Accountancy and Financial Management - Paper 1 | Solved Question Papers | April 2017 | Mumbai University

 Mumbai University Solved Question Papers
Accountancy and Financial Management – Paper I
April - 2017
Marks - 100
Time: Three Hours
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Q. 1. A. Fill in the blanks with the appropriate given options and rewrite the complete sentence.                           10

1)        Accounting Standard 2 (AS 2) deals with _______. (Disclosure of Accounting policies/Revenue Recognition/Valuation of inventory).

2)        Total amount payable by the purchaser in a Hire Purchase transaction is called _______. (Hire Purchase Price/Down Payment/Cash Price).

3)        In a Manufacturing Organization, Manufacturing Account is prepared to find out _______. (Gross Profit/Cost of Production/Net Profit).

4)        In Departmental Accounts, Rent is allocated on the basis of _______each department. (Sales Turnover/Area Occupied/Purchases).

5)        Income received in advance is shown in the _______. (Balance Sheet/Profit and Loss Account/Manufacturing Account).

6)        Amount received on issue of Shares is a _______. (Capital Expenditure/Capital Receipt/Revenue Receipt).

7)        As per Accounting Standard –I, Accounting policies used to prepare the final accounts should _______. (be scattered over the Final accounts/be disclosed at one place, forming a part of final account/not form a part of final account).

8)        For a books manufacturing company, paper is a _______. (Raw Material/Work-in-progress/finished goods).

9)        The person who receives goods under Hire Purchase System is called _______. (Hire Vendor/Hire Purchaser/Agent).

10)     In Departmental Accounts, Comprehensive Insurance (if ratio is not given) is taken in _______. (Departmental Trading Account/General Profit & Loss Account/Departmental Profit & Loss).

11)     In a Manufacturing Organization, purchase of machinery spares will appear in the _______ (Balance sheet/profit & loss account/Manufacturing Account).

12)     Interest received under Hire Purchase System by the hire vendor is his _______. (Expenditure/Income/Capital Receipt).

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

1.       AS-I deals with Disclosure of Accounting Policies. TRUE

2.    For valuation os stock under FIFO method, the Cost of the latest items is compared with their net realizable value. TRUE

3.    As per AS-9, Revenue from interest is recognized only when it is actually received. FALSE

4.    Profit and loss Account shows the financial position of a concern. FALSE

5.    Expenditure that results in acquisition of a permanent asset is a capital expenditure. TRUE

6.    Loss by fire in a Departmental is charged to General P & L A/c in Departmental Accounting. TRUE

7.    Under Hire Purchase System, Depreciation on Asset is charged by the Vendor until the payment of last installment. FALSE

8.    Down payment includes interest. FALSE

9.    Freight inward is allocated on the basis of purchase of the department. TRUE

10. Inventory is a current assets. TURE

11. If the buyer fails to pay the installment, the seller has a right to repossess the asset sold under Hire Purchase System. TRUE

12. Under FIFO Method, the stock includes goods held for resale. TRUE

Q. 6. Answer the following:        20

1)    What are the main features or requirements of AS-2?

Ans: Accounting Standard – 2: Valuation of Inventories

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.

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 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

Methods of valuation of inventories:

The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs.

For other inventories, cost can be assigned by using the first-in, first-out (FIFO), or weighted average cost formula, whichever reflects the fairest possible approximation to the cost incurred in bringing the inventories to their present location and condition.

However, when it is difficult to calculate the cost using above methods, Standard cost and Retail cost can be used if the results approximate the actual cost.

2)    How would you allocate expenses on different basis in case of Department Accounts?

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.

Or

Q. 6. Write short notes on (any 4) of the following:                                         20

a)    Cost of production.

Ans: Cost of production is the total cost which is incurred by an entity to produce a product in a particular period. It is calculated by adding raw material cost, labour charges, factory expenses and office & administrative expenses relating to production. Selling & distribution expenses are not included in cost of production. This cost is important because inventories are normally valued at cost of production.

Cost of production is calculated as follows: Ram material consumed + Direct labour + direct charges relating to production + office and administrative overheads.

b)   Interdepartmental transfers.

Ans: Inter departmental transfers: Transfer of goods or services by one department to another department are called inter departmental transfers. When one department transfers goods to another department, the transaction should be considered as a sale for the supplying department and a purchase for the receiving department. As such, the supplying department should be credited and the receiving department should be debited with the value of goods supplied.

Similarly, when one department renders service to another department, the department rendering the service should be credited and the department receiving the service should be debited with the value of service rendered.

Goods may be transferred either at cost price or at selling price. If goods are transferred at selling price by the transferor department and such goods are unsold at the end of the accounting year by the transferee department, then profit charged on such unsold goods by the transferor department is treated as unrealized profit and it should be debited to the general profit and loss account as stock reserve. In the balance sheet stock reserve should be deducted from closing stock. If unrealized profit is contained in the opening stock, such reserve should be credited to the general profit and loss account.

c)    Factors influencing choice of Accounting Policy.

Ans: 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.

d)   Distinguish between Capital Expenditure and Revenue Expenditure.

Ans: The following are the points of distinction between Capital Expenditure and Revenue Expenditure:

Basis	Capital Expenditure	Revenue Expenditure
1. Benefits	Its benefit realised for more than one accounting period.	Its benefits enjoyed within a particular accounting period.
2. Nature	It is non-recurring (Irregular) in nature.	It is Recurring (Regular) in nature.
3. Conversion	All Capital Expenditures eventually become Revenue Expenditures like depreciation	Revenue Expenditures are not generally capital expenditures.
4. Matching	These are not matched with Capital Receipts.	These are matched with Revenue Receipts.
5. Shown	These are shown in balance sheet.	These items are shown in income statement.

 

e)   Importance of Stock Valuation.

Ans: While preparing financial statements, inventories must be properly valued because of the following reasons:

a)    Determination of true profit: True profit of business can be ascertained only when stocks are properly valued and shown in income statement. Under or over valuation of inventories will lead to misleading profitability position.

b)   Presentation of true financial position: Balance sheet is prepared to show the financial position of an entity and true position can be ascertained only when all the assets and liabilities are correctly valued. That’s why valuation of stock is necessary.

c)    Ascertainment of liquidity position: Current and liquid ratio helps in assessing the liquidity position of an entity. Inventories are part of current assets and liquid. So as to determine the true liquidity position, stock must be properly valued.

f)     Revenue as per AS-9.

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.

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