Framework for Preparation & Presentation of Financial Statement Important Question & Answer | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


Q-1 A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine `1,00,000.
At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of production.
The new method will not require the machine ordered and it will be scrapped after delivery. The
expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-
X2.
Ans. A liability is recognised when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should
recognise a liability of ` 1,00,000 to Gamma Ltd..
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the
present case, flow of future economic benefit from the machine to the enterprise is improbable. The
entire amount of purchase price of the machine should be recognised as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
transferred to profit and loss account)
Q-2 With regard to financial statements name any four.
(1)   Users
(2)   Qualitative characteristics
(3)   Elements
(b) What are fundamental accounting assumptions?
Ans. (1) Users of Financial statement
Investors, employees, Lenders, Supllies/Creditors, Customers, Govt. & Public
(2) Qualitative Characteristics of Financial Statements :
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(3) Elements of Financial Statement :
Asset, Liability, Equity, Income/gain and Expense/Loss
(b) Fundamental Accountig Assumptions :
Accrual, Going Concern and Consistency
Framework for prepartion and presentation of Financial
Statements
Page 2


Q-1 A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine `1,00,000.
At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of production.
The new method will not require the machine ordered and it will be scrapped after delivery. The
expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-
X2.
Ans. A liability is recognised when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should
recognise a liability of ` 1,00,000 to Gamma Ltd..
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the
present case, flow of future economic benefit from the machine to the enterprise is improbable. The
entire amount of purchase price of the machine should be recognised as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
transferred to profit and loss account)
Q-2 With regard to financial statements name any four.
(1)   Users
(2)   Qualitative characteristics
(3)   Elements
(b) What are fundamental accounting assumptions?
Ans. (1) Users of Financial statement
Investors, employees, Lenders, Supllies/Creditors, Customers, Govt. & Public
(2) Qualitative Characteristics of Financial Statements :
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(3) Elements of Financial Statement :
Asset, Liability, Equity, Income/gain and Expense/Loss
(b) Fundamental Accountig Assumptions :
Accrual, Going Concern and Consistency
Framework for prepartion and presentation of Financial
Statements
Q-3
(a) Explain in brief, the alternative measurement bases, for determining the value at which an element can
be recognized in the Balance Sheet or Statement of Profit and Loss.
(b) Mohan started a business on 1st April 2017 with Rs.12,00,000 represented by 60,000 units of Rs.20 each.
During the financial year ending on 31st March, 2018, he sold the entire stock for Rs.30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in the
year 2017-18 if Financial Capital is maintained at historical cost.
Ans. (a) The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized in
the balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Currentcost (iii)
Realizable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an
amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition.
Liabilities are generally recorded at the amount of proceeds received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents
that would be required to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net
cash flows generated by the concerned assets in the normal course of business. Liabilities under
this convention are carried at present value of future net cash flows that are expected to be required
to settle the liability in the normal course of business.
(b)
Particular Financial Capital Maintenance at
Historical Cost (Rs.)
Closing equity  (Rs.30 x 60,000 units) 18,00,000 represented by cash
Opening equity 60,000 units x Rs. = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (1,80,000 - 12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw Rs. 6,00,000 as the maximum amount
Q-4 Explain main elements of Financial Statements.
Ans. Elements of Financial Statements
The Framework for preparation and Presentation of financial statements classifies items of financial
statements can be classified in five broad groups depending on their economic characteristics: Asset, Liability,
Equity, Income/Gain and Expense/Loss.
Assets Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits.
Page 3


Q-1 A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine `1,00,000.
At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of production.
The new method will not require the machine ordered and it will be scrapped after delivery. The
expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-
X2.
Ans. A liability is recognised when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should
recognise a liability of ` 1,00,000 to Gamma Ltd..
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the
present case, flow of future economic benefit from the machine to the enterprise is improbable. The
entire amount of purchase price of the machine should be recognised as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
transferred to profit and loss account)
Q-2 With regard to financial statements name any four.
(1)   Users
(2)   Qualitative characteristics
(3)   Elements
(b) What are fundamental accounting assumptions?
Ans. (1) Users of Financial statement
Investors, employees, Lenders, Supllies/Creditors, Customers, Govt. & Public
(2) Qualitative Characteristics of Financial Statements :
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(3) Elements of Financial Statement :
Asset, Liability, Equity, Income/gain and Expense/Loss
(b) Fundamental Accountig Assumptions :
Accrual, Going Concern and Consistency
Framework for prepartion and presentation of Financial
Statements
Q-3
(a) Explain in brief, the alternative measurement bases, for determining the value at which an element can
be recognized in the Balance Sheet or Statement of Profit and Loss.
(b) Mohan started a business on 1st April 2017 with Rs.12,00,000 represented by 60,000 units of Rs.20 each.
During the financial year ending on 31st March, 2018, he sold the entire stock for Rs.30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in the
year 2017-18 if Financial Capital is maintained at historical cost.
Ans. (a) The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized in
the balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Currentcost (iii)
Realizable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an
amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition.
Liabilities are generally recorded at the amount of proceeds received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents
that would be required to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net
cash flows generated by the concerned assets in the normal course of business. Liabilities under
this convention are carried at present value of future net cash flows that are expected to be required
to settle the liability in the normal course of business.
(b)
Particular Financial Capital Maintenance at
Historical Cost (Rs.)
Closing equity  (Rs.30 x 60,000 units) 18,00,000 represented by cash
Opening equity 60,000 units x Rs. = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (1,80,000 - 12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw Rs. 6,00,000 as the maximum amount
Q-4 Explain main elements of Financial Statements.
Ans. Elements of Financial Statements
The Framework for preparation and Presentation of financial statements classifies items of financial
statements can be classified in five broad groups depending on their economic characteristics: Asset, Liability,
Equity, Income/Gain and Expense/Loss.
Assets Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits.
Equity Residual interest in the assets of an enterprise after deducting all its liabilities.
Income/gain Increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decreases in liabilities that result in increase in equity other
than those relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decrease in equity other
than those relating to distributions to equity participants.
Q-5 Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below:
Liabilities Amount (`) Assets Amount (`)
Proprietor's Capital 3,00,000 Fixed Assets 3,60,000
Profit & Loss Account 1,25,000 Closing Stock 1,50,000
10% Loan Account 2,10,000 Sundry Debtors 1,00,000
Sundry Creditors 50,000 Deferred Expenses 50,000
_______ Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows :
(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The net realisable
value of fixed assets on 31.03.2018 was ` 3,25,000.
(2) Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000 respectively.
(3) The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and ` 2,50,000 respectively.
(4) Expenses for the year amounted to ` 78,000.
(5) Deferred Expenses are amortized equally over 5 years.
(6) Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection of another `
25,000 depends on successful re-installation of certain product supplied to the customer;
(7) Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.
(8) Cash balance as on 31.03.2018 is ` 4,22,000.
(9) There is an early repayment penalty for the loan of ` 25,000.
You are required to prepare: (Not assuming going concern)
(1) Profit & Loss Account for the year 2017-18.
(2) Balance Sheet as on 31st March, 2018.
Ans. Profit and Loss Account for the year ended 2017-18 (not assuming going concern)
Particulars Amount Particulars Amount
` `
To Opening Stock 1,50,000 By Sales 27,50,000
To Purchases 22,50,000 By Closing Stock 2,50,000
To Expenses* 78,000 By Trade payables 7,500
To Depreciation 35,000
To Provision for doubtful debts 30,000
To Deferred cost 50,000
To Loan penalty 25,000
To Net Profit (b.f.) 3,89,500 ________
30,07,500 30,07,500
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Q-1 A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine `1,00,000.
At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of production.
The new method will not require the machine ordered and it will be scrapped after delivery. The
expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-
X2.
Ans. A liability is recognised when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should
recognise a liability of ` 1,00,000 to Gamma Ltd..
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the
present case, flow of future economic benefit from the machine to the enterprise is improbable. The
entire amount of purchase price of the machine should be recognised as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
transferred to profit and loss account)
Q-2 With regard to financial statements name any four.
(1)   Users
(2)   Qualitative characteristics
(3)   Elements
(b) What are fundamental accounting assumptions?
Ans. (1) Users of Financial statement
Investors, employees, Lenders, Supllies/Creditors, Customers, Govt. & Public
(2) Qualitative Characteristics of Financial Statements :
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(3) Elements of Financial Statement :
Asset, Liability, Equity, Income/gain and Expense/Loss
(b) Fundamental Accountig Assumptions :
Accrual, Going Concern and Consistency
Framework for prepartion and presentation of Financial
Statements
Q-3
(a) Explain in brief, the alternative measurement bases, for determining the value at which an element can
be recognized in the Balance Sheet or Statement of Profit and Loss.
(b) Mohan started a business on 1st April 2017 with Rs.12,00,000 represented by 60,000 units of Rs.20 each.
During the financial year ending on 31st March, 2018, he sold the entire stock for Rs.30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in the
year 2017-18 if Financial Capital is maintained at historical cost.
Ans. (a) The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized in
the balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Currentcost (iii)
Realizable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an
amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition.
Liabilities are generally recorded at the amount of proceeds received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents
that would be required to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net
cash flows generated by the concerned assets in the normal course of business. Liabilities under
this convention are carried at present value of future net cash flows that are expected to be required
to settle the liability in the normal course of business.
(b)
Particular Financial Capital Maintenance at
Historical Cost (Rs.)
Closing equity  (Rs.30 x 60,000 units) 18,00,000 represented by cash
Opening equity 60,000 units x Rs. = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (1,80,000 - 12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw Rs. 6,00,000 as the maximum amount
Q-4 Explain main elements of Financial Statements.
Ans. Elements of Financial Statements
The Framework for preparation and Presentation of financial statements classifies items of financial
statements can be classified in five broad groups depending on their economic characteristics: Asset, Liability,
Equity, Income/Gain and Expense/Loss.
Assets Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits.
Equity Residual interest in the assets of an enterprise after deducting all its liabilities.
Income/gain Increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decreases in liabilities that result in increase in equity other
than those relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decrease in equity other
than those relating to distributions to equity participants.
Q-5 Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below:
Liabilities Amount (`) Assets Amount (`)
Proprietor's Capital 3,00,000 Fixed Assets 3,60,000
Profit & Loss Account 1,25,000 Closing Stock 1,50,000
10% Loan Account 2,10,000 Sundry Debtors 1,00,000
Sundry Creditors 50,000 Deferred Expenses 50,000
_______ Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows :
(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The net realisable
value of fixed assets on 31.03.2018 was ` 3,25,000.
(2) Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000 respectively.
(3) The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and ` 2,50,000 respectively.
(4) Expenses for the year amounted to ` 78,000.
(5) Deferred Expenses are amortized equally over 5 years.
(6) Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection of another `
25,000 depends on successful re-installation of certain product supplied to the customer;
(7) Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.
(8) Cash balance as on 31.03.2018 is ` 4,22,000.
(9) There is an early repayment penalty for the loan of ` 25,000.
You are required to prepare: (Not assuming going concern)
(1) Profit & Loss Account for the year 2017-18.
(2) Balance Sheet as on 31st March, 2018.
Ans. Profit and Loss Account for the year ended 2017-18 (not assuming going concern)
Particulars Amount Particulars Amount
` `
To Opening Stock 1,50,000 By Sales 27,50,000
To Purchases 22,50,000 By Closing Stock 2,50,000
To Expenses* 78,000 By Trade payables 7,500
To Depreciation 35,000
To Provision for doubtful debts 30,000
To Deferred cost 50,000
To Loan penalty 25,000
To Net Profit (b.f.) 3,89,500 ________
30,07,500 30,07,500
Balance Sheet as at 31st March, 2018 (not assuming going concern)
Liabilities Amount ` Assets Amount `
Capital 3,00,000 Fixed Assets 3,25,000
Profit & Loss A/c 5,14,500 Stock 2,50,000
10% Loan 2,35,000 Trade receivables (less provision) 1,20,000
Trade payables 67,500 Deferred costs Nil
________ Bank 4,22,000
11,17,000 11,17,000
*Assumed that ` 78,000 includes interest on 10% loan amount for the year.
Q-6 "One of the characteristic of the financial statement is neutrality."Do you agree with this statemen t?
Explain in brief.
Ans. Yes, one of the characteristics of financial statements is neutrality. To be reliable, the informati on
contained in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information, the focus of
analysis could shift from one area of business to another thereby arriving at a totally different conclusion
based on the business results. Information contained in the financial statements must be free from
bias. It should reflect a balanced view of the financial position of the company without attempting to
present them in biased manner. Financial statements cannot be prepared with the purpose to influence
certain division, i.e. they must be neutral.
Q-7 Briefly explain the elements of financial statements.
Ans. Elements of Financial Statements
Assets Resource controlled by the enterprise as a result of past events from which future economic
benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits.
Equity Residual interest in the assets of an enterprise after deducting all its liabilities
Income/gain Increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decreases in liabilities that result in increase in equity other
than those relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decrease in equity other than
those relating to distributions to equity participants.
Q-8 ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine amounting
to Rs. 4,00,000. As on 31st March, 2018 before delivery of the machine, ABC Ltd. had to change its
method of production. The new method will not require the machine ordered and so it shall be scrapped
after delivery. The expected scrap value is ‘NIL’.
Show the treatment of machine in the books of ABC Ltd.
Ans. A liability is recognized when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd. should
recognize a liability of Rs. 4,00,000 payable to XYZ Ltd. When flow of economic benefit to the enterprise
beyond the current accounting period is considered improbable, the expenditure incurred is recognized
as an expense rather than as an asset. In the present case, flow of future economic benefit from the
Page 5


Q-1 A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine `1,00,000.
At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of production.
The new method will not require the machine ordered and it will be scrapped after delivery. The
expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-
X2.
Ans. A liability is recognised when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should
recognise a liability of ` 1,00,000 to Gamma Ltd..
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the
present case, flow of future economic benefit from the machine to the enterprise is improbable. The
entire amount of purchase price of the machine should be recognised as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
transferred to profit and loss account)
Q-2 With regard to financial statements name any four.
(1)   Users
(2)   Qualitative characteristics
(3)   Elements
(b) What are fundamental accounting assumptions?
Ans. (1) Users of Financial statement
Investors, employees, Lenders, Supllies/Creditors, Customers, Govt. & Public
(2) Qualitative Characteristics of Financial Statements :
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(3) Elements of Financial Statement :
Asset, Liability, Equity, Income/gain and Expense/Loss
(b) Fundamental Accountig Assumptions :
Accrual, Going Concern and Consistency
Framework for prepartion and presentation of Financial
Statements
Q-3
(a) Explain in brief, the alternative measurement bases, for determining the value at which an element can
be recognized in the Balance Sheet or Statement of Profit and Loss.
(b) Mohan started a business on 1st April 2017 with Rs.12,00,000 represented by 60,000 units of Rs.20 each.
During the financial year ending on 31st March, 2018, he sold the entire stock for Rs.30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in the
year 2017-18 if Financial Capital is maintained at historical cost.
Ans. (a) The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized in
the balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Currentcost (iii)
Realizable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an
amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition.
Liabilities are generally recorded at the amount of proceeds received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents
that would be required to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net
cash flows generated by the concerned assets in the normal course of business. Liabilities under
this convention are carried at present value of future net cash flows that are expected to be required
to settle the liability in the normal course of business.
(b)
Particular Financial Capital Maintenance at
Historical Cost (Rs.)
Closing equity  (Rs.30 x 60,000 units) 18,00,000 represented by cash
Opening equity 60,000 units x Rs. = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (1,80,000 - 12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw Rs. 6,00,000 as the maximum amount
Q-4 Explain main elements of Financial Statements.
Ans. Elements of Financial Statements
The Framework for preparation and Presentation of financial statements classifies items of financial
statements can be classified in five broad groups depending on their economic characteristics: Asset, Liability,
Equity, Income/Gain and Expense/Loss.
Assets Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits.
Equity Residual interest in the assets of an enterprise after deducting all its liabilities.
Income/gain Increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decreases in liabilities that result in increase in equity other
than those relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decrease in equity other
than those relating to distributions to equity participants.
Q-5 Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below:
Liabilities Amount (`) Assets Amount (`)
Proprietor's Capital 3,00,000 Fixed Assets 3,60,000
Profit & Loss Account 1,25,000 Closing Stock 1,50,000
10% Loan Account 2,10,000 Sundry Debtors 1,00,000
Sundry Creditors 50,000 Deferred Expenses 50,000
_______ Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows :
(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The net realisable
value of fixed assets on 31.03.2018 was ` 3,25,000.
(2) Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000 respectively.
(3) The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and ` 2,50,000 respectively.
(4) Expenses for the year amounted to ` 78,000.
(5) Deferred Expenses are amortized equally over 5 years.
(6) Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection of another `
25,000 depends on successful re-installation of certain product supplied to the customer;
(7) Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.
(8) Cash balance as on 31.03.2018 is ` 4,22,000.
(9) There is an early repayment penalty for the loan of ` 25,000.
You are required to prepare: (Not assuming going concern)
(1) Profit & Loss Account for the year 2017-18.
(2) Balance Sheet as on 31st March, 2018.
Ans. Profit and Loss Account for the year ended 2017-18 (not assuming going concern)
Particulars Amount Particulars Amount
` `
To Opening Stock 1,50,000 By Sales 27,50,000
To Purchases 22,50,000 By Closing Stock 2,50,000
To Expenses* 78,000 By Trade payables 7,500
To Depreciation 35,000
To Provision for doubtful debts 30,000
To Deferred cost 50,000
To Loan penalty 25,000
To Net Profit (b.f.) 3,89,500 ________
30,07,500 30,07,500
Balance Sheet as at 31st March, 2018 (not assuming going concern)
Liabilities Amount ` Assets Amount `
Capital 3,00,000 Fixed Assets 3,25,000
Profit & Loss A/c 5,14,500 Stock 2,50,000
10% Loan 2,35,000 Trade receivables (less provision) 1,20,000
Trade payables 67,500 Deferred costs Nil
________ Bank 4,22,000
11,17,000 11,17,000
*Assumed that ` 78,000 includes interest on 10% loan amount for the year.
Q-6 "One of the characteristic of the financial statement is neutrality."Do you agree with this statemen t?
Explain in brief.
Ans. Yes, one of the characteristics of financial statements is neutrality. To be reliable, the informati on
contained in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information, the focus of
analysis could shift from one area of business to another thereby arriving at a totally different conclusion
based on the business results. Information contained in the financial statements must be free from
bias. It should reflect a balanced view of the financial position of the company without attempting to
present them in biased manner. Financial statements cannot be prepared with the purpose to influence
certain division, i.e. they must be neutral.
Q-7 Briefly explain the elements of financial statements.
Ans. Elements of Financial Statements
Assets Resource controlled by the enterprise as a result of past events from which future economic
benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits.
Equity Residual interest in the assets of an enterprise after deducting all its liabilities
Income/gain Increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decreases in liabilities that result in increase in equity other
than those relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decrease in equity other than
those relating to distributions to equity participants.
Q-8 ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine amounting
to Rs. 4,00,000. As on 31st March, 2018 before delivery of the machine, ABC Ltd. had to change its
method of production. The new method will not require the machine ordered and so it shall be scrapped
after delivery. The expected scrap value is ‘NIL’.
Show the treatment of machine in the books of ABC Ltd.
Ans. A liability is recognized when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd. should
recognize a liability of Rs. 4,00,000 payable to XYZ Ltd. When flow of economic benefit to the enterprise
beyond the current accounting period is considered improbable, the expenditure incurred is recognized
as an expense rather than as an asset. In the present case, flow of future economic benefit from the
machine to the enterprise is improbable. The entire amount of purchase price of the machine should
be recognized as an expense. Hence ABC Ltd. should charge the amount of Rs. 4,00,000 (being loss due
to change in production method) to Profit and loss statement and record the corresponding liability
(amount payable to XYZ Ltd.) for the same amount in the books for the year ended 31st March, 2018.
Q-9 Explain in brief, the alternative measurement bases, for determining the value at which an element can
be recognized in the Balance Sheet or Statement of Profit and Loss.
Ans. The Framework for Recognition and Presentation of Financial statements recognises four alternative
measurement bases for the purpose of determining the value at which an element can be recognized in
the balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Current cost (iii)
Realisable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an
amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition.
Liabilities are generally recorded at the amount of proceeds received in exchange for the
obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset
was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to settle the obligation currently.
3. Realisable (Settlement) Value: As per realisable value, assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net
cash flows generated by the concerned assets in the normal course of business. Liabilities under
this convention are carried at present value of future net cash flows that are expected to be
required to settle the liability in the normal course of business.
Q-10 "One of the characteristics of financial statements is neutrality"- Do you agree with this statement?
Comment.
Ans. Yes, one of the characteristics of financial statements is neutrality. To be reliable, the informati on
contained in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information, the focus of
analysis could shift from one area of business to another thereby arriving at a totally different conclusion
on the business results.
For example, if the assets of a company primarily consist of trade receivables and insurance claims and
the financial statements do not specify that the insurance claims have been lying unrealized for a
number of years or that a few key trade receivables have not given balance confirmation certificates, an
erroneous conclusion may be drawn on the liquidity of the company. Financial statements are said to
depict the true and fair view of the business of the organization by virtue of neutrality.
Q-11 ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom -made machine amounting
to  Rs.  4,00,000. As on 31st March, 2018  before delivery of the machine, ABC Ltd. had to change its
method of production. The new method will not require the machine ordered and so it shall be scrapped
after delivery. The expected scrap value is ‘NIL’.
Explain the treatment of machine in the  books of ABC Ltd.