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

 MUMBAI UNIVERSITY SOLVED QUESTION PAPERS
Accountancy and Financial Management – Paper I
April – 2018
Marks – 100
Time: Three Hours
Please check whether you have got the right questions paper.

Q. 1. (A) Fill in the blanks with the appropriate given options and rewrite the complete sentence. (any 10)        10

1)      Accounting Standard 9 (AS 9) deals with ________. (Disclosure of Accounting Policies/Revenue Recognition/Inventory Valuation).

2)      In a Hire Purchase transaction, Initial amount paid at the time of signing the contract is called ________. (Hire Purchase Price/Down Payment/Cash Price).

3)      In a Manufacturing Organization, the Trading A/c is prepared to find out ________. (Gross Profit/Cost of Production/Net Profit).

4)      In Departmental Accounts, Discount Allowed is allocated on the basis ________ of each department. (Sales Turnover/Area Occupied/Purchases).

5)      In ________ Method of Stock Valuation, latest purchased items are left in stock. (Weighted average/FIFO/Simple Average).

6)      Carriage Inward paid on purchase of Raw Materials is a ________. (Capital Expenditure/Capital Receipt/Revenue Expenditure).

7)      Expenses incurred for repairs of a Car already in use, is ________. (Revenue Expenditure/Capital Expenditure /Capital Receipt).

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

9)      The Hire vendor records the hire purchase transaction in his books as ________ (Sale of Fixed Asset/Sales of goods/Purchases).

10)   In Profit & loss a/c, the excess of credit side total amount over debit side total amount is ________. (Gross Profit/Net Loss/Net Profit).

11)   In Manufacturing Organization, depreciation on Machinery will appear on the debit side of ________ A/c. (Trading /Profit & Loss A/c/Manufacturing A/c).

12)   In a Hire Purchase transaction, interest paid by purchaser is credited to ________. (Interest A/c/Asset A/c/Hire Vendor A/c).

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

1.       Capital Expenditure is non-recurring in nature. TRUE

2.       AS-1-Disclosure of Accounting Policies is mandatory in nature. TRUE

3.       Outstanding expenses are shown on the liability side of the balance sheet. TRUE

4.       Inventories should be valued at cost or net realizable value whichever is higher. FALSE

5.       Balance Sheet shows the Financial position of the business. TRUE

6.       Revenue from Sale of goods is recognized, when the seller has received the payment for the goods from the buyer. FALSE

7.       In Departmental Accounting, each department is treated as a separate entity for the purpose of recording and reporting. TRUE

8.       Fixed assets acquired on Hire Purchase Basis are recorded at Hire Purchase price. FALSE

9.       The Hire purchaser becomes the owner of the asset only after paying the final installment. TRUE

10.   Inventory includes assets purchased and held for resale. FALSE

11.   Selling price is not considered while preparing stores ledger. TRUE

12.   Sale of scrap is debited to Manufacturing A/c. FALSE, Credited.

Q. 6. Answer the following:                                        20

a)    Explain the provisions of AS-1 regarding Disclosure of accounting policies.

Ans: Provisions of Accounting Standard - 1

Accounting policies refer to:

a) Specific accounting principles, and

b) Methods adopted by enterprises, in applying these principles in the preparation and presentation of financial statements.

There is no single list of accounting policies which are applicable to all circumstances. The differing circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable. The choice of the appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise call for considerable judgment by the management of the enterprise.

Areas in Which Differing Accounting Policies are Encountered

The following are examples of the areas in which different accounting policies may be adopted by different enterprises.

a.      Methods of depreciation, depletion and amortization

b.      Treatment of expenditure during construction

c.       Conversion or translation of foreign currency items

d.      Valuation of inventories

e.       Treatment of goodwill

f.        Valuation of investments

g.      Treatment of retirement benefits

h.      Recognition of profit on long-term contracts

i.         Valuation of fixed assets

j.        Treatment of contingent liabilities.

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.

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  .

 

b)   Explain the main features of 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.

Or

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

1)    Advantages of FIFO method of stock 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.

2)    Fundamental Accounting Assumptions.

Ans: Fundamental Accounting Assumptions

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.

3)    Trading A/c of Manufacturer.

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. It is prepared after manufacturing account and helps in preparation of profit and loss account.

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.

4)    Allocation of common expenses in Departmental Accounting.

Ans: Allocation of all Expenses and Incomes in Departmental Accounts:

Departmental Expenses: The expenses of a business can be broadly divided into following two categories:

1. Direct expenses: Expense relating to a particular department is called direct expenses. They are charged to respective department. For example wages, staff salaries, material etc.

2. Indirect Expenses: Expenses relating to more than one department are called indirect expenses. They are further divided into:

(a) Expenses which can be allocated

(b) Expenses which cannot be allocated

Allocation and Apportionment of Departmental Expenses:

(1) There are certain expenses which can be specially incurred for a particular department. Such expenses are charged directly to the department.

(2) There are certain expenses which are indirect in nature and incurred for the whole department. Such expenses are distributed amongst various departments on some suitable basis. The following table will help to know the proper basis for apportionment of some important expenses among various departments.

Expenses

Basis

a)   Sales expenses as traveling salesman, salary and commission, selling expenses after sales service, discount allowed, bad debts, freight outwards, provision for discount on debtors, sales manager’s salary and other benefits etc.

a) Sales of each department

b)   All expenses relating to building as rent, rates, taxes, air conditioning expenses, heating, insurance building etc.

b) Area or value of floor space

c)    Lighting

c)  Light points

d)   Insurance on stock

d) Average stock carried

e)   Insurance on plant & machinery

e) Value of plant & machinery

f)    Group insurance premium

f)  Direct wages

g)   Power

g) H.P or H.P x Hours worked

h)   Depreciation, Renewals & Repairs

h) Value of assets in each department

i)     Canteen expenses, Labour welfare expenses

i)   No. of employees

j)     Works manager’s salary

j)   Time spent in each department

k)   Carriage inwards

k) Purchases of each department

(3) There are certain expenses which cannot be allocated on some equitable basis such as debenture interest, dividend, share transfer fees, general office expenses, income tax etc. and thus should not be apportioned. Profits of all departments should be brought down in one total and such expenses should be debited and non-departmental profits credited to this without making any effort for its apportionment amount different departments in combined income account.

5)    Capital Receipts & Revenue Receipts.

Ans: A receipt of money may be of a capital or revenue nature. A clear distinction, therefore, should be made between capital receipts and revenue receipts.

A receipt of money is considered as capital receipt when a contribution is made by the proprietor towards the capital of the business or a contribution of capital to the business by someone outside the business. Capital receipts do not have any effect on the profits earned or losses incurred during the course of a year. Additional capital introduced by the proprietor; by partners, in case of partnership firm, by issuing fresh shares, in case of a company; and, by selling assets, previously not intended for resale.

A receipt of money is considered as revenue receipt when it is received from customers for goods supplied or fees received for services rendered in the ordinary course of business, which is a result of the firm’s activity in the current period. Receipts of money in the revenue nature increase the profits or decrease the losses of a business and must be set against the revenue expenses in order to ascertain the profit for the period.

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