Subject: Financial Accounting

Question Bank

1. What is Accounting Process?

A-1 Accounting is the process of identifying, measuring, and conveying business activities to users of that
information.

2. What is going concern assumption?

A-2The going concern assumption means that we assume that the entity for which we are accounting will continue
to operate into the foreseeable future. Investors and creditors would not do business with an entity if they did
not believe it would continue in business.

3. What is economic entity assumption?

A-3 The economic entity assumption means that the financial activities of a business can be accounted for
separately from the business owner’s financial activities. This assumption allows us to examine the economic
information of a business without concern that the information includes the personal affairs of the owner.

4. How does an entity profitability describe?

A-4 The profitability of an entity is described by revenues, expenses, and net income (or net loss).

5. What is point of revenue recognition?

A-5 Revenues are recognized when they are earned, when services are rendered or goods delivered to a customer.

6. what is the application of matching principles?

A-6 The matching principle states that expenses are recorded in the time period in which they are incurred to
generate revenues.

7. What do the assets & revenue represent?

A-7 Assets are economic resources owned by a business. Revenue represents the increase in assets from the sale
of goods or provision of services.

8. How does the financial position of a firm describe?

A-8 The financial position of an entity is described by assets, liabilities, and equity. Equity consists of contributed
capital and retained earnings.

9. What do the liabilities & Expenses represent?

A-9 Liabilities are the obligations (debts) of a business. Expenses represent the decrease in assets resulting from
the sale of goods or provision of services.

10. What is contributed equity?

A-10 Contributed equity is equity contributed by owners. Equity is the difference between total assets and total
liabilities and represents the share of assets owned by the owners.

11. List the measuring principles of accounting information.

A-11 The three principles used in measuring accounting information are revenue recognition, matching, and the
cost principle.
12. What is assets recognition Principle?
A-12 Assets are recorded at historical cost, the amount paid to acquire them.

13. What is the statement of retained earnigs?

A-13The income statement and balance sheet are linked by the statement of retained earnings, which uses net
income (or loss) from the income statement to determine ending retained earnings, which appears on the
balance sheet.

14. Discuss the different financial statements used to communicate economic information to users.
A-14 The different financial statements are used to communicate economic information to users. The purpose of
the income statement is to show the profitability of a company over a specific period of time by summarizing
the flows of revenues and expenses for that period of time. The purpose of a balance sheet is to show the
financial position of a company at a specific point in time by summarizing the company’s assets, liabilities, and
equity at that point in time. The purpose of the statement of retained earnings is to explain the changes in
retained earnings over a specific period of time. The purpose of the statement of cash flows is to show a
company’s sources and uses of cash over a period of time.

15. What are the qualitative characteristics of accounting

A-15 The qualitative characteristics of accounting are understandability, relevance, reliability, comparability, and
consistency. Information must be understandable to those who have a reasonable understanding of business
and are willing to study the information. If accounting information is relevant, it has the ability to make a
difference in decisions. Accounting information must be reliable, meaning it can be depended upon to
represent what it claims to represent in number and description. Accounting information is comparable if it
can be used to compare or contrast financial activities of different companies. Consistency describes the
ability of accounting information to be comparable across different time periods within the same company.

16. What is relevance concept in accounting?

A-16 Relevance means the accounting information has the capacity to affect decisions. Materiality describes the
threshold over which an item could begin to affect decisions.

17. What is the conceptual framework of accounting?

A-17 The conceptual framework of accounting is the collection of concepts that guide the manner in which
accounting is practiced. It provides guidelines under which businesses operate.

18. What are The three main forms of businesses & advantages?

A-18 The three main forms of businesses are 1) sole proprietorships, where there is one owner, 2) partnerships, where
ownership is spread over two or more people, and 3) corporations, where a separate legal entity is established in a
state and ownership is spread over investors.

The advantages of a sole proprietorship are the owner maintains complete control of the business and reaps all of the
profits. A disadvantage is that the owner bears all the risks of failure. The advantages of a partnership are expanded
expertise through pooled skills, additional capital for the business, and spreading of the financial risk among several
people. Disadvantages include shared ownership and decision-making and personal liability for the debts of the
business. The advantages of a corporation include the ability to raise capital through the sale of ownership interests
 and limited liability of the owners for the corporation’s debts. The disadvantages are ownership is spread among
owners, the business is subject to government regulations, and profits are taxable to the corporation and to the owners
if distributed as dividends.

19. What does GAAP refers?

A-19 GAAP refers to Generally Accepted Accounting Principles, which are those accounting standards, terms, methods,
principles, etc. that have been accepted and used over time by the accounting profession.GAAP are determined by a
number of institutions such as the Securities and Exchange Commission, the Financial Accounting Standards Board, and the
American Institute of Certified Public Accountants.

20. What are the main classification of Balance Sheet?

A-20 The main classifications on a classified Balance Sheet are as follows:

Assets: current assets, long-term investments, fixed assets, intangible assets, and other assets.

Liabilities: current liabilities and long-term liabilities.

Equity: capital stock and retained earnings

21. Describe Fixed assets in financial reporting?

A-21 Fixed assets are tangible resources that are used in a company’s operations for more than one year and are not

intended for resale. Examples include land, buildings, equipment, furniture, fixtures, etc. Intangible assets are also used

for more than one year and are not intended for resale, but they have no physical substance. They give the business

certain rights or privileges. Examples include trademarks, patents, franchise rights, copyrights, and goodwill.

22. What are current liabilities?

Current liabilities and long-term liabilities both represent obligations of the business. Current liabilities are reasonably

expected to be satisfied within the normal operating cycle of a business or within one year. Long-term liabilities are not

expected to be satisfied within the next year.

23 Explain equity of any organization?

A-23 Equity is classified as capital stock or retained earnings. Capital stock is the portion of equity contributed by

stockholders through the purchase of common or preferred stock. Retained earnings are the profits that a company

earns over time and retains in the business.

24. Discuss income statement features.

A-24 The Income Statement is divided into multiple steps in order to provide information on the profitability of various

aspects of the company’s operations.The subtotals of income on a multiple-step income statement include gross

margin, operating profit, income before taxes, and net income. Gross margin is calculated by subtracting cost of sales

from sales revenue. Operating profit represents the difference between gross margin and operating expenses. Income

before taxes is calculated by adding other revenues and subtracting other expenses, such as interest income or interest

expense, to or from operating profit. Net income results from subtracting income taxes from the income before taxes.

25. Explain Horizontal Analysis Vertical analysis.

A-25 Horizontal analysis is used to calculate the change in an account balance from one period to the next and expresses

that change in both absolute and percentage terms. Vertical analysis is used to show how various balances relate to a larger

base account by stating each account balance as a percentage of the base account. Horizontal analysis shows the growth or

decline in each account, but it does not explain the reason for the change. Vertical analysis shows how various balances

relate to a larger base amount.

26. Discuss The Statement of Stockholders’ Equity.

A- 26 The Statement of Stockholders’ Equity shows the changes in all equity accounts, including Retained Earnings and

Contributed Capital, over a period of time. Retained earnings is calculated by adding net income (or subtracting a net
 loss) to the previous period’s ending retained earnings and subtracting dividends paid. Retained earnings is one

element of stockholder’s equity along with contributed capital.

27. Discuss notes to the financial statements.

A- 27 In addition to providing the financial statements in an Annual Report, companies also disclose Notes to the Financial

Statements, the Auditor’s Report, and Management’s Discussion and Analysis. Notes to the Financial Statements include

disclosure of accounting methods used to prepare financial statements, additional detail and explanation of financial

statement account balances, and additional information such as contingencies and future commitments. The Auditor’s

Report, which is prepared by an independent Certified Public Accountant, states an opinion as to the fairness of the

financial statements in representing the company’s financial condition, results of operations, and cash flows in conformity

with generally accepted accounting principles (GAAP). Management’s Discussion and Analysis discusses and analyzes the

company’s financial activities.

28. Discuss an accounting information system.

A-28 An accounting information system identifies, records, summarizes, and communicates the various transactions of a
company.

29. Discuss accounting process.

An accounting transaction is any economic event that affects a company’s asset, liability, or equity at the time of the event.

The main function of an account is to yield an item’s balance based on activities that affect that item. chart of accounts
contains the account names or all of the accounts that a company uses to record accounting information and a numerical
reference for each account.

The fundamental accounting equation is Assets = Liabilities + Equity.

All accounting transactions must affect at least two accounts so that the basic accounting equation (A = L + E) remains in
balance. However, both sides of the equation may not be affected. For example, one asset might increase while another
asset decreases. This transaction would not affect any accounts on the right side of the equation.The double-entry system
does not mean that each transaction is recorded twice. It is called double-entry because all accounting transactions affect
at least two accounts so that the accounting equation remains in balance.

The statement that debit means “increase” and credit means “decrease” is false. Debit means the left side and credit
means the right side of an account. Some accounts, such as assets, are increased with debits. Other accounts, such as
liabilities and equity, are increased with credits.
30. Identify account balance type.

A-30

a) Equipment – normal debit balance

b) Unearned Revenue – normal credit balance

c) Supplies Expense – normal debit balance

d) Accounts Payable – normal credit balance

e) Retained Earnings – normal credit balance

31. What are effects of increase and decere

A-31 An asset account is decreased with a credit. A liability account is decreased with a debit. A revenue account is
decreased with a debit. An expense account is decreased with a credit.
 Practice Question on

Cash Flow Statement

Q.1 Prepare Cash flow statement of Sindbad Ltd from the Cash Book abstract:

Sindbad Ltd.
Cash Book Abstract for the year ended 31st March 2023
Receipts Rs. Payments Rs.
Opening balance: 65000 Payment to creditors 220000
Loan from Maharashtra bank 600,000 Administration Expenses 65000
Issue of share capital 1000000 Selling & Distribution Exp 45000
Collection from Debtors 200,000 Fixed assets acquired 1400000
Sale of fixed assets 700,000 Interest on Loan 135000
Interest on investment 140,000 Bank loan repaid 500000
Taxation 110000
Dividends 200000
Closing balance: 30000
2,705,000 2,705,000

Solution 1:

SIndbadLtd.
CASH FLOW STATEMENT FOR YEAR ENDED 31ST MARCH 2023
SR NO PARTICULARS AMOUNT AMOUNT
A Cash Flow from Operating Activities
Collection from Debtors 200,000
Payment to creditors -220000
Administration Expenses -65000
Selling & Distribution Exp -45000
Cash Flow from Operating Activities -130,000
Taxation -110000
Cash Flow from Operating Activities -240,000 -240,000
B Cash Flow from Investing Activities
Sale of fixed assets 700,000

Interest on investment 140,000

Fixed assets acquired -1400000

 Cash Flow from Investing Activities -560,000 -560,000
C Cash Flow from Financing Activities
Loan from Maharashtra bank 600,000
Issue of share capital 1000000
Interest on Loan -135000
Bank loan repaid -500000
Dividends -200000
Cash Flow from Financing Activities 765,000 765,000
D Gross Cash Flow -35,000
E Opening Cash & Cash Equivalent 65000
F Closing Cash & Cash Equivalent 30,000

Q.2 Prepare Cash flow statement of Laxmipati Ltd. from the Cash Book abstract.

Laxmipati Ltd.
Cash Book Abstract for the year ended 31st March 2023
Receipts Rs. Payments Rs.
Bank Balance on 01-04-2022 85000 Payment to Creditors 550000
Bank Loan 750,000 Administration Expenses 225000
Equity Shares Issued 2500000 Selling & Distribution Exp 375000
Collection from Receivables 750,000 Fixed assets acquired 2200000
1,200,00
Fixed Assets Sale Proceed Interest on Bank Loan 275000
0
Dividend Received 240,000 Bank loan repaid 1300000
Rent received from Invested
300000 Taxation 200000
Properties
Dividends 225000
Closing balance on 31-03-
475,000
2023
5,825,00 5,825,00
0 0
Solution -2

Laxmipati Ltd.
CASH FLOW STATEMENT FOR YEAR ENDED 31ST MARCH 2023
SR NO PARTICULARS AMOUNT AMOUNT
A Cash Flow from Operating Activities
Collection from Receivables 750,000
Payment to Creditors -550000
Administration Expenses -225000
Selling & Distribution Exp -375000
Cash Flow from Operating Activities -400,000

Taxation -200000

Cash Flow from Operating Activities -600,000 -600,000

B Cash Flow from Investing Activities

Fixed Assets Sale Proceed 1,200,000

Dividend Received 240,000

Rent received from Invested Properties 300000

Fixed assets acquired -2200000
Cash Flow from Investing Activities -460,000 -460,000
C Cash Flow from Financing Activities
Bank Loan 750,000
Equity Shares Issued 2500000
Interest on Bank Loan -275000
Bank loan repaid -1300000
Dividends -225000
Cash Flow from Financing Activities 1,450,000 1,450,000
D Gross Cash Flow 390,000
E Opening Cash & Cash Equivalent 85000
F Closing Cash & Cash Equivalent 475,000
Q.3 Prepare Cash flow statement of Ramapati Ltd. from the Cash Book abstract.

Ramapati Ltd.
Cash Book Abstract for the year ended 31st March 2023
Receipts Rs. Payments Rs.
Opening Cash Equivalent 325000 Payment to Creditors 1750000
Loan from IDBI 3,465,000 Operating Expenses 750000
Equity Capital Raised 2500000 Selling & Distribution Exp 525000
Collection from Receivables 2,000,000 PPE purchased 6200000
Building sale proceed 4,500,000 Financial charges 375000
Dividend Income 500,000 IDBI Loan Redeemed 2900000
Rental income 350000 Income Tax Paid 375000
Dividend to shareholders' 725000
Closing Cash Equivalent 40,000
13,640,000 13,640,000

Solution-3

Ramapati Ltd.
CASH FLOW STATEMENT FOR YEAR ENDED 31ST MARCH 2023
SR NO PARTICULARS AMOUNT AMOUNT
A Cash Flow from Operating Activities
Collection from Receivables 2,000,000
Payment to Creditors -1750000
Operating Expenses -750000
Selling & Distribution Exp -525000
Cash Flow from Operating Activities -1,025,000
Income Tax Paid -375000
Cash Flow from Operating Activities -1,400,000 -1,400,000
B Cash Flow from Investing Activities
Building sale proceed 4,500,000

Dividend Income 500,000

Rental income 350000

PPE purchased -6200000
Cash Flow from Investing Activities -850,000 -850,000
C Cash Flow from Financing Activities
Loan from IDBI 3,465,000
 Equity Capital Raised 2500000
Financial charges -375000
IDBI Loan Redeemed -2900000
Dividend to shareholders' -725000
Cash Flow from Financing Activities 1,965,000 1,965,000
D Gross Cash Flow -285,000
E Opening Cash & Cash Equivalent 325000
F Closing Cash & Cash Equivalent 40,000