All questions of Unit 8: Accounting Standards for CA Foundation Exam

The correct answer is option 'B' - AS 10.

AS 10, also known as Accounting Standard for Fixed Assets, provides guidelines for accounting for fixed assets. Fixed assets are long-term tangible assets that are used in the production or supply of goods and services, for rental purposes, or for administrative purposes. Some examples of fixed assets include land, buildings, machinery, equipment, and vehicles.

AS 10 provides guidelines for the following aspects of fixed assets accounting:

1. Recognition of Fixed Assets: Fixed assets should be recognized when they are probable to generate future economic benefits, their cost can be measured reliably, and they meet the definition of fixed assets.

2. Initial Measurement of Fixed Assets: Fixed assets should be measured initially at cost, which includes all the costs necessary to acquire and bring the asset to its working condition for its intended use.

3. Subsequent Measurement of Fixed Assets: Fixed assets should be carried at cost less accumulated depreciation and impairment losses.

4. Depreciation: Depreciation should be provided on fixed assets to reflect their consumption of economic benefits over their useful lives.

5. Impairment: Fixed assets should be tested for impairment whenever there is an indication of impairment, and an impairment loss should be recognized if the carrying amount of the asset exceeds its recoverable amount.

6. Retirement or Disposal of Fixed Assets: Fixed assets should be derecognized from the books when they are retired or disposed of, and any resulting gain or loss should be recognized in the profit and loss account.

In summary, AS 10 provides guidelines for recognizing, measuring, depreciating, impairing, and disposing of fixed assets. By following these guidelines, companies can ensure that their financial statements accurately reflect the value of their fixed assets and the expenses associated with their use over time.

AS 2: Valuation of Inventories
Introduction: AS 2 is an accounting standard that provides guidelines for the valuation of inventories. It is applicable to all entities that prepare financial statements under the accrual basis of accounting.
Key Points:
- Objective: The main objective of AS 2 is to prescribe the method of determining the cost of inventories, its subsequent recognition as an expense, and its measurement at the lower of cost and net realizable value.
- Scope: AS 2 applies to all inventories, except for work in progress arising under construction contracts, financial instruments, and biological assets related to agricultural activity.
- Valuation Methods: AS 2 allows the use of various methods for the valuation of inventories, including specific identification, first-in, first-out (FIFO), and weighted average cost.
- Cost of Inventories: The cost of inventories consists of all costs incurred in bringing the inventories to their present location and condition. It includes the cost of purchase or production, conversion costs, and other costs necessary to bring the inventories to their present condition.
- Net Realizable Value: Inventories should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion, disposal, and transportation.
- Recognition as an Expense: The cost of inventories should be recognized as an expense in the period in which the related revenue is recognized. Any write-down of inventories to net realizable value should be recognized as an expense in the period in which the write-down occurs.
- Disclosure Requirements: AS 2 requires certain disclosures in the financial statements, including the accounting policies adopted for the valuation of inventories, the carrying amount of inventories, and any write-downs recognized as an expense.
Conclusion: AS 2 provides guidance on the valuation of inventories, ensuring that they are carried at the lower of cost and net realizable value. It helps in presenting accurate and reliable financial statements by ensuring consistent accounting treatment for inventories across different entities.

Generally accepted accounting principals are more than just a set of rules on paper. the practice they serve very important function...

Explanation:

Accounting Standards are guidelines and principles that are used to prepare financial statements. They are issued by regulatory bodies such as the Institute of Chartered Accountants of India (ICAI) and the Ministry of Corporate Affairs (MCA). These standards aim to provide uniformity and consistency in the preparation and presentation of financial statements. However, they do not have the power to over-ride the statute.

Statute refers to the law enacted by the legislative body of a country. It is a set of rules that govern the actions and conduct of individuals and organizations. In the context of accounting, statute refers to the laws that are applicable to the preparation and presentation of financial statements. These laws have the force of the law and cannot be over-ridden by Accounting Standards.

Therefore, the correct answer to the question is option B - Accounting Standards cannot over-ride the statute.

Importance of Compliance with Accounting Standards and Statutes:

It is important for companies to comply with both accounting standards and statutes. Non-compliance can result in legal and financial consequences such as fines, penalties, and legal action. Compliance with accounting standards and statutes also helps to ensure that financial statements are prepared accurately and fairly, and provide reliable information to stakeholders.

Conclusion:

Accounting Standards provide guidelines and principles for the preparation and presentation of financial statements. However, they cannot over-ride the statute. Compliance with both accounting standards and statutes is important to ensure accuracy and reliability of financial statements and to avoid legal and financial consequences.

Accounting Standards are written policy documents issued by expert accounting body or by the government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation, and disclosure of accounting transactions in financial statements.

The correct answer is option 'D', which states that all of the above options are correct. Let's discuss each of these options in detail:

a) Harmonise accounting policies:
Accounting standards aim to harmonize accounting policies by providing guidelines and rules for preparing financial statements. These standards ensure that companies follow similar accounting principles, methods, and practices when recording and reporting their financial transactions. Harmonizing accounting policies promotes consistency and comparability in financial reporting, making it easier for users of financial statements to analyze and compare the financial performance and position of different companies.

b) Eliminate the non-comparability of financial statements:
One of the primary objectives of accounting standards is to eliminate non-comparability of financial statements. Non-comparability arises when companies adopt different accounting policies or methods for similar transactions or events. This can lead to variations in financial reporting, making it difficult for users to make meaningful comparisons. Accounting standards provide guidance on selecting appropriate accounting policies and methods, ensuring that financial statements are comparable across different entities and periods.

c) Improve the reliability of financial statements:
Another objective of accounting standards is to improve the reliability of financial statements. Reliability refers to the accuracy, completeness, and neutrality of the information presented in financial statements. Accounting standards establish rules and principles that enhance the reliability of financial reporting by requiring companies to provide relevant and reliable information, use appropriate estimation techniques, disclose necessary details, and follow consistent accounting policies. This promotes transparency and helps users make informed decisions based on reliable financial information.

In summary, accounting standards play a crucial role in harmonizing accounting policies, eliminating non-comparability, and improving the reliability of financial statements. These objectives ensure that financial reporting is consistent, comparable, and provides reliable information to users. By following accounting standards, companies can enhance the usefulness and credibility of their financial statements, thereby benefiting various stakeholders such as investors, creditors, regulators, and the general public.

 AS- 8 on Accounting for Research and Development was withdrawn w.e.f. 1st April 2003 and on and from that date AS- 26 on Intangible Assets become mandatory. Therefore AS- 8 was replaced by AS- 26.

The correct answer is option 'C': Institute of Chartered Accountants of India (ICAI).

Explanation:
Accounting standards are a set of principles, guidelines, and procedures that provide a framework for the preparation and presentation of financial statements. These standards ensure consistency, transparency, and comparability in financial reporting. In India, accounting standards are issued by the Institute of Chartered Accountants of India (ICAI), which is a statutory body established under the Chartered Accountants Act, 1949.

The ICAI is responsible for setting accounting standards in India through its Accounting Standards Board (ASB). The ASB comprises a group of experts and professionals who develop and issue accounting standards in line with international best practices and the requirements of Indian law.

The process of issuing accounting standards in India involves several stages:

1. Identification of the need for a new or revised accounting standard: The ASB identifies the areas where new or revised accounting standards are required. This can be based on changes in the business environment, emerging accounting issues, or updates to international accounting standards.

2. Drafting of the accounting standard: Once the need for a new or revised accounting standard is identified, the ASB drafts the standard. This involves extensive research, consultation with stakeholders, and consideration of international accounting standards.

3. Exposure draft: The draft accounting standard is then published as an exposure draft, which is made available for public comments and feedback. This allows stakeholders, including companies, auditors, and regulators, to provide their inputs and suggestions.

4. Finalization of the accounting standard: After considering the feedback received during the exposure draft stage, the ASB finalizes the accounting standard. This includes making any necessary revisions or modifications based on the inputs received.

5. Issuance of the accounting standard: Once finalized, the accounting standard is issued by the ICAI. It becomes mandatory for companies to comply with the accounting standard for the preparation and presentation of their financial statements.

It is important to note that while the ICAI issues accounting standards, it is the responsibility of companies, auditors, and regulators to ensure compliance with these standards. Non-compliance can result in penalties and legal consequences.

Overall, the Institute of Chartered Accountants of India (ICAI) is the authority responsible for issuing accounting standards in India through its Accounting Standards Board (ASB). These standards play a crucial role in ensuring the consistency and transparency of financial reporting in the country.

Consistency in Accounting Principles

Consistency in accounting principles refers to the application of the same accounting methods and procedures from year to year. It means that once a company chooses a particular accounting method or procedure, it should continue to follow it consistently in the future. This enhances comparability of financial statements between different years, which is important for investors, analysts, and other stakeholders.

Importance of Consistency

Consistency is important for various reasons, some of which are:

1. Comparability: Consistent application of accounting principles ensures that financial statements can be compared between different years. It helps in identifying trends and patterns in the financial performance of a company.

2. Accuracy: Consistent application of accounting principles ensures that financial statements are accurate. It helps in reducing errors and misstatements in the financial statements.

3. Transparency: Consistent application of accounting principles enhances the transparency of financial statements. It helps in providing a clear and accurate picture of the financial performance of a company.

4. Credibility: Consistent application of accounting principles enhances the credibility of financial statements. It helps in building trust and confidence among investors, analysts, and other stakeholders.

Examples of Consistency

Consistency can be demonstrated in various ways, some of which are:

1. Depreciation: A company can choose to use the straight-line method of depreciation for its fixed assets. Once it chooses this method, it should continue to use it consistently in the future. Changing the method of depreciation can affect the comparability of financial statements between different years.

2. Inventory Valuation: A company can choose to use the first-in, first-out (FIFO) method for valuing its inventory. Once it chooses this method, it should continue to use it consistently in the future. Changing the method of inventory valuation can affect the comparability of financial statements between different years.

Conclusion

Consistency is an important principle in accounting. It ensures that financial statements are comparable, accurate, transparent, and credible. Companies should choose accounting methods and procedures carefully and apply them consistently from year to year.

(iv), (B) (ii), (C) (iii), (D) (i)