Q. 1. Answer all the questions.

(i) What is full disclosure convention?

ANS- For a business, the full disclosure principle requires a company to provide the necessary
information so that people who are accustomed to reading financial information can make informed
decisions concerning the company.

The required disclosures can be found in a number of places including the following:

the company's financial statements including any supplementary schedules and notes (or footnotes).

Management's Discussion and Analysis that is included in a publicly-traded corporation's annual report
to the U.S. Securities and Exchange Commission.

Quarterly earnings reports, press releases and other communications.

(ii) Name the various material variances.

ANS- Material variance has two definitions, one relating to direct materials and the other to the size of a
variance. They are:

Related to materials. This is the difference between the actual cost incurred for direct materials and the
expected (or standard) cost of those materials. It is useful for determining the ability of a business to
incur materials costs close to the levels at which it had planned to incur them. However, the expected
(or standard) cost of materials can be a negotiated figure or only based on a certain purchase volume,
which renders this variance less usable. The variance can be further subdivided into the purchase price
variance and the material yield variance.

Related to size of variance. A variance is considered to be material if it exceeds a certain percentage or

dollar amount. This approach to the material variance is commonly used by auditors, who (for example)
may ask to see explanations of all variances exhibiting a change of at least $25,000 or 15% from the
preceding year. A variation on the concept is to consider a transaction material if its presence or
absence would alter the decisions of a user of a company's financial statements.

(iii) What is the objective of preparing Trial Balance?

ANS-Trial Balance is a statement of debit and credit balances taken out from all ledger accounts
including cash book. The golden rules that “Accounting equation remains balanced all the time” and
“For every business transaction there is an equal debit and credit” shall always prevail in the whole
accounting theory. Therefore, total of all debits balances must be equal to total of all credit balances.

Objectives of Preparing the Trial Balance:

The trial balance is prepared to achieve the following objectives:

(i) To ascertain arithmetical accuracy:

(ii) To facilitate detection of errors:

(iii) To facilitate preparation of financial statements:

(iv) To facilitate auditors:

(iv) State the formula for calculating PV Ratio.

ANS- Profit-volume ratio indicates the relationship between contribution and sales and is usually
expressed in percentage.

The ratio shows the amount of contribution per rupee of sales. Since, in the short-term, fixed cost does
not change, the profit-volume ratio also measures the rate of change of profit due to change in the
volume of sales.

The formula to calculate P/V ratio is:

A high P/V ratio indicates high profitability so that a slight increase in volume, without increase in fixed
cost, would result in high profits. A low P/V ratio, on the other hand, is a sign of low profitability so that
efforts should be made to improve P/V ratio.

(v) Write the adjustment entry for “Manager’s Commission on Net Profit”.

ANS- Sometimes the manager is entitled for a commission on profits which is usually calculated at a
fixed percentage of the profits. Let us take an example.

Suppose, a firm has earned Rs. 300000 as profits in the financial year 2016-17 without charging the
commission, which is 10 % of the profits. Then the manager's commision will be Rs. 30000.

The manager's commision will be treated as an outstanding expense and it is shown as an expense at
the debit side of profit and loss account a