Mumbai University Solved Question Papers
Accountancy and Financial Management –
Paper I
April – 2019
Marks – 100
Time: Three Hours
Please check whether
you have got the right questions paper.
Q. 1. A. Choose the correct
options from the bracket and rewrite complete sentences. 10
1. As per Accounting Standard 2, the term Inventory covers ________. (Goods on consignment/Goods for resale/Spare parts).
2. ________ method of inventory Valuation assumes that those items which have been purchased first are sold first. (First In Fast Out (FIFO)/ Last In Fast Out (LIFO)/Weighted Average)
3. Capital Expenditure means an expenditure carrying probable ________ benefits (Present/Past/Present and future).
4. In Departmental Accounts, Salary is allocated on the basis of ________ of each department. (Sales Turnover/Number of Machines/Number of Employees).
5. The initial amount paid at the time of signing the Hire Purchase agreement is called ________. (Cash Price/Interest/Down Payment).
6. Purchase of a Fixed Asset is a ________ Expenditure. (Capital/Revenue/Deferred Revenue).
7. The main objective of Accounting Standard is to ________ the different Accounting Policies and practices followed by different concerns. (Standardize/Mandate/Cancel).
8. Trade mark is a ________. (Current Asset/Fixed Asset/Investment).
9. ________ is an example of Accounting policy. (Entity/Accrual/Depreciation).
10. In Departmental Accounts, ________ is debited to General Profit & Loss A/c. (Audit fees/Rent/Power and Fuel).
11. Prepaid Expenses are shown on ________. (Debit side of P & L A/c/Asset Side of Balance Sheet/Liability side of Balance Sheet).
12. Under Hire Purchase system, Depreciation is provided by ________. (The Hire Purchaser/Hire Vendor/Both Purchaser and Vendor).
B. State whether the
following statements are TRUE or FALSE and rewrite the same. (Any 10) 10
1) As per AS-1, Disclosure is required if Fundamental Accounting Assumptions are not followed. TRUE
2) Fixed Assets are stated in the Balance Sheet at their Present Values. FALSE
3) Under FIFO method of Inventory valuation, Closing stock is valued at current cost. TRUE
4)
The Hire Purchaser becomes the owner of goods as
soon as he pays the down payment. FALSE
5)
As per AS-9, Revenue from Sales is recognized
only when the goods are invoiced and delivered. TRUE
6) Capital Expenditure is shown as a Liability in the Balance Sheet. FALSE
7) Accounting Standard-2 applied to Agricultural Products. FALSE
8) Gross profit is the excess of Sales over the Cost of Goods sold. TRUE
9)
The seller has a right to repossess the asset
sold under Hire Purchase System if the Hire purchaser fails to pay any
installment. TRUE
10) In Departmental accounts Loss by fire is treated as general expenditure and charged to General Profit and Loss A/c. TRUE
11) The
Purchaser can mortgage the Asset purchased on hire purchase system. FALSE
12) Trade
discount is deducted while determining the cost of purchases. FALSE
Q. 6. Answer the following:
a)
Explain in brief
the provisions of Disclosure of Accounting Policies and Fundamental Accounting
Assumptions as per AS-1. 10
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 .
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.
b) Define the term inventory. State the Items covered and
excluded from the scope of AS-2. 10
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.
Cost of Inventories:
Cost of inventories comprise all
costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present condition and location.
Costs of purchase include:
a) Purchase
price excluding trade discounts, rebates, etc.
b) Duties
and taxes other than refundable duties and taxes
c) Freight
inwards
d) Other
expenditure directly attributable to the acquisition
Costs of conversion include:
a) All
the cost directly related to production such as direct labour.
b) Allocation
of fixed production overheads based on normal capacity.
c) Variable
production overheads assigned to each unit of production on the basis of the
actual use of production facilities
Other costs: All other costs which are incurred to
bring the inventories to their present conditions and locations such as
designing, packaging, transportation etc. But other costs do not include:
a) Abnormal
wastage
b) Storage
costs unless necessary in the production process prior to a further production
stage
c) Selling
and Distribution costs
d) Administrative
overheads that do not contribute to bringing the inventories to their present
location and condition
e) Unallocated
overheads
Or
Q. 6. Write short notes on any
four of the following: 20
a)
Weighted Average
Method of Stock Valuation.
Ans: 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.
Advantages:
a. It gives more accurate results than simple average price because it considers both quantity as well as price.
b. It evens out the effect of price fluctuations. All jobs are charged a average price. So, comparison between jobs is more easy and realistic.
c. It is suitable in the case of materials subject to wide price fluctuations.
d. It is acceptable to income tax authorities.
Disadvantages:
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) Accounting for Hire Purchase Transactions.
Ans: ACCOUNTING FOR HIRE
PURCHASE SYSTEM
Accounting
treatment in the books of hire purchaser
There
are three methods to maintain the accounts in the books of hire purchaser they
are.
A. Outright property
method: under this method the asset is recorded at full cash price.
B. Asset accrual
method: under this method the asset is recorded at the cash price actually paid
(asset accrued is recorded)
C. Interest suspense method: Under this method asset is debited with cash price and difference between hire purchase price and cash price is debited to interest suspense account and corresponding credit is given to the vendor. Interest included in each installment is credited to interest suspense account by giving debit to interest account. In balance sheet, asset will be shown at cash price less depreciation charged and net balance of hire vendor is shown as liability after deducting interest suspense balance.
JOURNAL ENTRIES
IN THE BOOKS OF HIRE PURCHASER
Sl.No. |
Circumstances |
Outright
property |
Asset
accrual |
Interest
suspense |
At
the time of asset purchased. |
||||
01 |
When
the asset is purchased |
Asset
a/c Dr To
hire vendor a/c |
No
entry |
Asset
a/c Dr Interest
suspense a/c Dr To
vendor a/c |
02 |
When
the down payment is made |
Hire
vendor a/c Dr To
bank a/c |
Asset
a/c Dr To
bank a/c |
Vendors
a/c Dr To
bank a/c |
At
the end of every year. |
||||
03 |
When
the installment interest becomes due |
Interest
a/c Dr To
hire vendor a/c |
Asset
a/c Dr Interest
a/c Dr To
hire vendor a/c |
Interest
a/c Dr To
interest suspense a/c |
04 |
When
the installment is paid |
Hire
vendor a/c Dr To
bank a/c |
Hire
vendor a/c Dr To
bank a/c |
Vendors
a/c Dr To
bank a/c |
05 |
When
the depreciation is charged |
Depreciation
a/c Dr To
asset a/c |
Depreciation
a/c Dr To
asset a/c |
Depreciation
a/c Dr To
asset a/c |
06 |
When
the depreciation and interest is transferred to p/l a/c |
Profit
/ loss a/c Dr To
interest a/c To
depreciation a/c |
Profit
/ loss a/c Dr To
interest a/c To
depreciation a/c |
Profit
/ loss a/c Dr To
interest a/c To
depreciation a/c |
c) Basis of allocating common expenses amongst departments.
Ans: 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 |
d)
Cost of Production.
e) Capital 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.
f)
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.
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