Q1. What is Capital Expenditure?
Ans. Capital Expenditure is expenditure that results in acquiring or bringing into existence an asset or advantage of enduring benefit, Example is acquiring a fixed asset.
Q2. Give two examples of Capital Expenditure.
Ans. Two examples of Capital Expenditure are:
(i) Purchase of a fixed asset, and
(ii) Expenditure, incurred on improvement of existing asset.
Q3. What is Revenue Expenditure?
Ans. Revenue Expenditure is that expenditure benefit of which is exhausted within the accounting year in which it is incurred. Example is expense on salaries.
Q4. Give two examples of Revenue Expenditure.
Ans. Two examples of Revenue Expenditure are:
(i) Payment of rent, and
(ii) Expenditure on repairs and maintenance of assets.
Q5. Explain the term ‘Deferred Revenue Expenditure’ with the help of an example.
Ans. Deferred. Revenue Expenditure is that expenditure that is revenue in nature but the benefit of which extends beyond the accounting year in which it is incurred. Example of Deferred Revenue Expenditure: Large expenditure incurred on advertising to introduce a new product in the market.
Q6. State two points of distinction between Capital Expenditure and Revenue Expenditure.
(i) Capital Expenditure is incurred for acquisition of fixed assets for use in business while Revenue Expenditure is incurred to conduct the business.
(ii) Capital Expenditure increases the earning capacity of the business while Revenue Expenditure is incurred for earning profits.
Q7. What is Capital Receipt?
Ans. Capital Receipt is the amount received by the business on account of capital, loans or sale proceeds of fixed assets. In other words, they are not revenue for the business.
Q8. What is Revenue Receipt?
Ans. Revenue Receipt is the amount received by the business in the regular course of business say because of sales of goods or services.
Q9. Give two examples of Capital Receipt.
Ans. Two examples of Capital Receipts are:
(i) Contribution towards capital, and
(ii) Loan received by the business.
Q10. Give two examples of Revenue Receipts.
Ans. Two examples of Revenue Receipts are:
(i) Sales of goods or services, and
(ii) Interest received.
Q11. Distinguish between Capital Receipts and Revenue Receipts. (One point)
Ans. Capital Receipts are the receipts which are not obtained in the course of normal business activities, e.g., capital contributed by the owner, receipts from sale of fixed assets. Revenue Receipts are the receipts which are obtained in course of normal business activities, e.g., amount realised from sales of goods or rendering of services.
Q12. What is Trading Account?
Ans. Trading Account is the account that reveals gross profit or gross loss. It is credited with the amount of sales of goods and debited with the direct expenses related to the sales made, i.e., purchases, freight inwards, wages, etc.
Q13. Why is Trading Account prepared?
Ans. Trading Account is prepared to know gross profit or gross loss during the accounting year.
Q14. Name any two items that are credited to the Trading Account.
Ans. Sales and Closing Stock.
Q15. Name any two items that are debited to the Trading Account.
Ans. Opening Stock and Purchases.
Q16. Trial Balance has an item ‘Salaries and Wages’. To which account will you transfer it?
Ans. Salaries and Wages will be transferred to Profit and Loss Account.
Q17. If ‘Adjusted Purchases’ and ‘Closing Stock’ are given in the Trial Balance, will you transfer ‘Closing Stock’ to Trading Account? Give reason.
Ans. No. Closing Stock will not be transferred to Trading Account because it already stands credited to Trading Account as Adjusted Purchases mean Opening Stock + Purchases – Closing Stock.
Q18. If credit side of a Trading Account is larger than the debit side, does it mean the enterprise has incurred loss or earned profit? Why?
Ans. It means the business has earned profit as revenues are credited whereas expenses are debited.
Q19. If debit side of a Trading Account is larger, does it mean the enterprise has earned profit or incurred a loss? Why?
Ans. It means the business has incurred loss as revenues are credited whereas expenses are debited.
Q20. How is Returns Inward shown in the Trading Account?
Ans. Returns Inward is shown on the credit side of the Trading Account by way of deduction from sales.
Q21. What are Direct Expenses?
Ans. Direct Expenses are those expenses which are incurred on purchases of goods up to the point of bringing them to the place of business. In the case of manufacturing business, they are the expenses incurred to make them ready for sale.
Q22. Give two examples of Direct Expenses.
(i) Freight Inwards, and
(ii) Manufacturing wages.
Q23. Give a formula to calculate the ‘Cost of Goods Sold’.
Ans. Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock. Or, Cost of Goods Sold = Net Sales – Gross Profit.
Q24. Net Sales during the year 2011 is Rs.2,85,000. Gross Profit is 25% on Sales, Find out arse of Cost of Goods Sold.
Ans. Gross Profit = Rs.2,85,000 X 25/100 = Rs.71,250. Cost of Goods Sold = Rs.2,85,000 – Rs.71,250 = Rs.2,13,750.
Q25. What are Indirect Expenses?
Ans. Indirect Expenses are those expenses which are incurred and are not directly associated with the purchases of goods or manufacture of goods. Examples of such expenses are administrative expenses, selling and distribution expenses, etc. normal.
Q26. Give two examples of Indirect Expenses.
(i) Salaries, and
(ii) Printing and Stationer expenses.
Q27. What is the principle of valuation of inventory?
Ans. The principle of valuation of inventory is that inventory is valued at cost or net realisable value, whichever is lower.
Q28. What is Profit and Loss Account?
Ans. Profit and Loss Account is the account which shows net profit earned or net loss in curred during an accounting period. It is credited with gross profit and indirect incomes and debited with indirect expenses. The net result is either net profit or net loss.
Q29. Give any two items that are credited to Profit and Loss Account.
(i) Gross Profit, and
(ii) Interest earned on fixed deposits.
Q30. Give any two items that are debited to Profit and Loss Account.
(i) Business Promotion Expenses, and
(ii) Insurance Premium.
Q31. Salaries paid would be charged to which account—Trading A/c or Profit and Loss A/c?
Ans. Profit and Loss Account.
Q32. Will you transfer ‘Wages and Salaries Account’ to the debit of Profit and Loss Account? Why?
Ans. No. Wages and Salaries Account will be transfeired to Trading Account because it is assumed that when wages and salaries account is given, it relates to wages.
Q33. If credit side of Profit and Loss Account is larger than the debit side, does it mean net loss or net profit? Why?
Ans. It means net profit. It is so because all incomes and gains are credited while all expenses and losses are debited. If total of credit side (income) is more than the total of debit side (expense), it will result in profit.
Q34. If debit side of Profit and Loss Account is larger than the credit side, does it mean net profit or net loss? Why?
Ans. It means net loss. It is so because all incomes and gains are credited while all expenses and losses are debited. If total of debit side (expense) is more than the total of credit side (income), it will result in loss.
Q35. What are Financial Statements?
Ans. Financial statements are those statements which provide information about the profitability and the financial position of a business. The term Rs.Financial Statements' includes at least two statements which are : (i) Balance Sheet; (ii) Trading and Profit & Loss A/c.
Q36. Give the correct chronological order of ascertainment of the following profits from Trading and Profit and Loss Account: Operating Profit, Gross Profit, Net Profit.
Ans. Gross Profit, Operating Profit, Net Profit.
Q37. What is Balance Sheet?
Ans. Balance Sheet is a statement which sets out the assets and liabilities of the business as at a certain date.
Q38. What purpose does a Balance Sheet serve?
Ans. The purpose of Balance Sheet is to measure the-financial position of the business as at a particular date.
Q39. What is meant by Grouping or Marshalling a Balance Sheet?
Ans. Grouping of Balance Sheet means putting item of similar nature under a common heading. Marshalling of Balance Sheet means arranging the assets and liabilities in a particular order, i.e., in order of permanence or in order of liquidity.
Q40. What do you understand by Current Assets?
Ans. Current Assets are those assets of business that are kept temporarily for resale or for converting into cash.
Q41. Give an example of Current Assets.
(i) Stock, and
(ii) Cash in Hand.
Q42. What do you understand by Fixed Assets?
Ans. Fixed Assets are those assets which are acquired for use in business to increase the earning capacity.
Q43. List any two examples of Fixed Assets.
(i) Land and Building, and
Q44. Mention any one difference between fixed asset and current asset.
Ans. Fixed assets increase the earning capacity whereas current assets maintain the earnings.
Q45. Godrej Ltd. imported from Germany one machinery for sale in India and another machinery for production purpose. Will you treat them goods or fixed assets?
Ans. Machinery imported for sale in India will he treated as goods. Machinery purchased for production will be treated as fixed asset.
Q46. On which side of the Balance Sheet are Prepaid Expense shown?
Ans. Assets Side.
Q47. Give any two examples of Intangible Assets.
Q48. What do you understand by Contingent Liability?
Ans. Contingent Liability is that liability which becomes payable on the happening of an event. For example, a suit for claim is filed against the business which the business does not acknowledge. It is a contingent liability and will become payable if the court decides against it.
Q49. When assets are listed in order of liquidity in a Balance Sheet, which of two should be listed first Building or Cash in Hand.
Ans. Cash in Hand.
Q50. State what is the end product of Financial Accounting?
Ans. The end product of Financial Accounting is preparation of final accounts, i.e., Trading and Profit and Loss Account and Balance Sheet.
Q51. What is the use of Financial Statements for Potential Investors?
Ans. The prospective investors are in need of detailed information regarding the progress of the concern because on the basis of the information revealed by financial statements they take decisidns regarding the investment to be made in the particular business. They would like to get information relating to the past and present performance of the business and the decision to be taken for future. After keeping all facts in mind they come forward for investing their funds in the business.
Q52. When assets are listed in order of liquidity in a Balance Sheet in which order the following shall appear?
(a) Land and Building;
(b) Cash in hand;
(d) Bills Receivable.
1. Cash in Hand,
2. Bills Receivable,
4. Land and Building.
Q53. What is the primary objective of financial statements?
Ans. The primary objective of financial statements is to communicate the meaningful information to different stakeholders in the business so that they can make informed decisions.
Q54 What is a Trading Account?
Ans. Trading Account is one of the financial statements which show the result of buying and selling of goods and services of an accounting period.
Q55. "Profit and Loss Account shows the financial position of the enterprise". Do you agree?
Ans. No, It does not show the financial position of the enterprise. It shows the financial performance i.e. profit or loss of an enterprise for a particular period.
Q56. When does closing stock appear inside the Trial Balance?
Ans. Closing stock is given inside the Trial Balance when the entry to incorporate the closing stock in the books has already been passed. It would imply that the Closing Stock must have been deducted out of Purchases Account. Hence, in such a case, Closing Stock will not be shown in the Trading Account but will appear on the Assets side of the Balance Sheet only.
Q57. Give any two examples of Fictitious Assets.
(i) Debit balance of Profit & Loss Account.
(ii) Advertisement Expenses not yet written off.