Package for Slow Learners

ACCOUNTANCY

PACKAGE FOR SLOW LEARNERS

Ques.What is the importance of Financial Statements?

Ans.Financial statements are comprehensive way of communicating financial information to the users of accounting information.

Ques.Give one limitation of Balance sheet.

Ans.Balance sheet does not show the value of qualitative factors such as skill and loyalty of the

staff because it can not be measured in terms of money.

Ques.Name two sections of balance sheet.

Ans.1. Equity and liabilities 2. Assets

Ques.Name the major headings under which the asset part of a company's Balance Sheet is organised and presented?

Ans.1.Non-current Assets2. Current Assets

Ques.Name the major headings under which the equity and liabilities part of company's Balance Sheet is organised and presented?

Ans.The major headings of Equity and liabilities are:

1. Shareholder's fund

2. Share application money pending allotment

3. Non-current Liabilities

4. Current liabilities

Ques.Name the sub headings under which share holder's fund is shown in company's Balance Sheet.

Ans.Shareholder's fund is shown as follows:

(A) share capital

(b) Reserve and surplus

(c) money received against share warrant

Ques.Name any two items shown under the heading Non-current Liabilities.

Ans.Long term borrowings and Deferred tax liabilities

Ques.Name any two items shown under the heading Current liabilities.

Ans. Short term borrowing and Trade payables

Ques. Name any two reserves shown under “ Reserves and surplus”.

Ans.Capital reserve and capital redemption reserves

Ques.Name the head under which Calls in advance is shown in company's Balance sheet.

Ans.Calls in advance is shown under the head Current liabilities and sub heading other current liabilities.

Ques.What is contingent liability?

Ans. Contingent liability is a liability which may become payable depending on a happening in future.

Ques. Mention any two items of contingent liability of a company.

Ans.(i) Claims against company which are not accepted by the company.

(ii) Liability for amount uncalled or partly paid shares.

(iii) arrears of fixed cumulative dividend(on preference shares)

Ques. List any three items that can be shown under the heading Reserve and surplus.

Ans.(1) Capital Reserves

(2) Capital redemption reserves

(3) Debenture redemption reserves

Ques.List sub headings which are shown under the heading Current Liabilities as per schedule III part I of Companies Act 2013.

Ans. (1) Short term Borrowings

(2) Trade Payables

(3) Other Current Liabilities

(4) Short term provisions.

Ques.List sub headings which are shown under the heading Current Assets as per schedule III part I of Companies Act 2013.

Ans.(1) Current investments

(2) inventories

(3) trade receivables

(4) cash and cash equivalents

(5) Short term loans and advances

(6) Other current assets

Ques.Under which major headings and sub-headings will the following items be shown in the balance sheet of a comapany as per schedule III part 1 of the companies Act 2013:

i)Provision for tax

ii)Loose tools

iii)Interest accrued on investment

iv)Goodwill

v)Long term investment

vi)Motor car

vii)Security premium reserve

viii)Unclaimed dividend

ix)Debit balance of surplus

x)Computer software under development

Ans.

i)Current liabilityshort term provision

ii)Current assetsinventories

iii) Current assetsother current assets

iv) current assetsinventories

i)current assetsother current assets

ii)Non current assetsfixed assets- tangible assets

iii)shareholder’s fundReserves and surplus

iv)current liabilityother current liability

v)shareholder’s fundReserves and surplus

vi)Non current assetsfixed assets- Intangible assets

Under development

CHAPTER 2

ANALYSIS OF FINANCIAL STATEMENTS

Ques.State any one objective of Financial Statement Analysis.

Ans.To know long term as well as short term solvancy of the firm.

Ques.State any one limitation of Financial Statement Analysis.

Ans.It ignores price level changes.

Ques.State the significance of analysis of financial statements to top management.

Ans. It is useful for taking financial decisions or preparing budgetary programmes.

Ques.Stare why shareholders are interested in analysing financial statements?

Ans.They are interested in the profitability,dividends, market value of their holdings and long term solvancy of the business, so they are interested in analysing financial statements.

Ques.Name the three financial characteristics which are analysed by financial analysis.

Ans. Profitability , Liquidity and Solvancy

Ques.How is financial strength of a business unit assessed?

Ans. The financial strength of a business unit can be assessed on the basis of its earning capacity and its ability to pay debts and dividends.

Ques why are creditors interested in analysing financial statements?

Ans creditors are interested in analysingfinanacial statements so that they can assess the financial position of the enterprise before giving loans or granting credit.

Ques.give two purposes which are served by analysis of financial statements.

Ans. 1. It helps to determine the creditworthiness and earning potential of a business entity.

2. Long term as well as short term solvecy can be determined with the help of analysis of financial statements.

Ques.Why are investors interested in analysing financial statements?

Ans.Investors are interested in analysing the financial statements to assess the safety of their investments.

Ques. State the interest of tax authorities in the analysis of financial statements.

Ans.Tax authorities are interested to analyse the financial statements to know about the performance of company and to collect vaarious types of taxes.

Ques. State the interest of trade unions in the analysis of financial statements.

Ans.Employees and trade unions are interested in their welfare i.e better emoluments, bonus,better working conditions and security of their jobs. So they are always interested in profitability and strength of the concern.

Ques.How is the financial statements analysis useful to Manager/ Finance Manager.

Ans.For taking financial decisionfor the business it helps to throw the light on the financial strengths and weaknesses of the business units.

CHAPTER 3

TOOLS OF FINANCIAL STATEMENT ANALYSIS

Ques. Name any two tools of financial statement analysis.

Ans.1. Common size statements

2Ratio analysis

3. Cash Flow Statement

CHAPTER 4

ACCOUNTING RATIOS

Ques.What is understood by accounting ratio?

Accounting ratio may be defined as a mathematical expression of the relationship between two items or groups of items shown in the financial statements.

Ques.What is considered to be the ideal Current ratio?

Ans.2:1

Ques.What is considered to be the ideal quick ratio?

Ans.1:1

Ques. Name profitability ratio based on investment.

Ans.Return on Investment(ROI)

Quesprepare a comparative statement of profit and loss with the help of the following information:

Ans. Comparative Statement of profit and loss

for the year ended 31 March 2012-13

Ques.A business has current ratio 3:1 and a quick ratio1.2:1 if the working capital is rs 180000 calculate the total current assets and stock

ans- As current ratio = current assets /current liabilities=3/1

let current liabilities=x

Current assets=3x

Working capital= current assets-current liabilities

rs 180000= 3x-x

rs 180000=2x

x=180000/2=90000 (therefore current liabilities)

current assets = 3x=3X90000=217000

quick ratio= liquid assets/current liabilities=1.2/1

since current liabilities are =1x

so liquid assets= rs 1.2x

liquid assets= 1.2X90000=108000

stock= current assets-liquid assets-current

=270000-108000=162000

Ques.X ltd. Has a liquid ratio of 7:3. if its stock is 25000 and its current liabilities are 75000 find out the current ratio.

Ans. As liquid ratio= liquid assets/ current assets

7/3=liquid assets/75000

3Xliquid assets=75000 X7=525000

liquid assets = 525000/3=175000

current assets= liquid assets + stock

=175000+25000=200000

current ratio = current assets/ current liabilities

200000/75000= 2.67:1

Ques. Current liabilities are 560000 ;current ratio is 5:2 and quick ratio is 2:1. find out the value of stock.

Ans. 1) as current ratio= current assets/ current liabilities

5/2= current assets/560000

5X560000= 2Xcurrent assets

therefore current assets = 5X560000/2=1400000

2)as liquid ratio = liquid assets/ current liabilities

2/1= liquid assets/560000

therefore liquid assets =560000X2= 1120000

3) stock= current assets- liquid assets

=1400000-1120000

=280000

Ques.From the following information, calculate any two of the following ratios:

a) Debt to Equity Ratio b) Working Capital Turnover Ratio c) Return on investment

Information:

Equity Share Capital Rs 10,00,000; General Reserve Rs 1,00,000; Statement of Profit and loss( Profit afterTax and interest ) Rs 3,00,000; 12% Debentures Rs 4,00,000; Creditors Rs3,00,000; Land and building Rs14,00,000; Furniture Rs 3,00,000; Debtors Rs 2,90,000 Cash Rs 1,10,000 Revenue from Operation ( Net Sales) for the year ended 31st March, 2011 was Rs 3,00,000 and Tax Paid 50%

Answer: a) Debt to Equity Ratio = 0.29:1; b) Working Capital Turnover Ration = 30 Times;

c) ROI = 36%

Question: Current Assets of a company are Rs1,26,000 and the Current Ratio is 3:2 and the Inventories are Rs 2,000. Find Liquid Ratio

Ans: Current Liability = Rs 1,26000 X 2/3 = Rs 84,000

Liquid Ratio = Current Assets – Inventories

Current Liability

Liquid Ratio = Rs 1,26,000 – Rs 2,000 = Rs 1,24,000 = 1.47:1

Rs 84,000 Rs 84,000

Question: Ratio of Current Assets (Rs 3,00,000) to current liability ( Rs 2,00,000) is 1.5:1. The accountant of the firm is interested in maintaining a Current Ration of 2:1, by paying off a part of the current Liabilities. Compute amount of Current Liabilities that should be paid so that the current Ration at the level of 2:1 may be maintained.

Answer: Let the amount of Current Liabilities to be paid off be = x

then,

= Rs 3,00,000 - x = 2

Rs 2,00,000 – x 1

= Rs 3,00,000 – x = Rs 4,00,000 -2x :

X = Rs 1,00,000.

Question: Calculate amount of gross profit and sales from the following information:

Average Inventory = Rs 80,000

Inventory Turnover Ratio = 6 Times

Selling Price= 25% above the cost

Answer: Inventory Turnover Ratio = Cost of Revenue from Operation, i.e, Cost of Goods Sold

Average Inventory

6 = Cost of Revenue from Operation, i.e, Cost of Goods Sold

Rs 80,000

Cost of Revenue from Operation =Rs 80,000 X 6 =Rs 4,80,0000

Gross Profit = 25% of Rs 4,80,000 = Rs 1,20,000

Therefore, Revenue from operation = Cost of Revenue from Operation + Gross Profit

= Rs 4,80,000 + Rs 1,20,000 = Rs 6,00,000.

Question : Current Assest of a company are Rs 17,00,000 . Its Current ratio is 2.5 and liquid ratio is 0.95. Calculate Current Liability and Inventory.

Answer: Current Ratio = Current Assets .

Current Liabilities

2.5 = Rs17,00,000 .

Current Liabilities

Current Liabilities = Rs 6,80,000

Quick Ratio = QuickAssets .

Current Liabilities

0.95 = QuickAssets .

Rs 6,80,000

Quick Assets = Rs 6,46,000

Inventory = Current Assets – Quick Assets

= Rs 17,00,000 -Rs 6,46,000

= Rs 10,54,000

Current Liability = Rs 6,80,000

Inventory = Rs 10,54,000

Question: From the following calculate the ‘Gross Profit Ratio’ and ‘Working Capital Turnover Ratio’:

Revenue from operations = Rs 30,00,000

Cost of Revenue from operations = Rs 20,00,000

Current Assets = Rs 6,00,000

Current Liability = Rs 2,00,000

Paid up Capital = Rs 5,00,000

Answer :

Gross Profit Ratio = Gross Profit .

Revenue from Operation

= Rs 10,00,000 X 100 = 33 1/3 %

RS 3,00,000

Working Capital Turnover Ratio = Revenue from Operation = Rs 30,00,000

Working Capital Rs 4,00,000

= 7.5 Times

Question: From the given information , calculate inventory ( Stock) Turnover Ratio:

Revenue from the operation, i.e Net Sales Rs 4,00,000; Gross Profit : 25% on cost; opening Inventory (stock) was 1/3rd of the value of closing inventory ( Stock). Closing Inventory ( Stock) was 30% if sales.

Hint: Inventory (stock) Turnover Ration = 4 Times

Chapter 5

CASH FLOW STATEMENT

Ques.What is the objective of preparing cash flow statement?

Ans.To ascertain the cash flows of an enterprise during a specific period from its different activities(operating/investing/financing)

Ques.Define cash as per accounting standard-3.

Ans.Cash comprises of cash on hand and demand deposits with banks.

Ques. What is meant by cash Equivalents ?

Ans. Cash equivalents are short-term highly liquid investments that are readily convertable into

known amounts of cash and which are subjects to an insignificnt risk of change in value.

Ques. Give two example of cash equivalents ?

Ans. 1.Treasury bills

2. Marketable securities.

Ques. Purchase of patents would result in inflow outflow or no flow of cash. Give your answer with reasons.

Ans.Purchase of patents would result in outflow of cash because it decreases cash.

Ques. Under which type of activity will you classify sale of shares of another company while preparing cash flow statement.

Ans. investing activity.

Ques. Under which type of activity will your classify purchase of share by a trading company in another company while preparing cash flow statement.

Ans. Investing company.

Ques. Give one limitation of cash flow statement.

Ans.cash flow statement ignores the basic concept of accounting i.e. accrual concept.

Ques. How is purchase of goodwill shown in cash flow statement ?

Ans. It will be shown as outflow under cash flow from investing activity.

Ques. Give an example of activity which remains financing activity for every enterprises.

Ans. Dividend paid

Ques. When is interest received concidered as financing activity ?

Ans. Interest received on calls in – arrears by acompany is concidered as financing activity. ( H )

Ques.Dividend recevied by a finance company will come under which activity while preparing cashflowstatement ?

Ans-Operating activity.

Ques. Under which type of activity will you classify 'proceeds from sale of investment' While preparing cashflow statement.

Ans.Investing activity.

Ques.Redemption of debenture would result in inflow , outflow or inflow of cash .give your answer in reasion.

Ans.Redemption of debenture would result in outflow of cash because cash goes out.

Ques. Under which type of activity will you classify “proceed from sale of machinary” while preparing cash flow statement.

Ans. Investing activity

Ques. Under which type of activity will you classify “Refund of tax received”while preparing cash flow statement .

Ans. Operating activity.

Ques. Declaration of final dividend would result in inflow , outflow of no flow of cash . Give your answer in reason.

Ans no flow of cash in dividend in declared only , not yet paid.

Ques. Sale of marketable securities at par would result in inflow, outflow or no flow. Give reason.

Ans.No flow of cash as marketable securities are cash equivalent.

Ques.List any two financing activities that will result into outflow of cash.

Ans.1) Payment of dividend2) repayment of long term borrowing

Ques.List any two financing activities that will result into inflow of cash.

Ans.Proceed from issue of shares and proceed from issue of debentures,loanetc

Ques.Classify the following activities as operating ,investing and financing:

vii)Issue of shares

viii)Receipt of interest on investment by manufacturing company

ix)Sale of goods

x)Receipt of interest on investment by a bank

Ans. i) financing

ii) investing

iii) and iv) operating

Question : Following balance appeared in Plant Account and Accumulated Depreciation Account in the books of Bharat Ltd.:

Additional information:

Plant costing Rs 1,45,000; Accumulated depreciation thereon Rs 70,000, was sold for Rs 35,000. You are required to :

i) Compute amount of plant purchased, depreciation charged for the year and loss on sale of plant.

ii) Show how each of the items related to the plant will be shown in Cash Flow Statement.

Answer: i)

PLANT ACCOUNT

ACCUMULATED DEPRECIATION ACCOUNT

ii) a) Sale of Plant of Rs 35,000 is an inflow of cash from investing Activities.

b) Purchase of Plant of Rs 3,65,000 is an outflow of cash from Investing Activities.

c) Loss on Sale of Plant ( Rs 1,45,000 – Rs 70,000 – Rs 35,000 = Rs 40,000) and depreciation charged will be added in Net Profit while computing Cash Flow from operating Activities.

Question: X Ltd. Made a profit of RS 1,00,000 after consideration the following items;

i) Depreciation on Fixed Assets Rs 20,000.

ii) Writing off Preliminary Expenses Rs 10,000.

iii) Loss on Sale of Furniture Rs 1,000

iv) Provision for Taxation RS 1,60,000

v) Transfer to General Reserve Rs 14,000.

vi) Profit on sale of Machinery Rs 6,000.

The following additional information is available to you:

Calculate Cash Flow operation Activities

Answer : Cash Flow from operating activities = Rs 1,41,800.