IBS559 AFM (A) / 0805

Semester – I Mid – Semester (Make – Up) Examinations (Class of 2007)

IBS559 – Accounting for Managers
Part – A
Q. Which of the following is a current liability?
a. Pre-paid expenses
b. Securities Premium
c. Advance to Supplier
d. Outstanding salaries
e. Discount on issue of shares

Q. Gross Profit is –
a. The difference between two sides of trading account
b. The excess of sales over cost of goods sold
c. The amount available to the proprietor
d. The distributable profit
e. Capital profit

Q. Based on which of the following concepts, capital account is shown on the liability side of the
Balance Sheet.
a. Business Entity Concept
b. Money Measurement Concept
c. Cost Concept
d. Balance Sheet Concept
e. Cost concept

Q. According to AS-7, the primary issue in accounting for construction contracts is :

a. The calculation of profit
b. The allocation of contract revenue and contract costs to the accounting period
c. The amount payable to the contractee
d. Calculation of work-in-progress
e. Charging depreciation on assets.

Q. ‘Pre-Paid Insurance a/c’ represents:

a. Personal a/c
b. Real a/c
c. Nominal a/c
d. Current a/c
e. A liability

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Q. Any expense intended to benefit current period is called –

a. Capital expenditure
b. Deferred revenue expenditure
c. Revenue expense
d. Capital expense
e. None of these

Q. As per which accounting principle, we create ‘Provision for bad and doubtful debts’ -
a. Business Entity Principle
b. Conservatism Principle
c. Dual Aspect Principle
d. Realisation Principle
e. None of these

Q. If sales is Rs.1,50,000 ; Opening stock is Rs.40,000; Gross Profit is Rs.15,000 and purchases is
Rs.1,20,000, then the closing stock will be -
a. Rs.15,000
b. Rs.25,000
c. Rs.35,000
d. Rs.18,000
e. Rs.5,000

Q. As per the double entry concept –

a. Assets + Liabilities = Capital
b. Capital = Assets – Liabilities
c. Capital – Liabilities = Assets
d. Capital + Assets = Liabilities
e. Liabilities – Capital = Assets

Q. A stapler purchased for Rs.80 for a business is debited to office equipment account.
Which accounting concept is violated –
a. Entity concept
b. Materiality concept
c. Cost concept
d. Going concern concept
e. Consistency concept

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Q. Goods taken by the proprietor for personal use is debited to –

a. Trading account
b. Purchases account
c. Drawings account
d. P & L account
e. Cash account

Q. Depreciation is –
a. An expense
b. A loss
c. Both (a) and (b)
d. An expenditure
e. Neither an expense nor a loss

Q. A company’s accountant made an error in calculating the inventory as on 31st March 2004
and recorded the value as Rs.78,000 whereas, it should be Rs.87,000. What will be effect
on profit and loss account –
a. Profit is overstated
b. Profit is understated
c. No effect on profit
d. Decrease in loss
e. Decrease in revenue

Q. When there is loss on sale of an asset, such loss is –

a. Credited to the asset account
b. Credited to the P & L account
c. Credited to the accumulated deprecation account
d. Debited to the asset account
e. Debited to cash account.

Q. Which transaction will increase both total assets and total liabilities simultaneously–
a. Purchase of office equipment on account
b. Bank borrowing
c. Both (a) and (b)
d. Sale of fixed assets for cash
e. Repayment of a bank loan

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Q. An increase in asset always results in an increase in –

a. Owner’s equity
b. Liabilities
c. Both (a) and (b)
d. Either (a) or (b) or (c)
e. Long term loan only

Q. When closing inventory is given in Trial Balance, it will appear in–

a. Trading account
b. Profit and Loss account
c. Balance Sheet
d. Both (a) and (c)
e. Profit and loss appropriation account

Q. In accounting, following is a recorded fact–

a. Market value of investments
b. Accounts Receivable
c. Replacement cost of a machinery
d. Contingent asset
e. Contingent liability

Q. Goods worth Rs.24,000 were destroyed by fire and the insurance company admitted the claim in
full. This adjustment is-
a. Deducted from purchases and debited in the P & L account
b. Credited in the trading account and debited in the P & L account
c. Shown in the Balance Sheet only
d. Shown in the P & L account only
e. Credited in the trading account and shown on the asset side of the Balance Sheet

Q. Profit on reissue of forfeited shares is transferred to

a. Share Capital A/c.
b. General Reserve A/c
c. Bonus Shares A/c
d. Capital Reserve A/c
e. Forfeited Shares A/c

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Q. Dividends are paid on

a. Authorized Capital.
b. Subscribed Capital.
c. Called up Capital.
d. Paid up Capital
e. Issued Capital.

Q. Double entry book keeping involves

a. Two accounts being affected for each transaction, which are equal and opposite to
one another
b. Two sets of books being kept for the business
c. Business book-keeping being kept by more than one person
d. Every entry in the business books being checked twice
e. Every transaction is recorded once in the journal and again in the ledger.

Q. At the time of preparation of final accounts, bad debts recovered account will be transferred to
a. Debtor’s account
b. Profit & loss account
c. Profit & loss adjustment account
d. Profit & loss appropriation account
e. Provision for discount on debtors account.

Q. Which of the following is not a part of the annual report

a. Directors report
b. Auditors report
c. P & L account
d. Balance sheet
e. Funds flow statement

Q. The amount earmarked for distribution to the shareholders is known as

a. Profit after tax
b. Retained earnings
c. Dividends
d. Operating profit
e. Profit before tax.

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Q. If a concern proposes to discontinue its business from March 2003 and decides to dispose off all
its assets within a period of 4 months, the Balance Sheet as on March 31, 2003 should indicate
the assets at their

a. Historical cost

b. Net realizable value

c. Cost less depreciation

d. Cost price or market value, whichever is lower

e. Replacement cost.

Q. The statement which helps an accountant to assess the arithmetical accuracy of the accounting
process is the

a. Balance sheet

b. Profit and loss account

c. Cash book

d. Trial balance

e. Bank reconciliation statement.

Q. Which of the following items should not appear under the head ‘unsecured loans’ in the Balance
Sheet of a company?

a. Sinking funds

b. Loans and advances from subsidiaries

c. Loans and advances from banks

d. Loans and advances from others

e. Fixed deposits accepted.

Q. The process of converting cost of intangible assets to expense is called

a. Depreciation

b. Amortization

c. Depletion

d. Deterioration

e. None of the above.

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Q. Which of the following is not considered as capital loss?

I. Loss on issue of debentures.
II. Expenses on issue of debentures.
III. Discount on issue of debentures.
IV. Premium on redemption of debentures.
V. Premium on issue of debentures.
a. (V) only
b. Both (IV) and (V) above
c. Both (III) and (IV) above
d. (II), (III), (IV) and (V) above
e. All (I), (II), (III), (IV) and (V) above.

Part B
Problems, Conceptual Understanding, Analytical Ability and Situational Analysis

1. Consider the Balance Sheet of Web Services Ltd. as on March 31, 2005:
Liabilities Rs. Assets Rs.
Share capital 1,00,000 Cash at bank 42,000
Profit and Loss account 19,000 Sundry debtors 90,000
Sundry creditors 25,000 Closing stock 10,000
Prepaid Rent 2,000
Total 1,44,000 Total 1,44,000

Following is the summary of transactions that occurred during the month of April 2005:
Rs.
Collections from debtors 88,000
Payments to creditors 24,000
Purchase of inventory on credit 80,000
Sale of inventory on credit (cost Rs.70,000) 85,000
Recognition of rent expenses in the month of April 2005 1,000
Salaries paid by cheque in the month of April 2005 8,000

You are required to prepare Trial Balance of the company as on April 30, 2005
(13 marks)

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Suggested Answer:
Trial Balance of Web Services Ltd. as on 30-4-2005
Heads of Accounts Debt Balance (Rs.) Credit Balance (Rs.)
1. Cash at bank 98,000
2. Sundry Debtors Account 87,000
3. Purchases Account 80,000
4. Prepaid Rent Account 1,000
5. Rent Expenses Account 1,000
6. Salaries Account 8,000
7. Inventory Account 10,000
8. Sundry Creditors Account 81,000
9. Sales Account 85,000
10. Share Capital Account 1,00,000
11. Profit and Loss account 19,000
TOTAL 2,85,000 2,85,000
Working Notes:
1. Cash account Rs.
Opening Cash 42,000
Add: Collections from debtors 88,000
1,30,000
Less: Paid to creditors 24,000
Wages paid 8,000
Closing cash balance 98,000
2. Sundry debtors
Opening balance 90,000
Add: Credit sales 85,000
1,75,000
Less: Cash received 88,000
Closing balance 87,000
3. Sundry creditors
Opening balance 25,000
Add: Credit purchases 80,000
1,05,000
Less: Cash paid 24,000
Closing balance 81,000

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4. Prepaid rent
Opening balance 2,000
Less: Rent recognized 1,000
Closing balance 1,000
5. Rent account 1,000
6. Sales 85,000
7. Purchases 80,000
8. Wages 8,000
9. There is no change in closing stock,
capital and profit and loss accounts

2. From the following balances of Mr. Amal, prepare Trading and Profit and loss account for the
year ended 31st March 2005 and a Balance Sheet as on that date:
Rs. Rs.
Opening Inventory 30,000 Machinery 60,000
Purchases 1,10,000 Accounts Receivable 20,000
Sales 2,50,000 Bad debts 3,000
Buildings 55,000 Bank overdraft 25,400
Wages 23,000 Accounts payable 24,000
Carriage 3,000 Rent, Rates and Taxes 4,000
Bills Payable 10,000 Trade Expenses 4,000
Furniture 9,000 Amal’s Capital 90,000
Salaries 42,000 Petty expenses 4,000
Advertisement 24,000 Provision for bad debts 1,000
Coal & Gas 2,000 Power & Fuel 1,200
Cash at bank 15,000
Investments 25,000
Bank loan 34,600
Cash in hand 800

The following additional information is supplied:

a. Closing inventory – Rs.15,000
b. Stock valued at Rs.10,000 was destroyed by fire, but the insurance company admitted a
claim of Rs.8500 only
c. Depreciate machinery @ 10% p.a
d. The Manager is entitled to a commission of 10% of the net profit calculated after charging
such commission.
(15 marks)

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Suggested Answer:
st
Trading and profit and loss a/c of Mr.Amal for the year ended 31 March 2005
Particulars Amount Particulars Amount
Opening Inventory 30,000 Sales 2,50,000
Purchases 1,10,000 Loss of goods by fire 10,000
Wages 23,000 Closing stock 15,000
Carriage 3,000
Coal and gas 2,000
Power and fuel 1,200
Gross profit c/d 1,05,800
2,75,000
Salaries 42,000 275,000
Advertisement 24,000 Gross profit b/d 1,05,800
Bad debts 3,000
Rent, rates & Taxes 4,000
Trade Expenses 4,000
Petty expenses 4,000
Loss due to fire 1,500
( unrecovered )
Depreciation on Machine 6,000
Managers commission 1,573
Payable(17,300 x 10/110) 15,727
Net profit ( to capital)
1,05,800 1,05,800
st
Balance Sheet of Mr. Amal as on 31 March 2005
Liabilities Amount Assets Amount

Bills payable 10,000 Cash in hand 800

Bank loan 34,600 Cash at bank 15,000
Bank over draft 25,400 Closing inventory 15,000
Accounts payable 24,000 Accounts receivable 20,000

Managers commission payable 1,573 Less-provision 1,000 19,000

Investments 25,000
Capital-90,000 Buildings 55,000
Add- N P-15,727 1,05,727 Furniture 9,000
Machinery ( 60000 – 6000) 54,000
Insurance company ( claim) 8,500
2,01,300 2,01,300

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3. In each of the following unrelated cases, state whether an accounting principle or concept has
been violated. If a principle or concept is violated, name the principle or concept and briefly
explain why.
a. The O K Company purchased and paid for television advertising on 15th December 2004
to be aired during the next year. The journal entry at the time of payment was:
Advertisement Expenses a/c Dr 28,000
To Cash a/c 28,000

b. A contract to sell a major part of the business assets is not reported in the financial
statements.
c. A firm was planning an addition to its warehouse. The lowest bid for the construction was
Rs.58,000. After careful consideration, the firm used its own workers to construct the
addition.
The accountant made the following entry:
Wages a/c Dr 15,200
Buildings a/c Dr 31,000
To Material Inventory a/c 20,000
To Cash a/c 15,200
To Gain on self construction of building a/c 11,000

d. The Mammoth Company Ltd. with assets of 200 crores, purchased a electric pencil
sharpener for Rs.30, which had an estimated life of two years. The accountant made the
following entry in the journal:
Office Equipment a/c Dr. 30
To Cash 30

e. A firm purchased a building in 1960 at a price of Rs.40,000. The firm was recently offered a
price of Rs.8,00,000. The owner increased the value of the asset on the firms records to
the current market value.

f. The method of depreciation is changed every two years and the change is disclosed in the
financial corporate report.
(12 marks)

Suggested Answer:
a. Matching principle is violated: Advertising was paid for in December 2004, but was an
expense of 2005. The advertising expenditure should have been charged to prepaid
expenses to recognize the cost (expense) in the same accounting period in which the
related revenues (sales) should be recognized.

b. Full disclosure principle violated: A contract is an agreement of a future business transaction

to sell major part of the business assets which could have grave effects on future business
operations. This affects the full disclosure principle in that the facts should have been
disclosed in the financial statements, notes thereto or the auditors report.

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c. Wages are to be capitilise and taken to building account cost principle is violated cost
principle requires the reporting of all assets acquired at historical or acquisition cost and
cost concept and there is no gain on self concept.

d. Materiality principle is violated: The transaction of Rs.30 is an insignificant amount of money

in relation to assets of Rs.200 crores and therefore would have been charged to office
expenses or miscellaneous expenses instead of the assets.

e. Cost principle is violated: This transaction violates the cost principle in that assets are
recorded at purchase (cost) price. The firm did not pay Rs.8,00,000 for the assets and
therefore, can not record Rs.8,00,000 as the value of building.

f. Consistency principle is violated: The reporting procedure once adopted for recording
depreciation should be followed from period without change except in extreme
circumstances.

4. a. Goods invoiced Rs.10,000 were sent on sale or return basis, the customer still having the
right to return the goods. The goods were invoiced charging a profit of 20 per cent on cost.
Give the effect of this adjustment in the final accounts.
(5 marks)
b. From the following details of Melco Ltd. Calculate the maximum managerial remuneration
payable.
Profit before tax for the year ended 31.3.05 84,00,000
Managerial Remuneration paid 6,96,250
(including Directors fee of Rs. 30,000)
Depreciation charged in the accounts 15,94,500
Depreciation u/s 350 21,06,000
Fixed assets sold (original cost Rs. 12,60,000 WDV Rs. 13,40,000
5,60,000)

(5 marks)
Suggested Answer:

a. The adjusting entries for this adjustment are :

i. Sales a/c Dr. 10,000
To Debtors a/c 10,000

ii. Closing Stock a/c Dr. 8,333

To Trading a/c 8,333

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Effect on final account:

Sales will be deducted in the trading account by Rs.10,000 and Debtors will also be
deducted in the balance sheet by Rs.10,000
Closing stock will be increased both in the Trading account as well in the Balance Sheet by
Rs.8,333 as stock with customer as such or return basis.

b. Calculation of Profit for Managerial Remuneration

Rs.
Profit before tax 84,00,000
Add:
Managerial Remuneration
6,66,250
(Excluding Directors fees)
Depreciation as per books 15,94,500 22,60,750
1,06,60,750
Less:
Capital profits on sale of assets 80,000
Depreciation u/s 350 21,06,000 21,86,000
Profit for Managerial Remuneration 84,74,750
Maximum Managerial Remuneration payable = 11% of 84,74,750 i.e. Rs. 9,32,223

Part C
Case Analysis / Applied Theory

5. a. “Anticipate no profits but provide for all possible losses”. Explain with examples?
b. Differentiate between Trial Balance and Balance Sheet?

(10 marks)
Suggested Answer:
a. This is the working rule of the principle of conservatism or prudence. It is a policy of
caution or playing safe and had its origin as a safeguard against possible losses in a orld of
uncertainty. A prudent business man should anticipate the future losses and provide for
such risks. For example, provision for bad and doubtful debts. Similarly closing inventory is
valued at cost or market price which ever is lower. As per AS-11, para 25(a) “ in foreign
currency translation, exchange variation gain or long term liabilities ( not related to
acquisition of fixed assets) is ignored but exchange variation loss is accounted for”.

b. i. A Trial balance is prepared to verify the arithmetical accuracy of the ledger accounts,
where as a Balance Sheet is prepared to reveal the financial position of a Business
enterprise as on a particular date.

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ii. A trial balance contains the balances all accounts, namely, personal, nominal and
real. But a Balance Sheet contains the balances of only Real and Personal accounts.

iii. A trial balance shows either the debit or credit balance of an account. But a Balance
Sheet is a statement of Assets and Liabilities.

6. a. Explain the “Business Entity Concept”.

b. Discuss the fundamental accounting assumptions for the preparation and presentation of
financial statements.
(10 marks)
Suggested Answer:

a. Business Entity Concept:

This concept implies that a business unit is separate and distict from the persons who
supply capital to it. A business unit has got its own individuality as distinguished form who
owns and controls it. Business is kept separate from the proprietor so that the transactions
of the business may also kept with him. Business affairs should not be mixed up with the
private affairs.
Cost concept

An asset is recorded in the books at the price paid to acquire it and that this cost is the basis
for all subsequent accounting for the asset. An asset will systematically reduce its value
when depreciation is charged. This concept brings the advantage of objectivity into the
business. Financial statements will not be affected by the personal bias.

b. The fundamental accounting assumptions underlie the preparation and presentation of

financial statements. They are usually not specifically stated because their acceptance and
use are assumed. Disclosure is necessary if they are not followed.
The generally accepted fundamental accounting assumptions are:
Going concern, Consistency and accrual
Brief each of the above should be explained.

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