Accountancy and Financial Management - Paper 1 | Solved Question Papers | November 2016 | Mumbai University

 Mumbai University Solved Question Papers
Accountancy and Financial Management – Paper I
November – 2016
Marks – 100
Time: Three Hours
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Q. 1. A Fill in the blanks with the appropriate given options and rewrite complete sentences. (Any 10)                                10

1.       Accounting Standard 2 deals with ________. (Disclosure of Accounting Policies/Revenue Recognition/Inventory Valuation).

2.       The initial amount payable at the time of signing the agreement in Hire Purchase transaction is ________. (Hire Purchase Price/Down Payment/Cash Price).

3.       The Manufacturing A/c is prepared to find out ________. (Gross Profit/Cost of Production/Net Profit).

4.       In Departmental A/c, Office Rent is allocated on the basis ________ of each department. (Sales Turnover/Area Occupied/Purchases).

5.       In ________ Method of Stock Valuation, items received first are issued first, so that the latest purchased items are left in stock. (Weighted Average/FIFO/Simple Average).

6.       Wages paid for installation of new machinery is a ________. (Capital Expenditure/Capital Receipt/Revenue Expenditure).

7.       As per the rules, stock is to be valued at Cost or Net Realizable Value whichever is ________. (Higher/Lower/Available).

8.       For a Book Manufacturing Company, Books is a ________. (Raw Material/Work in Progress/Finished Goods).

9.       The person who sells goods on Hire Purchase Basis, is called a ________. (Hire Purchaser/Hire Vendor/Consignor).

10.   ________ shows the financial position of the company at the end of the year. (Trading A/c/Profit & Loss A/c/ Balance Sheet).

11.   In case of a manufacturer, Sale of Scrap appears on the credit side of ________ A/c. (Trading /Profit & Loss/Manufacturing).

12.   Under Credit Purchase Method of Hire Purchase System, Depreciation on Asset purchased is charged for the first year on ________. (Full Cash Price/Hire Purchase Price/Down Payment).

Q. 1. B State whether the following statements are TRUE or FALSE after rewriting the same. (Attempt any 10)  10

1)      Inventories which are held for sale in the ordinary course of business are current assets. TRUE

2)      AS-9 does not cover revenue arising from government grants and subsidies. TRUE

3)      It is not necessary to disclose the change in accounting policy. FALSE

4)      Revenue expenses are non-recurring expenses. FALSE, Recurring.

5)      The Manufacturing A/c always shows a debit balance. TRUE

6)      Departmental Accounts are necessary for evaluating departmental efficiency. TRUE

7)      Disclosures under AS-1 need not form a part of final Accounts. FALSE

8)      Income received in advance is shown on the asset side of the balance sheet. FALSE, Liabilities

9)      Hire Purchase Price is the total of cash price and interest. TRUE

10)   Full Cash Price Method is also known as Credit Purchase Method. TRUE

11)   Amount paid as carriage inward is included in cost of inventory. TRUE

12)   Under Hire Purchase System the seller is the owner of goods until the payment of last installment. TRUE

Q. 6. Answer the following:                                                        20

a)    What are the provisions of Revenue Recognition as per AS-9.

Ans: Accounting Standard – 9: Revenue Recognition

Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. In other words, revenue is charge made to customers/clients for goods supplied and services rendered. Accounting Standard 9 deals with the bases for recognition of revenue in the Statement of Profit and Loss of an enterprise but this standard does not deal with the following aspects of revenue recognition to which special considerations apply:

(i) Revenue arising from construction contracts;

(ii) Revenue arising from hire-purchase, lease agreements;

(iii) Revenue arising from government grants and other similar subsidies;

(iv) Revenue of insurance companies arising from insurance contracts.

Examples of items not included within the definition of “revenue” for the purpose of this Standard are:

(i) Appreciation in the value of fixed assets;

(ii) Unrealised holding gains resulting from the change in value of current assets

(iii) Realised or unrealised gains resulting from changes in foreign exchange rates.

(iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount;

(v) Unrealised gains resulting from the restatement of the carrying amount of an obligation.

Timing of Revenue Recognition: Revenue from sale or rendering of services should be recognized at the time of sale or rendering of services. But in case of uncertainty of collection of the revenue, the revenue recognition is postponed and in such cases revenue should be recognized only when it becomes reasonably certain that ultimate collection will be made.

Conditions to recognised revenue in various cases:

a) Revenue from Sale of Goods: Revenue is recognized when all the following conditions are fulfilled:

a)      Seller has transferred the ownership of goods to buyer for a price.

b)      All significant risks and rewards of ownership have been transferred to buyer.

c)       Seller does not retain any effective control of ownership on the transferred goods

d)      There is no significant uncertainty in collection of the amount of consideration.

b) Sale on Approval: Revenue should be recognized when buyer confirms his desire to buy such goods through communication.

c) Guaranteed Sales: Revenue should be recognized as per the substance of the agreement of sale or after the reasonable period has expired.

d) Warranty Sales: Revenue should be recognized immediately but the provision should be made to cover unexpired warranty.

e) Consignment Sales: Revenue should be recognized only when the goods are sold to third party.

f) Special Order and Shipments: Revenue from such sales should be recognized when the goods are identified and ready for delivery.

f) Installment Sales: Revenue of sales price excluding interest should be recognized on the date of sale. Interest should be recognized proportionately to the unpaid balance.

Revenue from Rendering of Services: Revenue from rendering of service is generally recognized as the service is performed. The performance of service is measured by following two methods:

(i) Completed Service Contract Method: Completed service contract method is a method of accounting which recognises revenue in the Statement of Profit and Loss only when the rendering of services under a contract is completed or substantially completed.

(ii) Proportionate Completion Method: Proportionate completion method is a method of accounting which recognises revenue in the Statement of Profit and Loss proportionately with the degree of completion of services under a contract.

b)   Explain the Provisions of Disclosure of Accounting Policies as per AS-1?

Ans: Disclosure of Accounting Policies:

This statement deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. The view presented in the financial statements of an enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policies followed in the preparation and presentation of the financial statements. The accounting policies followed vary from enterprise to enterprise. Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated.

Need for Disclosure of Accounting Policies

a) To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Such disclosure should form part of the financial statements.

b) It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements, schedules and notes.

c)  Any change in an accounting policy which has a material effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated.

If a change Is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

Considerations in the Selection of Accounting Policies

The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit or loss for the period ended on that date. For this purpose, the major considerations governing the selection and application of accounting policies are:

a. Prudence: In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.

b. Substance over Form: The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.

c. Materiality: Financial statements should disclose all “material” items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements.

CHANGE IN   ACOUNTING POLICIES

A   change   in accounting policies should be made   in the following condition:

(a)It is required by some Statute or for compliance   with an Accounting standard.

(b)change  would  result  in  more  appropriate  presentation    of  financial  statement.

Change   in   accounting  policy  may  have  a   material  effect  on  the  items  of  financial  statements. For   example, if  depreciation    method  is   changed  from straight   -line   method   to  written  -down  value  method, or  if  cost  formula  used  for  inventory   valuation  is   changed   from  weighted    average  to  FIFO, or   if  interest  is  capitalised  which  was   earlier   not in  practice,  or  if  proportionate   amount   of  interest  is changed  to   inventory  which  was  earlier  not  the  practice , all these may  increase   or  decrease  the  net  profit. Unless   the  effect   of  such   change in  accounting   policy   is  quantified ,the  financial  statements  may  not  help  the  users  of  accounts. Therefore, it is   necessary  to  quantify  the  effect of  change  on  financial  statements  items  like  assets, liabilities ,profit  / loss  .

Or

Q. 6. Write short notes on Any four of the following:                                     20

a)    Manufacturing A/c.

Ans: Manufacturing account is prepared by factories who do not maintain separate cost accounts to find the cost of goods manufactured for a particular period. This account also helps to find profit or loss on goods manufactured. It is debited with opening stock of raw materials and work in progress, net purchase of raw materials, factory overheads and credited with closing stock of raw materials & work in progress and sale of scrap. The balance of this account is transferred to trading account.

b)   FIFO Method of Inventory Valuation.

Ans: According to this method the units first entering the process are completed first. Thus the units completed during a period would consist partly of the units which were incomplete at the beginning of the period and partly of the units introduced during the period.  The cost of completed units is affected by the value of the opening inventory, which is based on the cost of the previous period. The closing inventory of work-in-process is valued at its current cost.

Advantages:

a. This method is simple to understand and easy to operate.

b. The closing stock is valued at the current market price.

c. Since issues are priced at cost, no profit or loss arises from pricing.

d. This method is more suitable in times of falling prices.

e. Deterioration and obsolescence can be avoided.

                Disadvantages:

a. When prices fluctuate, calculation becomes complicated. This increases the possibility of clerical errors.

b. During the period of price fluctuations, material charged to jobs vary. Therefore, comparison between jobs is difficult.

 

c)    Main Features of AS-2.

Ans: Accounting standard 2 deals with the determination of value at which inventories are carried in the financial statements, including the ascertainment of cost of inventories and any write-down thereof to net realisable value. This standard is applicable to all the companies irrespective of their level.

Inventories means all items, goods and products held by any business unit for use in production or selling in open market to earn profit. Inventories are normally in three from – raw materials, work in progress and finished goods. Those goods and items held by business unit for own use and consumption cannot be considered as inventory.

According to AS – 2, inventories includes:

a)    Inventories held for sale in the ordinary course of business or

b)   Work-in-progress; or

c)    In the form of materials or supplies to be consumed in the production process or in the rendering of services.

But inventories do not include:

a)      Work in progress of a construction company.

b)      Work in progress in a service contract.

c)       Financial instruments held as stock in trade.

d)      Live stocks and agricultural products.

e)      Spare parts, servicing equipment and standby equipment.

Valuation of Inventories:

Inventories are valued at cost or market price whichever is lower except the following:

a)    Shares, debentures and other financial instruments held as stock in trade.

b)   Live stocks and agricultural products valued at net realisable value.

c)    Work in progress in the service and construction business.

 

d)   Stock Reserve.

Ans: Stock reserve is the amounts of profit included in stocks which are remain unsold at the end of the accounting year. Concept of stock reserve is arises mainly when head office sends goods to its branch at invoice price. If goods are sent at invoice price and it remain unsold at the end of the accounting year, then profit included in such stock is called stock reserve and it is to be deducted while preparing final accounts of the branch. The following journal entry are passed to deduct stock reserve:

a) For adjustment of loading (profit) included in opening stock at branch or in transit:

Stock reserve Account                   Dr

To Branch Account

b) For adjustment of loading (profit) included in goods sent to branch less return:

Goods sent to branch account                   Dr

To Branch Account

c) For adjustment of loading (profit) included in closing stock at branch or in transit:

Branch Account                Dr

To Stock reserve Account

 

e)   Fundamental Accounting Assumptions.

Ans: Fundamental Accounting Assumptions (Fundamental Accounting Concept)

AS-1 highlights three important practical rules. Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed. The following have been generally accepted as fundamental accounting assumptions:

a.      Going Concern Concept: This concept is applied on the basis that the reporting entity is normally viewed to be continuing in operation in the foreseeable future, and without there being any intention or necessity for it to either liquidate or curtail materially its scale of business operations.

b.      Accrual Concept: This is relevant in the area of revenue and costs. These are accrued, i.e., recognised, as they are earned or incurred (and not as cash is received or paid). Also, they are recorded in the period to which they relate.

c.       Consistency Concept: There should be consistency of accounting treatment of comparable (similar) items, not only within each accounting period, but also from one period to another.

These concepts, which are fundamental to accounting, are the broad-based assumptions, underlying preparation of financial statements periodically. Financial statements are assumed to be prepared by adhering, among others, to these.

f)     Importance of Departmental Accounts.

Ans: Importance of Departmental Accounts is listed below:

a)    It provides an idea about the affairs of each department.

b)   It helps to evaluate the performance of each department.

c)    It helps to reward the Departmental mangers and staff on the basis of performance.

d)   It facilitates control over the working of each department.

e)   It helps to compare the result of one department with those of other departments.

f)     It helps the management to formulate the right business policies for the various departments.

g)    It will help in the preparation of departmental budgets.

h)   It helps to calculate stock turnover ratio of each department.

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