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Accountancy and Financial Management - Paper 1 | Solved Question Papers | April 2019| Mumbai University

 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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