Question Bank on Accounting for Manage with answer 1. What is accounting?

the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of a financial character and interpreting the results there of. 2. What are financial items? The financial items are: Purchase Sales Dividend received Gain or loss on financial investment Interest received Interest gain Foreign exchange gain or loss etc. 3. What is GAAP? Generally Accepted Accounting Principle (GAAP): A set of conventions, rules, and procedures which defines accepted accounting practice, constitute Generally Accepted Accounting Principles. It represents the fundamental positions that have generally agreed upon by accountants and encompasses permissible accounting practice.

 Accounting principle means rule of action or conduct, or basis of practices.

conduct or

4. What are the statutory and non-statutory financial statements? A statutory financial statement is a financial statement of an insurance company prepared in accordance with statutory accounting standards. A Non-statutory Audit is an audit not required by law, the following might have one: Clubs, certain charities, Small companies, Sole trade/partnerships 5. Explain the relationship between financial items and financial statements. The financial items are recorded in book keeping in to separate accounts and the financial statement is prepared as per the accounts of financial item. 6. Who sets accounting rules in India? Are they different from the rules of other countries? The Institute of Charted Accountant India (ICAI) sets accounting rules in India. And it is deferent from the rules of other countries because, each countries, has its own set of rules and regulations for accounting and financial reporting. 7. How different is partnership from Joint Stock Company? Partnership: 1.partnehip is an association of individuals competent to enter into contracts, who agree to carry on the business in common with a view to earn and share profits. 2. Registration is not compulsory 3.there is unlimited liability. 4. All partner are mutual agents 5.number of partner cannot exceed 10.

Joint stock Company: 1.this Company is an artificial peon recognized by the law, with a distinctive name, a common seal, a common capital and carrying limited liabilities. 2. Registration is compulsory. 3. There is limited liability. 4. a member is not an agent of another member. 5. In case of pvt the member is 50 & in case of public it is unlimited. 8. What are the important features of a company form of organization? The important features of a company form of organizations are: (1) Formation. A company is a corporate body. It enjoys a separate entity of its own which is distinct from its member that constitutes it. It can be set up by following the procedure laid down for this purpose under the law. The formation of a company passes through four stages (i) promotion (ii) incorporation (iii) subscription and (iv) commencement. (2) Financing. A company limited by shares raises capital by issuing of a prospectus. In the prospectus, general public is invited to purchase the shares of the company. The company, through wide publicity, is able to collect necessary capital. (3) Control. In theory and according to law, the ultimate control of the affair of the company lies with the shareholder. The shareholder exercises their power of control in the annual general meeting of the company. They review the progress and the prospects of the company and give approval on important matte of the company. (4) Management. The shareholder, who are the owner of the company, cannot take part in the management of its affair. They entrust the management to a Board of Director elected by them. The Board administer the internal affair and the management of the company. The shareholder are, thus, the risk bearer and the director are the risk take. (5) Duration. A company enjoys continuous existence. The existence of the company is not affected by the transfer, the death or insolvency of the member. The member may come and the member may go, its continuity is not affected until dissolved by a process of law.

(6) Double taxation. The company is subject to double taxation. Fit, the tax is levied on the profits of the company. Secondly, the shareholder pay tax on the dividends received. (7) Irredeemable share capital. Share capital is the capital collected by subscription to the shares of the company. The capital is non-refundable except in the case of winding up and reduction of capital. (8) Winding up. The continuous existence of a company can come to an end only through winding up which is possible through a legal process. A liquidator is appointed for this purpose that carries the company to its end under a strict legal procedure. 9. Who are the use of accounting information? The user of accounting information is Shareholder Security analyst Banks Rating agency Manage Employees Supplier Customer Government Regulator Television channel and News paper 10. What are the contents of the annual report of a joint stock company? The contents of the annual report of a joint stock company are: Accounting policies Balance sheet Cash flow statement Contents: non-audited information

Profit and loss account Notes to the financial statements Chair peons statement Director' Report Operating and financial review Other features Auditor report

11. What do you mean by perpetual succession of a company? In company law, perpetual succession is the continuation of a corporation's or other organization's existence despite the death, bankruptcy, insanity, change in membership or an exit from the business of any owner or member, or any transfer of stock, etc. 12. What is a foreign company? A foreign company means a company incorporated outside India but having a place of business in India [Sec. 591 (1)]. Within 30 days of the establishment of the business in India, 13. Property of a company is not the property of the shareholder. Comment Shareholder are the proprietor of the company. The word shareholder means who have owned share of a particular company and gain certain rights and liabilities over that company. Generally the main goal of a shareholder is to gain profit because everyone knows that man and woman in business are interested in one thing: money, and will do anything that has to be done to make money. But it is a traditional view, things are changed and company is the property of a shareholder is now an exploded myth. The new concept according to the new socio economic thinking is that, company is not property of shareholder; it is a social institution having duties and responsibilities towards the community. I support that shareholder are the owner of the company, and as an owner of the company there goal shouldnt be only profit maximization. Besides this shareholder also should concentrate about their duties towards the society and

other interest groups. This essay starts with the discussion about the shareholder ownership and their general goal. 14. What are the interim financial reports? A public financial report covering a period of less than one year. An interim statement is used to convey the performance of a company before the end of the year. Unlike annual statements, interim statements do not have to be audited. Interim statements increase communication between companies and the public, and provide investor with up-to-date information between annual reporting periods. 15. Distinguish between a public limited company and a private limited company. Public companies - Ownership rights (Shares) are traded on the stock exchange. Anyone can have part ownership of the company i.e. BT, Microsoft. Their accounts need to be audited and are of public information Private company - Ownership is usually just a few people. These are commonly smaller businesses. Their shares are not traded on the stock exchange. Their accounts dont need to be audited, and their financial statements are private 16. Explain the concept of limited liability. A type of liability that does not exceed the amount invested in a partnership or limited liability company. The limited liability feature is one of the biggest advantages of investing in publicly listed companies. While a shareholder can participate wholly in the growth of a company, his or her liability is restricted to the amount of the investment in the company, even if it subsequently goes bankrupt and racks up millions or billions in liabilities.

17. Write a brief note on the accounting policies. It is a set of rules, concepts, conventions and Procedures which have been accepted by accountants over a period of time for accounting practices. 18. What are accounting standards? The following are the mandatory Accounting Standards (AS) as on July 1, 2012 as listed on the site of The Institute of Chartered Accountants of India (ICAI)

AS 1 Disclosure of Accounting Policies AS 2 Valuation of Inventories AS 3 Cash Flow Statements AS 4 Contingencies and Events Occurring after the Balance Sheet Date

AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies

AS 6 Depreciation Accounting AS 7 Construction Contracts (revised 2002)

AS 8 Accounting for Research and Development (AS-8 is no longer in force since it was merged with AS-26)

AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003), AS 12 Accounting for Government Grants AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations AS 15 Employee Benefits (revised 2005) AS 16 Borrowing Costs AS 17 Segment Reporting AS 18 Related Party Disclosures AS 19 Leases AS 20 Earnings Per Share AS 21 Consolidated Financial Statements AS 22 Accounting for Taxes on Income.

AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

AS 24 Discontinuing Operations AS 25 Interim Financial Reporting AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets AS 29 Provisions, Contingent` Liabilities and Contingent Assets

AS 30 Financial Instruments: Recognition and Measurement and Limited Revisions to AS 2, AS 11 revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29

AS 31, Financial Instruments: Presentation

AS 32, Financial Instruments: Disclosures, and limited revision to Accounting Standard (AS) 19, Leases

19. Distinguish between financial accounting and management accounting FINANCIAL ACCOUNTING External( Investor, government authorities, creditor) Help investor, creditor, and other make investment, credit, and other decisions Delayed or historical GAAP FASB AND SEC MANAGEMENT ACCOUNTING Internal(Manage of business, employees) Help manage plan and control business operations

PRIMARY USE

PURPOSE OF INFORMATION

TIMELINES RESTRICTIONS

NATURE OF INFORMATION

SCOPE

Objective, auditable, reliable, consistent and precise Highly aggregated information about the overall organization about

BEHAVIOURAL IMPLICATIONS Concern

Current and future oriented GAAP does not apply, but information should be restricted to strategic and operational needs More subjective and judgmental, valid, relevant and accurate Disaggregated information to support local decisions Concern about how

FEATURES

adequacy of disclosure Must be accurate and timely Compulsory under company law Is an end in itself

SEGMENTS OF ORGANISATION

reports will affect employees behavior Usually approximate but relevant and flexible Except for few companies, it is not mandatory Is a mean to the end It is primarily Segment reporting is concerned with the primary reporting for the emphasis. company as a whole.

20. Distinguish between public sector companies and public limited companies. A public limited company is a corporate entity that openly sells its shares on the stock exchange and has share holder ranging from one to infinity (1-infinity).Its headed by officials who are elected every end of the financial year at the Annual General Meeting. A Public Sector Undertaking is a corporation in the public sector in India, where management control of the company rests with the Government; it can be Central Government or the State Governments. Below given is a partial list of Public Sector Undertakings of the Government of India. 21. Explain the important features of public limited companies. The features of public limited companies are There is limited liability for the shareholder. The business has separate legal entity. There is continuity even if any of the shareholders die. These businesses can raise large capital sum as there is no limit to the number of shareholder.

 The shares of the business are freely transferable providing more liquidity to its shareholder. 22. Who manages a Joint Stock Company? The company is managed on behalf of the shareholder by a Board of Director, elected at an Annual General Meeting. The shareholder also vote to accept or reject an Annual Report and audited set of accounts. Individual shareholder can sometimes stand for directorships within the company, should a vacancy occur, but this is uncommon. 23. Write a brief note on the separation of management from the ownership of a company. Separation of ownership and management in cooperate governance involves placing the management of the firm under the responsibility of professionals who are not its owner. Owner of a company may include shareholder, director, government entities, other corporations and the initial founder. In corporate governance these owner are sometimes different from those running the company to allow skilled manage to conduct the complicated business of running a large company. 24. Who takes the profits of a Joint Stock Company? Share holder take the profits of a Joint Stock Company. 25. Why companies prepare the financial statements? The companies are preparing the financial statements because: To find out the financial performance (profit or loss) during an accounting period. To show financial position or health of a business. To provide reliable information about the flow of cash during an accounting period. To reveal the changes in fund. To provide other information relevant to the needs of use. 26. What are the different statutory financial statements? The different financial statements are: Balance sheet Profit & loss Account Cash flow statement etc.

27. Examine the relationship between balance sheet, income statement, and cash flow statement. Income Cash Flow Balance statement statement sheet 500,000 375,000 125,000

The income statement shows revenue of 500,000. The cash flow statement shows the cash received from customer is 375,000. The balance sheet shows under assets the difference, i.e. accounts receivables is 125,000. The income statement = cash flow statement + balance sheet. In the example above: 500,000 = 375,000 + 125,000 28. Distinguish between cash from operations and profit. The difference between EBITDA and OCF would then reflect how the entity finances its net working capital in the short term. OCF is not a measure of free cash flow and the effect of investment activities would need to be considered to arrive at the free cash flow of the entity. 29. Distinguish between PAT and dividend. Earnings after Tax or Profit after Tax equals sales revenue after deducting all expenses, including taxes (unless some distinction about the treatment of extraordinary expenses is made). In the US, the term Net Income is commonly used. Income before extraordinary expenses represents the same but before adjusting for extraordinary items. Dividend is the part of the PAT Earnings after Tax (or Net Profit after Tax) minus payable dividends becomes Retained Earnings.

30. What is the relevance of audit report? The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit or evaluation performed on a legal entity or subdivision thereof (called an "audited"). The report is subsequently provided to a "user" (such as an individual, a group of peons, a company, a government, or even the general public, among other) as an assurance service in order for the user to make decisions based on the results of the audit. 31. Who appoints the auditor? Member (share holder) are appoints the auditor at an annual general meeting, 32. What items are included in the notes to the financial statements? Balance sheet Profit & loss Account Cash flow statement etc. 33. Where do you find the description of a companys accounting policies? Financial statement 34. Explain the accounting equation. It shows the relationship between the economic resources of a business and the claims against those resources. At any given time, the following relationship holds: Economic resources = Claims Economic resources are assets. The claims consist of creditor claims or liabilities, and owner claims or equity. So the accounting equation now is: Assets= Liabilities + Equity 35. What are the three major sources of finance? Overdraft financing. Shareholder and director funds. Trade Credit. Factoring and invoicing discounting.

Hire purchase and leasing. Bank loans. 36. What is the relationship between the accounting equation and the balance sheet? The balance sheet shows the position of assets, liabilities and equity. The accounting equation shows Asset= liabilities + Equity 37. Define cash from operating activities. An accounting item indicating the cash a company brings in from ongoing, regular business activities. Cash flow from operating activities does not include long-term capital or investment costs. It can be calculated as: Cash Flow from Operating Activities = EBIT + Depreciation Taxes 38. What are the components of cash from financing activities? Proceeds from borrowings (both short-term and long-term) Cash received from owner usually on issuance of stock Repayments of borrowings Repayments to owner 39. What are the components of cash from investment activities? Cash payments to acquire or construct long-term fixed assets such as plant and machinery, vehicles, equipment, etc. Cash receipts from sale of PPE and intangible assets such as buildings, copyrights, etc. Cash payments to purchase bonds or shares of other companies (subsidiaries, associates and joint ventures). Cash receipts from sale of bonds and shares of other companies. Cash payments in the form of loans and advances and receipt related to payback of such loans and receivables, etc.

40. Classify the following financial transactions/items into cash flows from financing, investment, operating activities: Sold goods on credit. operating Collection from customer operating Bad debt operating Sale of shares for cash Financing Interest received Investing Interest paid Investing Dividend received Investing Dividend paid Financing Purchased goods for cash operating Depreciation Investing 41. Briefly explain the basic assumptions for preparing the financial statements. According to the Framework of IAS/IF, the underlying assumptions for the preparation of financial statements are: Accrual basis the financial statements are prepared under the accrual basis. According to accrual basis of accounting, the effects of transactions and other events are recognized when they occur and not when the cash is received or paid. In other words, the transactions are recorded in the books of accounts when they occur and not when the cash is received or paid. It is opposite to cash basis of accounting. 42. Examine the effect of inventory valuation on the profit and cash flows. The different methods of inventory valuation will affect the cash flow, the actual or assumed association of inventory unit costs with goods sold or in stock not goods flow, the actual movement of goods. Therefore, gross profits will vary among the different methods.

43. Examine the importance of the accrual concept. The effects of transactions and events are recognized when they occur (and not when cash is received or paid), and they are recorded in the financial statements Accrual basis the financial statements are prepared under the accrual basis. According to accrual basis of accounting, the effects of transactions and other events are recognized when they occur and not when the cash is received or paid. In other words, the transactions are recorded in the books of accounts when they occur and not when the cash is received or paid. 44. Explain the difference between accrual concept and matching concept. Accrual Concept: It recognizes income when it is earned not when it is collected Matching Concept: Revenues of a period are matched with expenses to ascertain profit or loss. 45. Why is the matching concept central to the determination of profit? Matching concept central to the determination of profit because the revenues of a period are matched with expenses to ascertain profit or loss. 46. Explain the importance of dual aspect concept in understanding the balance sheet. In this system, every business transaction is having a twofold effect of benefits giving and benefits receiving aspects. The recording is made on the basis of both these aspects. Double Entry is an accounting system that records the effects of transactions and other events in at least two accounts with equal debits and credits. 47. Distinguish between expenses and payments. Expenses are expenses. Money can reduce & the word can use little bit amounts. We should not get any assets, liability. Payments:- it means we can get some assets, liabilities against the payments. We can loss revenue but the same cost or more asset we should get against payments.

48. Distinguish between incomes and receipts. Receipt is the money that you receive and you might have to return it on a later stage. Further the receipt can be on sale of goods, or business receipts out of which the profit shall be your income. If salaried, the salary is your income for the purpose of tax calculations. All receipts need not be income. But all incomes will be receipts. 49. Name three receipts which are not incomes. Receipt from customer against credit sale Loan receipt Receipt cash from share holder against issue of share capital 50. Name three payments which are not expenses. Dividend payment Payment of loan Payment to 51. Name three financial items which are shown in the income statement but may not result in any cash outflow. Depreciation Bad debt Outstanding expenses 52. Explain the impact of issue of shares at a discount on the accounting equation. Asset= liabilities + Equity When share issued +cash at asset site= +Equity 53. Examine the impact of buy-back of shares on the accounting equation. The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholder who may be looking for a controlling stake. The equity and cash at asset site will increases.

54. What is capital employed and owners fund? Capital employed is usually presented as total assets less current liabilities, or fixed assets plus working capital also called owner fund. 55. Explain the difference between stock dividend and cash dividend. Stock dividend- A dividend payment made in the form of additional shares, rather than a cash payout. Also known as a scrip dividend." cash dividend- Money paid to stockholder, normally out of the corporation's current earnings or accumulated profits. 56. Explain the difference between bonus shares and rights shares. Bonus share- An offer of free additional shares to existing shareholde. A company may decide to distribute further shares as an alternative to increasing the dividend payout. Right share- Right shares are the shares which are offered by the company to the existing shareholder. Simply stated the existing shareholder have a right to subscribe for the shares which are offered by the company after initial allotment until some special right is reserved for any other peon by special resolution in this respect. 57. Explain different methods of presenting balance sheet. Horizontal Vertical 58. What is an account? A record of financial transactions for an asset or individual, a bank, brokerage, credit card company or retail store.

such

as

at

59. Briefly explain the debits and credit. Debits-An accounting entry which results in either an increase in assets or decrease in liabilities. CreditAn accounting entry which results in either an Decrease in assets or increase in liabilities. or opposite of debit. 60. How is an account balanced? The account on left side of this equation has a normal balance of debit. The accounts on right side of this equation have a normal balance of credit. The normal balance of all other accounts is derived from their relationship with these three accounts. Normal balance of common accounts: Asset: Debit Liability: Credit Owner's Equity: Credit Revenue: Credit Expense: Debit Retained Earnings: Credit Dividend: Debit 61. What is credit balance? In a margin account, the amount of funds deposited in the customer's account following the successful execution of a short sale order. The credit balance amount includes both the proceeds of the short sale itself and the specified margin amount the customer is required to deposit under Regulation T. 62. What is debit balance? The debit balance is the amounts of funds the customer must put into his or her margin account, following the successful execution of a security purchase order, in order to properly settle the transaction.

63. What are real accounts? Asset, liability, reserves, and capital accounts that appear on a balance sheet. The balances of real accounts are not cancelled out at the end of an accounting period but are carried over to the next period. Also called permanent accounts. 64. What are the nominal accounts? Revenue or expense account that is a subdivision of the owner' equity account, and which is closed to a zero balance at the end of each accounting period. It starts with a zero balance at the beginning of a new accounting period, accumulates balances during the period, and returns to zero at the yearend by means of closing entries. Nominal accounts are income statement accounts and are also called 'temporary accounts' in contrast to balance sheet (asset, liability, and owner' equity) accounts which are called 'permanent accounts' or 'real accounts. 65. What is the relevance of trial balance? A trial balance should show the debit and credit balances in all accounts and should add to zero. Maintaining a trial balance allows you to immediately check the balances of all of your accounts and can help you to find some error in your entries. Trial balance will be "out of balance" (i.e. not add to zero) if you make one of the following error: If you accidently forget to book one side of an entry; If both sides of the entry are not booked at the same amount; If you accidently book the part of the entry as debit when it should be credit or vice versa. 66. Explain the process of preparing trial balance. After posting all transactions from an accounting period, accountants prepare a trial balance to verify that the total of all accounts with debit balances equals the total of all accounts with credit balances. The trial balance lists every open general ledger account by account number and provides separate debit and credit columns for entering account balances.

67. Classify the following items into real, personal, and nominal accounts: Bad debt Nominal Discount received Nominal Interest paid Nominal Dividend received Nominal Share capital Nominal Bonds Personal Capital Personal 68. Classify the following items into balance sheet and income statement accounts: Outstanding Salary Balance sheet, Income statement Discount received Income statement Interest received Income statement Dividend received Income statement Share capital Balance sheet Bonds issued Balance sheet Cash Balance sheet Rent Income statement Depreciation Income statement 69. What is positing? The process of transferring entries from a journal of original entry to a ledger book. 70. Explain the difference between journalizing and posting. When you journalize you are recording transactions in a journal. A journal is a chronological record of transactions and is the fit place that transactions are recorded. It is often referred to as a book of original entry. Each entry records the date, the accounts affected and their reference number, an explanation of the transaction, and the debit/credit effect on the accounts named. Information from the Journal is later posted to each account.

Periodically, usually at the end of the day, you transfer the debits and credits from the journal entries by posting to the affected accounts. 71. Distinguish between ledger and journal. The journal and the ledger are the most important books of the double entry system of accounting. Following are the points of difference between these two types of books: The journal is the book of fit entry (original entry); the ledger is the book of second entry. It is the goal where all the entries in the journal find their ultimate destination. The journal is the book of chronological record; the ledger is the book for the analytical record. The journal, as a book of source entry, ordinarily has greater weight as legal evidence than the ledger. The unit of classification of data within the journal is the transaction; the unit of classification of data within the ledger is the account. The process of recording in the journal is called journalizing; the process of recording in the ledger is called posting. 72. What is income? Income is the consumption and savings opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received. in a given period of time. 73. How is income different from profit? Income = Money you make (with or without taking out expenses) profit = Money earned after subtraction of expenses. 74. When is income recognized in the income statement? Bottom line" is the net income that is calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it is informally called

"bottom line." It is important to investor as it represents the profit for the year attributable to the shareholder. 75. What are expenses? An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or automobile, paid salaries is often referred to as an expense. 76. What is an income statement? A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurred its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. 77. Explain some of the important items of an income statement. Net Sales (sales or revenue): These all refer to the value of a company's sales of goods and services to its customer. Even though a company's "bottom line" (its net income) gets most of the attention from investor, the "top line" is where the revenue or income process begins. Also, in the long run, profit margins on a companys existing products tend to eventually reach a maximum that is difficult on which to improve. Thus, companies typically can grow no faster than their revenues. Cost of Sales (cost of goods (or products) sold (COGS), and cost of services): For a manufacturer, cost of sales is the expense incurred for raw materials, labor and manufacturing overhead used in the production of its goods. While it may be stated separately, depreciation expense belongs in the cost of sales. For wholesale and retaile, the cost of sales is essentially the purchase cost of merchandise used for resale. For service-related businesses, cost of sales represents the cost of services rendered or cost of revenues.

Gross Profit (Gross income or gross margin): A company's gross profit does more than simply represent the difference between net sales and the cost of sales. Gross profit provides the resources to cover all of the company are other expenses. Obviously, the greater and more stable a company's gross margin, the greater potential there is for positive bottom line (net income) results. Selling, General and Administrative Expenses: Often referred to as SG&A, this account comprises a company's operational expenses. Financial analysts generally assume that management exercises a great deal of control over this expense category. The trend of SG&A expenses, as a percentage of sales, is watched closely to detect signs, both positive and negative, of managerial efficiency. Operating Income: Deducting SG&A from a company's gross profit produces operating income. This figure represents a company's earnings from its normal operations before any so-called non-operating income and/or costs such as interest expense, taxes and special items. Income at the operating level, which is viewed as more reliable, is often used by financial analysts rather than net income as a measure of profitability. Interest Expense: This item reflects the costs of a company's borrowings. Sometimes companies record a net figure here for interest expense and interest income from invested funds. Pretax Income: Another carefully watched indicator of profitability, earnings garnered before the income tax expense is an important step in the income statement. Numerous and drive techniques are available to companies to avoid and/or minimize taxes that affect their reported income. Because these actions are not part of a company's business operations, analysts may choose to use pretax income as a more accurate measure of corporate profitability. Income Taxes: As stated, the income tax amount has not actually been paid - it is an estimate, or an account that has been created to cover what a company expects to pay. Special Items or Extraordinary Expenses: A variety of events can occasion charges against income. They are commonly identified as restructuring charges, unusual or nonrecurring items and discontinued operations. These write-offs are supposed to be one-time events. Investor need to take these special items into account when making inter-annual profit comparisons because they can distort evaluations. Net Income (net profit or net earnings): This is the bottom line, which is the most commonly used indicator of a company's profitability. Of course, if expenses exceed income, this account caption will read as a net loss. After the payment of preferred

dividends, if any, net income becomes part of a company's equity position as retained earnings. Supplemental data is also presented for net income on the basis of shares outstanding (basic) and the potential convention of stock options, warrants etc. (diluted). Comprehensive Income: The concept of comprehensive income, which is relatively new (1998), takes into consideration the effect of such items as foreign currency translations adjustments, minimum pension liability adjustments and unrealized gains/losses on certain investments in debt and equity. The investment community continues to focus on the net income figure. The aforementioned adjustment items all relate to volatile market and/or economic events that are out of the control of a company's management. Their impact is real when they occur, but they tend to even out over an extended period of time. Conclusion When an investor understands the income and expense components of the income statement, he or she can appreciate what makes a company profitable., it experienced a major increase in sales for the period reviewed and was also able to control the expense side of its business. That's a sign of very efficient management. 78. Distinguish between expense and asset? An asset is something of value that is controlled by the businesses. You may have current assets (items that will be available for up to 12 months) such as cash or office supplies and you may have non-current assets (items that will be available for more than 12months) such as a car. (PS on some non-current assets you will also have to take into consideration the depreciation of the asset) An expense is outflows that are incurred when used to generate revenue, such as wages, rent, advertising etc. these are all items that the business must pay for in order for them to generate revenue. for example: if running a cafe, if the business operator don't pay wages to their staff, then they will not have anyone to serve customer, which in turn leads them to lose revenue. 79. What is depreciation? A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes A decrease in an asset's value caused by unfavorable market conditions.

80. (A). Why arent purchase of equipment shown in the income statement? Because it is capital expenditure. according to dual aspect concept the P/L account is not related to purchase of equipment, the balance of equipment account transferred to balance sheet. (B) Why is credit sales shown in the income statement? Because when we calculate profit (Profit= total sales-total expenses) Total sales=cash sales + credit sales (C) Why is dividend not shown in the income statement? Dividend is a part of income; dividend is distributed after calculating the income, thats why dividend is not shown in the income statement. (D) Why is depreciation on furniture an expense? Depreciation moves the cost of an asset to Depreciation Expense during the asset's useful life. The accounts involved in recording depreciation are Depreciation Expense and Accumulated Depreciation. As you can see, cash is not involved. In other words, depreciation reduces net income on the income statement, but it does not reduce the Cash account on the balance sheet. (E) Why is interest due but not paid shown as an expense? According to Accrual concept It recognizes income when it is earned not when it is collected. In case of expenses vice vea. 81. Explain the impact of depreciation on the financial statements. In income statement shown as a expenses, In balance sheet depreciation deducted from fixed asset and shown net figure of fixed asset. In cash flow statement depreciation adding to the net cash flow as a non cash expenses. 82. What are the different methods of charging depreciation? Commonly used depreciation methods: The straight line method Accelerated methods: Written -down-value method

 Sum-of-the-yea-digit method The production unit method 83. Examine the impact of provision for bad and doubtful debts on the income statements. The provision for doubtful debts is identical to the allowance for doubtful accounts. The provision is the estimated amount of bad debt that will arise from accounts receivable that have not yet been collected. The provision is used under accrual basis accounting, so that an expense is recognized for probable bad debts as soon as invoices are issued to customer, rather than waiting several months to find out exactly which invoices turned out to be bad debts. Thus, the net impact of the provision is to accelerate the recognition of bad debts. You typically estimate the amount of bad debt based on historical experience, and charge this amount to expense with a debit to the bad debt expense account (which appear in the income statement) and a credit in the provision for doubtful debts account (which appear in the balance sheet). You should make this entry in the same period when you bill the customer, so that revenues are matched with all applicable expenses (as per the matching principle). 84. Explain the process of determining EPS. The process of determining EPS is particular Revenue Direct Expanses Gross profit Indirect expenses EBIT Interest EBT Tax EAT EAT/no of equity share= EPS Amount xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx

Lessless less less

85. What is relevance of diluted EPS? A performance metric used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised. Convertible securities refer to all outstanding convertible preferred shares, convertible debentures, stock options (primarily employee based) and warrants. Unless the company has no additional potential shares outstanding (a relatively rare circumstance) the diluted EPS will always be lower than the simple EPS. 86. What is weighted average number of share? This element represents the weighted average total number of shares issued throughout the period including the fit (beginning balance outstanding) and last (ending balance outstanding) day of the period before considering any reductions (for instance, shares held in treasury) to arrive at the weighted average number of shares outstanding. Weighted average relates to the portion of time within a reporting period that common shares have been issued and outstanding to the total time in that period. Such concept is used in determining the weighted average number of shares outstanding for purposes of calculating earnings per share (basic). 87. What is appropriation of profit?
A debit in a nominal account for ascertaining profits like the Trading and Profit and Loss account which represents a transfer of credit balance from to some other nominal account (holding profits kept aside) is said to be an appropriation of profits. Such accounts to which credit balances (profits) are transferred to are generally named reserve, provision or fund.

88. What is the composition of borrowing cost? Borrowing cost may include: interest expense calculated by the effective interest method under IAS 39, finance charges in respect of finance leases recognized in accordance with IAS 17 Leases, and Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

89. Examine the impact of borrowing cost on the financial statement. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset and, therefore, should be capitalized. Other borrowing costs are recognized as an expense. 90. What is the difference between revenue and profit? Revenue is the money coming in (from sales or whatever), profit is what is left after all expenses have been paid. 91. Explain the relationship between income statement and accounting equation. The income statement is the financial statement that reports a company's revenues and expenses and the resulting net income. While the balance sheet is concerned with one point in time, the income statement covers a time interval or period of time. The income statement will explain part of the change in the owner's or stockholder' equity during the time interval between two balance sheets. 92. What are cash equivalents?
Cash equivalents are one of the three main asset classes, along with stocks and bonds. These securities have a low-risk, low-return profile. Cash equivalents include U.S. government Treasury bills, bank certificates of deposit, banker' acceptances, corporate commercial paper and other money market instruments.

93. Distinguish between cash and profit. Profit is the surplus after total costs have been deducted from total revenue, whereas cash is money at bank or in hand, readily available for use. Profits are calculated in the trading, profit and loss account whereas cash is shown in the cash flow forecast or cash flow statement.

94. Classify the cash flows. A list of cash flows is more meaningful to investor and creditor if they can determine the type of transaction that gave rise to each cash flow. Toward this end, the statement of cash flows classifies all transactions affecting cash into one of three categories: (1) Operating activities, (2) Investing activities, and (3) Financing activities. 95. What is cash from operating activities (CFO)? The inflows and outflows of cash that result from activities reported in the income statement are classified as cash flows from operating activities inflows and outflows of cash related to transactions entering into the determination of net operation income.. In other words, this classification of cash flows includes the elements of net income reported on a cash basis rather than an accrual basis. Cash inflows include cash received from: Customer from the sale of goods or services These amounts may differ from sales and investment income reported in the income statement. For example, sales revenue measured on the accrual basis reflects revenue earned during the period, not necessarily the cash actually collected. Revenue will not equal cash collected from customer if receivables from customer or unearned revenue changed during the period. Cash outflows include cash paid for: Cash paid to supplier Cash paid to employees Income tax paid Extraordinary items

Basis rather than an accrual basis. Likewise, these amounts may differ from the corresponding accrual expenses reported in the income statement. Expenses are reported when incurred, not necessarily when cash is actually paid for those expenses. Also, some revenues and expenses, like depreciation expense, don't affect cash at all and aren't included as cash outflows from operating activities. The difference between the inflows and outflows is called net cash flows from operating activities. This is equivalent to net income if the income statement had been prepared on cash. 96. What is the treatment of dividend and interest received and paid? The dividend and interest received and paid is going under nominal account as per nominal account principle dividend & interest paid show in income statement as expense and it show at cash flow statement in financing activity as cash out flow. In case of received it vice versa. 97. Distinguish between cash from operating activities and operating profit. Cash from operating is cash basis accounting and operating profit is accrual basis of accounting You make sales on credit, but haven't collected cash yet. Net Income goes up, but A/R goes up instead of cash. 98.

Examine the relationship between profit and cash from operating activities.
Net income is the profit after all expenses have been accounted for - based on GAAP. Cash from operating activities is the cash increase from just the operating activities of the business. It does not include buying and selling assets (investing activities) or borrowing / paying back debt or money received from issuing stock (financing activities). Net income is nice but cash pays the bills. Most companies use the indirect method of preparing the cash flow statement where you start with net income and then add / subtract differences between GAAP and cash.

99. Why is cash generated during the year generally not equal to profit for the year? Cash" transactions where the transaction and the transfer of cash occur at different times. Non -cash transactions where actual "cash" is not exchanged Many businesses do their bookkeeping and accounting on an "accrual" basis. Some businesses are required to use accrual methods for tax or other reasons It is because of this accrual method that cash flows and net profits become separately important. Net profits are Total revenue minus Total expenses, often calculated by taking Gross profits and subtracting overheads and interest expenses. Net profits are a measure of a business's long-term financial health. A similar relative measure (to Net Profits) is EBITDA "Earnings before Interest, Taxes, Depreciation, and Amortization". Cash flows are cash receipts less cash payments. Cash flows are a measure of a business's short-term financial health. A business can go bankrupt in the short-run if "negative" cash flows go on for too long a period of time; likewise they will likely go bankrupt in the long-run when net profits are too low over a long period of time. 100. Briefly explain the provisions of the Accounting Standard (AS)-3 Accounting Standard (AS) 3, Cash Flow Statements (revised 1997), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-1997. This Standard speeders Accounting Standard (AS) 3, Changes in Financial Position, issued in June 1981.This Standard is mandatory in nature2 in respect of accounting periods commencing on or after 1-4-2004 for the enterprises which fall in any one or more of the following categories, at any time during the accounting period: Objective of Accounting Standard 3 - Cash Flow Statements - AS 3 Information about the cash flows of an enterprise is useful in providing use of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize those cash flows. The economic decisions that are taken by use require an evaluation of the ability of an enterprise to

generate cash and cash equivalents and the timing and certainty of their generation. The Statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities. Classification Of Cash Flows According to Accounting standard -3 (Revised) the cash flow statement should report cash flows during the period classified by operating, investing, and financing activities. Thus cash flows are classified in to three main categories: 1. Cash flow from operating activities. 2. Cash flow from investing activities. 3. Cash flow from financing activities. 1. Cash flow from operating activities: Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. The amount of cash flow arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flow to maintain the operating capability of the enterprise, pay dividends, repay loans, and make new investments without resource to external source of financing. Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows. Cash flow from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore they generally result from the transactions and other events that enter into the determination of net profit or loss.

Examples of cash flow from operating activities are: a. Cash receipts from the sale of goods and the rendering of service; b. Cash receipts from royalties, fees, commissions, and other revenue

c. Cash payments to and on behalf of employees ; d. e. Cash payments to and on behalf of employees ; f. Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits; g. Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities ; h. Cash receipts and payments relating to future contracts, forward contracts, option contracts, and swap contracts when the contracts are held for dealing or trading purposes. Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of net profit or loss however the cash flow relating to such transactions are cash flows from investing activities. 2. Cash flow from investing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Examples of cash flow arising from investing activities are: a. Cash payment to acquire fixed assets (including intangibles). These payments include those relating to capitalized research and development cost and sale constructed fixed assets. b. Cash receipt from disposal of fixed assets (including intangibles). c. Cash payments to acquire shares, warrants or debt instruments of other enterprises and interest in joint venture (other than payments for those instruments considered to be cash equivalent and those held for dealing or trading purpose). d. Cash received from disposal of shares, warrants or debt instruments of other enterprises and interest in joint venture (other than received for those instruments considered to be cash equivalent and those held for dealing or trading purpose). e. Cash advances nd loans made to third parties (other than advances and loans made by a financial enterprise).

f. Cash received from the payment of advances and loans made to third parties (other than advanced and loans of financial enterprise). g. Cash payments for future contracts, forward contracts options and swap contracts except when the contracts are dealing or trading purpose, or the payments are classified as financing activities. h. Cash received for future contracts, forward contracts options and swap contracts except when the contracts are dealing or trading purpose, or the received are classified as financing activities. 3. Cash flow from financing activities. Financing activities are activities that result in changes in the size and composition of the owners capital (including preference share capital in the case of a company) and borrowing of the enterprise. The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by provider of fund (both capital and borrowings) to the enterprise. Examples of cash flow arising from financing activities are: a. Cash proceeds from issuing shares or other similar instruments. b. Cash proceeds from issuing debentures, loans, bonds, and other short or long term borrowings. c. Cash payments of amounts borrowed such as redemption of debentures, bonds, preference shares. 101.

Examine the impact of the changes in the working capital on the cash from operating activities.
Working capital is calculated as current assets minus current liabilities on the balance sheet. Just as the name suggests, working capital is the money that the business needs to "work." Therefore, any cash used in or provided by working capital is included in the "cash flows from operating activities" section. Any change in the balances of each line item of working capital from one period to another will affect a firm's cash flows. For example, if a company's accounts receivable increase at the end of the year, this means that the firm collected less money

from its customer than it recorded in sales during the same year on its income statement. This is a negative event for cash flow and may contribute to the "Net changes in current assets and current liabilities" on the firm's cash flow statement to be negative. On the flip side, if accounts payable were also to increase, it means a firm is able to pay its supplier more slowly, which is a positive for cash flow. Were all about shortcuts to make financial statement analysis easier, so here's a little secret that's all you really need to remember regarding changes in working capital:

If balance of an asset increases, cash flow from operations will decrease. If balance of an asset decreases, cash flow from operations will increase. If balance of a liability increases, cash flow from operations will increase. If balance of a liability decreases, cash flow from operations will decrease.

Current assets may include things like inventories and accounts receivable, while current liabilities would include short-term debt and accounts payable. 102. When will the cash from investing activities (CFI) be negative? Negative cash flow from investing activities means that a company has spent more money on fixed assets than it has received from the sale of fixed assets in a given financial period. It's usually a sign of a company growing/investing in itself with a few to growing cash flow from operating activities, 103. Explain with example the impact of depreciation on the cash from operating activities. Depreciation is accounting's way to record wear and tear on a company's property, plant, and equipment (P&E). Even though it's an expense on the income statement, depreciation is not a cash charge, so it's added back to net income.

Example Use the following information to calculate net cash flow from operating activities using indirect method: Net Income Depreciation Expense Increase in Accounts Receivable Increase in Prepaid Rent Decrease in Prepaid Insurance Increase in Accounts Payable Increase in Wages Payable Decrease in Income Tax Payable Gain on Sale of Equipment Solution: Cash Flows from Operating Activities: Net Income Depreciation Expense Gain on Sale of Equipment Increase in Accounts Receivable Increase in Prepaid Rent Decrease in Prepaid Insurance Increase in Accounts Payable Increase in Wages Payable Decrease in Income Tax Payable Net Cash Flow from Operating Activities 7,000 1,000 4,400 7,000 1,300 14,000 1,000 700 1,800

7,000 1,000 1,800 4,400 7,000 1,300 14,000 1,000 700 10,400

104. Examine the implications of having positive CFF, negative CFI, and negative CFO. The investing activities refer to the company's investment in other companies and goods, or to investments made in the company by other. When a company records negative cash flow, it may be because the company is struggling, or it may be because the company had a number of expenses that upped outflow.

Reviewing this statement can help owner and manage discover problems related to the companys negative cash flow. High operating expenses are one reason a company may have negative cash flow. 105. Can a company have positive profit and huge negative CFO? Yes it is possible. Here's an example: Near the end of the year you signed a big client. To meet their needs, you have to rapidly increase production. You buy a new production machine with cash; you increase your raw materials inventory, paid for in cash. And just before the end of the year, you ship out your fit large order to this new client on 30 day terms, increasing your profits...and receivables (not cash). And the result is negative cash flow from operation and positive profit. 106. A company having profit will always have positive cash from operating activities (CFO). Comment. Cash flow from operating activities is a section of the cash flow statement that provides information regarding the cash-generating abilities of a company's core activities. How It Works/Example: Cash flow from operating activities is generally calculated according to the following formula: Cash Flow from Operating Activities = Net income + Noncash Expenses + Changes in Working Capital The noncash expenses are usually The depreciation and/or amortization expenses listed on the firms income. A statement of cash flows typically breaks out a company's cash sources and uses for the period into three categories: cash flows from operations, cash flows from investing activities, and cash flows from financing activities. Cash flows from

operations primarily measure the cash-generating abilities of the company's core operations rather than from its ability to raise capital or purchase assets. Because working capital is a component of cash flow from operations, investo should be aware that companies can influence cash flow from operating activities by lengthening the time they take to pay the bills (thus preserving their cash), shortening the time it takes to collect whats owed to them (thus accelerating the receipt of cash), and putting off buying inventory (again thus preserving cash). It is also important to note that companies also have some leeway about what items are or are not considered capital expenditures, and the investor should be aware of this when comparing the cash flow of different companies.

107. Changes in working capital will no effect on CFO. Comment. Operating cash flow doesn't mean EBITDA (earnings before interest taxes depreciation and amortization). While EBITDA is sometimes called "cash flow", it is really earnings before the effects of financing and capital investment decisions. It does not capture the changes in working capital (inventories, receivables, etc.). The real operating cash flow is the number derived in the statement of cash flows. 108. Buy back of shares will increase the cash from financing activities (CFF). Cash flow that a company acquires from a financing round instead of from operations. That is, cash flow from financing activities is the net amount that a company receives from issuing stock and bonds. Generally speaking, shareholder prefer to see positive cash flow from financing activities, but a negative amount could mean that a company is buying back its own stock, which drives up the share price. It is calculated thus: Cash flow from financing activities = Cash from stock and bonds - debt service on bonds - dividends paid to stockholder - Stock buybacks - called debt. 109. Dividend paid and dividend received will affect the cash from financing activities (CFF). Comment. An entity may classify dividends paid as a financing cash flow because they are a cost of obtaining financial resources. Alternatively, the entity may classify

dividends paid as a component of cash flows from operating activities because they are paid out of operating cash flows. 110. The impact of the following transaction of CFO: Paid salaries operating outflow Purchased goods on credit Interest received investing inflow Interest paid investing outflow Profit on the sale of fixed assets investing inflow Issued capital at a premium Financing inflow Collections from old debtor. Operating inflow Buy back of shares Financing Inflow 111. What is stock split? A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split. 112. How is stock split different from the issue of bonus issue? Simply put- A bonus is a free additional share. A stock split is the same share split into two. Usually companies accumulate its earnings in reserve funds instead of paying it to share-holder in form of dividend. This accumulated reserve fund is then converted into share-capital and allotted to share-holder as bonus shares in proportion to their existing holding. So, Share-capital of the company increases with a concomitant decrease in its Reserve profits. Share-holder get bonus shares in compensation of dividend. But when a share is split, say, from 10 denominations to Re 1 denomination, there would neither be an increase in the share capital nor a concomitant decrease in the reserves of the company. This is because while in a bonus issue a peon having one share of 10 face value would get another share of the same face value should the

company go for a 1:1 bonus what would happen in a stock split is his one 10 share would now be converted into ten Re 1 shares. 113.
Explain the impact if bonus issue on the financial statements of a company.

When the additional shares are allotted to the existing shareholder without receiving any additional payment from them, it is known as issue of bonus shares. Bonus shares are allotted by capitalizing the reserves and surplus. Issue of bonus shares results in the conversion of the company's profits into share capital. Therefore it is termed as capitalization of company's profits. Since such shares are issued to the equity shareholder in proportion to their holdings of equity share capital of the company, a shareholder continues to retain his / her proportionate ownership of the company. Issue of bonus shares does not affect the total capital structure of the company. It is simply a capitalization of that portion of shareholder' equity which is represented by reserves and surpluses. it also does not affect the total earnings of the shareholder. Issue of Bonus Shares is more or less a financial gimmick without any real impact on the wealth of the shareholder. Still firms issue bonus shares and shareholder look forward to issue of bonus shares. 114. When are the shares said to be issued at a premium? A company issues its shares at a premium when the price at which it sells the shares is higher than their par value. This is quite common, since the par value is typically set at a minimal value, such as 0.01 per share. The amount of the premium is the difference between the par value and the selling price. 115. How share premium is be used? According to Companies Act 1985 s.130 and companies ordinance 1984 (Nepal) s.84 1) If a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account called "the share premium account".

(2) The share premium account may be applied by the company in paying up unissued shares to be allotted to member as fully paid bonus shares, or in writing off(a) The company's preliminary expenses; or (b) The expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company, or (c) In providing for the premium payable on redemption of debentures of the company. (3) Subject to this, the provisions of this Act relating to the reduction of a company's share capital apply as if the share premium account were part of its paid up share capital. 116. What are the right shares? Rights shares are issued u/s 81 of the Companies Act, 1956 when the company decides to increase its subscribed capital. The scheme has the following characteristics: (a) Such share shall be offered to its equity shareholder in proportion to their holding. (b) The offer shall be made by a notice of not less than 15 days within which the offer is to be accepted. Otherwise it is deemed as declined. (c) The equity shareholder to whom the offer is made shall be given a right to renounce the offer in full or in part in favor of any other peon and the notice shall contain a statement to this effect. (d) After the expiry of the notice period or on receipt of intimation declining the offer, whichever is earlier, the Board of Director may dispose of such shares in the manner most beneficial to the company.

117. What the bonus shares? A bonus share is a free share of stock given to current shareholder in a company, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. 118. What is the difference between public issue and private issue of shares? When an issue isnt made to just a select group of people however is available to the general public as well as any other investor at large, its a public issue. However, if the issue is enabled to a select group of people, its known as private placement. According to Companies Act, 1956, an share issue becomes public when it results in allotment of 50 peons or even more. Share issue becomes privately when an allotment is made to lower than 50 peons. 119. What is capital redemption reserve? Capital Redemption Revere is an reserve created when a company buys it owns shares which reduces its share capital. This reserve is not distributable to shareholder and can be used to pay bonus shared issued. 120. What is buyback of shares? The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholder who may be looking for a controlling stake. 121. Examine the impact of buy-back of shares on the financial statements. The impact of buy-back of shares If Market Price per Share is greater than Book Value per Share, Book Value per Share will decrease.

If Market Price per Share is less than Book Value per Share, Book Value per Share will increase. This happens because the shares are repurchased at or above the market value, so when the market price is more than the book value, more money is spent to buy shares having less value which erodes the book value for remaining shares. 122. What is book-building? Book building refer to the process of generating, capturing, and recording investor demand for shares during an Initial Public Offering (IPO), or other securities during their issuance process, in order to support efficient discovery. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or book runner. The book is the off-market collation of investor demand by the book runner and is confidential to the book runner, issuer, and underwriter. Where shares are acquired, or transferred via a book build, the transfer occur off-market, and the transfer is not guaranteed by an exchanges clearing house. Where an underwriter has been appointed, the underwriter bea the risk of non-payment by an acquirer or non-delivery by the seller. 123. How is dividend declared? Dividends are payments made by a corporation to its shareholder member. It is the portion of corporate profits paid out to stockholder.[1]When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholder. There are two ways to distribute cash to shareholder: share repurchases or dividends. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

A dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholder. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company's balance sheet - the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends.

Cooperatives, on the other hand, allocate dividends according to membe' activity, so their dividends are often considered to be a pre-tax expense. Dividends are usually paid in the form of cash, store credits (common among retail consume' cooperatives) and shares in the company (either newly created shares or existing shares bought in the market.) Further, many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder. 124. How is cash dividend different from stock dividend? A cash dividend is a payment made by a company out of its earnings to investor in the form of cash (check or electronic transfer). This transfer economic value from the company to the shareholder instead of the company using the money for operations. However, this does cause the company's share price to drop my roughly the same amount as the dividend. For example, if a company issues a cash dividend equal to 5% of the stock price, shareholder will see a resulting loss of 5% in the price of their shares. This is a result of the economic value transfer. Another consequence of cash dividends is that receive of cash dividends must pay tax on the value of the distribution, lowering its final value. Cash dividends are beneficial, however, in that they provide shareholder with regular income on their investment along with exposure to capital appreciation. A stock dividend, on the other hand, is an increase in the amount of shares of a company with the new shares being given to shareholder. For example, if a company was to issue a 5% stock dividend, it would increase the amount of shares by 5% (1 share for every 20 owned). If there are 1 million shares in a company, this would translate into an additional 50,000 shares. If you owned 100 shares in the company, you'd receive five additional shares. 125. How is the preference shares redeemed? According to Section 100 of the Companies Act, 1956 : If a company collects the money through redeemable preference shares, this money must be returned on its maturity whether company is liquidated or not. Section 80 of the Companies Act, 1956 lays down some provisions relating to redeemable preference shares: The shares to be redeemed must be fully paid-up.

 Capital reserves from forfeiture of shares and share premium account are not available for payment of redeemable preference share holder. Its payment will be out of the net profit of the company or amount received on issue of new shares. Company cannot sale amount of asset for redemption of redeemable preference shares. 126. Examine difference between preference shares and equity shares? Equity Share Holder gets Equity Shares of the Company while Preference Share Holder get Preference Shares. Equity Shares are shares whose profit sharing depends on the PROFIT making of the Company. If the company makes huge profits, there dividend sharing will be high else it will be low. Whereas for Preference Share Holder, Dividend is a fixed income to them. They get dividend at a fixed rate, irrespective of the Profit Making of the Company. Dividends to Equity Share holder is optional and at company's discretion. For preference share holder, it is a right to get cumulative or non cumulative dividends from the company. Equity Shareholder are called Residual Owner of the company. After all the obligations of the company are over, the Equity Share Holder get their share. Preference Share Holder get paid their dividends ahead of Equity Shareholders. 127. What is preferential allotment of shares? A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. A listed company going for preferential allotment has to comply with the requirements contained. According to SEBI (DIP) Guidelines, in addition to the requirements specified in the Companies Act. In short, preferential issue means allotment of equity to some selected people by a company which has its share already listed.

128. Explain the impact of the issue of bonus shares on the book value per share. The impact of the bonus shares on the book value per share. Reserves/Retained Earnings of the company reduce. Paid up equity share capital increases. Total Net worth remains unchanged. No. of outstanding shares of the company increases. Shareholder proportional ownership remains unchanged. EPS (Earnings per share), MPS (Market price of share), BVPS (Book value per share) decreases. 129. Examine the difference between buy-back and payment of dividend. Simply put, the company uses existing cash for both purposes; the difference is that dividends go directly into your pocket, which you have to pay taxes on, while the share buyback goes to purchasing shares on the open market, which are then retired after purchase. This action reduces the number of shares outstanding, so profits are then divided amongst fewer shares. 130. What are convertible debentures? Convertible debentures, which are convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. "Convertibility" is a feature that corporations may add to the bonds they issue to make them more attractive to buyer. In other words, it is a special feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert, convertible bonds typically have lower interest rates than nonconvertible corporate bonds. 131. What are current and long term liabilities? Current Liabilities Money that a business owner must pay to a creditor within 12 months of the balance sheet date is a current liability. Ideally, short-term assets, such as cash and accounts receivable, should more than offset short-term liabilities, such as accounts payable, notes payable and payroll. It is wise for a business owner to remain alert to his

company's current liabilities and the cash and assets that will be turned to cash within one year to meet these obligations. Long-term liabilities are liabilities with a future benefit over one year, such as notes payable that mature longer than one year. In accounting, the long-term liabilities are shown on the right wing of the balancesheet representing the sources of funds, which are generally bounded in form of capital assets. Examples of long-term liabilities are debentures, mortgage loans and other bank loans. (Note: Not all bank loans are long term as not all are paid over a period greater than a year; an example of this is a bridging loan.) 132. How long term liabilities differ from the other sources of funds? Long-term liabilities are liabilities with a future benefit over one year, such as notes payable that mature longer than one year. The sources of fund include both the long term and current liabilities. 133. Explain some of the popular sources of current liabilities. A company's debts or obligations that is due within one year. Current liabilities appear on the company's balance sheet and include Short term debt An account shown in the current liabilities portion of a company's balance sheet. This account is comprised of any debt incurred by a company that is due within one year. The debt in this account is usually made up of short-term bank loans taken out by a company. Accounts payable Accounts payable is money owed by a business to its supplier shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. Accrued liabilities An accounting term for an expense that a business has incurred but has not yet paid. A company can accrue liability for any number of items, such as a pension account that will pay retirees in the future. Accrued liabilities can be recorded as either short or long-term liabilities on a company's balance sheet.

Bank overdraft An extension of credit from a lending institution when an account reaches zero. An overdraft allows the individual to continue withdrawing money even if the account has no funds in it. Basically the bank allows people to borrow a set amount of money. 134. What are the contingent liabilities? A contingent liability is a potential liability. This means that the contingent liability might become an actual liability and a loss, or it might not. It depends on something in the future. If your parent guarantees your loan, your parent will have a contingent liability. Your parent will have an actual liability and a loss only if you do not make the payments on the loan. On the other hand, if you make the loan payments, your parent will not have a liability and loss. 135. Explain the accounting treatment of the contingent liabilities? Contingent liabilities that are assessed as likely to result in an adhere outcome and which can be estimated are totaled and recorded as an estimated liability. No disclosure is provided of either the individual estimates or the total amount of the allowance. In the case where an accrual is recorded but only cove a portion of the estimated range of liability, the difference between the amount recorded and the top of the range should be considered for disclosure in the notes to the financial statements.

136. What is the accounting treatment of the loss on the issue of debentures? When cash is received: Bank A/c To Debenture Application A/c (Being money received on debentures@...each) When debentures are allotted: Debenture Application A/c

(Dr.)

Discount on issue of debentures A/c (Dr.) To Debenture A/c To Bank A/c When loss on issue of debenture charged P/L account. P/L Account (Dr.) To Discount on issue of debentures A/c (Being loss on issue of debenture charged P/L A/c) 137. What is amortization of debenture loss? Discounts on issue of debentures are deferred and amortized on a straight-line basis over the redemption period of the debentures commencing from the date of issue of debentures. The discount on issue of debentures would be amortized over the redemption periods in such a way as to result in a constant rate of interest (effective interest rate). The difference as a result of applying the effective interest rate method for discounts on issue of debentures was not significant for the year ended March 31, 2004. Amortization of discount on debentures and finance setup costs is included under Amortization in the Profit and Loss Account. 138. What is operating lease? An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. 139. How operating lease differ from financing lease? Operating lease is a lease agreement which is NOT a finance lease. In short, a lease agreement in which risks and rewards associated with the asset are not transferred to the lessee and stays with the owner of the asset i.e. lessor.

Finance lease is a lease agreement in which substantially all the risks and rewards incidental to ownership of an asset are transferred to the lessee from the lessor. Where lessee is the peon who acquired an asset from lesser for use and lessor is the peon who is the owner of the asset and has handed over the asset to lessee to earn rentals. 140. What is sale and lease back? Arrangement in which one party sells a property to a buyer and the buyer immediately leases the property back to the seller. This arrangement allows the initial buyer to make full use of the asset while not having capital tied up in the asset. Leasebacks sometimes provide tax benefits. Also called leaseback. 141. What are deep discount bonds? A bond issued with a very low coupon or no coupon that sells at a price far below par value. A bond that has no coupon is called a zero-coupon bond. 142. What is difference between bonds and shares? Shares are equity and represent ownership in a company while bondholder have no stake in the company except that they are entitled to interest from the company. Bonds are debts to the company and bondholder are the fit to receive their money back in case a company dissolves. Bonds are relatively safer but pay lower returns on investment. Shares can be volatile but also carry higher rewards. Shares are for perpetuity or as long as the company lasts whereas bonds are for a limited time period and have no value after the completion of the term. 143. What is unearned revenue? Payment received before a good is sold or a service is provided. Unearned revenue is classified as a current liability on the balance sheet until it is recognized as earned during the accounting cycle.

144. Distinguish between short-term loan and creditor. A Short Term Loan (STL) is an advance of your financial aid when there is an acute immediate need for funds. A peon or institution that giving goods or services on credit. Creditor can be classified as either "personal" or "real. 145. What are bills payable? Similar to accounts payable, this term is used to describe a bank's indebtedness to other banks, principally a Federal Reserve Bank that is backed by collateral consisting of the bank's promissory note and a pledge of government securities. In other words, bills payable is the money a bank borrows, mainly on a short-term basis, and owes to other banks. 146. What are different types of debentures? On the basis of security: Secured Debenture Unsecured debenture On the basis of convertibility Convertible debenture Non-convertible Debenture On the basis of permanence Redeemable

Irredeemable On the basis of negotiability Registered Debenture Bearer Debenture On the basis of priority Fit Debenture Second Debenture

147. Explain the impact of issue of debentures on the accounting equation. When debenture issue Debenture increase capital and increase cash at asset site.

148. Explain the treatment of loss on issue of debentures. The loss on issue of debenture shows in income statement as an expense. 149. Explain the difference between finance lease and operating lease. While financial lease is a long term arrangement between the lessee (user of the asset) and the owner of the asset, whereas operating lease is a relatively short term arrangement between the lessee and the owner of asset. Under financial lease all expenses such as taxes, insurance are paid by the lessee while under operating lease all expenses are paid by the owner of the asset. The lease term under financial lease cove the entire economic life of the asset which is not the case under operating lease. Under financial lease the lessee cannot terminate or end the lease unless otherwise provided in the contract which is not the case with operating lease where lessee can end the lease anytime before expiration date of lease. While the rent which is paid by the lessee under financial lease is enough to fully amortize the asset, which is not the case under operating lease. 150. When is the revenue recognized in the income statement The revenue recognition principle is a cornet one of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting in contrast revenues are recognized when cash is received no matter when goods or services are sold.

151. Briefly explain the relevant standard for revenue recognition. This extract has been prepared by IF Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards. The primary issue in accounting for revenue is determining when to recognize revenue. Revenue is recognized When it is probable that future economic benefits will flow to the entity Tend these benefits can be measured Reliably. This Standard identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognized. It also provides practical guidance on the application of these criteria. Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary Activities of an entity when those inflows result in increases in equity, other than increases relating to Contributions from equity participants. This Standard shall be applied in accounting for revenue arising from the following transactions and events: (a) The sale of goods; (b) The rendering of services; and (c) The use by other of entity assets yielding interest, royalties and dividends. The recognition criteria in this Standard are usually applied separately to each transaction. However, in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. For example, when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognized as revenue over the period during which the service is performed. Convexly, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be undertook without reference to the series of transactions as a whole. For example, an entity may sell goods and, at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together. Revenue shall be measured at the fair value of the consideration received or receivable. Fair value is the amount for which an asset could be exchanged, or a liability settled, between

knowledgeable, willing parties in an arms length transaction. The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity. Sale of goods Revenue from the sale of goods shall be recognized when all the following conditions have been satisfied: (a) The entity has transferred to the buyer the significant risks and rewards of ownership of the goods; (b) The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) The amount of revenue can be measured reliably; (d) It is probable that the economic benefits associated with the transaction will flow to the entity; and (e) The costs incurred or to be incurred in respect of the transaction can be measured reliably. Rendering of services When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognized by reference to the stage of completion of the transaction at the end of the reporting period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: (a) The amount of revenue can be measured reliably; (b) It is probable that the economic benefits associated with the transaction will flow to the entity; (c) The stage of completion of the transaction at the end of the reporting period can be measured reliably; and (d) The costs incurred for the transaction and the costs to complete the transaction can be measured reliably. The recognition of revenue by reference to the stage of completion of a transaction is often referred to as the percentage of completion method. Under this method, revenue is recognized in the accounting periods in which the services are rendered. The recognition of revenue on this basis provides useful information on the extent of service activity and performance during a period. When the outcome of the transaction

involving the rendering of services cannot be estimated reliably, revenue shall be recognized only to the extent of the expenses recognized that are recoverable Interest, royalties and dividends Revenue shall be recognized on the following bases: (a) Interest shall be recognized using the effective interest method as set out in IAS 39. (b) Royalties shall be recognized on an accrual basis in accordance with the substance of the relevant agreement; and (c) Dividends shall be recognized when the shareholders right to receive payment is established. 152. Examine the treatment of bad debt in the financial statement. If a buyer does not pay the amount it owes, the seller will report: 1. A credit loss or bad debts expense on its income statement, and 2. A reduction of accounts receivable on its balance sheet. With respect to financial statements, the seller should report its estimated credit losses as soon as possible using the allowance method. For income tax purposes, however, losses are reported at a later date through the use of the direct write-off method. 153. Explain impact of credit sales on the financial statements. The impact of credit sales on the financial statements are: Balance Sheet Credit sales interact with a balance sheet through the customer receivables account, which is a short-term asset. Along with merchandise and cash, accounts receivable represent resources a business will use in the next 12 months. Long-term assets serve in operating activities for more than 52 weeks. Examples include real property, production equipment, plants and computer gear, all of which go under the "property, plant and equipment" section of a balance sheet.

Income Statement
Credit sales flow into the top-line section of a statement of profit and loss -- the other name for an income statement, or statement of income. In the top-line category, you also find merchandise expense, also known as cost of sale or cost of goods sold. Total

sales minus merchandise expense equals gross profit, a measure of top-line growth. Don't mistake this for the bottom line, which is the net performance result an organization publishes at the end of a given period -- say, a month or fiscal quarter. Cash Flow Statement A credit sale doesn't directly affect a statement of cash flows because it involves no monetary element. However, a liquidity report -- an identical term for a statement of cash flows -- prepared under the indirect method touches on credit sales and accounts receivable. To calculate cash flows from operating activities, financial manage add a decrease in customer receivables back to net income, doing the opposite for an increase in the accounts' value. This makes sense, because a decrease in accounts receivable means more money coming in corporate coffee. Equity Statement Credit sales affect an equity statement through the retained earnings account. Sales revenue increases a company's net income, which ultimately flows into retained earnings -- an equity statement item. 154. Examine the accounting treatment of provision for bad and doubtful debts. In case debtor does not give us our amount . Then if we have make provision or reserve for this, we can easily purchase new goods but if we have no money due to every year bad debts then we can become insolvent . So with our work experience we should make our provision on our debtor with some % on debtor. The accounting treatment of provision for doubtful debts . Fit of pass the journal entry of actual bad debts . Entry for recording actual bad debt which did not record in books of business 1. Bad debts account Dr. xxxxx To Sundry Debtor Account xxxxxx Entry for transferring bad debts to provision for bad debts Account 2. Provision for bad debts account Dr. xxxxxx To Bad Debts account xxxxx Transfer of provision for bad debts account to profit and loss account

3. Profit and loss account Dr. xxxxxx To Provision for bad debts account xxxxx 155. What is factoring? Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. In "advance" factoring, the factor provides financing to the seller of the accounts in the form of a cash "advance," often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor's discount fee (commission) and other charges, upon collection from the account client. In "maturity" factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch. 156. Distinguish between recourse and non-recourse factoring. Recourse factoring is an agreement where a company sells its current invoices to a factoring company with the understanding that the company will buy them back if they go uncollected. This factoring plan is generally affordable since the company is agreeing to absorb some of the risk involved in the transaction. Non-recourse factoring allows a company to sell its invoices to a factor without the obligation of absorbing any unpaid invoices. Instead, if the customer renege on their payments or pay their invoices late any losses are absorbed by the factor, leaving the business unscathed. 157. Examine the impact of the expenses paid but not due on the financial statements. It shows as a expense of income statement.

158. What are operating expenses? An operating expense is an ongoing cost for running a product, business, or system. Operating expenses include: accounting expenses license fees maintenance and repair, such as snow removal, trash removal, janitorial service, pest control, and lawn care advertising office expenses supplies attorney fees and legal fees utilities, such as telephone insurance property management, including a resident manager property taxes 159. Explain the treatment of discount to debtor in the financial statements. This discount is recorded when a debtor or customer settles the full invoice within the specified time. This discount needs to be entered as an expense in a Discount Allowed account and will reduce the net profit and will have no effect on the gross profit. 160. What is the difference between debtor and bills receivables? Debtor are those people to whom we have made sales and now amount need to be received but sometime debtor issue bills to use them until received money from them which is called bills receivables. Example: we sold goods to Mr. A, for 5000 on account and Mr. A, issue bill for 5000 so now until Mr. A, don't pay us if we need money we can use that bill to discount from bank and get money and at the time of payment now Mr. A, will pay to the bank and get back that bill from bank.

161. Distinguish between cash discount and trade discount.

Sl no 1 2 3 4 5 6 Trade Discount Trade discount is issued by deduction in list price. Trade discount is given with the aim to purchase at high quantity. Trade discount is shown as deduction in Invoice. There is no any accounting treatment for trade discount. Trade discount is related to quantity of the goods purchased. There is no need to give cash discount with trade discount.2 Cash discount Cash discount is issued by deduction in payable amount of debto. Cash discount is given with the aim to get payment fitly and before payment date. Cash Discount is not shown as deduction in Invoice. There is accounting treatment for cash discount both in vendor and buyers day book. Cash Discount is related to the amount of payment but not to quantity of goods. If seller has given trade discount, cash discount can be given after trade discount.

162. Distinguish between investment in fixed assets and investment in revenue assets. The investing in fixed asset is long term investment and investment in revenue asset is a short term investment. 163. What consists of the cost of acquisition of fixed assets? Acquisition cost of an asset includes all additional costs incurred for getting title over and legal ownership of such asset. Such additional expenses may include various fees, commission, etc. Acquisition cost, especially of machinery and equipment, is also inclusive of additional expenses that are incurred in getting such fixed asset to the desired location, say, the plant. Examples of such additional carrying cost includes cost of transportation, octori, toll, storage cost (if the asset is to be transported across stations and warehousing is required on the way), etc. 164. What is capitalization of expenses? The expenditure which are primary in nature, but due to certain circumstances they may be treated as capital expenditure are termed as capitalised expenditure.

165. Examine the impact of capitalization expenses on the income statement. Following these are the capitalized expenses Wages paid for installation of machinery or creation of an asset. Materials consumed for constructions of assets. Carriage paid for transportation of asset. Immediate repair of the second hand asset to bring it to the running condition. Legal charges incurred in connection with purchase of fixed assets. These expenses show in Income Statement as a expenses. 166. What is capitalized interest? An account created in the income statement section of a business' financial statements that holds a suitable amount of funds meant to pay off upcoming interest payments. Furthermore, this type of interest is seen as an asset and unlike most conventional types of interest, it also is expensed over time. 167. Why is depreciation required to be recorded? The former affects the balance sheet of a business or entity, and the latter affects the net income that they report. Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. This expense is recognized by businesses for financial reporting and tax purposes. 168. What is written down value? Depreciation is computed at a fixed rate percent of an asset carrying amount at the beginning of an accounting period. This is also known as Diminishing Balance Method. The depreciation can be calculated as: 1 n (Residual Value/ Cost)

n = Useful life period in yea 169. Explain the difference between straight line method and reducing balance method of determining depreciation. Straight-line method: It distributes the depreciable amount equally over the life of the asset. The annual depreciation expenses can be calculated as: (Cost Residual value) Useful Life Written -down-value method (Diminishing Balance): Depreciation is computed at a fixed rate percent of an asset carrying amount at the beginning of an accounting period. This is also known as Diminishing Balance Method. The depreciation can be calculated as: 1 n (Residual Value/ Cost) n = Useful life period in yea 170. Distinguish between sum-of-digits method of charging depreciation and conventional reducing balance method of charging depreciation. Sum-of-the-yea-digit method: This method is rarely used in India. It charges a large part of the cost of an asset in the early yea. This can be calculated as:

(Cost Residual value) x ( n / Sum of the digits) n = useful life of the asset. Written -down-value method (Diminishing Balance): Depreciation is computed at a fixed rate percent of an asset carrying amount at the beginning of an accounting period. This is also known as Diminishing Balance Method. The depreciation can be calculated as: 1 n (Residual Value/ Cost) n = Useful life period in yea 171. Show the impact of acquisition of assets on the accounting equation. Only one side of the accounting equation will be affected when an asset is acquire the asset Cash decreases and the asset Equipment increases. If a asset acquire in credit it will affect two (2) side of the accounting equation the asset increase and the liability (creditor) increase. 172. Show the impact of acquisition of assets on credit on the financial statements. When asset acquire on credit it directly show at balance sheet in financial statement both the sides creditor as a liability side and an asset as a asset side. 173. What is meant by impairment of assets? Impairment of a fixed asset is an abrupt decrease of its fair value due to damage, when impairment of a fixed asset occurs, the business has to decrease its value in the balance sheet and recognize a loss in the income statement. 174. What is impairment loss?

When impairment of a fixed asset occurs, the business has to decrease its value in the balance sheet and recognize a loss in the income statement. That loss is impairment loss 175. What is revaluation reserve? An accounting term used when a company has to enter a line item on their balance sheet due to a revaluation performed on an asset. This line item is used when the revaluation finds the current and probable future value of the asset is higher than the recorded historic cost of the same asset.

176. How is revaluation reserve used? Let's say you have a building that has a historical cost of 1, 000. The accumulated depreciation is 600; therefore Net Book Value is 400. It is found that this building actually has a fair (market) value of 1, 200. You might want to reflect this on your Balance Sheet to make your business look good. The correct double entry is Buildings 200, (Dr) (Dr)

Accumulated depreciation 600 To Revaluation Reserve 800

This amount in the revaluation reserve needs to be slowly transferred over to the Retained Earnings Account throughout the remaining useful life of the building. 177. Examine the impact of revaluation of assets on the financial statements. If an assets carrying amount is increased as a result of a revaluation, the increase shall be credited directly to equity under the heading of revaluation surplus. However,

The increase shall be recognized in profit or loss to the extent that it reserves a revaluation decrease of the same asset previously recognized in profit or loss. If an assets carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be debited directly to equity under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset. 178. Explain the impact of the change in depreciation method from straight line method to reducing balance method on the financial statements. if depreciation method change from straight line to reducing balance method the depreciation amount will decrease and credited to profit and loss account and the book value of the fixed asset amount will also increase and it credited to FA account and it show at balance sheet. 179. What consists of current assets? The current assets normally consist of: Sundry Debtor Accounts Receivable Inventory Short term investment/marketable securities Cash & cash equivalent 180. How does stock-in-trade differ from other assets? Stock in trade is Goods held by a business for sale and the other assets are a firm's assets that do not include cash, securities, receivables, inventory and prepaid assets, and can be convertible into cash within one business cycle, which is usually one year. 181. Explain FIFO method of inventory valuation.

Fit-In, Fit-Out (FIFO) is one of the methods commonly used to calculate the value of inventory on hand at the end of a period and the cost of goods sold during the period. This method assumes that inventory purchased or manufactured fit is sold fit and newer inventory remains unsold. Thus cost of older inventory is assigned to cost of goods sold and that of newer inventory is assigned to ending inventory. The actual flow of inventory may not exactly match the fit-in, fit-out pattern. Fit-In, Fit-Out method can be applied in both the periodic inventory system and the perpetual inventory system. The following example illustrates the calculation of ending inventory and cost of goods sold under FIFO method
Example

Use the following information to calculate the value of inventory on hand on Mar 31 and cost of goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory system. Mar 1 5 14 27 29 Solution FIFO Periodic Units Available for Sale Units Sold Units in Ending Inventory Cost of Goods Sold Sales From Mar 1 Inventory Sales From Mar 5 Purchase Sales From Mar 27 Purchase = 60 + 140 + 70 = 190 + 30 = 270 220 Units Unit Cost 60 15.00 140 15.50 20 16.00 220 = 270 = 220 = 50 Total 900 2,170 320 3390 Beginning Inventory 60 units @ 15.00 per unit Purchase 140 units @ 15.50 per unit Sale 190 units @ 19.00 per unit Purchase 70 units @ 16.00 per unit Sale 30 units @ 19.50 per unit

Ending Inventory Inventory From Mar 27 Purchase FIFO Perpetual

Date Mar 1 5 14 27 29 31 70 16.00 1,190 10 20 15.50 16.00 Purchases Sales Units Unit Cost Total Units Unit Cost 140 15.50 2,170 60 130 15.00 15.50

Units 50

Unit Cost 16.00

Total 800

Total Units 60 60 140 900 10 2,015 10 70 155 50 320 50

Balance Unit Cost Total 15.00 900 15.00 900 15.50 2,170 15.50 155 15.50 155 16.00 1,120 16.00 800 16.00 800

182. Examine the impact of different methods of inventory valuation on the gross profit. The inventory valuation method you choose for your business such as FIFO, LIFO, or Averaging has an impact on your businesss profit margin. You can compare these methods to see what effect each method might have on the bottom line. In this example, assume Company A bought the inventory in question at different prices on three different occasions. Beginning Inventory is valued at 500 (thats 50 items at 10 each). Heres the calculation for determining the number of items sold: Beginning Inventory + Purchases = Goods available for sale Ending inventory = Items sold 50 + 500 = 550 75 = 475

Heres what the company paid to purchase the inventory: Date April 1 April 15 April 30 Example: The Averaging method Heres an example of how you calculate the Cost of Goods Sold using the Averaging method: Quantity 150 150 200 Unit Price 10 25 30

Beginning Inventory Purchases

50 150 @ 10 150 @ 25 200 @ 30 Total Inventory 550 Average Inventory Cost 11,750 550 = 21.36 Cost of Goods Sold 475 21.36 = 10,146 Ending Inventory 75 @ 21.36 = 1,602

500 1,500 3,750 6,000 11,750

Remember, the Cost of Goods Sold number appea on the income statement and is subtracted from Sales. The Ending Inventory number shows up as an asset on the balance sheet. This is true for all three inventory valuation methods. Example: The FIFO method Heres an example of how you calculate the Cost of Goods Sold using the FIFO method. With this method, you assume that the fit items received are the fit ones sold, and because the fit items received here are those in Beginning Inventory, the table starts with them:
Beginning Inventory Next in April 1 Then April 15 Then April 30 Cost of Goods Sold 50 @ 10 150 @ 10 150 @ 25 125 @ 30 475 500 1,500 3,750 3,750 9,500

Ending Inventory

75 @ 30

2,250

Only 125 of the 200 units purchased on April 30 are used in the FIFO method. Because this method assumes that the fit items into inventory are the fit items sold (or taken out of inventory), the fit items used are those on April 1. Then the April 15 items are used, and finally the remaining needed items are taken from those bought on April 30. Because 200 were bought on April 30 and only 125 were needed, 75 of the items bought on April 30 are left in ending inventory. Example: The LIFO method Heres an example of how you calculate the Cost of Goods Sold using the LIFO method. With this method, you assume that the last items received are the fit ones sold, and because the last items received were those purchased on April 30, the table starts with them
April 30 Next April 15 Then April 1 Cost of Goods Sold Ending Inventory 200 @ 30 150 @ 25 125 @ 10 475 75 @ 10 6,000 3,750 1,250 11,000 750

Because LIFO assumes the last items to arrive are sold fit, the Ending Inventory includes the 25 remaining units from the April 1 purchase plus the 50 units in Beginning Inventory. Heres how the use of inventory under the LIFO method impacts the company profits. Assume the items are sold to the custome for 40 per unit, which means total sales of 19, 000 for the month (thats 40 475 units sold). In this example, look at the Gross Profit, which is the profit from Sales before considering expenses incurred for operating the company. Gross Profit is calculated by the following equation: Sales Cost of Goods Sold = Gross Profit Example: Comparing Gross Profit The following table shows a comparison of Gross Profit for the three methods used in the example scenario.

Income Statement Line Item Sales Cost of Goods Sold Gross Profit

Averaging 19,000 10,146 8,854

FIFO 19,000 9,500 9,500

LIFO 19,000 11,000 8,000

Looking at the comparisons of gross profit, you can see that inventory valuation can have a major impact on your bottom line. LIFO is likely to give you the lowest profit because the last inventory items bought are usually the most expensive. FIFO is likely to give you the highest profit because the fit items bought are usually the cheapest. And the profit produced by the Averaging method is likely to fall somewhere in between the two.

183. Examine the impact of different methods of inventory valuation on the value of the closing stock The following example will illustrate this: Cindy Sheppard runs a candy shop. She ente into the following transactions during July: July July July 1 13 14 Purchases Purchases Sells 1,200 500 700 lollypops lollypops lollypops at at at Rs1 Rs1.20 Rs2 each. each. each.

Fit of all, how many lollypops does she have at the end of the month? Answer: 1,200 + 500 700 = 1,000 lollypops Now, there are three ways that Ms. Sheppard could value her closing stock:

1. The Fit-In-Fit-Out Method (FIFO) This method assumes that the fit inventories bought are the fit ones to be sold, and that inventories bought later are sold later. The value of our closing inventories in this example would be calculated as follows:

Using the Fit-In-Fit-Out method, our closing inventory comes to Rs1,100. This equates to a cost of Rs1.10 per lollypop (Rs1,100/1,000 lollypops). It is very common to use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life, because the oldest goods need to be sold before they pass their sell-by date. Thus the fit-in-fit-out method is probably the most commonly used method in small business. Well, probably. The Last-In-Fit-Out Method (LIFO) This method assumes that the last inventories bought are the fit ones to be sold, and that inventories bought fit are sold last. The value of our closing inventories in this example would be calculated as follows:

Using the Last-In-Fit-Out method, our closing inventory comes to Rs1,000. This equates to a cost of Rs1.00 per lollypop (Rs1,000/1,000 lollypops). The LIFO method is commonly used in the U.S.A. 3. The Weighted Average Cost Method This method assumes that we sell all our inventories simultaneously. The weighted average cost method is most commonly used in manufacturing businesses where inventories are piled or mixed together and cannot be differentiated, such as chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those bought yesterday, as they are all mixed together. So we work out an average cost for all chemicals that we have in our possession. The method specifically involves working out an average cost per unit at each point in time after a purchase. In our example above (assuming the weighted average cost method was allowed for valuing the lollypops), the value of our closing inventories would be calculated as follows:

Using the weighted average cost method, our closing inventory amounts to Rs1,059. This equates to a cost of Rs1.06 per lollypop (Rs1,059/1,000 lollypops). Oddly enough, the LIFO method is the preferred inventory valuation method in the United States but is disallowed in non-US countries. The FIFO method and the weighted average cost method are used in non-US countries. In recent yea there have been calls for the standardization of accounting rules throughout the world, and talk specifically about disallowing LIFO in the US (or making the rest of the world follow the LIFO system). As of this writing the matter has not been resolved and the differences in inventory valuation still. 184. Which method of inventory valuation approximates the physical flow of products in most business? Specific Identification, Average Cost Method

185. Valuation of cost of goods sold depends on the methods of inventory valuation. Explain. The following equation expresses how a company's inventory is determined: Beginning Inventory + Net Purchases - Cost of Goods Sold (COGS) = Ending Inventory Cost of goods sold = sales-(opening stock + purchase - Closing stock) +direct expenses

If closing stock change as per different method the cost of goods sold will changed. 186. Define investments. An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price. 187. What are current investments? An account in the current assets section of a company's balance sheet. This account contains any investments that a company has made that will expire within one year. For the most part, these accounts contain stocks and bonds that can be liquidated fairly quickly.

188. What are long term investments? An account on the asset side of a company's balance sheet that represents the investments that a company intends to hold for more than a year. They may include stocks, bonds, real estate and cash. 189. What is cost of investment? Those cost directly or indirectly involve with investment thats called cost of investment like suppose we purchase a fixed asset the cost of investment is purchase price, installation expenses etc. similarly when we invest in share market the cost of investment is cost price of security brokerage etc. 190. Explain the impact of acquiring investments on the accounting equation. Only one side of the accounting equation will be affected when an investment is acquire the asset Cash decreases and the asset investment will increases.

191. Explain the impact of acquiring investments on the financial statements. When we acquire investment it affect the asset side of balance sheet on financial statement the cash will decrease and the investment of asset side will increase. 192. What is ex-interest price? Without interest; coupon for interest just due and detached. This term is particularly used in reference to "registered bonds," which, in as much as the interest is forwarded to the holder by check, are, to a certain extent, treated more or less from the standpoint of shares of stock. When the checks of interest are sent out to registered bondholder, they go forward to holder of record as of a certain date. Any sale of such a bond upon or immediately after a certain date, or, in other words, the closing of the books, would be sold "ex-interest; that is, the interest check would go to the previous holder and the purchaser makes his transaction upon that undemanding. There is at times a difference in the quotations between the registered and coupon bonds of the same issue, equal to the amount of the coupon. A registered 6% bond, for example, on which 2% (four months) interest has accumulated, might be quoted at 106, which would be the equivalent of the same bond in coupon form selling at 104 "and interest." Registered bonds selling exinterest are at that time quoted about equally in price, as 104 " ex-interest" and 104 " and interest are equal one to the other. 193. What is cum-interest price? The calculation for cumulative interest is (FV/PV)-1. It ignores the 'per year' convention and assumes compounding at every payment date. It is usually used to compare two long term opportunities. 194. Distinguish between rights issue and bonus issue from the investors point of view. Bonus issues are generally associated with an investor being issues with extra shares than what they paid for. This can be as means of maintaining net wealth also

(redistribution from company held shares to shareholder etc). This is the issue of an actual share that can then be traded on an open market. Rights Issues are issued to existing shareholder of a company when that company decides to raise more capital via issuing new shares. Existing shareholder are given the "right" to purchase new shares at a discounted price (generally discounted - not always); if they choose not to take this "right" they can instead sell the rights to purchase the shares on a free market to ensure that their net wealth is maintained (as the increase in supply effectively devalues each preexisting share). 195. How is profit on sale of investment calculated? When you make an investment, you're likely to have a range of expenses in relation to it. For example, you may pay sales costs, commissions, and taxes; you may even pay for financial advice. In order to calculate investment profit, youll typically need to add up all of your related expenses. Once this is done, youll need to add the expenses to the base cost of your investment to obtain the total cost of the investment. Finally, you can subtract the total cost of the investment from its current worth to figure out how much you have profited.

196. What is financial statement analysis? Financial statement analysis (or financial analysis) the process of understanding the risk and profitability of a firm (business, sub-business or project) through analysis of reported financial information, by using different accounting tools and techniques. 197. What are the tools of financial statement analysis? Horizontal Analysis Trend Analysis Vertical Analysis Ratio Analysis

198. Financial statement analysis is the solution to the problem of inefficiency of a company. The number on financial statements provide clear, objective information about a company's situation, including how much it earns and how much it owes. This clarity and quantifiable assessment is valuable for making financial decisions such as when to cut costs and when to invest in expansion, but not all business decisions can be made on the basis of objective financial criteria alone. Your business may choose to also consider intangible variables, such as quality of life issues affecting employees and owner. 199. Financial statement analysis will help in improving the efficiency of a company. Do you agree with the statement? Yes I am agreeing in ratio analysis of financial statement analysis Efficiency ratios measure how efficiently the company turns inventory into revenue. The day sales outstanding ratio focuses on the time required to turn inventory into cash and the age of your accounts receivable. The inventory turnover ratio indicated the rapidity with which the company is able to move its merchandise, report s Credit Guru. Accounts payable to sales shows the percentage of sales funded with supplier's money. 200. What is a common size balance sheet? A common size balance sheet is a type of standardized financial statement that completely lists all of firms specific assets, liabilities, and equity claims as a percentage of a firms total assets. 201. What is a comparative income statement? A comparative income statement is a multi-column income statement, where the results of multiple accounting periods are shown in separate columns. The intent of this format is to allow the reader to compare the results of multiple historical periods, thereby giving a view of how the business is performing over time.

202. What is the purpose of common size analysis? The purpose of common size analysis is to know the proportional expression of the amount of each item on a financial statement to the statement total. 203. What is trend analysis? It involves calculation of percentage changes in a financial statement items for a number of successive yea. A longer period of this analysis facilitates to identify the basic changes in the nature of the business. 204. What is liquidity? Liquidity is the ability of a business to meet its short term obligations when they fall due.

205. How liquidity differ from solvency? Liquidity is all about cash and assets near to cash (assets that can be easily converted to cash with incurring minimum cost), while Solvency is the ability of a business entity to meets its debts and financial obligations as they mature. In another word, Liquidity is cash on hand and Solvency is ability to pay debts. 206. What is owner fund? Owner Funds is when the owner of a company (business) invests his own money into the business At the start of a business, owner put some funding into the business to finance operations. This creates a liability on the business in the shape of capital as the business is a separate entity from its owner. Businesses can be considered, for accounting purposes, sums of liabilities and assets; this is the accounting

equation. After liabilities have been accounted for, the positive remainder is deemed the owner's interest in the business. 207. Explain the different ways of finding owner fund. The capital employed in a company, computed by deducting the book value of the liabilities from the book value of the assets. Also called net assets, net worth, shareholder' equity, or shareholder' funds. In financial accounting, owner's equity consists of the net assets of an entity. Net assets are the difference between the total assets of the entity and all its liabilities. Equity appear on the balance sheet / statement of financial position, one of the four primary financial statements. The assets of an entity include both tangible and intangible items, such as brand names and reputation or goodwill. The types of accounts and their description that comprise the owner's equity depend on the nature of the entity and may include: Share capital (common stock) Preferred stock Capital surplus Retained earnings Treasury stock Stock options Reserve The individual investor is interested not only in the total changes to equity, but also in the increase / decrease in the value of his own peonal share of the equity. This reconciliation of equity should be done both in total and on a per share basis. Equity (beginning of year) + net income internet money you gained dividends how much money you gained or lost so far +/ gain/loss from changes to the number of shares outstanding.

 = Equity (end of year) if you get more money during the year or less or not anything 208. Examine the difference between working capital and capital employed. Capital Employed Working Capital is what funds you have for the day to day running of the business. For example, Current Assets - Current Liabilities = Net Current Assets Capital Employed is how much money has been invested/employed within the company or business. 209. Explain the different ways of finding capital employed. Formula for Capital Employed The general formula used for computing capital employed is: Capital employed = Total Assets Current Liabilities = Equity + Non-current Liabilities

Calculating Capital Employed Generally, the capital employed can be calculated through two methods as mentioned below: Method 1 The fit method involves calculating capital employed from the assets side and is worked out by 5the adding up the following: I. The fixed assets are included in their net values, be it original cost or the replacement cost after depreciation. In times of inflation, it is advisable to count fixed assets at the replacement cost which is actually the current market value of the assets. II. Investments into the business. III. All current assets like cash in hand, sundry debtor, cash at bank, bills receivable, stock, and similar more.

IV. To determine the capital employed, current liabilities are subtracted from the total assets Method 2 As an alternative to the fit method, capital employed can also be calculated from the liabilities side of a balance sheet. While calculating form the liabilities side, he following items will be included: I. Share capital which includes issued share capital (Equity + Preference) II. Reserves and Surplus that includes General reserve, Capital reserve, Profit & Loss account, Debentures, and other long term loans. III. To evaluate the capital employed, the sum of liabilities mentioned above is deducted from the total assets worth. 210. Define operating cycle. The operating cycle is the amount of time it takes for a company to turn cash used to purchase inventory into cash once again. This number is calculated by adding the age of inventory (the number of days that inventory is held prior to sale) with the collection period (the number of days required to collect receivables). A company with a short operating cycle is able to quickly recover its investment. A company with a long operating cycle will have less cash available to meet any short-term needs, which can result in increased borrowing and interest expense. 211. Explain the difference between current assets and liquid assets Current assets are cash and other assets expected to be converted to cash or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the core of a business during normal business activity. Whereas liquid assets are an asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally regarded in the same light as cash because their prices are relatively stable when they are sold on the open market. 212. List the major items of current assets and current liabilities.

The major items included into current assets are: Cash and cash equivalents it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money order, bank drafts). Short-term investments include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities). Receivables usually reported as net of allowance for no collectable accounts. Inventory trading these assets is a normal business of a company. The inventory value reported on the balance is usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule. Prepaid expenses these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries. The list of major current liabilities is: Accounts payable. These are the trade payables due to supplier, usually as evidenced by supplier invoices. Sales taxes payable. This is the obligation of a business to remit sales taxes to the government that it charged to customer on behalf of the government. Payroll taxes payable. This is taxes withheld from employee pay, or matching taxes, or additional taxes related to employee compensation. Income taxes payable. This is income taxes owed to the government but not yet paid. Interest payable. This is interest owned to lender but not yet paid. Bank account overdrafts. These are short-term advances made by the bank to offset any account overdrafts caused by issuing checks in excess of available funding. Accrued expenses. These are expenses not yet payable to a third party, but already incurred, such as wages payable.

Customer deposits. These are payments made by customer in advance of the completion of their order for goods or services. Dividends declared. These are dividends declared by the board of director, but not yet paid to shareholder. Short-term loans. This is loans that are due on demand or within the next 12 months. Current maturities of long-term debt. This is that portion of long-term debt that is due within the next 12 months. 213. Examine the limitations of current ratio. Limitations of current ratio Current ratio suffers from a number of limitations. Some are given below: Some businesses have different trading activities in different seasons. Such businesses may show low or high current ratio in certain periods during the year. To compare the ratio of two companies it is necessary that both the companies use same inventory valuation method. For example, comparing current ratio of two companies would be like comparing apples to oranges if one uses fast-in, fitout (FIFO) method and the other uses Last-in, fit-out (LIFO) method for the valuation of inventory. So the analyst would not be able to compare the ratio of two companies even in the same industry. It is not exact science to test the liquidity of a company because the quality of each individual asset is not taken into account while computing this ratio. It can be easily manipulated by equal increase or decrease in current assets and current liabilities. For example, if current assets of a company are Rs10,000 and current liabilities are Rs5,000, the current ratio would be 2:1 as computed below: Rs10,000 / Rs5,000 2:1 If both current assets and current liabilities are reduced by Rs1,000, the ratio would be increased to 2.25:1 as computed below: Rs9,000 / Rs4,000 2.25:1

214. List the two methods of computing inventory turnover. The two methods of computing inventory is Sales/ inventory Cost of goods sold (COGS)/Average inventory 215. High current assets mean high liquidity. Do you agree? Yes I am agreeing High current assets mean high liquidity because: Businesses use liquidity ratios to measure their financial health. The three most important are: 1. Current Ratio - the company's current assets divided by its current liabilities. It determines whether a company could pay off all its short-term debt with the money it got from selling its assets. 2. Quick Ratio - The same as the current ratio, only using just cash, accounts receivable and stocks/bonds. The business can't count its inventory or prepaid expenses that can' be easily sold. 3. Cash Ratio - Like the name implies, the company can only use it cash to pay off its debt. If the cash ratio is one or greater, that means the business will have no problem paying its debt, and has plenty of liquidity. If company have high current asset it means high liquidity. 216. What is working capital? Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. Also called net current assets or current capital.

217. Explain the concept of working capital through current items and also through non-current items. Working capital is defined as the excess of current assets over current liabilities. Current assets are those assets which will be converted into cash within the current accounting period or within the next year as a result of the ordinary operations of the business. They are cash or near cash resources. These include: * Cash and Bank balances * Receivables * Inventory Raw materials, stores and spares Work-in-progress Finished goods * Prepaid expenses * Short-term advances * Temporary investment The value represented by these assets circulates among several items. Cash is used to buy raw materials, to pay wages and to meet other manufacturing expenses. Finished goods are produced. These are held as inventories. When these are sold, accounts receivables are created. The collection of accounts receivables brings cash into the firm. The cycle starts again. Current liabilities are the debts of the firms that have to be paid during the current accounting period or within a year. These include: * Creditors for goods purchased * Outstanding expenses i.e., expenses due but not paid * Short-term borrowings * Advances received against sales * Taxes and dividends payable * Other liabilities maturing within a year Working capital is also known as circulating capital, fluctuating capital and revolving capital. The magnitude and composition keep on changing continuously in the course of business.

Permanent and Temporary Working Capital Considering time as the basis of classification, there are two types of working capital viz, 'Permanent' and 'Temporary'. Permanent working capital represents the assets required on continuing basis over the entire year, whereas temporary working capital represents additional assets required at different items during the operation of the year. A firm will finance its seasonal and current fluctuations in business operations through short term debt financing. For example, in peak seasons more raw materials to be purchased, more manufacturing expenses to be incurred, more funds will be locked in debtors balances etc. In such times excess requirement of working capital would be financed from short-term financing sources. The permanent component current assets which are required throughout the year will generally be financed from long-term debt and equity. Tandon Committee has referred to this type of working capital as 'Core Current Assets'. Core Current Assets are those required by the firm to ensure the continuity of operations which represents the minimum levels of various items of current assets viz., stock of raw materials, stock of work-in-process, stock of finished goods, debtors balances, cash and bank etc. This minimum level of current assets will be financed by the long-term sources and any fluctuations over the minimum level of current assets will be financed by the short-term financing. Sometimes core current assets are also referred to as 'hard core working capital'. The management of working capital is concerned with maximizing the return to shareholders within the accepted risk constraints carried by the participants in the company. Just as excessive long-term debt puts a company at risk, so an inordinate quantity of short-term debt also increases the risk to a company by straining its solvency. The suppliers of permanent working capital look for long- term return on funds invested whereas the suppliers of temporary working capital will look for immediate return and the cost of such financing will also be costlier than the cost of permanent funds used for working capital. 218. What is negative working capital? Situation in which the current liabilities of a firm exceed its current assets. For example, if the total of cash, marketable securities, accounts receivable and notes receivable, inventory, and other current assets is less than the total of accounts

payable, short-term notes payable, long-term debt due in one year, and other current liabilities, the firm has a negative Working Capital. 219. What is funds flow statement? A fund flow statement, better known as a cash flow statement, is an important document in the accounting world. A fund flow statement shows a company's inflows and outflows of funds. It is used to show investors, stakeholders or owners where the company's money came from and where it went. 220. How is fund different from cash? Cash means money and does not include credit or kind. Fund includes everything like credit or kind. For example, a supplier supplies material on credit for which payment is not made immediately. Till the payment is made by us, the supplier has given us moneys worth of goods. Similarly services would also be provided. Thus fund could mean, either physical cash or credit for supply of goods or services. Hence, at times, the term fund also refers to money or moneys worth (OR) cash or kind. Another example is in case capital is brought into an enterprise in a form, other than cash; say in the form of land or building or machinery or vehicle. This is also fund but would not fall under the category of cash. 221. Explain the process of determining funds from operation. The process for determining the FFO involves adding the amount of depreciation and amortization related to the assets in the fund to the earnings generated by the trust. In most cases, the figure is presented as a per share basis, indicating an increase or decrease from one period to another. Net Income + Depreciation + Amortization - Gains on Sales of Property =Funds from Operations 222. Is fund from operation same as cash from operation? Funds from Operations (FFO) is a measure of cash generated by a real estate investment trust (REIT). It is important to note that FFO is not the same as Cash from Operations, which is a key component of the indirect-method cash flow statement.

223. How are debtors days calculated? The calculation of debtor days is: (Trade receivables / Annual credit sales) x 365 days 224. Explain the reasons for very high debtor days. The reason of very high debtor is low credit sale or previous debt highly collected of current year. 225. What is solvency? Solvency of a firm is measured by the ability of the firm to meet all its current obligations. It is affected by the extent of debt used to finance the assets of the company. It shows the firms ability to earn surplus money to meet all obligations. 226. What are the measures of solvency? Debt to Equity Ratio Liability to Equity ratio Interest Coverage Ratio 227.