Mumbai
University Solved Question Papers
Accountancy and
Financial Management – Paper I
November – 2017
Marks – 100
Time: Three
Hours
Please check whether you have got the right
questions paper.
1. (A) Choose the correct
options from the bracket and rewrite complete sentences. 10
1) ________ item of inventory is excluded from the scope of Accounting Standard-2. (Finished Goods/Goods for Resale/Spare Parts).
2) Payment of loan is a ________ Expenditure. (Capital/Revenue/Deferred Revenue).
3) Dividend is a reward received from investment in ________. (Gold/Shares/Real Estate).
4) Outstanding Expenses are recorded on the ________. (Debit side of P & L A/c/Asset Side of Balance Sheet/Liability side of Balance Sheet).
5)
In Departmental Accounts, ________ is debited to
General Profit & Loss A/c. (Salaries/Rent/Interest
on loan).
6) The title to goods sold on Hire Purchase passes on payment of ________. (Down payment/First instalment/Last instalment).
7) Under Perpetual Inventory System, Closing Stock may be ascertained from quantity details recorded on ________. (Bin Card/Stock Ledger/Sales Ledger).
8) Depreciation on the Asset taken on Hire Purchase is calculated on ________. (Full Cash Price/Hire Purchase Price/Installments paid).
9) ________ factory should be considered while selecting and applying an accounting policy. (Dual Aspect/Prudence/Consistency).
10) Stock reserve is ________ closing stock in the Balance Sheet under Departmental Accounts. (Added to/Deducted from/Not adjusted in).
11) Inventories are generally valued at ________. (Cost/net Realizable Value/Lower of Cost or Net Realizable Value).
12) ________ is the total amount payable by the hirer which is made up of cash price of the asset plus interest. (Hire purchase price/Down payment/Instalment).
(B) State whether the following
statements are TRUE or FALSE and rewrite the same. (Any 10) 10
1. Disclosure
of Accounting Policy cannot be a remedy for a wrong or improper accounting
policy. TRUE
2. Hire
vendor has a right to terminate the hire purchase agreement for non-payment of
any installment. TRUE
3. Wages
paid to a carpenter for making furniture is a Revenue Expenditure. FALSE
4. Revenue
from Interest is recognized only when it is actually received. FALSE
5. Weighted
Average Method of stock valuation is not recognised by AS-2. FALSE
6. Reserve for Doubtful Debts is deducted from Creditors in the Balance Sheet. FALSE
7. Departmental
Profit and Loss A/c are useful to managers for evaluating the performance of each
department. TRUE
8. Under
FIFO method, Closing Stock is calculated at the latest Purchase Cost. TRUE
9. Over valuation of inventory leads to higher profit and larger current assets. TRUE
10. As
per AS-1 if in a year method of charging depreciation is changed it need not be
disclosed. FALSE
11. Hire Purchase is an agreement between the vendor and the agent. FALSE
12. Fixed
Assets are stated at their Historical Cost less depreciation in the Balance
Sheet. TRUE
6. Answer the following:
1)
Explain the
Provisions of AS-9: Revenue Recognition. 10
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.
2)
Explain in brief
the main features of Accounting for Hire Purchase and contents of the Hire
Purchase Agreement. 10
Ans: Features and Characteristics of Hire Purchase
System
The characteristics of hire-purchase system
are as under
a) Hire-purchase
is a system of credit sale.
b) The price
under hire-purchase system is paid in installments.
c) The goods
are delivered in the possession of the purchaser at the time of commencement of
the agreement.
d) Hire
vendor continues to be the owner of the goods till the payment of last
installment.
e) The hire
purchaser has a right to use the goods as a bailer.
f) The hire
purchaser has a right to terminate the agreement at any time in the capacity of
a hirer.
g) The hire
purchaser becomes the owner of the goods after the payment of all installments
as per the agreement.
h) If there
is a default in the payment of any installment, the hire vendor will take away
the goods from the possession of the purchaser without refunding him any
amount.
Important terms and provisions in Hire Purchase Agreement
Hire purchase
agreement: it is an agreement between hire purchaser and hire vendor
according to section 2(c) of the hire purchase act, 1972 for purchasing of
goods according to agreement. Some of the important contents of hire purchase
agreement are as follows:
1. Cash
price: it is the price of goods which is sold under ‘contract of sale’
2. Down Payment:
Initial Payment made by vendee to vendor on the date of entering into hire
purchase agreement is known as down payment.
3. Deposit: it
refers any sum payable by the hirer under the hire purchase agreement by way of
initial payment or credited or to be credited to him under the agreement on
account of any deposit.
4. Hire
charges: it is an amount refers to the difference between hire purchase
price and cash price (H P- C P= H C) it also referred to as interest.
5. Statutory
hire charges: it is a hire charges according to the hire purchase act of,
1972.
6. Termination
of hire purchase agreement: The hirer can terminate the agreement at any
time by giving the 14 days notice to the owner. However whatever the amount is
already paid by the hirer is considered as a hire charges.
7. Installment
money: it is the part of the hire purchase price paid by hire purchaser,
in periodic intervals.
Or
6. Write short notes on any
four of the following: 20
a)
Manufacturing A/c.
Ans: 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)
General Profit and
Loss A/c, as prepared in Departmental Accounts.
Ans: General Profit and Loss A/c is a nominal account which is prepared to find overall profit or loss the departments. In this account those expenses and incomes are shown which are not shown in departmental trading & profit and loss account. For example: debenture interest, dividend paid, stock reserve, rent of the organisation as a whole, income from investment, profit or loss on sale of investments etc. This account is prepared after departmental trading & profit and loss account and balance of this account is transferred to capital account.
c) Periodic Inventory System.
Ans:
d) Importance of Accounting Standards.
Ans: Accounting standard seek to
describe the accounting principles, the valuation techniques
and the methods
of applying the accounting principles
in the preparation and
presentation of financial statements
so that they may
give a true and
fair view .
By setting
the accounting standards, the accountant has following benefits:
a.
Standards
reduce to a reasonable extent or
eliminate altogether confusing
variations in the
accounting treatments used
to prepare financial statements.
b.
There are certain areas where important
information is not statutorily required to be disclosed. Standards may call for
disclosure beyond that required by law.
c.
The
application of accounting standards would ,to
a limited extent, facilitate comparison
of financial statements
of companies situated in
different parts of the
world and also of different
companies situated in
the same country. However, it should
be noted in
this respect that
differences in the institutions, traditions and
legal systems from
one country to
another give rise to differences
in accounting standards
adopted in different
countries.
e) Inter departmental Transfer.
Ans:
Transfer of goods or
services by one department to another department are called inter departmental
transfers. When one department transfers goods to another department, the
transaction should be considered as a sale for the supplying department and a
purchase for the receiving department. As such, the supplying department should
be credited and the receiving department should be debited with the value of
goods supplied.
Similarly, when one department
renders service to another department, the department rendering the service
should be credited and the department receiving the service should be debited
with the value of service rendered.
Goods may be transferred either at
cost price or at selling price. If goods are transferred at selling price by
the transferor department and such goods are unsold at the end of the
accounting year by the transferee department, then profit charged on such
unsold goods by the transferor department is treated as unrealized profit and
it should be debited to the general profit and loss account as stock reserve.
In the balance sheet stock reserve should be deducted from closing stock. If
unrealized profit is contained in the opening stock, such reserve should be
credited to the general profit and loss account.
f) Capital Expenditure and Revenue Expenditure.
Ans: Capital
Expenditure: The transactions of capital expenditure give benefits for more
than one accounting period, such as acquisition and improvement of assets,
acquisition of special rights, increasing of earning capacity, and restoration
of operating efficiency. It is non-recurring in nature. Therefore, they are
shown on the assets side of the Balance Sheet.
Rules for
Determining Capital Expenditure
Ø Expenditure
incurred to acquire long term assets (at least more than one accounting
period).
Ø Such Long
term assets must be uses in business to earn profits and not meant for resale.
Ø Expenditure
incurred to keep the assets in working condition.
Ø Expenditure
is incurred to increase earning capacity of a business.
Ø Preliminary
expenses incurred before the commencement of business is considered capital
expenditure.
Some examples of capital expenditure: (i) Purchase
of land, building, machinery or furniture; (ii) Cost of leasehold land and
building; (iii) Cost of purchased goodwill; (iv) Preliminary expenditures; (v)
Cost of additions or extensions to existing assets; (vi) Cost of overhauling
second-hand machines; (vii) Expenditure on putting an asset into working
condition; and (viii) Cost incurred for increasing the earning capacity of a
business.
Revenue
Expenditure: It is incurred for generating revenue in the current accounting
period and its benefit expires with such period. It helps to maintain the
normal working condition of a business. It is charged as expenses in Trading /
Profit & Loss Account on debit side.
Rules for
Determining Revenue Expenditure
Any expenditure which cannot be recognised as
capital expenditure can be termed as revenue expenditure. Revenue expenditure
temporarily influences only the profit earning capacity of the business.
Expenditure is recognised as revenue when it is incurred for the following
purposes:
Ø Expenditure
for day-to-day conduct of the business.
Ø Expenditure
for the benefits of less than one year.
Ø Expenditure
on consumable items, on goods and services for resale.
Ø Expenditures
incurred for maintaining fixed assets in working order. For example, repairs,
renewals and depreciation.
Some examples of Revenue Expenditure: (i)
Salaries and wages paid to the employees; (ii) Rent and rates for the factory
or office premises; (iii) Depreciation on plant and machinery; (iv) Consumable
stores; (v) Inventory of raw materials, work-in-progress and finished goods;
(vi) Insurance premium; (vii) Taxes and legal expenses; and (viii)
Miscellaneous expenses. The
accounting treatments of capital and revenue expenditure are as under:
Ø Revenue expenditures – Debited to Profit and Loss Account.
Ø Capital Expenditures – Shown as assets in the Balance Sheet.
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