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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