Accountancy and Financial Management - Paper 1 | Solved Question Papers | November 2018 | Mumbai University

 Mumbai University Solved Question Papers
Accountancy and Financial Management – Paper I
November – 2018
Marks – 100
Time: Three Hours
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1. (A) State whether the following statements are True or False (Any 10):                           10

1)      Change in the Method of Depreciation on Fixed Assets needs to be disclosed as per AS-1. TRUE

2)      Valuation of Stock of goods in trade is done at Cost only. FALSE

3)      Interest on asset purchased on Hire Purchase basis is charged by the vendor. TRUE

4)      Revenue expenditure includes cost of improving the storage capacity of a computer by changing the hard disk. TRUE

5)      Trading Expenses are debited to Profit and Loss A/c. TRUE

6)      Balance sheet shows the profitability of the organization. FALSE

7)      Departmental accounting helps to determine profit or loss of each department. TRUE

8)      When Department A transfers goods to Department B, Department A a/c is debited and Department B a/c is credited. FALSE

9)      Lighting is allocated on the basis of horse power of equipments installed by each department. FALSE

10)   Under Hire purchase system, depreciation is charged on the Hire Purchase Price of the Asset. FALSE

11)   The disclosure of significant accounting policies is mandatory as per AS-1. TRUE

12)   Dividend received on shares is a Capital Receipt. FALSE

(B) Match the Column A with most appropriate answer in column B. (Any 10):                                  10

Column A		Column B
1.	Method of stock valuation.	a.	Allocated on the basis of sales.
2.	Accounting Standard-9.	b.	FIFO Method.
3.	Drawings by proprietor.	c.	Added to purchases in manufacturing A/c.
4.	Capital Expenditure.	d.	Evaluation of performance of each department.
5.	Basic rule for valuation of stock.	e.	Fundamental Accounting assumptions.
6.	Weighted Average Method.	f.	Purchase of Fixed Assets.
7.	Accounting Standard-I.	g.	Financing Activities.
8.	Import duty on purchase of Raw material.	h.	Initial payment at the time of hire purchase agreement.
9.	Selling Expenses.	i.	Lower of Cost or Net realizable Value.
10.	Down Payment.	j.	Revenue Recognition.
11.	Departmental accounting.	k.	Debited to capital A/c.
12.	Capital Receipt.	l.	Total Cost of Inventory/Total Units of inventory.

Solution:-

Column A		Column B
1.	Method of stock valuation.	B.	FIFO Method.
2.	Accounting Standard-9.	J.	Revenue Recognition.
3.	Drawings by proprietor.	K.	Debited to capital A/c.
4.	Capital Expenditure.	F.	Purchase of Fixed Assets.
5.	Basic rule for valuation of stock.	I.	Lower of Cost or Net realizable Value.
6.	Weighted Average Method.	L.	Total Cost of Inventory/Total Units of inventory.
7.	Accounting Standard-I.	E.	Fundamental Accounting assumptions.
8.	Import duty on purchase of Raw material.	C.	Added to purchases in manufacturing A/c.
9.	Selling Expenses.	A.	Allocated on the basis of sales.
10.	Down Payment.	H.	Initial payment at the time of hire purchase agreement.
11.	Departmental accounting.	D.	Evaluation of performance of each department.
12.	Capital Receipt.	G.	Financing Activities.

6. Answer the following:

a)    Explain Accounting Standards and state the advantages of Accounting Standards.     10

Ans: Accounting Standards are the policy documents or written statements issued, from time to time, by an apex expert accounting body in relation to various aspects of measurement, treatment and disclosure of accounting transactions for ensuring uniformity in accounting practices and reporting. These standards are prepared by Accounting Standard Board (ASB). Accounting Standards are formulated with a view to harmonies different accounting policies and practices in use in a country.

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.

b)   Explain features of Hire Purchase Agreement.                                                            10

Ans: A trader could sell goods either for cash or for credit. For goods sold on credit, the payments may be made by the buyer in lump sum on a future date, or in installments spread over for a specified period of time. When goods are sold on credit, for which payment is made by the buyer in installments over a period of time, it is called purchase system or installment system.

Hire Purchase System defers to the system wherein, the seller of goods transfers the goods to the buyer without transferring the ownership of goods. The payment for the goods will be made by the buyer in installments. If the buyer pays all the installments, the ownership of the goods will be transferred, on payment of the last installment. However, if the buyer does not pay for any installment, the goods will be repossessed by the seller and the money paid on earlier installments will be treated as hire charges for using the goods. So, under this system, the transaction may result in purchasing of goods by the buyer or in hiring the goods. Hence, the system is called Hire Purchase System.

Types of Hire Purchase Agreements:

Hire purchase agreements are of two types:

a) In first case, the goods are purchased by the financer and sold to the vendee under hire purchase agreement. The vendee will only get the possession of the goods and ownership is transferred from financer to the vendee only when he makes full and final payment together with interest to the financer of the goods. Owner will get his money from the financer.

b) In second case, the vendee purchases the goods and executes a hire-purchase agreement with a financier who paid the amount to the owner of the goods on customer’s behalf. The financier has the right to repossess the goods when vendee fails to make the payment.

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.

Or

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

a)    Limitations and advantages of Weighted Average Method of Stock Valuation.

Ans: Weighted Average Method: This is an improvement over the simple average method. This method takes into account both quantity and price for arriving at the average price. The weighted average is obtained by dividing the total cost of material in the stock by total quantity of material in the stock. It gives more accurate results than simple average price because it considers both quantity as well as price. But it suffers from the following limitations:

a. Stock on hand does not represent current market price.

b. When large numbers of purchases are made at different rates, the calculation is tedious. So, there are more chances of clerical error.

c. With some approximation in average price, there will be profit or loss due to over or under charging of material cost to jobs.

 

b)   Revenue Expenditure.

Ans: 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.

c)    Adjustment entries in Final Accounts.

 

d)   Trading A/c and Profit & Loss A/c.

Ans: Trading account is one of the financial statements prepared by the company to show the result of buying and selling of goods and services during an accounting period. Trading account is prepared to ascertain the gross profit or gross loss.

Objectives or Need for Trading Account: The trading account may be prepared with the following objectives:

1)      To ascertain gross profit or gross loss.

2)      To know the direct expenses.

3)      To make comparison of stock.

4)      To fix up selling price of goods.

5)      To know the limit of indirect expenses.

Profit and loss account is one of the financial statements prepared by the company to show the financial performance of company during an accounting period. It is prepared to ascertain net profit or net loss. It is also called income statement.

Need for Profit & Loss Account

1)      Knowledge of net profit or net loss for the year.

2)      Comparison of profits over the years.

3)      Control over expenses by establishing the relationship of indirect expenses with sales.

4)      On the basis of information disclosed by the profit and loss account, the future course of action may be decided by the management.

5)      Helpful in the preparation of balance sheet.

 

e)   Main features of AS-9 Revenue Recognition.

Ans: 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.

f)     Fundamental Accounting Assumptions as per AS-1.

Ans: 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.

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