned to the suppliers when purchased
on credit.
Date Name of Supplier Debit L. F. Details Total
(Account to be debited) Note Amount
No.

4. Sales Returns Books – for recording goods returned by the customers when sold on credit.
Date Name of Customers Credit L. F. Details Total
(Account to be credited) Note Amount
No.

5. Bills Receivable Book – for recording the bills received [Bills Receivables] from customers for credit
sales.
 6. Bills Payables Book – for recording the acceptances [Bills Payables] given to the suppliers for credit
purchases.

7. Cash Book – for all receipts and payments of cash.

8. Journal Proper – for recording any transaction which could not be recorded in the above-mentioned
subsidiary books. For example, assets purchased or sold on credit and opening entry etc., are entered in
this book.
e. Ratio Analysis: A ratio analysis is a quantitative analysis of information contained in a company’s
financial statements. Ratio analysis is used to evaluate various aspects of a company’s operating and
financial performance such as its efficiency, liquidity, profitability and solvency.
When investors and analysts talk about fundamental or quantitative analysis, they are usually referring to
ratio analysis. Ratio analysis involves evaluating the performance and financial health of a company by
using data from the current and historical financial statements. The data retrieved from the statements is
used to - compare a company's performance over time to assess whether the company is improving or
deteriorating; compare a company's financial standing with the industry average; or compare a company
to one or more other companies operating in its sector to see how the company stacks up.
Methods of Ratio Analysis:
1. Liquidity Ratios: liquidity ratios measure a company's ability to pay off its short-term debts as they
come due using the company's current or quick assets. Liquidity ratios include current ratio, quick ratio,
and working capital ratio.
2. Solvency Ratios: also called financial leverage ratios, solvency ratios compare a company's debt levels
with its assets, equity, and earnings to evaluate whether a company can stay afloat in the long-term by
paying its long-term debt and interest on the debt. Examples of solvency ratios include debt-equity ratio,
debt-assets ratio, and interest coverage ratio.
3. Profitability Ratios: these ratios show how well a company can generate profits from its operations.
Profit margin, return on assets, return on equity, return on capital employed, and gross margin ratio are
examples of profitability ratios.
4. Efficiency Ratios: also called activity ratios, efficiency ratios evaluate how well a company uses its
assets and liabilities to generate sales and maximize profits. Key efficiency ratios are the asset turnover
ratio, inventory turnover, and days' sales in inventory.
5. Coverage Ratios: these ratios measure a company's ability to make the interest payments and other
obligations associated with its debts. Times interest earned ratio and debt-service coverage ratio are two
examples of coverage ratios.
 6. Market Prospect Ratios: e.g. dividend yield, P/E ratio, earnings per share, and dividend payout
ratio: These are the most commonly used ratios in fundamental analysis. Investors use these ratios to
determine what they may receive in earnings from their investments and to predict what the trend of a
stock will be in the future. For example, if the average P/E ratio of all companies in the S&P 500 index is
20, with the majority of companies having a P/E between 15 and 25, a stock with a P/E ratio of 7 would
be considered undervalued, while one with a P/E of 50 would be considered overvalued. The former may
trend upwards in the future, while the latter will trend downwards until it matches with its intrinsic value.
Comment: “Ratios Analysis is a tool to examine the health of a business with a view to make the
financial results more intelligible”
Section C
Answer 3
a. Users of Accounting Information
There are various parties or users who are interested in the business of an enterprise and require
accounting information. These users can be bifurcated in two categories as- Internal Users and External
Users.
1. Internal Users
These are the users who are internal to an organisation. Such users have a direct access to the
financial statements of a business. The following users are included in the category of internal
users.
i. Owners- These are the persons who make investment in the business. These are interested in
knowing the profit earned or loss incurred during an accounting period. They are interested in
assessing the profitability and viability of the capital invested by them in the business. The
financial statements prepared by the business concerns enable them to have sufficient
information to assess the financial status and financial health of the business.
ii. Management- The management is an integral part of an organisation. They are indulged in
drafting plans, decision-making process, evaluating the past performances, etc. The financial
statements enable the management not only in drafting policy measures and planning but also
in efficient implementation of the plans. With the help of information revealed by the financial
statements, management can not only enhance the efficiency of the business but also exercise
various cost controlling measures to remove inefficiencies.
iii. Employees and Workers- They are interested in the timely payment of wages and salaries,
bonus and appropriate increment in their wages and salaries. With the help of the financial
statements they can know the amount of profit earned by the company and can demand
reasonable hike in their wages and salaries. The financial statements also help them to assess
their individual career scope and their growth prospects.
2. External Users
External users are those who are outsiders to an organisation and are interested in the financial
affairs of the business. These users do not have a direct access to the financial statements of the
business. The following parties come under the head of external users.
i. Banks and Financial Institutions- Banks provide finance to various businesses in the form of
loans and advances. Thus, they need information regarding liquidity, credit worthiness,
solvency and profitability to advance loans. The accounting information revealed through the
financial statements of business enable them to have access over such information.
ii. Investors and Potential Investors- These are the parties who have invested or are planning to
invest in the business of an enterprise. They are interested in knowing the safety of their
investment in the business and regularity of returns on their investments. Hence, in order to
assess the viability and prospects of their investments, they need information about the
profitability and solvency position of the business.
iii. Creditors- These are the parties to whom a business owes money on account of credit
purchases of goods and services. Hence, creditors require accounting information to enquire
 about the credit worthiness and liquidity position of the business.
iv. Tax Authorities- They need accounting information to know whether the amount of sales,
production, profits, revenues, etc. are correctly calculated and shown unambiguously in the
books. This is very important so that appropriate and correct tax rates (of taxes such as sales tax, excise
duty, etc.) are levied on the business.
v. Government- Government requires information to determine various macro-economic variables such
as national income, GDP, industrial growth, etc. The accounting information assists the government in the
formulation of various policy measures and to address various economic problems such as
unemployment, poverty, etc.
vi. Consumers- Every business attempts to build-up reputation in the eyes of consumers, which
can be created only by supplying better quality products and post-sale services at reasonable
and affordable prices. Businesses that have transparent financial records, assists the customers
in knowing the correct cost of production and accordingly assess the degree of reasonability of
the price charged by the business for its products. Thus, unambiguous and transparent financial
statements help in building business reputation.
vii. Researchers- Various research institutes such as NGOs and other independent research
institutions like CRISIL, stock exchanges, etc. undertake various research projects. The
accounting information facilitates their research work.
viii. Public- Public is keenly interested in knowing the proportion of profit that the business spends
on various public welfare schemes; for example, making charities, funding schools, etc. This
information is revealed by the financial statements of a business.
b. Cash Book: A Cash Book is a type of subsidiary book where cash (or) bank receipts and cash (or)
bank payments made during a period are recorded in a chronological order. Receipts are recorded on the
debit – the left hand side, and payments are recorded on the credit – right hand side. Entries are recorded
just like a ledger account with the help of “To” and “By“. The number of cash transactions in a business is
generally large, hence it is convenient to have a separate cash book to record such transactions.
In case a transaction affects both the cash and the bank account, a contra entry is recorded. There are 3
types of a cash book.
Single Column Cash Book
Also known as a simple cash book or a one column cash book, a single column cash book has one
relevant column on each side which shows the simple “receipts” and “payments” of cash. Receipts are
shown on the left side and the right side is for payments.
Sample Format of One Column Cash Book
Date Receipts L.F. Amount Date Payments L.F. Amount

Double Column Cash Book

Also known as a two column cash book, a double column cash book is the one which has a “Bank”
column in addition to the regular “Cash” column. Just like the other type of books, it records
receipts from cash and bank on the left side and payments – on the right side.
Sample Format of Two Column Cash Book
Date Receipts L.F. Cash Bank Date Receipts L.F. Cash Bank

Triple Column Cash Book

Also called a three column cash book, a triple column cash book has “Cash”, “Bank” and “Discount
Allowed” on the receipt on the left side and “Cash”, “Bank” and “Discount Received” on the payments
 are on the right side of the cash book. Cash discount is recorded, when payments are made in cash or by
check.

Date Receipts L.F. Cash Bank Discount Date Receipts L.F. Cash Bank Discount

Answer 4
Rules of Debit and Credit
Types of Accounts
1. Real Accounts
 Debit what comes in

Consider the following Transaction :

Bought Furniture on credit from M/s Wood Mart
The two elements effected by the transaction are
i. Furniture a/c (Real account) and
ii. M/s Wood Mart a/c (Personal account).
Since furniture is being bought, we can say that it is coming in. Thus we say that Furniture a/c is
to be debited based on the principle "Debit what comes in".
 Credit what goes out

Consider the following Transaction

Sold Goods to Mr. Murty on credit
The two elements effected by the transaction are
i. Goods a/c (Real account) and
ii. Mr. Murty a/c (Personal account).
Since goods are being sold, we can say that it is going out. Thus we say that Goods a/c is to be
credited based on the principle "Credit what goes out".
2. Personal Accounts
 Debit the benefit receiver
Consider the following Transaction
Paid Cash to Mr. Ibrahim
The two elements effected by the transaction are
i. Cash a/c (Real account) and
ii. Mr. Ibrahim a/c (Personal account).
Since cash is being paid to Mr. Ibrahim, we can say that he is receiving (the benefit) from the
organisation. Thus we say that Mr. Ibrahim a/c is to be debited based on the principle "Debit the
benefit receiver".
 Credit the benefit giver
Consider the following Transaction
Bought Goods on credit from M/s Maghan Lal & Co
The two elements effected by the transaction are
i. Goods a/c (Real account) and
ii. M/s Maghan Lal & Co a/c (Personal account)
 Since the goods are being bought on credit from M/s Maghan Lal & Co, we can say that they are
giving (the benefit) to the organisation. Thus we say that M/s Maghan Lal & Co a/c is to be
credited based on the principle "Credit the benefit giver".
3. Nominal Accounts
Accounting transactions affecting an element or account of the type nominal are related to an
expenditure/loss or income/gain to the organisation.
 Debit all Expenses and Losses
Consider the following Transaction
Paid Wages to Workers
The two elements effected by the transaction are

i. Cash a/c (Real account) and

ii. Wages a/c (Nominal account)

Since wages are being paid, it amounts to an expenditure for the organisation. Thus we say that
Wages a/c is to be debited based on the principle "Debit all expenses and losses"
 Credit all Incomes and Gains
Consider the following Transaction
Received Commission from M/s Onyx Chemicals by Cheque
The two elements effected by the transaction are

i. Bank a/c (Personal account) and

ii. M/s Commission a/c (Nominal account).

Since commission is being received, it amounts to an income for the organisation. Thus we say
that Commission a/c is to be credited based on the principle "Credit all incomes and gains".

Answer 5 (a)
Transactions Assets = Liabilities + Capital
Cash + Stock + Furniture + Debtors =Creditors + Bank O/D + Capital
i. Invested 50000 + 0 + 0 + 0 = 0 + 0 + 50000
Rs. 50,000 in Cash to
start a business.
(-)4500+ 4500 + 0 + 0 = 0 + 0 + 0
ii. Purchase
goods for Rs. 4,500 in
cash.
New Equation 45500 + 4500 + 0 + 0 = 0 + 0 + 50000
iii. Sold goods amounting 30000 - 2500 + 0 + 0 = 0 + 0 + 500
Rs.3,000, costing Rs. 2500.
New Equation 48500 + 2000 + 0 + 0 = 0 + 0 + 50500
iv. Paid wages Rs. 300. (-)300 + 0 + 0 + 0 = 0 + 0 - 300
New Equation 48200 + 2000 + 0 + 0 = 0 + 0 + 50200
v. Bought furniture Rs.
2000. (-)2000+ 0 + 2000 + 0 = 0 + 0 + 0
New Equation 46200 + 2000 + 2000 + 0 = 0 + 0 + 50200
vi. Purchase refrigerator
for personal use Rs. 5,000. (-)5000+ 0 + 0 + 0 = 0 + 0 - 5000
New Equation 41200 + 2000 + 2000 + 0 = 0 + 0 + 45200
Vii. Purchase goods from
Ramesh for 10,000 and (-)4000+ 10000 + 0 + 0 = 6000 + 0 + 0
cash paid Rs. 4,000.
New Equation 37200 + 12000 + 2000 + 0 = 6000 + 0 + 45200
viii. Sold goods to Suresh
for Rs. 10,000. 0 - 10000 + 0 +10000 = 0 + 0 + 0
New Equation 37200 +2000 + 2000 + 10000 = 6000 + 0 + 45200
ix. Payment received from
Suresh Rs. 9,800 in full 9800 + 0 + 0 - 10000 = 0 + 0 - 200
sattelment.
New Equation 47000 + 2000 + 2000 + 0 = 6000 + 0 + 45000
x. Rent Paid Rs. 2,500 by
cheque. 0 + 0 + 0 + 0 = 0 + 2500 - 2500
New Equation 47000 + 2000 + 2000 + 0 = 6000 + 2500 + 42500

Answer 5 (b)
Common Size Statement: Common size financial statements present all items in percentage
terms where balance sheet items are presented as percentages of assets and income statement
items are presented as percentages of sales. Published financial statements are common size
statements that contain financial results for the respective accounting period. In the above
example, if the results were presented for a single accounting period, it is a common size
statement. Common size statements are useful in comparing results with similar companies.
Difference between Comparative and Common Size Statement

Basis Comparative Statement Common Size Statement

1. Meaning Comparative financial statements Common size financial statements

present financial information for
several years side by side in the form of
absolute values,percentages or both.
2.Purpose Comparative statements are prepared
for internal decision making purpose.
present all items in percentage terms
where balance sheet items are presented
as percentages of assets and income
statement items are presented as
percentages of sales.
Common size statements prepared for
reference purpose for stakeholders.

3.Usefulness Comparative statements become more Common size statements can be used to
useful when comparing company compare company results with similar
results with previous financial years. companies.
 Answer 6(a)
Trading Profit And Loss A/c
(For the year ending 31.3.2012)
Particulars Amount Particulars Amount
To Opening Stock 3460 By Sales 15450
To Purchase 5457 (-) Sales Return 200 15250
(-) Purchase Return 125 5332 By Closing Stock 3250
To Gross Profit 9708

18500 18500
To Depreciation on: By Gross Profit 9708
Building 375 By Commission 375
(-) Advance Commission 125 250
Furniture 64
Motor vehicle 1250 1689
To interest on bank O/D 118
(+) O/S Interest 85 203
To Salaries 3300
(+) O/S Salaries 300 3600
To Taxes and Insurance 782
(+) O/s Tax 200
782
(-) Prepaid Insurance 200 882
To Bad Debts 125
(+) Further Bad Debts 100
(+) New Provision 185
410
(-) Old Provision 200 210
To General Expenses 1250
To Advertising 450
To Net Profit 1674
 9958 9958

Balance Sheet
(as on 31.3.2012)
Liabilities Amount Assets Amount
Capital 12500 Furniture 640
(+) Net Profit 1674 14174 (-) Depreciation 64 576
Creditors 2500 Motor Vehicle 6250
Bank Overdraft 2850 (-) Depreciation 1250 5000
O/S Intertest 85 Building 7500
O/s Salary 300 (-) Depreciation 375 7125
O/s Taxes 200 Sundry Debtors 3800
Advance Commission 125 (-) Further Bad Debts 100
3700
(-) New Provision 185 3515
Cash 650
Closing Stock 3250
Prepaid Insurance 100

20234
20234
20234

Answer 6 (b)
 Depreciation: The monetary value of an asset decreases over time due to use, wear and tear or
obsolescence. This decrease is measured as depreciation.
 Wear and tear. Any asset will gradually break down over a certain usage period, as parts wear
out and need to be replaced. Eventually, the asset can no longer be repaired, and must be disposed
of. This cause is most common for production equipment, which typically has a manufacturer's
recommended life span that is based on a certain number of units produced. Other assets, such as
buildings, can be repaired and upgraded for long periods of time.
 Perishability. Some assets have an extremely short life span. This condition is most applicable to
inventory, rather than fixed assets.
 Usage rights. A fixed asset may actually be a right to use something (such as software or a
database) for a certain period of time. If so, its life span terminates when the usage rights expire,
so depreciation must be completed by the end of the usage period.
 Natural resource usage. If an asset is natural resources, such as an oil reservoir, the depletion of
the resource causes depreciation (in this case, it is called depletion, rather than depreciation). The
pace of depletion may change if a company subsequently alters its estimate of reserves remaining.
 Inefficiency/obsolescence. Some equipment will be rendered obsolete by more efficient
equipment, which reduces the usability of the original equipment.
Depreciation Accounting Policies

Depreciation is the expired or used portion of a fixed asset during an accounting period.
This is taken into account to achieve the matching principle of matching revenues earned during an
accounting period with the expenses incurred during that period. Since plant assets have useful life
spreading over a number of accounting periods, the portion used in one accounting period is charged to
Income Statement of that accounting period in the form of Depreciation Expense.
Land is recorded at cost, other fixed assets are recorded at Book Value i.e. cost less
accumulated depreciation. For this, separate Depreciation Expense and Accumulated Depreciation
Accounts for different plant assets are maintained. It must also be noted that depreciation is a process of
cost allocation and not a process of valuation as such.
Answer 7 (b)
 Cash Flow Statement: A cash flow statement provides information about the changes in cash
and cash equivalents of a business by classifying cash flows into operating, investing and
financing activities. It is a key report to be prepared for each accounting period for which
financial statements are presented by an enterprise.
Objectives of preparing Cash Flow Statement
 Cash flow statement shows inflow and outflow of cash and cash equivalents from various
activities of a company during a specific period under the main heads i.e., operating
activities, investing activities and financing activities.
 Information through the Cash Flow statement is useful in assessing the ability of any
enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize
those cash flows.
 Taking economic decisions requires an evaluation of the ability of an enterprise to generate
cash and cash equivalents, which is provided by the cash flow statement
Cash From Operation
Particulars Amou Amoun
nts ts
Net profit during the year *****
Add: Non Cash or Non Operating Expenses
Depreciation *****
Goodwill written of *****
Preliminary expenses written of *****
Discount on issue of shares & debenture written of *****
Loss on Sale of assets / investments *****
Propose dividend for current year *****
Provision for tax during the current year ***** *****
*****
Less: Non Cash or Non Operating Income
Dividend received *****
Interest received *****
Rent received *****
Profit of sale of assets / investments ***** *****
Operating Profit Before Working Capital Changes *****
Add: Increase in current Liabilities *****
Decrease in Current Assets ***** *****
*****
Less: Decrease in Current liabilities *****
Increase in Current Assets ***** *****
Cash Generated From Operation *****
Less: Income Tax paid *****
Cash inflow From Operating Activities *****