Q.1 Uncertainties inevitable surround many transaction.

This should be
recognized by exercising prudence in preparing financial statement. Explain this
concept with the help of an example.

Ans. Financial Statements are used to find the financial health of a company or of an
individual. There are two basic statements to be considered. The Statement is simply Assets
less liabilities.
In the example picture I have listed all of the Assets, which in include your house,
401k, car, savings, and furniture. I then listed the accounts that are owed, including house,
car, and Visa. Add up all of the Assets. Add up all of the Liabilities. Subtract the Liabilities
from the Assets and you have the Net Worth. A positive net worth means you have more
assets than you have debts. This is a good thing. A negative net worth means you have
more debts than you have things of worth. Not so good.

A business uses several accounting reports to keep track of its assets. These reports include
the balance sheet, income statement, retained earnings Statement and statement of cash
flows. Businesses rely on these reports for many reasons which include finding out whether
or not the company is profitable, where a company is spending its capital, and what the total
value of the company is. Companies also use these reports for planning for the future. One
of the most important reports is the balance sheet.
The balance sheet provides a snapshot of the company’s assets and liabilities on the
final day in a given period the balance sheet really has three different sections such as
assets, liabilities and the owner’s equity. Another report widely regarded as important in a
business is the income statement.
Another common financial statement is the statement where you list all of your
income and then all of your expenses. This can be for a week, month, or year. In the
example shown I'm using monthly increments. You will note that in the month of Feb the
Property Tax bill is due which drives the Net Cash Flow negative. But the months of Jan and
Mar are positive, so money will have to be managed from these months to fill the gap in Feb.
Again, if the Net Cash Flow is positive you are in good shape. If negative, you must increase
your income or decrease your expenses to bring it back in balance.

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Q.2 (A) When is the change in accounting policy recommended and what are the
disclosure requirement regarding the change in accounting policy?

(B) Explain IFRS.

Ans. (A) Accounting Policy

Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
If refers to specific accounting principles and methods of accounting adopted by the
enterprise while preparing and presenting the financial statement. The management of each
enterprise has to select appropriate accounting policies based on the nature and
circumstances of the business they are in. some of the areas in which different accounting
policies may be adopted are:-
➢ Treatment of expenditure during construction,
➢ Methods of depreciation, amortization,
➢ Conversion or translation of foreign currency items,
➢ Valuation of inventories,
➢ Valuation of investments,
➢ Treatment of goodwill,
➢ Valuation of fixed assets,
➢ Recognition of profit on long-term contract and
➢ Treatment of contingent liabilities.
A change in accounting estimate is an adjustment of the carrying amount of an asset or
liability, or related expense, resulting from reassessing the expected future benefits and
obligations associated with that asset or liability.

Change in Accounting Policies:-

The change in accounting policy is recommended only in the following
circumstances—
➢ If is required by statute for compliance with an accounting standard
➢ If is considered that the change would result in a more appropriates presentation
of the financial statements of an enterprise.
Disclosure in case of change in Accounting Policy:-
➢ If change has a material effect in current period and the effect of change is
ascertainable the amount of change should be disclosed.
➢ If change has no material effect in current period but which is reasonably
accepted to have a material effect in later periods, the fact of such change should be
appropriately disclosed.
➢ If the change has a material effect in current period and the effect of change is
not ascertainable wholly or in part, the fact should be disclosed.
(B) IFRS (International Financial Reporting System)

International Accounting Standards Board

(IASB) that companies and organizations can follow when compiling financial statements.
The creation of international standards allows investors, organizations and governments to
compare the IFRS-supported financial statements with greater ease. Over
100 countries currently require or permit companies to comply with IFRS standards. The
International Financial Reporting Standards were previously called the International
Accounting Standards (IAS). Organizations in the United States are required to use
the Generally Accepted Accounting Principles (GAAP).

Objective:-
The main objective of IFRS are-----

1) To develop in public interest, a single set of high quality, understandable and

enforceable global accounting standards that require high quality, transparent and
comparable information in financial statement.
2) To promote the use and rigorous application of those standards.
3) In fulfilling the objectives associated above to take account of, as appropriate, the
special needs of small & medium-sized entities & emerging economies.
4) It should also provide the current financial status of the entity to all the users of
financial information.

Benefits:-
The main benefits of IFRS are—

1) Encourage international investing & there by increase in foreign capital inflow.

2) Benefit the economy by increased international business.
3) More relevant, reliable, timely & comparable information to investors.
4) Better understanding of financial statements would benefit investors who wish to
invest outside the country.
5) Capital at lesser cost from foreign market.
6) Professional opportunity to serve international clients.
7) Increased mobility to work in different parts of the world either in industry or
practice.
Q.3 Journalise the following transaction:

01.01.09 Bought goods for Rs.10,000

02.01.09 Purchased goods from X Rs.20,000
03.01.09 Bought goods from Y for Rs.30,000
against a current dated cheque
04.01.09 Purchased goods from Z [price list
price is Rs.30,000 and trade discount
is 10%]
05.01.09 Bought goods of the list prce of
Rs.1,25,000 from M less 20% trade
discount and 2% cash discount. Paid
40% of the amount by cheque
06.01.09 Returned 10% of the goods supplied
by X
07.01.09 Returned 10% of the goods supplied
by Y
Ans.

Date Particulars LF Debit Credit (Rs.)

(Rs.)

01.01.0 Purchase a/c Dr. 10.000

9
To Cash A/c 10.000

(Bought goods for Rs. 10.000)

02.01.0 Purchase a/c Dr. 20.000

9
To X 20.000

(Purchased goods from X Rs. 20.000)

03.01.0 Purchase a/c Dr. 30.000

9
To Y 30.000

(Bought goods from Z)

04.01.0 Purchase a/c Dr. 27.000

9
To Z 27.000

(Purchased goods from Z)

05.01.0 Purchase a/c Dr. 1.00.000
9
To Bank 40.000

To Cash a/c 58.800

To Discount 1.200

(Bought goods of the list price of Rs. 1.25.000

From M less 20% trade discount and 2% cash
discount)

06.01.0 Cash a/c Dr. 2.000

9
To Purchase return a/c 2.000

(Returned 10% of the goods supplied by X)

07.01.0 Cash a/c Dr. 3.000

9
To Purchase return a/c 3.000

(Returned 10% of the goods supplied by Y)

Note:-

On 05.01.09 it’s assumed that all the payment are made on same day of purchase.

Q.4 Bring out the different between Funds Flow Statement and Cash Flow
Statement, mention up to what point in time they are similar and from where the
different begin.

Ans. Fund Flow Statement

“A statement of sources and application of funds is a technical device designed to analyses

the change in the financial condition of a business enterprise between two dates.”

In brief it may be said that fund statement focuses on flow of funds between the
various assets and equity items during the accounting period. And analysis base4d on this
statement is generally called “fund flow statement”.

Meaning of fund:The term “fund” refers t cash, to cash equivalent or to working capital
and all financial resources which are used in business.

Meaning of flow of fund:The term “flow of funds” refers to change or movement of funds
or change in working capital in the normal course of business transactions.

FIRM

BUSINESS
TRANSACTIONS
 INFLOW OF
OUTFLOW OF

FUNDS FUNDS

Cash Flow Statement

Cash flow is the life blood of a business which plays a vital role in an entire economic life.
Cash flow s refers to actual movement of cash into and out of an organization. In other
words, the movement of cash inclusive of inflow of cash and outflow of cash. When the cash
flow into the organization, it represents ‘inflow of cash’. Similarly when the cash flows out of
the business concern, it called as “cash outflow”.

In order to ensure cash flows are adequate to meet current liabilities such as tax
payments, wages, amounts due to trade creditors, it is essential to prepare a statement of
changes in the financial position of a firm on cash basis is called as “cash flow statement”.
This statement depicting movement of cash position from one period to another.

The cash flow statement is intended to:-

1. provide information on a firm's liquidity and solvency and its ability to change cash
flows in future circumstances

2. provide additional information for evaluating changes in assets, liabilities and equity

3. improve the comparability of different firms' operating performance by eliminating

the effects of different accounting methods

4. Indicate the amount, timing and probability of future cash flows.

The cash flow statement has been adopted as a standard financial statement because it
eliminates allocations, which might be derived from different accounting methods, such as
various timeframes for depreciating fixed assets.
Difference between Funds flow statement and Cash flow statement

No. Funds Flow Statement Cash Flow Statement

1. Funds Flow Statement showing the Cash Flow Statement showing changes in
source & application of funds during the inflow & outflow of cash during the period.
period.
2. FFS is showing the fund for the future CFS is showing the fund for present
activates of the activates of the company

Company.

3. Fund Flow statement helps to measure Cash flow statement focuses on the causes
the causes of change in working capital. for the movement of cash during a
particular period.

4. Fund flow statement is prepared on the Cash Flow statement is based on cash
basis of fund or all financial recourses. basis of accounting.

5 Fund Flow analysis helps to Cash flow statement guides to the

management for intermediate and long management for short term financial
term financial planning. planning.

6. Statement of changes in working capital For cash Flow statement no such

is required for the presentation of Fund statement is required.
Flow statement.

Q.5 (A) Determine the sales of a firm with the following financial data.

Current Ratio 1.5

Acid Ratio 1.2

Current Liabilities 8,00,000

Inventory Turnover Ratio 5 times

(B) What is Du-Pont chart?

Ans. (A)

Du-Pont Chart:Return on investments represents the earning power of the company. It

depends on Net profit ratio and capital turnover ratio. A change in any of these ratios will
change the firm’s earning capacity. This chart shows how the return on capital employed is
affected by various factors such as cost of goods sold. Change in working capital, change is
selling and administrative expenses etc. this chart helps the management in detecting the
core issues that confront the management and it helps in effective use of capita.At the apex
of the Du Pont chart is the Return on Total Assets (ROTA), defined as the product of the
NetProfit Margin (NPM) and the Total Assets Turnover Ratio (TATR). As a formula this can be
shown as,Follows:-

(Net profit/Total asset)= (Net profit/Net sales)*(Net sales/Total assets).

The left side of the Du Pont chart shows details underlying the net profit margin ratio. A
detailed Examination of this side presents areas where cost reductions may be effected to
improve the net profit margin.

The right side of the chart highlights the determinants of total assets turnover ratio. If this
study is supplemented by the study of other ratios such as inventory, debtors, fixed asset
turnover ratios, a deeper insight into efficiencies and inefficiencies of asset utilization can be
sought.
The basic Du Pont analysis can be extended to explore the determinants of the Return on
Equity (ROE).

Return on equity= Asset turnover * Net profit margin*leverage

(Net profit/Equity)= (Net profit/Sales)*(Sales/Total assets)*(Total assets/Equity)

Importance of Du-Pont Analysis:-Any decision affecting the product prices, per unit
costs, volume or efficiency has an impact on the profit margin or turnover ratios. Similarly
any decision affecting the amount and ratio of debt or equity used will affect the financial
structure and the overall cost of capital of a company. Therefore, these financial concepts
are very important to evaluate as every business is competing for limited capital resources.
Understanding the interrelationships among the various ratios such as turnover ratios,
leverage, and profitability ratios helps companies to put their money areas where the risk
adjusted return is the maximum.

Q.6 From the following data calculates the:-

(A) Break-even point expressed in terms of sale amount/revenue.

(B) Number of units that must be sold to earn a profit of Rs. 60, 000 per year

Ans. (A)

Break-even point (in units) = Fixed costSales-Variable cost

Break-even point (in amount) = Fixed cost (FC)Sales-Variable cost (S-V) ×

Sales

Given,

Sales price (per unit) =RS. 20

Total Variable cost (per unit) = Rs. 11+3 = Rs. 14

Total Fixed (per year) = Rs. 5, 40,000+2, 52,000 = Rs. 7, 92,000

B.E.P. (in unit) = 7,92,000(20-14) ,

= 7,92,0006 ,

= 132000 (per unit)

B.E.P. (in Rs.) = 7,92,000(20-14) × 20,

= 7,92,0006 × 20,

= Rs. 26, 40,000.

(B)

Sales (in unit) = F.C. +Profit ( Traget)(S-V)

Sales (in unit) = 7,92,000+60,000(20-14) ,

= 8,52,0006,

= 1, 42,000 (units)