Cs Executive: Corporate & Management Accounting

CS EXECUTIVE
मा र ोक
CORPORATE & MANAGEMENT
ACCOUNTING
CA CS Harish A. Mathariya
INDEX
PART A: CORPORATE ACCOUNTING PART B: MANAGEMENT ACCOUNTING
S.N Name of the topic Pg. No. S.N Name of the topic Pg. No.
1 Introduction To Financial Accounting 1.1 - 1.18 13 Overview Of Cost 13.1 - 13.14
2 Introduction To Corporate Accounting 2.1 - 2.11 14 Cost Accounting Records & Cost Audit 14.1 - 14.13
3 Share Capital Accounting 3.1 - 3.32 15 Budgets 15.1 - 15.8
4 Debentures 4.1 - 4.13 16 Ratio Analysis 16.1 - 16.13
5 Related Aspects Of Company Accounts 5.1 - 5.6
17 Management Reporting 17.1 - 17.6
6 Financial Statements Interpretation 6.1 - 6.10
18 Decision Making Tools 18.1 - 18.6
7 Consolidation Of Accounts 7.1 - 7.7
19 Valuation Principles And Framework 19.1 - 19.11
8 Corporate Financial Reporting 8.1 - 8.14
20 Valuation of Shares, Business & 20.1 - 20.16
9 Cash Flow Statement 9.1 - 9.12
Intangibles
10 Accounting Standards 10.1 - 10.12
11 National & International Accounting 11 .1 - 11.5 21 Accounting For Share Based 21.1 - 21.8
Authorities Payments
12 IFRS & AS In India 12.1 - 12.9 22 Methods Of Valuation 22.1 - 22.6
CA CS Harish A. Mathariya 98220 93220 Yes Academy 8888 545 545

Know your Subject…
PART A: CORPORATE ACCOUNTING PART B: MANAGEMENT ACCOUNTING
S.N Name of the topic Marks S.N Name of the topic Marks
1 Introduction To Financial Accounting 5 13 Overview Of Cost 7
2 Introduction To Corporate Accounting 4 14 Cost Accounting Records & Cost Audit 3
3 Share Capital Accounting 10
15 Budgets 3
4 Debentures 6
5 Related Aspects Of Company Accounts 3 16 Ratio Analysis 4
6 Financial Statements Interpretation 4 17 Management Reporting 2
7 Consolidation Of Accounts 6 18 Decision Making Tools 7
8 Corporate Financial Reporting 4
19 Valuation Principles And Framework 3
9 Cash Flow Statement 7
10 Accounting Standards 5 20 Valuation of Shares, Business & 6
11 National & International Accounting 3 Intangibles
Authorities 21 Accounting For Share Based 2
12 IFRS & AS In India 5 Payments
22 Methods Of Valuation 3
Topic 1 Introduction to Financial Accounting
ACCOUNTING FUNCTIONS OF ACCOUNTING
1. Measurement
In layman’s language Accounting means to record
2. Forecasting
business transactions
3. Decision-Making
4. Comparison & Evaluation
5. Control
6. Government Regulation & Taxation
“Aaasaan bhasha me, Accounting ka matalb hai Hisab-
Kitab rakhna”
Need for Accounting
1. To maintain systematic accounting records.(Recording)
Layman's Means to record financial 2. To ascertain the financial position.(Balance Sheet)
language transactions 3. To ascertain the financial performance.(P&L Account)
Accounting
Using the rules of 4. To communicate information to users.(Reporting)

Debit / Credit “Accounting is the art of recording, Other reasons for accounting: To Know..
classifying and summarising in a 1. the amount receivable from the various persons
significant manner and in terms of
Technical money, transactions and events which 2. the amount payable to the various persons
language are, in part at least, of a financial 3. the expenses incurred during the year
character and interpreting the results
thereof” 4. the income earned during the year, etc.
CA CS Harish A. Mathariya 98220 93220 Yes Academy 8888 545 545 1.1
Book Keeping
BOOK-KEEPING •
•
Recording transactions
Work mainly routine and clerical in nature
• Book-keeping constitute the base for accounting.
As per Carter: “Book-Keeping is a science as well
• To follow Basic accounting concepts and
as art of correctly recording in books of accounts conventions.
all those business transactions that result in
transfer of money or money‘s worth” • Financial statements not form part of book-
keeping
Book-keeping is a mechanical task which • Financial position of the business cannot be
involves: ascertained
1. Collection of basic financial information
2. Identification of events and transactions with financial Accounting
character, i.e., economic transactions • Summarizing of the recorded transactions.
3. Measurement of economic transactions in terms of • Reqd. higher level of knowledge
money
• Language of business.
4. Recording of financial effects of economic transactions
in order of its occurrence • The methods and procedures for accounting may
vary from firm to firm.
5. Classifying effects of economic transactions
• Financial statements are prepared from the
6. Preparing organized statement known as Trial Balance bookkeeping records.
• To ascertained Financial position of the business
Basic Accounting Terms Business:
✓Is the set of activities for earning profit (Profit Motive)
✓Regularly carried on by a person or an organization
Financial Transaction ✓Business may be: Manufacturing; Trading or Service
Condition 1 Condition 1 Condition 1

If there is inflow If there is out If there is inflow or
in money or OR flow in money or OR outflow in money
money’s worth money’s worth or money’s worth
Goods
✓Products / Articles / Items which are regularly traded by
the businessman are called “Goods”.
If any of the above conditions are satisfied then transaction shall
deemed be a Financial transaction
Transactions are those activities of a business, which involve

transfer of money or goods or services between two persons or
two accounts.
3
Drawing
Cash / Goods / Assets drawn by the owner for his personal
Assets purpose is called as Drawing. It decreases the capital.
•In Technical Language: Debtors
✓Resource controlled by the enterprise Persons from whom the business has to receive money, due to
✓as a result of past events and credit sales made to them.
✓from which future economic benefits are
Expenses
expected to flow to the enterprise.
Amount spent for benefits for an accounting period. For eg. Rent
•In General Language: paid for the benefit of Business.
✓Properties of the business Losses
✓Amounts receivable from others by the business Amount spent but no benefits is derived / amount not recoverable
✓Eg. Stock, Land, Building, Debtors, Receivables, etc from debtors. For eg. Bad Debt, Stocks lost due to earthquake, etc.
Liabilities
Amounts Payable by the business to outsiders and includes capital.
Property of every For eg. Bank loans, Expenses not yet paid
description of business,
Capital
which gives future economic
benefit Amount (in money / money’s worth) Invested by the owner into the
business
4 1.4
Creditors
Revenue Expenditure
Persons to whom the business has to pay money due to
credit Purchase made from them. Revenue Expenditure is an expenditure which is
incurred
Incomes Meanin (a) To maintain productivity or earning capacity
Any amount received or receivable arising out of the g of business.
regular operations (eg. Sales) of the business. For eg.
(b) To carry out operating activity in normal
Interest, commission due or received, etc.
course of business.
Purchase (from purchaser’s point of view) Accountin debited to Trading / P&L Account
g
Buying of goods / raw materials for consideration. Sale Expenses for replacement of worn out part of
for one person is the purchase for another person. Examples
machine, Repairs of an existing machine.
Sales
Gain
sales” refers to Transfer of ownership in goods from one
person to another for a consideration” Benefit received without hard work is gain
3 Conditions for sale: Discount
(a) Transfer of ownership
(b) Ownership must be in goods Discount is an allowance or concession in price. Discount is
(c) Consideration – some money or money’s worth must given so that the buyer is induced (lured) to place an order
be given by one person to another. and later to make payment in time.
Inventory
Inventory is technical term for “stock”(Unsold Goods/
Unused raw material).
It includes Raw Material stock, work in progress and finished
goods stock
Capital Expenditure
An expenditure which is incurred –
To acquire an asset or
To acquire or bring into existence an
Meaning
advantage of enduring nature, or
To increase productivity or earning capacity
Capital Expenditure is debited to Respective

Accounting
Asset Account
Expenses incurred before the asset is put to
Examples use, Repairs of a newly purchased old machine,
Purchase of new machine.
‘Double Entry System is most scientific method of recording all monetary
transactions.
Owes its origin to Italian Merchant “LUCA D. BARGO PACIOLI” on 10th November 1494
Fictitious Assets and this day is celebrated as International Accounting Day
There are two aspects of every business transactions.
Wasting Assets Recording of two aspects of monetary transactions in the Books of Account in terms of
Debit (Dr.) and Credit (Cr.) is called as "Double Entry" System of Book-keeping.
Trade Discount
Recording of
Cash Discount Accounting Info
Contingent Liability
Indian System English System
Internal Liability Records only Cash book
Records in Indian languages, and Personal accounts.
Good Debts such as Marathi, Hindi, Urdu, It is unscientific method
Gujrati etc. (Mahajani Single Entry (Incomplete recording
Deshinama system) System system)
Doubtful Debts
Most scientific method of recording
Bad Debts all business transactions. Two fold
Double Entry effects of each transaction is
System recorded
TYPES OF ACCOUNTS (TRADITIONAL APPROACH):
PRINCIPLES OF DOUBLE ENTRY

BOOK-KEEPING SYSTEM:
2 A/c: One Personal Accounts Real Accounts Nominal Accounts

is receiver • Debtors / • Cash • Expenses
Two Effects of benefit & Creditors • Car • Losses
(Dr. & Cr.) other is • Representative • Computer • Income
giver • All Natural & • Furniture • Gains
Artificial Persons • Goodwill
If One A/c GOLDEN RULES OF DEBIT AND CREDIT (TRADITIONAL APPROACH):

is Dr. other Dr. = Cr.
must be Cr. Personal A/c Real A/c Nominal A/c
• Debit the Receiver • Debit what comes in • Debit Exp. & Losses
• Credit the Giver • Credit what goes out • Credit Income &
Gains
Complete Records (Both
Effects) ACCOUNTING EQUATION
Arithmetical Accuracy Not Disclose all
Limitations of Double Entry System

errors
Assets Liabilities Capital
Advantages of Double Entry
Business Results
Common Acceptance CLASSIFICATION OF ACCOUNTS (MODERN APPROACH)

System
Trial Balance does

not disclose all the
errors Dr. Cr.
Minimize Frauds
Dr. Balance Cr. Balance Dr.
Cr.
Receivable & Payable
Balances can determined Assets Liabilities
easily
Drawing Capital
It costly (Required
Decision Making
to maintain no. of Debtors Creditors
a/c)
Expenses Incomes
Losses Gains
Easy Tax Calculation
Persons from
Amount Amount spent
Properties of every whom the
Cash / Goods / spent for but no benefits
description of the Business. business has to
Assets drawn by benefits for is derived /
(Resources having some receive money,
the owner for his an amount not
future economic benefit to due to credit
personal purpose accounting recoverable
business.) sales made to
period from debtors
them.
Dr.
Dr. Balance
ALL ASSESTS, DRAWING, DEBTORS, EXPENSES & LOSSES –
Cr.
Cr.
ALL LIABILITIES, CAPITAL, CREDITORS, INCOMES & GAINS – Cr. Balance
Dr.
Amounts Payable by
Amount
the business to Persons to amount received or amount received or
Invested
outsiders and whom the receivable arising out receivable arising out
by the
includes capital. For business has of the regular of the operations for
owner into
eg. Bank loans, to pay money operations of the which no hard work
the
Expenses not yet due business has done
business
paid
Going For all other transactions not covered in any
Business
Concern of the above categories – i.e., purchase or
sale of assets, expense accruals, rectification
entries, etc
Transactions
All cash and bank transactions
Journal Book
Cash Book
Dr. All credit purchase of goods – only those
Record
Cr. Purchase Book goods that are purchased for resale are
covered here
Sales Book All credit sale of goods
Subsidiary Books
Posting Dr. A/C Cr.
Bills Receivable Book All bill receivables – these are bills
accepted by Customers
Bills Payable Book All bills payable -these are bills
Cr. Dr.
Balancing Balance Balance Purchase Return Book accepted by the business to be
honored by paying to suppliers at an
Dr Cr Sales Return Book agreed date
Trial All purchase returns – i.e., return of
Balance goods back to suppliers
All sales returns – i.e., return of goods
Final Accounts Will see later.. back from Customers
❑ Example: Journalise the following transactions in the books of 3. Paid Wages on Erection of Machinery Rs. 2,000.
Akashay Kumar
First Step Second Step Third Step
1. Akashay Kumar commenced business with Cash Rs. 95,000. (Identification of A/C) (Classification) (Apply the RULE)
Furniture Rs. 5,000, Machinery Rs. 80,000. Of the Cash Rs.
8,000 was borrowed from sumit personally by owner Machinery A/c Dr. Balance Dr. 2,000
First Step Second Step Cash A/c Dr. Balance Cr. 2,000
Third Step
(Identification of A/C) (Classification) (Apply the RULE)
4. Received an order from M/s Pushpalata for goods
Cash A/c Dr. Balance
Dr. 95,000 Rs. 8,000.
Furniture A/c Dr. Balance
Dr. 5,000
Machinery A/c Dr. Balance First Step Second Step Third Step
Dr. 80,000 (Classification) (Apply the RULE)
Capital A/c Cr. Balance (Identification of A/C)
Cr. 1,80,000
No entry will be recorded for this event
2. Purchased Machinery from kent and Co, for Rs. 18,000 and paid
Rs. 800 as freight on our account. 5. Cash of Rs. 200 was stolen by the cashier who is
absconding.
First Step Second Step
(Identification of A/C) (Classification) Third Step First Step Second Step Third Step
(Apply the RULE) (Identification of A/C) (Classification) (Apply the RULE)
Machinery A/c Dr. Balance
Kent & Co. A/c
Dr. 18,800 Loss by theft A/c Dr. Balance
Cr. Balance Dr. 200
Cash A/c Cr. 18,000 Cash A/c Cr. 200
Dr. Balance Dr. Balance
Cr. 800
SUB-DIVISION OF LEDGER
6. Executed pushpalata’s order and paid transport
charges on her account Rs. 100.
First Step(Identifica- Second Step Third Step

tion of A/C) (Classification) (Apply the RULE)
Pushpalata A/c Dr. Balance Dr. 8,100
Sales A/c Cr. Balance Cr. 8,000
Accounting Concepts:
Cash A/c Dr. Balance Cr. 100 • Going Concern
• Consistency Income & Exp. Assets & Liab.
7. Purchased 20 shares of Rs. 100 each at Rs. 90 by • Accrual
paying 2% brokerage. • Cost Concept
• Conservatism
First Step Second Step Third Step • Revenue Matching
(Identification of A/C) (Classification) (Apply the RULE) • Dual Aspect
• Prudence
Investment in shares A/c Dr. Balance Dr. 1,800 • Substance over form
Brokerage A/c Dr. Balance Closing Balance and Opening Balance:
Dr. 36
The debit or credit balance that we get at end of the accounting period is
Cash / Bank A/c Dr. Balance Cr. 1,836 known as closing balance of that account.
“Balance of the nominal accounts” is closed by transferring to trading account,
8. Goods worth Rs. 100 were distributed as free samples. & profit & loss account which shows the net operating results – net profit or
net loss.
First Step Second Step Third Step “Balance of personal accounts & real accounts” representing assets, liabilities,
(Identification of A/C) (Classification) (Apply the RULE) owner‘s equity are reflected in Balance Sheet, which shows financial position
Advertisement A/c Dr. Balance Dr. 100 of a business on a particular date.
These balances are transported as opening balance in the succeeding
Purchase A/c Dr. Balance Cr. 1`00 accounting period.
Trial Balance: statement or a list of all ledger account
balances taken from various ledger books on a particular • It forms the basis for the preparation
of financial statements,
date to check the arithmetical accuracy • ensures the arithmetical accuracy of
the entries made
Features of a Trial Balance: Purpose of a Trial Balance:
• can easily find outthe balance in any
• list of debit and credit balances • To check the arithmetical ledger account without actually
Trial Balance
• does not prove arithmetical accuracy of recorded – Utility and referring to the ledger
accuracy transactions Interpretation • can do a quick time analysis. Hence,
listing is usually done in the sequence
• is not an account. It is only a • To ascertain the balance of Asset accounts, Liability accounts,
statement of any ledger account Capital accounts, Owner‘s equity
• not a part of the final statements • To serve as an evidence of accounts, Income or gain accounts and
Expenses or Losses accounts in that
• Usually prepared at the end of the fact that the double order
the accounting year but it can entry has been completed
also be prepared any time • To facilitate the Cash Book
• link between the Books of preparation of final
Accounts, Profit and Loss Account accounts Single Column Cash Book
and Balance sheet
Double Column Cash Book
Triple Column Cash Book
• Total Method or Gross Trial Balance. Multi Column Cash Book
Method of • Balance Method or Net Trial Balance.
Preparation Petty Cash Book
• Compound Method
Contra Transactions
1. Accounting policies followed by organizations – (b) ₹20,000
(a) Can be changed every year. (c) ₹15,000
(b) Should be consistently followed from year to year (d) ₹12,000
(c) Can be changed after 5 years
(d) None of the above 5. The present value of machinery is –
(a) ₹10,000
2. It is essential to standardize the accounting principles and policies in order (b) ₹20,000
to ensure – (c) ₹15,000
(a) Transparency
(d) ₹12,000
(b) Profitability
(c) Reputation
(d) All of the above 6. The historical cost of machinery is –
(a) ₹10,000
3. Generally, which of the following measurement bases are usually (b) ₹20,000
accepted in accounting parlance? (c) ₹15,000
(a) Historical Cost (d) ₹12,000
(b) Current Cost
(c) Realizable Value 7. The realizable value of machinery
(d) Any of the above (a) ₹10,000
(b) ₹20,000
On the basis of following information answer next 4 questions. (c) ₹15,000
Mohan purchased a machinery amounting ₹ 10,000 on 1.4.2010. (d) ₹12,000
On 31.3.2019 similar machinery could be purchased for ₹ 20,000 but
the realizable value of the machinery (purchased on 1.4.2010) was 8. Accounts which represent a certain person or group of persons are termed
estimated at ₹15,000. The present discounted value of the future net cash as
inflows that the machinery was expected to generate in the normal course (a) Artificial or legal persons account
of business, was calculated as ₹ 12,000. (b) Natural persons personal account
4. The current cost of the machinery is (c) Representative personal ac-counts
(a) ₹10,000 (d) Any of the above
CA CS Harish A Mathariya 98220 93220 Yes Academy 8888 545 545 1.15
(b) Prudence
9. Which of the following types of accounts represent assets and properties (c) Substance over form
which can be seen, touched, felt, measured, purchased and sold? (d) All of the above
(a) Tangible real accounts
(b) Intangible real accounts 13. Ledger is the of accounts where similar transactions relating to a particular
(c) Representative personal ac-counts person or property or revenue or expense are recorded.
(d) Artificial or legal persons account (a) Principal book
(b) Primary entry book
10. On 1.1.2019, CS HM paid rent of ₹ 25,000 for HMs professional (c) Third entry book
Academy. This can be classified as – (d) None of above
(a) An event
(b) A transaction 14. Process of recording transaction in ledger is known as –
(c) A transaction as well as an event (a) Balancing
(d) Neither a transaction nor an event (b) Posting
(c) Journalizing
11. Mr. Harish purchased a car for ₹50,000, making a down payment of ₹ (d) None of above
10,000 and signing a ₹ 40,000 bill payable due in 60 days. As a result
of this transaction: 15. Journal and ledger records transactions in –
(a) Total assets increased by ₹ 50,000 (a) A chronological order and analytical order respectively.
(b) Total liabilities increased by ₹ 40,000 (b) An analytical order and chrono-logical order respectively.
(c) Total assets increased by ₹ 40,000 (c) A chronological order only
(d) Total assets increased by ₹ 40,000 with corresponding increase in (d) An analytical order only.
liabilities by ₹ 40,000
16. A second hand motor car was purchased on credit from B & Co. for ₹
10,000. It will be recorded in –
12. Accounting policy for inventories of HM Ltd. states that inventories are
(a) Journal Proper (General Journal)
valued at the lower of cost or net realizable value. Which accounting
(b) Cash Book
principle in followed in adopting the above policy?
(c) Purchase Book
(a) materiality
(d) Sales Book
17. Outstanding salary ₹ 34,000 to be provided in the accounts will be 20. Is that expenditure which results in acquisition of an asset or which results
recorded in – in an increase in the earning capacity of a business.
(a) Bills receivable book (a) Capital expenditure
(b) Journal proper (General Journal) (b) Revenue expenditure
(c) Purchases Return Book (c) Deferred revenue expenditure
(d) Purchase book (d) None of the above
18. A debit note for ₹20,000 issued to Mr. HM for goods returned by us is to 21. Expenses whose benefit expires within the year of expenditure and which
be accounted for in – are incurred to maintain the earning capacity of existing assets are
(a) Bills receivable book termed as –
(b) General journal (a) Capital expenditure
(c) Purchases return book (b) Revenue expenditure
(d) Purchase book (c) Deferred revenue expenditure
(d) None of the above
19. HM Ltd. makes payments to its sundry creditors through cheques and the
cash discount received on these payments is recorded in the triple- 22. There are certain expenses which may be in the nature of revenue but
columnar cash book. In the event of dishonor of any such cheques, the their benefit may not be consumed in the year in which such expenditure
discount so received should be written back through: has been incurred; rather the benefit may extend over a number of years
(i) A debit to discount column of the cash book. are termed as –
(ii) A credit to discount column of the cash book. (a) Capital expenditure
(iii) A credit to bank column of the cash book. (b) Revenue expenditure
(iv) A debit to discount account through journal proper. (c) Deferred revenue expenditure
(v) A credit to creditor's account through journal proper. (d) None of the above
Select the correct answer from the options given below –
(a) Only (i) above 23. Costs incurred to acquire an asset are but costs incurred to keep them in
(b) Only (ii) above working condition or to defend their ownership are
(c) Both (i) & (iii) above (a) Capital expenditure, Revenue expenditure
(d) Both (iv) & (v) above (b) Revenue expenditure, Revenue expenditure
(c) Deferred revenue expenditure, Revenue expenditure (a) Capital expenditure, Revenue expenditure
(d) Revenue expenditure, Capital expenditure (b) Revenue expenditure, Revenue expenditure
(c) Deferred revenue expenditure, Revenue expenditure
24. Fee paid to a lawyer for checking whether all the papers are in order (d) Revenue expenditure, Capital expenditure
before land is purchased is But if later a suit is filed against the purchaser,
the legal costs will be
Answers
1 b 2 a 3 d 4 b 5 d 6 a 7 c 8 c
9 a 10 a 11 d 12 b 13 a 14 b 15 a 16 a
17 b 18 c 19 d 20 a 21 b 22 c 23 a 24 a
Topic 2 Introduction to corporate accounting
PREPARATION & PRESENTATION OF FINANCIAL STATEMENT; SECTION 129

▪ Shall give a true and fair view of the state of affairs of ▪ At every annual general meeting board of directors of the company
a company comply with the accounting standards notified shall lay before all
under section 133 ▪ Where a company has one or more subsidiaries, in addition to financial
▪ Nothing contained in this shall apply to any insurance or statements financial statement of the company and of all the
banking company or any company engaged generation subsidiaries in the same form and manner laid before the annual
or supply of electricity, general meeting
▪ Mandatorily file their financial statements in extensible ▪ shall also attach along with its financial statement, a separate statement
business reporting language (XBRL) containing the salient features of the financial statement of its
▪ members financial statements subsidiary or subsidiaries.
▪ provisions of this Act are applicable to the preparation, financial shall,
mutatis mutandis, apply to the consolidated financial statements.
▪ If a company contravenes the managing director, the whole-time
director in charge of finance, the Chief Financial Officer or any other
person shall be give the charge by the Board with the duty to
complying with the requirements of this section and in the absence of
any of the officers mentioned above, all the directors punishable
imprisonment may extend to one year or with fine not be less than fifty
thousand to rupees five lakh or with both.
GENERAL INSTRUCTIONS FOR THE PREPARATION
PRESENTATION OF FINANCIAL • Schedule III sets out minimum requirements
STATEMENT • Disclosure requirements in Schedule are in addition to AS
• Each item of the Balance Sheet & Profit & Loss shall be
SCHEDULE III cross-referenced to information in the notes to accounts
• Depending upon turnover, the figures may rounded off
1. Turnover less than one hundred crore rupees –
Part I From Balance Sheet Part II From of statement of Rounded off to the nearest hundreds, thousands,
(Vertical format) profit and loss (Vertical) lakhs or millions, or decimals thereof
2. Turnover one hundred crore rupees or more –
Profit & loss A/C should be drawn upon principles stated Rounded off to the nearest lakhs, millions or crores,
below: or decimals thereof
Materiality: All significant factors which will have an impact on the Unmortised portion of share issue expenses, etc.
mind of the reader should be disclosed. • Sch. III not contain disclosure requirement for unamortized
Prior-Period Items: Once accounts are adopted at the AGM, they portion of expense items such as Share Issue Expenses,
cannot be reopened. If any error is discovered, it can be corrected Ancillary Borrowing Costs & Discount or Premium relating
only in the accounts of the subsequent period. Such prior errors are to Borrowings.
prior period items which to rectify in current period • As per AS-16, Ancillary Borrowing Costs and Discount or
Extraordinary Items: If expenses or income that do not arise in the Premium relating to Borrowings could be amortized over
ordinary course and are material they should be stated separately loan period.
Change in Accounting Policies: If there is any change in an • Further, share Issue Expenses, Discount on Shares, Ancillary
accounting policy, say method of valuation of inventories or of Costs- Discount, Premium on Borrowing, etc. being special
change in depreciation, there has to be a disclosure about the fact nature items, are excluded from scope of AS- 26
of change and on profit or loss resulting from such a change Intangible Assets.
PART 1 – FROM OF BALANCE SHEET
Balance Sheet
Equity & Liabilities Assets
Share
Shareholders Application Non-current Current Non - Current Current Assets
Funds Money Pending Liabilities Liabilities Assets
Allotment
BREAK-UP OF EQUITY & LIABILITIES
Share Capital
BREAK-UP OF ASSETS
Shareholders
Funds
Reserve & Surplus
ASSETS
Share Money Received Against
EQUITY & LIABILITIES
Share Warrants
Application Non - Current Assets Current Assets
Money Pending
Allotment Long Term Loan Borrowing
Fixed Assets Current Investments
Deferred Tax Liabilities
(Nel)
Non Current Non Current Assets Inventories
Liabilities
Other Long Term Liabilities
Non Current Investments Trade Receivables
Long Term Provisions
Deferred Tax Asset (DTA) Cash & Cash Equipment's
Short Term Borrowing
Long Term Loans & Advances Short Term Loans & Advances
Trade Payables
Current Other Non Current Assets Other Current Assets
Liabilities
Other Current Liabilities
Short Term Provisions
PART II-FORM OF STATEMENT OF PROFIT & LOSS
Name of the Company :………………………………………………… Profit and Loss Statement for
the year ended:……………………………………………………………………….….. (Rs. in ……..)
S.N Particulars Note No. Current Period Previous Period
I Revenue from Operations
II Other Income
III Total Revenue (I+II)
IV Expenses:
V Total Expenses
VI Profit before Exceptional & Extraordinary Items & Tax (III – IV)
VII Exceptional Items
VIII Profit before Extraordinary Items and TAX (VI-VII)
IX Extraordinary Items
X Profit before Tax (VIII-IX)
XI Tax Expense (Current & Deferred)
XII Profit / Loss for the period (From Continuing Operations) (X-XI)
XIII Net Profit / Loss for period (From Discontinuing Operations)
XIV PROFIT / LOSS for the period (XII+XIII)
XV EPS (Basic & Diluted)
ITEM GENERAL INSTRUCTIONS FOR PREPARATION OF STATEMENT OF PROFIT AND LOSS
1. For Sec.25 Provisions of P&L A/c (Sec. 129) shall apply to the Income & Expenditure Account of NPO in the same manner
Companies
2. Revenue from For Company other than a Finance Company: For Finance Company: Revenue from Operations shall
Operations Revenue from operation disclose separately in Notes, include Revenue from:
Revenue from- (a) Interest &
(a) Sale of Products (b) Other Financial Services
(b) Sale of Services Revenue under each of the above heads shall be disclosed
(c) Other Operating Revenues separately by way of Notes to Accounts
(d) Less: Excise Duty
3. Finance Costs Finance Costs shall be classified as –
(a) Interest Expenses,
(b) Other Borrowing Costs,
(c)Applicable Net Gain / Loss on Foreign Currency Transactions and Translation.
4. Other Income Other Income shall be classified as –
(a) Interest Income (in case of a Company other than a Finance Company),
(b) Dividend Income,
(c) Net Gain/Loss on Sale of Investments,
(d) Other Non-Operating Income (Net of Expenses directly attributable to such income).
5. Additional A Company shall disclose by way of Notes, additional information regarding Aggregate Expenditure and Income
Information:
TRUE & FAIR VIEW OF FINANCIAL
STATEMENTS: SECTION 128
▪ Every company shall prepare and keep its registered
office books of account and other relevant books and
papers and financial statements
▪ Financial statements shall give a true and view of the
state of affairs
▪ FS not be treated as not disclosing a true and fair view
merely by reason of the fact that they do not disclose:–
• in the case of an insurance company,
• in the case of a banking company
Note: Term ‘true and fair’ has not been
• in the case of a company engaged in the generation
defined nor has it been the subject of any
or supply of electricity, judicial decision. Just FS should not mislead
• company governed by any other law for the time the user about the financial health of
being in force organization
1. An asset shall be classified as current: 5. As per Rule 3 of the Companies (Filing of Documents and Forms in
(a) If it is held primarily for the purpose of being traded Extensible Business Reporting Language) Rules, 2015, all companies
(b) If it is not possible to classify such asset as non-current asset having turnover of _____ has to file their Balance Sheet, Profit & Loss
(c) If for the asset normal operating cycle cannot be identified. A/c and other documents with the Registrar using the Extensible
(d) If such asset expected to be realized after twelve months after the
Business Reporting Language (XBRL) -
reporting date.
(a) ₹ 50 Crore or above
2. As per Schedule III of the Companies Act, 2013, where the normal (b) ₹ 100 Crore or above
operating cycle cannot be identified, it is assumed to have duration of – (c) ₹ 250 Crore or above
(a) 3 months (d) ₹ 500 Crore or above
(b) 6 months
(c) 9 months 6. As per section 128 of the companies Act. 2013 every company shall
(d) 12 months prepare and keep at its _____ books of account and other relevant
books and prepares and financial statement for every financial year-
3. As per Rule 12 of the Companies (Accounts) Rules, 2014, a financial
(a) corporate office
statement shall be filed in ______ which should be pre-certified by
Practicing CA. (b) registered office
(a) Form AOC-3 (c) corporate office or registered office
(b) Form AOC-4 (d) Head office
(c) Form AOC-5
(d) Form AOC-6 7. Which of the following type of company is required to file their accounts
in Extensible Business Reporting Language (XBRL) format?
4. A liability shall be classified as current when it satisfies any of the (a) Banking companies
following criteria: (b) Insurance companies
(a) It is expected to be settled in the company's normal operating cycle.
(b) It is due to be settled within twelve months after the reporting date (c) Non-Banking Financial companies
(c) The company does not have an unconditional right to defer settlement (d) None of the above
of the liability for at least twelve months after the reporting date.
(d) All of the above
8. Which of the following type of company is required to file their accounts or unclaimed for 30 days of declaration of dividend, then in next ______
in Extensible Business Reporting Language (XBRL) format? the company has to transfer the amount unclaimed to the to a special
(i) Subsidiary of Indian Listed Company account in any scheduled bank to be called the ‘unpaid dividend
(ii) Companies which are required to prepare their financial account’
statements in accordance with the Companies (Indian Accounting (a) 5 days; 5 days
Standards) Rules, 2015 (b) 30 days; 7 days
(iii) Private company having turnover of ₹ 99 Crore. (c) 30 days; 5 days
(iv) Public companies having paid-up capital of ₹ 3 Crore. (d) 10 days; 7 days
(a) (I) & (II) 11. Any money transferred to the un-paid dividend account of a company
(b) (II) & (IV) which remains unpaid or unclaimed for a period of ______ from the
(c) (I) & (III) date of such transfer must be transferred by the company to Investor
(d) (I), (II) & (III) Education and Protection Fund
(a) 3 years
(b) 5 years
9. As per the provisions of the Companies Act, 2013, the amount of the
(c) 7 years
dividend, including interim dividend, shall be deposited in a scheduled
(d) 10 years
bank in a separate account within ____ from the date of declaration of
such dividend.
(a) 30 days 12. A Company has a paid-up equity share capital of ₹ 37,50,000 (of 10
(b) 15 days each) and 11% preference share capital of 12,50,000 (of ₹ 100 each).
(c) 10 days The balance of profit brought forward from the previous Balance Sheet
(d) 5 days was ₹ 95,000. Profit for the year ended on 31.3.2018 amounted to ₹
14,50,000 after tax. The directors proposed a dividend of 24% on equity
10. After declaration of dividend, the company has to pay dividend within share capital, after the following provisions:
(i) Transfer 10% of current profits to general reserves.
______ of declaration of dividend. If amount of dividend remains unpaid
(ii) Provisions of dividend on preference share 14. Due to paucity of profits, MUSKAT LTD. an Indian company proposes to
Assume corporate dividend tax rate A/c will be 17%. Closing balance of declare dividends out of its general reserves
Profit & Loss A/c will be- ₹
(a) ₹ 1,86,125 10% pref. shares (₹ 100 each) 10,00,000
(b) ₹ 3,62,500 Equity shares (₹ 100 each) 30,00,000
(c) ₹ 2,48,350 General reserve 8,00,000
(d) ₹ 1,75,425 Securities premium 2,00,000
Credit balance of P & L A/c 20,000
13. Trial balance of complex Ltd. As at 31.3.2019 shows the following item: Net profit for the year (after tax) 1,80,000
Particulars Dr. (₹) Cr. (₹) Average dividend for last 3 years 15%
Advance income tax provision for 55,000 - As the Companies (Declaration of Dividend Out of Reserves) Rules, 2014
tax for year ended 31.3.2018 - 30,000 how much maximum percentage of dividend can be paid by the
(1) Advance payment of income tax includes ₹ 35,000 for 2017-2018. company out of reserves.
(2) Actual tax liability for 2017-2018 amounts to ₹ 38,000 and no (a) 10%
effect for the same has so far be given in accounts. (b) 8%
(3) Provision for income tax has to be made for 2018-2019 for ₹ (c) 12%
40,000. (d) 15%
You are required to calculate: (a) Liability for taxation for last year i.e.
2017-2018; (b) Extra provision to be made in current year for last year. 15. The paid-up capital of Apsara Ltd. consisted of 5,00,000 equity shares of
(a) ₹ 8,000; ₹ 3,000 10 each and 50,000, 8% preference
(b) ₹ 5,000; ₹ 12,000 shares of ₹ 100 each. The statement of profit and loss of the company
(c) ₹ 3,000; ₹ 8,000 for the year ended 31.3.2019 showed net profit before tax of ₹
(d) ₹ 12,000; ₹ 5,000 20,00,000. Net profit brought forward from previous year's balance
sheet amounted to ₹ 6,00,000. Company makes a provision of 40% for (a) ₹ 3,94,500
income tax. Following appropriations were proposed by the company: (b) ₹ 2,94,500
(i) To pay final dividend @ ₹ 1.50 per share to equity shareholders. (c) ₹ 4,94,500
(ii) To transfer 5% of net profit to general reserve. Assume corporate (d) ₹ 1,94,500
dividend tax rate 17%. Closing balance of Profit & Loss A/c will be –
Answers
1 a 2 d 3 b 4 d 5 b 6 d 7 d 8 a
9 d 10 b 11 c 12 a 13 c 14 a 15 a
Topic 3 Share Capital Accounting
SHARES & KINDS OF SHARE CAPITAL
1. Share in the share capital of a company and it also includes stock.
2. A share is one unit into which the total share capital is divided.
3. It is a fractional part of the share capital and forms the basis of ownership in the company. (Shares are divisions of the share capital of
a company.)
Equity share capital – (a) with voting rights, or (b) with different rights as to dividend, voting or otherwise in accordance with the prescribed
(issue of share capital with differential voting rights) rules, 2001
Preference Share Capital-, i.e. priority for dividend at fixed rate + priority for repayment of capital
APPLICATION OF MINIMUM SEBI GUIDELINES RELATING TO ISSUE OF SHARES

DISCLOSURE OF SHARE CAPITAL SUBSCRIPTION • Prospectus
1. Purchase price of property, • No allotment of shares can be made, until the
Authorized Share Capital 2. Any preliminary expenses, beginning of the 5th day after prospectus
Issued share capital 3. Underwriting Commission, • Subscription list (3 to 10 working Days)
4. Repayment of money • No allotment unless the minimum subscription
Subscribed share capital borrowed for the above • SEBI - minimum subscription is 90%
purpose, • approval of the stock exchange
Called up share capital
5. Working capital, and • dematerialized form
Paid up Capital 6. Any other expenditure stating • one month between calls
nature and purpose • 14 days-notice to pay
Reserve Capital
S. No. Transaction Journal Entry
1 Receipts of application money on shares Bank A/c (amount actually received) Dr.
issued To shares Application A/c (amount actually received)
2 Allotment of shares to applicants, and Share Application A/c Dr.
transfer of application money To shares capital A/c [shares allotted x Application money due]
To Securities premium A/c [share allotted x premium per share]
(if premium amount is collected at the time of application itself)
3 Adjustment of excess Application money Share Application A/c Dr.
received for allotment stage To Share Allotment A/c [Amount adjusted for allotment]
4 Refund of excess money received / refund to Share Allotment A/c Dr.
unsuccessful applicants To Bank A/c [Amount refund money paid]
5 Allotment money due Share allotment A/c Dr.
Discount on Issue of shares A/c (if any) Dr.
To Share Capital A/c [shares allotted x Allotment money due]
To securities premium A/c [shares allotted x Premium per share]
(if premium amount is collected at the time of Allotment only)
6 Receipt of share Allotment Money Bank A/c (Amount actually received on allotment) Dr.
To share Allotment A/c (Amount received on Allotment)
7 Making calls, i.e. call money due Share….(first or second or final)……Call A/c Dr.
To share capital A/c [shares allotment x call money due]
8 Receipts of share call money Bank A/c (amount actually received on calls) Dr.
To Share ….. Call A/c (Amount actually received on calls)
SECURITIES PREMIUM ACCOUNT ISSUE OF SHARES AT A DISCOUNT
MAY BE APPLIED
Provision: (Sec. 53)
company shall not issue shares at a discount except as
provided in section 54 for issue of sweat equity shares.
1. fully paid bonus shares
Any share issued by a company at a discounted price shall
2. writing off the preliminary expenses be void.
3. writing off of commission paid or discount Penalty:
allowed
punishable with fine which shall not be less than one lakh
4. premium payable on the redemption rupees but which may extend to five lakh rupees
AND
5. purchase of its own shares Buy-back
Every officer in default- punishable with imprisonment for
a term which may extend to six months or with fine which
shall not be less than one lakh rupees but which may
extend to five lakh rupees, or with both.
1 3
Over Subscription
(Apllications received >
CALLS IN ARREARS
No. of shares offered)
1. money remaining unpaid
2. debit balance
3. deduction from share capital in the liabilities
side
Under Subscription
(Apllications received <
4. Interest received at the rate of 10% p.a. as
No. of shares offered) per Table F
2 4
CALLS IN ADVANCE ISSUE OF SHARES FOR
1. money received (before due date) CONSIDERATION OTHER THAN CASH
2. if permitted by its articles, may accept
3. not be entitled to any voting rights on calls in 1. to vendors
advance 2. to the promoters
4. always have a credit balance 3. same must be clearly stated in the balance
5. at the rate of 12% p.a. Interest sheet and must be distinguished from the issue
6. No dividend made for cash
7. Not become part of capital (Shown under current 4. Entries on next slide
liab.)
Date Particulars Dr. (Rs.) Cr.(Rs.)
FORFEITURE & RE-ISSUE OF SHARES
When fair value of assets is equal to shares 1. Shareholders fail to pay allotment or call money due
are issued: 2. directors may forfeit
Sundry Assets A/c Dr.
To Share Capital A/c 3. Proper notice (14 days)
When fair value of assets is more than value 4. amount will not refunded (Trf to share forfeiture
of shares are issued: account)
To Share Capital A/c 5. shown as an addition to share capital, on the
To Securities Premium A/c liabilities side
When fair value of assets is less than value of

shares are issued:
FORFEITURE OF SHARES
Discount on Issue of Shares A/c • 1st: Cancellation of membership of the
To Share Capital A/c shareholder (Reduce share capital a/c by called
(Companies Act, 2013 totally prohibits the issue
of shares at discount) up face value of forfeited shares)
• 2nd: Forfeit, amount received except premium
Issue of shares to promoters for their services:
Goodwill A/c Dr.
(By transferring such amt to share forfeiture
To Share Capital A/c A/c)
• 3rd: Allotment or call money (as the case may
be) not received is required to be reversed
RE – ISSUE OF
ENTRY FOR SHARE FORFEITURE FORFEITED SHARES
1. BOD can sell / re-issue / dispose off
as they think fit
2. Sales, not Allotment
3. Auction Sale
4. Loss on re–issue of forfeited shares
should not exceed the forfeited
Amount
5. Loss on re–issue: debited to
“forfeited shares” A/c
6. surplus arising on the reissue to
capital reserve A/c
7. excess amount should be credited to
securities premium A/c
CONDITIONS FOR BUY-BACK
BUY-BACK OF SHARES i. Authorized by its AOA;
If co., substantial cash resources, may buy its own shares,
out of FR / SP / Proceeds of issue of other sp. Securities.
ii. SR ; BR (@BM) if ≤ 10% of the Paid-up ESC and FR
If prevailing price is lower than its true value iii.BB ≤ 25% of Paid-up capital and FR;
May pay High iv.should not exceed 25% paid-up ESC in that FY
dividend
𝑆𝑒𝑐𝑢𝑟𝑒𝑑 𝐷𝑒𝑏𝑡𝑠 + 𝑈𝑛𝑠𝑒𝑐𝑢𝑟𝑒𝑑 𝐷𝑒𝑏𝑡𝑠
v. Post BB D/E Raito, i.e. not
𝑃𝑎𝑖𝑑 𝑢𝑝 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐹𝑟𝑒𝑒 𝑅𝑒𝑠𝑒𝑟𝑣𝑒
Buyback of Invest in more than 2:1

Equity shares securities vi.Only Fully paid up
If there is
surplus vii.If Listed, follow SEBI regu. (O. Wise Co. Act)
cash
viii.1 year gap between 2 Buy-Back
ix.Not be made out of the proceeds same kind of Shares
Redemption Takeover of
of Sh. / other x. Nominal Value of Shares Bought Back out of FR shall be
debentures company
transferred to CRR (use-Bonus Share)
ADVANTAGES OF BUY-BACK & JOURNAL ENTRIES
No approval reqd
Transaction Journal Entry
improve EPS 1. Amount due on Equity Share Capital A/c Dr.
Buyback on Equity Premium on Buyback A/c Dr.
Takeover of other Shares To Equity Shareholders A/c
company
2. Sourcing / Providing Securities Premium A/c Dr.
improve ROC for Premium payable on Profit and Loss A/c Dr.
Buyback General Reserve A/c Dr.
Exit route
Other Reserves A/c Dr.
Advantages consolidation of stake To Premium on Buyback A/c
(Objectives)
3. Transferring Divisible Profit and Loss A/c Dr.
prevent unwelcome
takeover Profit to Capital General Reserve / Revenue Reserve A/c Dr.
Redemption Reserve Other Divisible Profits A/c Dr.
return of surplus cash Account, to the extent of (e.g. Dividend Equalization Reserve)
Nominal Value of Shares To Capital Redemption Reserve A/c
optimum capital structure
bought back
support share price
4. Payment to Equity Equity Shareholder A/c Dr.
Shareholder To Bank A/c
serve the equity more
efficiently
ISSUE OF BONUS SHARES
CONDITIONS FOR BONUS ISSUE
i. Authorized by its articles;
Securities
Its free ii. Board recommendation to authorized in the GM;
premium
reserves; iii.not defaulted in payment of interest or principal;
account; or
iv. not defaulted statutory dues pay (PF/Gratuity/Bonus)
Capital redemption
v. partly paid-up to made fully paid-up;
reserve account
vi. once announced shall not subsequently withdraw
vii.only on fully paid up shares.
viii.not be issued in lieu of dividend.
May issue fully paid-up bonus shares out of ... ix. Revaluation Reserve can not be utilised
ISSUE OF SWEAT EQUITY SHARES (SEC. 54)
1. shares issued to its directors or employees
2. at a discount or for consideration, other than cash (know-how or
intellectual)
3. Conditions:
i. Comply with the SEBI regulations (if listed co.) otherwise companies act
ii. special resolution (clearly specify)
a) Number of Shares
b) Market Price
c) Considerations
d) Class of directors / employees
iii. Provisions of equity shares shall be applicable to the sweat equity shares
REGISTER OF SWEAT EQUITY SHARES
QUANTUM OF
1. in Form No. SH. 3
2. at the registered office or such other place
SWEAT EQUITY SHARE
as the Board may decide 1. Not more than 15% of the existing
paid up equity share capital in a
3. authenticated by the Company Secretary year or value of Rs. 5 crores,
whichever is higher
PRICING OF SWEAT EQUITY SHARE 2. shall not exceed 25% of paid-up

capital at any time
1. at a price determined by a registered valuer (with
justification) 3. start-up company may issue sweat
2. provide the same report to the Board (with equity shares not exceeding 50%
justification) of its paid up capital up-to 10 yrs
3. copy of gist shall be sent to the shareholders with from the date of its incorporation
the notice of the general meeting
PROCEDURE FOR ISSUE OF SWEAT EQUITY SHARE
1. board meeting to consider the proposal of issue of sweat equity shares
2. Issue notices (Which contains):
• reasons • terms and conditions • ceiling on managerial remuneration, if
• date of the Board meeting • period of association any, be breached
• class of shares • names • Diluted Earnings per Share
• total number of shares • price • class of directors or employees
• consideration • accounting standards
3. convene the GM and Pass a SR

4. File SR with MCA in Form No. MGT-14 within 30 days
5. Call a Board meeting and allot sweat equity
6. File Form No. PAS-3 within 30 days of above BR
7. Register of Sweat Equity Shares in Form No. SH-3 (@ Regstd. Office)
8. register shall be authenticated by the Company Secretary
DISCLOSURE IN THE DIRECTORS’
REPORT IN RESPECT OF SWEAT RIGHT SHARES
EQUITY SHARE If company wants to issue of further
Above 3 slides details required to be shares, such shares shall be offered to-
disclosed in Director’s Report 1. To existing equity share holders
(Letter of offer)
 Notice – No. of shares & Time (15 to 30 days)
ACCOUNTING TREATMENT OF  Transferrable
SWEAT EQUITY SHARE ISSUED  After expiry of time, BOD may dispose
Follow specific Accounting Standards 2. To employees under a scheme of

1. If issued for a non-cash consideration ESOP
2. If part of managerial remuneration 3. To any persons, authorised by SR
3. compensation to the employee or the
director
4. acquisition of an asset
VALUE OF RIGHT
Example- A company has decided to increase its existing share capital by making
rights issue to the existing shareholders in the proportion of one new share for every
two old shares held. Calculate the value of the right if the market value of share at
the time of announcement of right issue is Rs. 960. The company has decided to give
one share of Rs. 100 each at a premium of Rs. 380 each.
Market value of 2 shares already held by a shareholder (2 x 960) 1,920
Add: The price required to be paid for acquiring one more share 480
Total price of 3 shares 2,400
Average price of one share = 2,400/3 = 800
Market Value - Average Price = Value of right 960 - 800 = 160
An alternative formula is:

Right shares/Total shares after right issue x (Cum rights price - New issue price)
1/3 x (960 - 480) = 160
REDEMPTION OF PREFERENCE SHARE CAPITAL
Point Description
Max. 20 years Can-not Issue:
period for a. Irredeemable Pref. Sh., or
Out of Fresh Issue
redemption b. redeemable after 20 years
Extended time a. If company engaged in the setting up and Nominal Value
Amount req.
limit of 30 years dealing with of Infrastructural projects (see Out of FR trf. To
CRR
for infrastructure note below)
facilities b. More than 20 years but not exceeding 30
years Premium Payable Out of FR / SP
c. Minimum 10% redemption every year from
the 21st year
Co. prescribed in a. Premium on redemption – out of profit
sec 133 only
UNDERWRITING UNDERWRITING - CONTENTS
1. Underwriting is an arrangement / 1. Contract: is a contract between a Company and
Underwriter, Underwriter agrees to take up the balance, in
agreement between the company, the event of the Shares or Debentures not being subscribed
issuing shares / Debentures to public FULLY
and the underwriter. 2. Benefits: Ensures that the Company’s issue will be fully
subscribed. The risk of the Capital not being subscribed is
2. Underwriter undertakes to purchase borne by the Underwriters.
and pay for the shares / debentures 3. Commission: Underwriting Commission will be payable
not subscribed (applied for) by the only at a rate authorized by the Articles of Association,
not exceeding 2.5% of the Issue Price of Debentures and 5%
public. of Shares. No Commission can be paid in respect of private
3. For this underwriter gets commission placement. These are further subject to SEBI Guidelines in
from the company. this regard.
4. Disclosure in Prospectus: Names of the Underwriters and
the opinion of the Directors that the resources of the
Underwriters are sufficient to discharge their obligations
FULL UNDERWRITING SOLE UNDERWRITING
When the entire issue is underwritten such When the issue is underwritten only by one underwriter,
underwriting is termed ‘full underwriting’. For such underwriting is termed as ‘Sole underwriting’. For
example, X Ltd. decided to make a public issue of example, if an issue of 1,00,000 shares of Rs.10 each of X
Ltd., is underwritten by A, it is a case of sole underwriting.
1,00,000 Equity shares of Rs.10 each which is
In such a case, the distinction between marked and
entirely underwritten by A, B, C and D in the ratio of
unmarked applications is not of such significance.
2:2:1:1.
PARTIAL UNDERWRITING FIRM UNDERWRITING

Meaning: Definite commitment of the underwriter to take
When only a part of issue is underwritten, such up a specified number of securities (even in Over-
underwriting is termed as ‘Partial Underwriting’. For subscription).
example, X Ltd. decided to make a public issue of Treatment: The benefit of firm underwriting may be given
1,00,000 Equity shares of Rs.10 each out of which either.
90,000 shares are underwritten by A, B, C and D in To an individual underwriter on the basis of his individual
the ratio of 2:2:1:1. It means 10,000 shares are firm underwriting, or
To all the underwriters in the ratio of their gross liability.
underwritten by the company itself.
In other words, firm underwriting shares may be treated at
In such a case, the benefit of unmarked applications par with either ‘Marked Applications’ or ‘Unmarked
will first be given to the company. Applications’.
IMP POINTS
UNDERWRITER'S
LIABILITY
WITHOUT FIRM
UNDERWRITING WITH FIRM
UNDERWRITING
[A]
BENEFIT OF FIRM UNDERWRITING BENEFIT OF

FIRM UNDERWRITING NOT INCLUDED IN FIRM
FIRM
UWUWNOT
FIRM UW NOT INCLUDED IN TOTAL
GIVEN TO TOTAL GIVEN TO
APPLICATION RECD.
INDIVIDUAL [D] INDIVIDUAL
UNDERWRITER UNDERWRITER
FIRM UW TREATED AS FIRM UW TREATED AS

UNMARKED MARKED
[B] [C]
ACCOUNTING FOR ISSUE OF SHARES
1. Securities premium account must be shown separately on the liabilities side
of the balance sheet in _____ under the heading_____ 5. A company may allot fully paid shares to promoters or any other party
(a) Share Capital; Shareholders Funds for the services rendered by them, share capital account is credited and
(b) Reserves & Surplus; Shareholders Funds ______ debited
(c) Secured Loan; Reserves & Sur-plus (a) Preliminary expenses account
(d) Unsecured Loan; Profit or Loss (b) Goodwill account
(c) Capital reserve account
2. Which of the following Table of Schedule Ito the Companies Act, 2013 (d) Suspense account
contains the provisions relating to Calls-in-Advance & Calls-in-Arrears?
(a) Table F 6. _______ may be said to be the compulsory termination of membership
(b) Table A by way of penalty for non-payment of allotment and any call money.
(c) Table C (a) Surrender of shares
(d) Table G (b) Forfeiture of shares
(c) Transfer of shares
3. If the number of shares issued for is more than the number of shares (d) Transmission of shares
applied the shares are said to be –
(a) Oversubscribed 7. The subscribed share capital of S Ltd. is ₹ 80,00,000 of ₹ 100 each.
(b) Undersubscribed There were no calls in arrear till the final call was made. The final call
(c) Minimum subscription made was paid on ₹ 77,500 shares. The calls in arrear amounted to ₹
(d) None of above 62,500. The final call per share =?
(a) ₹ 25
4. If authorized by _______ a company may receive from, a shareholder (b) ₹ 7.80
the amount remaining unpaid on shares, even though the amount has not (c) ₹ 20
been called up which is known as calls-in-advance. (d) ₹ 62.50
(a) Memorandum of Association (MOA)
(b) Articles of Association (AOA)
8. N Ltd. has allotted 10,000 shares to the applicants of 14,000 shares on
(c) Prospectus
(d) Securities Exchange Board of India pro rata basis. The amount payable on application is ₹ 2. Ram applied
for 420 shares. The number of shares allotted and amount carried 11. Q Ltd. had allotted 1,00,000 shares to the applicants of 1,40,000 shares
forward for adjustment against allotment - on pro rata basis. The amount payable on application is ₹ 2. Mr. N
(a) 300 shares; 240 applied for 4,200 shares. The number of shares allotted and the amount
(b) 60 shares; 160 carried forward for adjustment against allotment money due from Mr. N
(c) 340 shares; 160 =?
(d) 320 shares; 240 (a) 600 shares; ₹ 1,200
(b) 3,200 shares; ₹ 2,000
9. Following information pertains to X Ltd. (c) 3,400 shares; ₹ 1,600
Called-up share capital = ₹ 5,00,000 (d) 3,000 shares; ₹ 2,400
Calls-in-arrear = ₹ 40,000
Calls-in-advance = ₹ 25,000 12. R Ltd. forfeited 300 equity shares of ₹ 10 fully called-up, held by Mr. X
Proposed dividend = 15% for non-payment of first call of ₹ 2 and final of ₹ 3 each. However, he
The amount of dividend payable is ______ paid application money @ ₹ 2 per share and allotment money @ At the
(a) ₹ 75,000 time of forfeit ₹ 3 per share. forfeiture Share Capital A/c will be credited
(b) ₹ 72,750 by
(c) ₹ 71,250 (a) ₹ 1,500
(d) ₹ 69,000 (b) ₹ 3,000
(c) ₹ 600
10. R Ltd. purchased the business of C Ltd. for ₹ 2,70,000 payable in fully (d) ₹ 900
paid shares. R Ltd. allotted equity shares of ₹ 10 each fully paid in
satisfaction of the claim by C Ltd. Such shares are issued at premium of 13. R Ltd. forfeited 300 equity shares of ₹ 10 fully called-up, held by Mr. X
20%. Number of shares to be issued by R Ltd. to settle the purchase for non-payment of first call of ₹ 2 and final of ₹ 3 each. However, he
consideration = ? paid application money @ ₹ 2 per share and allotment money @ ₹ 3
(a) 22,500 shares per share. These shares were reissued at ! leach. Amount to be transferred
(b) 27,500 shares to Capital Reserve Account = ?
(c) 27,000 shares (a) ₹ 1,500
(d) 30,000 shares (b) ₹ 3,000
(c) ₹ 600
(d) ₹ 900 On reissue amount to be transferred to capital reserve account =?
(a) ₹ 1,200
14. T Ltd. forfeited 500 equity shares of ₹ 10 fully called-up, held by Mr. (b) ₹ 1,600
Ram for non-payment of allotment money of ₹ 5 (including ₹ 2 premium), (c) ₹ 1,050
first call of ₹ 2 and final of ₹ 3 each. However, he paid application money (d) ₹ 750
@ ₹ 2 per share. These shares were reissued at ₹ 9 each. On reissue
amount to be transferred to capital reserve account = ? 17. W Ltd. issued 2,00,000 shares of 100 each at a premium of 20% on
(a) ₹ 1,500 May 1, 2015, payable as follows: On application (including premium) ₹
(b) ₹ 2,500 45
(c) ₹ 500 On allotment ₹ 25
(d) ₹ 1,000 On first & final call ₹ 50
Sunil to whom 10,000 shares were allotted, has paid ₹ 5,00,000 on June
15. W Ltd. forfeited 400 equity shares of ₹ 10 fully called-up, held by Mr. 1, 2015. At the time of remitting the allotment money, he indicated that
P for non-payment of final of ₹ 3 each. However, he paid application the excess money should be adjusted towards the call money. The
money ₹ 2, Allotment 2 and first call 3 per share. These shares were directors of the company made the first and final call on October 31,
reissued at ₹ 13 each. 2015. The company has a policy of paying interest on calls-in-advance
On reissue amount to be transferred to capital reserve account = ? as per Table F of Schedule I to the Companies Act, 2013. The amount of
(a) ₹ 2,800 interest paid to Sunil on Calls-in-Advance will be
(b) ₹ 1,600 (a) ₹ 25,000
(c) ₹ 1,200 (b) ₹ 12,500
(d) ₹ 400 (c) ₹ 20,833.33
(d) ₹ 18,750
16. X Ltd. Forfeited 200 equity shares of ₹ 10 each, 8 called-up for non-
payment of first call money @ ₹ 2 each. Application money @ ₹2 per 18. Following data is available from the records of NS Ltd.
share and allotment money @ ₹ 4 per share already been received by Issued capital - 2,00,000
the company. Out of these 150 shares were reissued at 7 per share as Call in arrear - 10,000
showing 8 paid up. P&L credit balance (1.4.2018) - 67,000
Profit for the year - 1,90,610 (a) ₹ 1,06,000
The company wants to create debenture redemption reserve and (b) ₹1,06,810
transfer ₹ 50,000 every year. The company declared 10% dividend. (c) ₹1,68,100
The balance of surplus after effecting the above transaction = ? (d) ₹ 1,88,610
Answers
1 b 2 a 3 b 4 b 5 b 6 b 7 a 8 a 9 d 10 a
11 d 12 b 13 c 14 c 15 a 16 d 17 b 18 d
ISSUE OF RIGHT & BONUS SHARES

1. Match the following: (c) Ordinary Resolution
List-I List-II (d) Board Resolution
A. Bonus issue 1. Bonus shares
B. CRR 2. Can be re-announced 3. The notice relating to offer for right issue shall be to through registered
C. Right issue 3. Section 61 post or speed post or through electronic mode to all the existing
D. Not taxable 4. Does not affect income market price shareholders at least ______ before the opening of the issue.
(a) 3 days
5. Section 69 (b) 5 days
Select the correct answer from the options given below - (c) 7 days
(A) (B) (C) (D) (d) 10 days
(a) 4 5 2 3
(b) 5 4 1 2 4. Which of the following statement is true if company issues bonus shares?
(c) 4 5 2 1 (a) Bonus share is an income.
(d) 5 4 2 1 (b) Total market value comes down after bonus issue.
(c) Paid-up share capital increases with the issue of bonus shares.
2. Right shares can be offered by the companies to persons other than (d) Fund flow is affected adversely due to bonus issue.
existing shareholders or employees by passing a:
(a) Special Resolution 5. which of the following statement is false-?
(b) Extra-ordinary Resolution (a) The bonus shares shall not be issued in lieu of dividend.
(b) The company which has once. announced the decision of its Board (c) ₹96
recommending a bonus Issue Can withdraw the same. (d) ₹82
(c) In case of bonus issue there is no cash flow.
(d) Issue of bonus shares does not affect the market value of the company. 8. Following are the extracts from the draft Balance Sheet of OMG Ltd.:
Equity shares Capital (₹10 each) - 8,00,000
Securities premium - 1,00,000
6. Following was the Balance Sheet of BCC Ltd. as on 31st December, 2019: General reserve - 2,50,000
Equity Shares of ₹10 each ₹28,00,000 Profit & loss account -1,50,000
Securities Premium ₹22,80,000 A resolution was passed declaring 3 bonus shares for 5 shares held. Use
General Reserve ₹ 1,40,000 minimum securities premium balance. To issue bonus shares Securities
Profit & Loss Account ₹22,40,000 Premium A/c will be debited by –
Sundry Creditors ₹ 21,80,000 (a) ₹1,50,000
Company issued 3 bonus shares for every 4 fully paid-up shares. (b) ₹90,000
Securities premium account will be utilized first and then General Reserve. (c) ₹1,20,000
To issue bonus shares Profit & Loss A/c will be debited by – (d) ₹80,000
(a) ₹2,40,000
(b) ₹1,80,000 9. A Ltd. has 20,000 Equity Shares of ₹10 each. Balance of Profit & Loss
(c) ₹2,00,000 Account is ₹1,40,000. It has issued 6% Debentures in the past of
(d) ₹2,20,000 ₹1,20,000. At the annual general meeting it was resolved that
(i) To pay a dividend of 10% in cash. Corporate dividend tax rate is
7. A company has decided to increase its existing share capital by making 17%.
rights issue to the existing shareholders in the proportion of 1 new share (ii) To issue 1 bonus share for every 4 shares held after 1 month of right
for every 2 old shares held. You are required to calculate the value of issue.
the right if the market value of share at the time of announcement of right (iii) To give existing shareholder right to purchase one ₹10 share for
issue is 2576. The company has decided to give one share of ₹100 each every 4 shares prior to bonus issue.
at a premium of ₹188 each. (iv) To repay debentures at a premium of 5%.
(a) ₹348 Balance of Profit & Loss A/c after giving effect to above transactions will
(b) ₹174 be –
(a) ₹48,100 (c) ₹52,000
(b) ₹54,100 (d) ₹65,100
Answers
1 c 2 a 3 a 4 c 5 b 6 b 7 c 8 d 9 a
REDEMPTION OF PREFERENCE SHARES

1. Capital Redemption Reserve account may be applied to issue – (c) Cumulative, non-participating and non-convertible
(a) Right shares (d) Non-cumulative, participating and non-convertible
(b) Bonus debentures
(c) Bonus to employees of the company 5. Which of the following can be utilized in redemption of preference share
(d) Bonus shares. capital account?
1. Profits available for dividend
2. The balance in capital redemption reserve is available for – 2. Capital Reserve
(a) Issue of fully paid-up bonus shares 3. Dividend Equalization Fund
(b) Redemption of preference shares 4. Development Rebate Reserve
(c) Redemption of debentures 5. Profit Prior to Incorporation
(d) All of the above Select the correct answer from the options given below –
(a) 1, 3 and 5 only
3. A preference share is one which enjoy a: (b) 2 and 4 only
(a) Preferential right regarding payment of dividend (c) 1 and 3 only
(b) Preferential right regarding allotment of shares (d) 1, 2, 3 and 5 only
(c) Preferential right regarding payment of dividend and return of
capital 6. Statement I
(d) Preferential right regarding re-turn of capital The main purpose to create CRR is to keep the capital structure of the
company variable.
4. Unless otherwise stated, a preference share is always deemed to be – Statement II
(a) Cumulative, participating and non-convertible Another purpose to create CRR is to protect the interest of creditors, since
(b) Non-cumulative, non-participating and non-convertible CRR cannot be utilized for payment of dividend.
Select the correct answer from the options given below – Profit & Loss A/c
(a) Statement I is true but Statement II is false To Capital Redemption Reserve A/c
(b) Both Statement I and Statement II are false (d) Preference Shareholders A/c Dr.
(c) Statement I is false but Statement II is true To General Reserve A/c
(d) Both Statement I and Statement II are true To Profit & Loss A/c
7. Preference shares are entitled to
10. Which of the following cannot be used for the purpose of creation of
(a) Variable rate of dividend.
capital redemption reserve account?
(b) Fixed rate of dividend.
(a) Profit & Loss A/c (credit balance)
(c) Both (A) and (B)
(b) General Reserve A/c
(d) Neither (A) nor (B)
(c) Dividend Equalization Reserve A/c
(d) Unclaimed Dividends A/c
8. Redeemable Preference shares Statement It be redeemed out of_____
(a) The sale proceeds of Investor
11. Which of the following statements is correct?
(b) The proceeds of a fresh issue of shares
(a) Preference shares and debentures have priority right for a reward
(c) Share premium
over ordinary shares.
(d) The proceeds of issue of debentures
(b) Debentures will not receive interest in a year when the company
makes an operating loss.
9. A company used balance of 'General Reserve' and 'P & L A/c' for (c) Preference shares will get dividend only when ordinary shares to
redemption of preference share capital amount. Which of the following is receive them.
correct journal entry for this transaction? (d) Ordinary shares could be paid dividend even when a company. has
(a) Capital Redemption Reserve A/c Dr. negative retained earnings.
To General Reserve A/c
To Profit & Loss A/c 12. For which one or more of the following reasons could a balance the share
(b) General Reserve A/c Dr. premium be applied?
Profit & Loss A/c A. To issue bonus shares.
To Preference Shareholders A/c B. For distribution to shareholder as dividend.
(c) General Reserve A/c Dr. C. To write down the value of sets, particularly when they impaired.
D. To write off expenses of commission on issuing the same shares 15. During the year 2005-2006, T Ltd. issued 20,000, 1296 Preference
Select the correct answer from options given below – shares of ₹ 10 each at a premium of 5%, which are redeemable after 4
(a) (C) & (D) years at par. During the year 2010-2011, as the company did not have
(b) (A) & (D) sufficient cash resources to redeem the preference shares, it issued
(c) (B) & (C) 10,000,14% debentures of ₹ 10 each at a premium of 10%. At the time
(d) (A) & (B) of redemption of 12% preference shares, the amount to be transferred
to capital redemption reserve = ?
13. S Ltd. had 9,000 8% preference shares of ₹100 each, fully paid up. The (a) ₹90,000
Company decided to redeem these preference shares at par by the issue (b) ₹1,00,000
of sufficient number of equity shares. How much equity shares are (c) ₹2,00,000
required to be issued if new equity shares are to be issued at ₹12 for a (d) ₹1,10,000
premium including ₹2.
(a) 90,000 equity shares 16. Preference shares amounting to ₹2,00,000 are redeemed at a premium
(b) 1,00,000 equity shares of 5%, by issue of equity shares amounting to ₹1,00,000 at a premium
(c) 75,000 equity shares of 10%. The amount to be transferred to capital redemption reserve = ?
(d) 93,333 equity shares (a) ₹1,05,000
(b) ₹1,00,000
14. S Ltd. issued 2,000, 10% Preference shares of ₹ 100 each at par, which (c) ₹2,00,000
are redeemable at a premium of 10%. For the purpose of redemption, (d) ₹1,11,000
the company issued 1,500 Equity Shares of ₹100 each at a premium of
20% per share. At the time of redemption of Preference Shares, the
17. Ajay Ltd. decided to redeem 10,000 Preference shares of ₹10 each at
amount to be transferred by the company to the Capital Redemption
Reserve Account = ? 10% premium. Balance in profit & loss account is ₹60,000 and in
(a) ₹50,000 Securities Premium A/c is ₹1000. You are required to calculate the
minimum number of equities shares to be issued for the purpose of
(b) ₹40,000
redemption if new equity shares are to be issued at 20% premium having
(c) ₹2,00,000
face value of ₹10 each.
(d) ₹2,20,000 (a) 4,000 equity shares
(b) 5,000 equity shares
(c) 3,333 equity shares (a) ₹3,80,000
(d) 6,000 equity shares (b) ₹5,00,000
(c) ₹4,20,000
18. Preference shares of ₹9,00,000 are redeemable by issuing shares of (d) ₹6,00,000
₹100 each 3,000 equity shares of ₹100 each at ₹140. The amount to be
transferred to Capital Redemption Reserve –
Answers
1 d 2 a 3 c 4 c 5 c 6 c 7 b 8 a 9 c 10 d
11 a 12 b 13 a 14 a 15 c 16 b 17 a 18 d
BAYBACK OF SHARES
1. Provisions of the Section 68 relating to buy-back of shares are applicable To Equity Share Capital A/c
to – (b) Equity Shareholders A/c Dr.
(a) Private companies To Equity Share Capital A/c
(b) Public companies To Reserves/Securities Premium A/c
(c) Listed companies
(c) Equity Share Capital A/c Dr.
Reserves/Securities Premium A/c
To Equity Shareholders A/c
2. No company shall purchase its own shares or other specified securities,
unless buy-back is authorized by its (d) Equity Shareholders A/c Dr.
(a) Memorandum of Association To Bank A/c
(b) Registrar of Companies
(c) Shareholders agreement 4. For buy-back up to______of the company Board resolution is sufficient.
(d) Article of Association (a) 1096 of paid-up capital
(b) 10% of free reserves
3. Which of the following is correct journal entry for the 'Amount due on buy (c) 1096 of paid-up capital or free reserves
back of shares'? (d) 10% of paid-up capital and free reserves
(a) Equity Shareholders A/c Dr.
5. The buy-back of the shares or other specified securities listed on any 8. Where a company proposes to buy-back its own shares or other specified
recognized stock exchange is in accordance with the - securities, it shall, before making such buy-back, file with the ROC and the
(a) SEBI (Buy-Back of Securities) Regulations, 2018 SEBI, a declaration of solvency signed by –
(b) SEBI (Buy-Back of Securities) Regulations, 2014 (a) at least 2 directors of the company, one of whom shall be the
(c) SEBI (Buy Back of Securities) Regulations, 1992 managing director.
(d) SEBI (Buy Back of Securities' Regulations, 1994 (b) at least 2 directors, managing director and Chief Financial Officer, if
any.
6. The notice of the meeting at which the special resolution is proposed to be (c) at least 2 directors of the company and Company Secretary, if any.
passed relating to buy-back of shares shall be accompanied by an (d) at least 3 directors of the company one of whom shall be the
explanatory statement stating – managing director.
(a) Full and complete disclosure of all material facts
(b) Analysis of debt equity 9. A company used balance of 'General Reserve' and P & L A/c' for buy-
(c) Gross profit ratio before buy-back back of equity shares. Which of the following is correct journal entry for
(d) Chairman's view on buy-back this transaction?
(a) Capital Redemption Reserve A/c Dr.
7. Which of the following method of buy back is allowed under the To General Reserve A/c
Companies Act, 2013? To Profit & Loss A/c
(i) Buy-back from the existing share-holders or security holders on a (b) General Reserve A/c Dr.
proportionate basis. Profit & Loss A/c Dr.
(ii) Buy-back from the promoters of the company only on selective basis.
to Equity Shareholders A/c
(iii) Buy-back from the open market.
Select the correct answer from the options given below. (c) General Reserve A/c
(a) (i) only Profit & Loss A/c Dr.
(b) (i) and (ii) only To Capital Redemption Reserve A/c
(c) (i) and (iii) only (d) Equity Shareholders A/c Dr.
(d) (i), (ii) and (iii) To General Reserve A/c
To Profit & Loss A/c
10. Declaration of solvency in relation to buy back of shares has to be filed (b) 90,000 shares
in – (c) 1,00,000 shares
(a) Form SH-6 (d) 1,20,000 shares
(b) Form SH-9
(c) Form SH-4 13. During the year 2018-2019, T Ltd. buy-back 20,000 equity shares of
(d) Form SH-8 ₹100 each at a premium of 5%. During the year 2018-2019, as the
company did not have sufficient cash resources to buy back equity shares,
11. Paid-up equity shares capital of ABC Ltd. Is ₹50,00,000 having face it issued 1,00,000, 12% Preference shares of ₹ 10 each at a premium of
value of ₹10 each fully paid-up. Other details: 15%. The company has sufficient balance in general reserve. At the time
General Reserve = ₹ 15,00,000 of buy-back equity shares, the amount to be transferred to capital
Capital Redemption Reserve = ₹4,00,00 redemption reserve = ?
Profit & Loss Account = ₹ 1,00,000 (a) ₹ 10,00,000
Statutory reserve = ₹ 6,40,000 (b) ₹9,50,000
(c) ₹12,00,000
Securities Premium = ₹1,00,000
(d) ₹15,00,000
The Board of Directors passed resolution in Board meeting to buy-back
maximum number of shares as allowed by law Maximum No. of shares
that can be brought back = ? 14. Following are the extract of balance sheet of Light Co. Ltd.
(a) 55,000 shares Equity Shares of ₹10 each - 10,00,000
(b) 67,000 shares Securities Premium - 2,40,000
(c) 1,25,000 shares Reserves - 7,50,000
(d) 78,000 shares Profit & Loss Account - 2,80,000
Bank - 9,10,000
12. N Ltd. had 90,000 equity shares of ₹100 each, fully paid up. The Non-Trading Investments - 4,20,000
company decided to buy-back 10% shares at par by the issue of sufficient Company bought-back 15,000 shares at ₹40 each. The transaction in
number of preference shares. N Ltd does not have any reserves. How respect of buy-back was financed by sale of 2/3rd of non-trade
much preference shares are required to be issued if new preference investment for ₹5,90,000.
shares are to be issued at ₹10 each? Amount to be transferred to capital redemption reserve =?
(a) 9,00,0 shares (a) ₹ 6,00,000
(b) ₹ 1,00,000 (c) ₹ 14,50,000
(c) ₹ 4,50,000 (d) ₹ 18,00,000
(d) ₹ 1,50,000
16. Following information is available from the audited balance sheet of TH
15. Following are the extract of balance, sheet of Tube Ltd. Ltd.:
Equity Shares of ₹10 each - 20,00,000 (₹ in lakhs)
Securities Premium - 4,80,000 Equity Share Capital - 30,000
Reserves - 15,00,000 (3,000 lakh Shares of 10 each)
Profit & Loss Account - 5,60,000 Securities Premium A/c - 3,000
Bank - 18,20,000 General Reserve - 10,000
Non-Trading Investments - 8,40,000 Secured Loans - 40,000
Company bought back 30,000 shares at ₹40 each. The transaction in Unsecured Loans - 22,000
respect of buyback was financed by sale of 2/3rd of non-trade Compute the maximum limit up to which buy-back is permitted in the
investment for ₹11,80,000. financial year 2018-2019.
Bank balance after buy-back will be – (a) 800 lakh shares
(a) ₹12,00,000 (b) 600 lakh shares
(b) ₹16,00,000 (c) 500 lath shares
(d) 400 lakh shares
Answers
1 d 2 d 3 c 4 d 5 a 6 a 7 c 8 a 9 c 10 b
11 b 12 b 13 b 14 d 15 d 16 b
UNDERWRITING OF SHARES & DEBENTURES

1. In case of issue of debentures, underwriting commission shall not exceed (d) 3.5% of the face value
(a) 2.5% of the nominal value
(b) 2.5% of the issue price 2. In case of issue of debentures, the rate of underwriting commission paid
(c) 2.5% of the market price or agreed to be paid shall not exceed:
(a) 2.5% of the issue price (c) Both (A) and (B)
(b) A rate authorized by the articles (d) (A) only not (B)
(c) 2.5% of the issue price or a rate authorized by the articles, which-
ever is more. 6. LPG Ltd. issued 32,000 shares which were underwritten as follows:
(d) 2.5% of the issue price or a rate authorized by the articles, which- A: 19,200 shares, B: 8,000 shares & C: 4,800 shares.
ever is less. The underwriters made applications for firm underwriting as –
A: 2,560 shares, B: 960 shares & C: 3,200 shares.
3. A definite commitment by the underwriter to take up a specified number Details of marked application are –
of shares or debentures of a company irrespective of the number shares A: 3,200 shares, B: 6,400 shares & C: 1,600 shares.
or debentures subscribed for by the public is known as – Unmarked applications are for 11,520 shares. Find out the net liability of
(a) Definite underwriting individual underwriters.
(b) Pakka underwriting (a) 10,624; 960; 4,416 respectively
(c) Marked underwriting (b) 10,642; 906; 4,461 respectively
(d) Firm underwriting . (c) 10,264; 940; 4,146 respectively
(d) 10,462; 940; 4,641 respectively
4. Unmarked application has to be distributed to underwriters in the ratio of
- 7. Cybertech Ltd. issued 1,00,000 shares for public subscription and these
(a) Gross Liability Ratio were underwritten by A, B and C in the ratio of 25%, 30% and 45%
(b) Last Agreed Ratio respectively. Applications were received for 80,000 shares and of these
(c) Net Liability Ratio applications for 16,000 shares had the stamp of A, those for 20,000
(d) Equal ratio shares had the stamp of B and those of 24,000 shares had the stamp of
C. The remaining applications did not bear any stamp. Net liability of
5. An underwriter – underwriters in shares is:
(a) Guarantees that if the public do not take up all shares the A B C
underwriters will purchase the remaining shares. (a) 4,000 12,000 4,000
(b) Agrees to receive an underwriting commission at prescribed (b) 6,000 6,000 18,000
percentage allowed as per law. (c) 4,000 4,000 12,000
(d) 12,000 4,000 4,000 (a) ₹ 75,000
(b) ₹ 87,500
8. LG Ltd. issued 10,000 shares of ₹ 100 at a premium of ₹ 15 each. 90% (c) ₹ 64,750
of the issue was underwritten by M/s. X & Co. at a commission of 1% on (d) ₹ 52,500
the nominal value. Applications were received for 8,000 shares &
allotment was fully made. All money was received in one instalment. Net 10. Biggie Ltd. made an issue of 10,000, 10% mortgage debentures of ₹
amount to be received from underwriter at time of allotment of shares is 100 each at ₹ 96. The whole of the issue was underwritten by Smart Bulls.
(a) ₹ 2,07,000 8,500 debentures were applied for and allotted to the public. The
(b) ₹ 1,98,000 underwriters discharged their liability and were paid commission at the
(c) ₹ 2,16,000 rate of 2% on the nominal value of the debentures. Which of the following
(d) ₹ 1,42,000 statement is correct?
(a) Net amount to receivable from underwriter is ₹ 1,22,000
9. HM Ltd. entered into an underwriting agreement with B Ltd. for commission (b) Net amount payable to under-writer is ₹ 12,000
of 2.5% for 60% of the issue of ₹ 35,00,000, 15% Debentures with a (c) Net amount to receivable from underwriter is ₹ 1,24,000
firm underwriting of ₹ 3,50,000. Marked application were for ₹ (d) Net amount payable to under-writer is ₹ 14,000
24,50,000 debentures. Calculate the commission payable to underwriter.
Answers
1 b 2 d 3 d 4 a 5 c 6 a 7 c 8 b 9 d 10 c
Topic 4 Debentures
• is an acknowledgement of a debt taken by the company
• Issued under the common seal of the company and
• a debenture certificate contains an undertaking to pay back the principal sum
DEBENTURE? • on or after a specified maturity period and
• to pay the interest on the debt at a fixed rate whichever is decided at regular intervals
• generally half yearly until the debt is repaid fully
WHY ISSUE OF DEBENTURE??

❑Equity sources of financing are not always sufficient to meet needs of co.
❑hence, debt financing, through:
▪ Financial institutions,
ISSUE OF DEBENTURES
▪ commercial banks or
at par, or
▪ by issuing debt instruments
❑Either through at a premium, or
 private placement or
 by public subscription at a discount without any legal
restriction
❑Having tax benefits, helps in reducing the cost of capital (appropriate
capital structure)
❑THUS, Debentures are part of loan capital and interest is to pay (Charge)
KINDS OF DEBENTURES
KINDS OF DEBENTURES
• Secured or Mortgage Debenture Debentures Shares
• Unsecured or Naked Debenture
• Bearer Debenture loan capital Ownership capital
• Registered Debenture
• Convertible Debenture Creditor Owner
• Non-Convertible Debenture
• Redeemable Debenture Interest Dividend
• Irredeemable Debenture
• First Mortgage Debenture
Charge appropriation
• Second Mortgage Debenture
CONDITIONS FOR ISSUE OF DEBENTURES No Voting Voting

Special Resolution Can issue @
Discount No Discount
No Voting Rights
Debenture Redemption Reserve Fixed Interest Dividend rate –
vary
Debenture Trustee (>than 500)
according to prescribed terms and conditions Convertible Non-convertible
ISSUE OF DEBENTURES AS
A COLLATERAL SECURITY
For acquisition of Sundry Assets A/c Dr
‘Collateral Security’-additional security given for a loan
assets To Vendor A/c
Issue of Debentures for other than
it may issue its own debentures to the lender as collateral

Vendor A/c Dr. security
On allotment of
debentures (at par) To Debenture A/c
Cash
Lender has right over debentures until and unless the

loan is repaid
On allotment of Vendor A/c Dr.
debentures (at To Debenture A/c
premium) To Sec. Prem a/c Holder of such debentures is entitled to interest only on the
amount of loan
On allotment of Vendor A/c Dr.

Entry- Debenture Suspense Dr. xxx
debentures (at a Disc. On deb a/c Dr
discount) To % Debenture A/c xxx
To Debenture A/c
WRITE OFF LOSS / DISCOUNT INTEREST ACCRUED AND DUE
ON ISSUE OF DEBENTURES: (OUTSTANDING INTEREST)
Suppose a company pays interest on 30th September and 31st
Can be treated as Capital loss
March on Rs. 5,00,000, 14% Debentures. The company will
pay Rs. 35,000 in every six months. The debenture-holders
• Written off against capital profits cannot demand interest before these specified due dates.
Can be treated as deferred revenue expenditure Assuming that the accounting period ends on 31st March and
the interest from 1st October to 31st March remains unpaid.
• Written off against revenue profit
Is to write it off against revenue over the period
of life of the debentures on an equitable basis (In INTEREST ACCRUED BUT NOT DUE
the raito, amount of debentures o/s) (ACCRUED INTEREST)
if the debenture interest is paid on 30th June and 31st December
and the company closes its books on 31st March. After the
TREATMENT OF DISCOUNT/LOSS payment of interest on 31st December, the next payment will be
made on 30th June in next accounting period. But for proper
ON THE ISSUE OF DEBENTURES accounting, interest from 1st January to 31st March must be
accounted for. It is called interest accrued but not due or simply
Is to write it off against revenue over the accrued interest and will be recorded as:
period of life of the debentures on an
equitable basis (In the raito, amount of
debentures o/s)
REDEMPTION OF DEBENTURES
Methods of
Redemption
By Means of By Purchase of
In Lump Sum Annual By Conversion in its own
Instalments or by to Shares Debebntures in
Draw of Lots the Open Market
As Investment in As Investment in
own Debentures own Debentures
DEBENTURES REDEMPTION INSURANCE POLICY METHOD
RESERVE (DRR) - SECTION 71(4) annual sum is appropriated out of surplus and credited to
Debenture Redemption Fund A/c in the same manner as it is
❑is created out of divisible profits done in Sinking Fund method
❑CO. required to create DRR shall on or before the 30th day However, the appropriate profit is not invested in marketable
of April in each year invest or deposit, as the case may be, a securities, instead an insurance policy is taken for the
sum which shall not be less than 15% of the amount of its required amount and an amount equal to profit set aside is
debentures maturing during the year ending on 31st day of paid as premium to insurance company. At the end of policy
March of next year in: period, the insurance company returns the total accumulated
❑deposits with any scheduled banks free of any charge amount which is sufficient to pay the debenture holders
❑Securities of the Central / State Government
❑Securities of Indian Trusts Act, 1882 Eg. Go ltd. Issued 500, 12% debentures of rs. 100
❑shall be used only for the redemption of the debentures each at par on 1st april, 2015, repayable at par
after 3 years on 31st march, 2018. The directors
❑DRR shall create in respect of non-convertible portion decided to take out an insurance policy to provide
❑No DRR is required for AIFIs & Banking companiesa necessary cash for the redemption of the debentures.
The annual premium for the policy payable on 1st
❑For other companies (Including NBFC (not reqd. if pvt. april every year was rs. 15,705. You are required to
Placement for NBFC)) 10% of the value of outstanding show the journal entries in the books of the company.
debentures issued
DEBENTURE REDEMPTION FUND/SINKING FUND METHOD
REDEMPTION BY CONVERSION At the end of the first year
Bima Ltd. had issued 11% 5,00,000 debentures of Rs. 100 each
redeemable on 31st March 2019 at a premium of 5%. The a. Annual P & L Appropriation Account
Appropriation to To Debentures Sinking Fund Account
company offered three options to debenture holders as under:
Sinking Fund (Annual Installment is derived from Sinking Fund
(i) 13% Preference shares of Rs.10 each at Rs.10.50 Table)
(ii) 14% debentures of Rs. 100 at par. a. Investment of Debentures Sinking Fund Investment Account
(iii) Redemption in cash. annual appropriation To Bank A/c
The options were accepted as under : in outside securities (Amt. of Investment = Annual Installment only)
Option (i) by holders of 1,00,000 debentures.
Option (ii) by holders of 1,00,000 debentures. At the end of the second and subsequent years
Option (iii) by holders of 3,00,000 debentures. 1.Interest earned Bank Account Dr.
The company carried out the redemption. Pass the necessary on Sinking Fund To Debentures Sinking Fund Account
journal entries Investments (Income relates to the Fund, hence credited to the
Fund itself)
2.Annual P & L Appropriation Account Dr.
PURCHASE OF DEBENTURES IN THE OPEN MARKET Appropriation to To Debentures Sinking Fund A/c
On 1.1.2014, HM Ltd. Had outstanding in its books 1,000 12% Sinking Fund (Amt. of annual Installment is derived from Sinking Fund
Debentures of Rs.100 each. The interest is payable on 30th June and Table)
31st December. In accordance with the power in the deed, the 3.Investment of Debentures Sinking Fund Investment A/c Dr.
directors acquired in the open market Debentures for immediate annual To Bank Account
cancellation as follows: appropriation in (Amt. of Investment = Annual Installment + Interest
outside securities earned)
2014 1st March Rs.10,000 @ Rs.98.00 (cum interest) Note: If however, if the Sinking Fund is non-cumulative,
2014 1st August Rs.20,000 @ Rs.100.25 (cum interest) the amount of investment every year = Annual
Installment only. In this case, the interest earned every
2014 1st Nov Rs.5,000 @ Rs.98.50 (ex – interest)
year will not be re – invested.
At the time of redemption
a. Interest earned on Sinking Fund Bank Account
Investments To Debentures Sinking Fund Account
(Income relates to the Fund, hence credited to the Fund itself)
a. Annual Appropriation to P & L Appropriation Account
Sinking Fund To Debentures Sinking Fund A/c
(Amt. of annual Installment is derived from Sinking Fund Table)
a. Sale of Investments for Bank Account
providing cash for redemption Loss on Sale of Investments (if sold at a loss)
To Debentures Sinking Fund Investment
To Profit on Sale of Investments (if sold at a profit)
a. Transfer of loss / Profit on sale Debentures Sinking Fund A/c
of investments to Sinking Fund To Loss on Sale of Investments A/c (in case of loss)
OR
Profit on sale of investments A/c
To Debentures Sinking Fund A/c (in case of Profit)
a. Redemption of Debentures Debenture holders A/c (face value + Premium if any)
To Bank Account
a. Transfer to General Reserve Debenture Sinking Fund A/c
To General Reserve Account
(Amount equal to Face value of Debentures redeemed is transferred to General Reserve,
any surplus in Sinking Fund Account is transferred to Capital Reserve, any shortfall is
provided from the P & L Account)
1. Premium on redemption of debentures account appearing in the balance (b) Debit Debenture suspense A/c and credit Cash A/c
sheet is_____ (c) Debit Debenture suspense A/c and credit Debentures A/c
(a) A real account (d) Debit cash A/c and credit the loan A/c for which security is given
(b) A nominal account - income
(c) A personal account 6. Discount on issue of debentures is a
(d) A nominal account - expenditure (a) Revenue loss to be charged in the year of issue.
(b) Capital loss to be written off from capital reserve.
2. Which of the following statements is FALSE? (c) Capital loss to be written off over the tenure of the debentures.
(a) At maturity, debenture holders get back their money as per the terms (d) Capital loss to be shown as good-will.
and conditions of redemption.
(b) Debentures can be forfeited for non-payment of call money. 7. Non-convertible debentures refer to
(c) In company's balance sheet, debentures are shown under secured (a) Owner's capital
loans. (b) (B) Loan capital
(d) Interest on debentures is charged against profits. (c) (C) Short term fund
(d) (D) Deferred investment
3. Debenture interest –
(a) is payable only in case of profits. 8. "Interest accrued & not due on debentures" is shown –
(b) accumulates in case of losses or inadequate profits. (a) Under debentures
(c) is payable after the payment of preference dividend but before the (b) As current liabilities
payment of equity dividend. (c) As provisions
(d) is payable before the payment of any dividend on shares. (d) As a reduction of bank balance
4. Which of the following is NOT a characteristic of Bearer Debentures? 9. Profit on cancellation of debentures is transferred to –
(a) They are treated as negotiable instruments. (a) Capital reserve
(b) Their transfer requires a deed of transfer. (b) Capital redemption reserve
(c) They are transferable by mere delivery. (c) Profit & loss account
(d) The interest on it is paid to the (d) General reserve
5. When debentures arc issued as collateral security, the final entry for 10. Statement I:
recording the collateral debentures in the books is: Debentures can be converted into shares as per the terms of issue of
(a) Credit Debentures A/c and debit Cash A/c debentures.
Statement II: (d) is shown on assets side of the balance sheet under the head Non-
Shares cannot be converted into debentures in any circumstances. Current Assets'.
(a) Statement I is true while Statement II is false. 14. Another name of Debenture Redemption Fund Method is –
(b) Statement II is true while Statement I is false. (a) Sum of year digit method
(c) Statement I and Statement II both are false. (b) Depreciation fund method
(d) Statement I and Statement ll both are true. (c) Double decline method
11. Sound business policy demands that discount on issue of debenture should
be written off – 15. Loss on sale of Debenture Redemption Fund Investment account must be
(a) As quickly as possible set-off against –
(b) In 5 years (a) Profit & loss account
(c) In 10 years (b) General reserve account
(d) As agreed at the time of issue (c) Sinking fund account
12. If the company acquires some assets from the vendor and instead of
paving the vendor in cash, the company may allot debentures in payment 16. If debentures are issued at discount but redeemable at premium then –
of purchase consideration. In such case if the face value of debentures (a) Loss on Issue of Debentures A/c will be credited
issued is less than value of assets acquired then difference will be – (b) Debentures A/c will be debited
(a) Credited to capital reserve account (c) Loss on Issue of Debentures A/c will be debited
(b) Debited goodwill account (d) Premium on Redemption of Debenture A/c will be debited
(c) Credited to premium on debentures account
17. HM Ltd. issued 10,000, 12% Debentures of 100 each at ₹94 on 1st
(d) Credited to profit and loss account
January, 2010. Under the terms of issue, the debentures are redeemable
13. Debentures Suspense Account – at the end of 8 years from the date of the issue. Calculate the amount of
(a) is treated as deferred asset ac-count. discount to be written-off in each of the 8 years.
(b) is shown on assets side of the balance sheet under the head `Current (a) ₹8,000
Assets'. (b) ₹7,500
(c) is capital loss and must be written off over the tenure of the (c) ₹6,000
debentures. (d) ₹5,000
12% Debentures of Z 100 each at 10% discount. No. of debentures to
18. HM Ltd. issued 10,000, 12% Debentures of 100 each at ₹94 on 1st be issued -r-?
January, 2010 Under the term of issue, 1/5th of the debentures are (a) 3,000 debentures
annually redeemable by drawings, the first redemption occurring on 31st (b) 4,000 debentures
December, 2010. Calculate the amount of discount to be written off in (c) 4,444 debentures
2010 & 2011. (d) 30,000 debentures
(a) ₹20,000 & ₹16,000
(b) ₹16,000 & ₹12,000 21. T Ltd. has issued 14% Debentures of ₹20,00,000 at a discount of 10%
(c) ₹16,000 & ₹12,000 on April 1, 2017 and the company pays interest half-yearly on June 30,
(d) ₹12,000 & ₹8,000 and December 31 every year. On March 31, 2019, the amount shown as
"interest accrued but not due" in the Balance Sheet will be –
19. Moon Ltd. issued 5,000 debentures of ₹100 each at a discount of 10%. (a) ₹ 70,000
The expenses on issue amounted wants to ₹ 20,000. The company redeem (b) ₹ 2,10,000
the debentures at the rate of 1,00,000 each year commencing with the (c) ₹ 1,40,000
end of 5th year. How much discount and expenses should be written off
in each year? (d) ₹ 2,80,000
(a) ₹10,000, ₹10,000, ₹10,000, ₹10,000, ₹10,000, ₹8,000, ₹6,000, 22. On 1st July, 2017 a company issued 2,500, 9% debentures of ₹100 each
₹4,000, ₹2,000 in each year respectively at a discount of 10%. The debentures were redeemable by five annual
(b) ₹10,000, ₹10,000, ₹10,000, ₹10,000, ₹10,000, ₹4,000, ₹6,000, drawings of ₹50,000 on 31st March each year.
₹6,000, ₹8,000 in each year respectively Calculate the amount of discount on debentures to be written off at the
(c) ₹2,000, ₹6,000, ₹8,000, ₹10,000, ₹10,000, ₹10,000, ₹10,000, end of each year on 31st March.
₹10,000, ₹10,000 in each year respectively (a) ₹6,818, ₹ 7,273, ₹ 5,455, ₹3,636, ₹ 1,818 for the year ended
(d) ₹7,000, ₹7,000, ₹7,000, ₹7,000, ₹7,000, ₹7,000, ₹7,000, ₹7,000, 31.3.2018 to 31.3.2022.
₹7,000 in each year respectively (b) ₹ 6,188, ₹ 7,723, ₹ 5,545, ₹3,366, ₹1,188 for the year ended
31.3.2018 to 31.3.2022.
20. HM Ltd. purchased fixed asset of ₹4,00,000 out of ₹1,30,000 paid in (c) ₹ 6,881, ₹7,237, ₹5,455, ₹ 3,663, ₹ 1,881 for the year ended
cash and balance in debentures. The consideration was paid by issue of 31.3.2018 to 31.3.2022.
(d) None of the above is correct
(d) 3,560 Preference shares
23. Sana Ltd. issues 13% Debenture of ₹100 at a premium of 5%,
redeemable at the end of 5 years at a premium of 10%. Which of the 25. Following balances stood in books X Ltd.:
following entry is correct?
(a) Bank A/c Dr. 105 3,50,000, 6% Delhi Govt. Bonds 3,56,300
Loss on Issue of Deb. A/c Dr. 10 4,00,000, 596 Punjab Water Loan 3,20,340
To 12% Debenture A/c 100 3,00,000, 8% Goa Govt. Loan 3,08,550
To Premium on 15 80,000, 7% Gurgaon Gramin Loan 80,210
Redemption A/c Investments were sold as follows:
(b) Bank A/c Dr. 105 6% Delhi Govt. Bond at par
Loss on Issue of Deb. A/c Dr. 10
To 13% Debenture A/c 100 5% Punjab Water Loan at ₹ 91
To Securities Premium A/c 5 8% Goa Govt. Loan at ₹ 109
To Premium on 10 7% Gurgaon Gramin Loan at ₹103
Redemption A/c How much profit will be transferred to debenture redemption fund
(c) Both (A) and (B) entries are correct account on sale of above investments?
(d) None of the above is correct (a) ₹ 63,000
(b) ₹ 58,000
24. On 1.12015 X Ltd. issued 10,000 fifteen years 10% debentures of ₹ 100 (c) ₹ 46,000
each. On 1.4.2020 the company gave notice to the debenture holders of (d) ₹ 43,600
its intention to redeem the debentures on 1.10.2020 either by payment
in cash or by allotment of 11% preference shares of ₹100 each at ₹130
26. Following balances appeared in the books of Bright Ltd.:
per share or 11% second debenture of ₹100 at 96 per debenture.
(A) Sinking fund account ₹50,000
Holders of 4,000 debentures accepted the offer of the preference shares.
How much preference shares will be issued if debentures are to be (B) Sinking fund investment account ₹ 48,000 (10% Govt. securities,
redeemed at 4% premium? nominal value ₹45,000)
(a) 3,077 Preference shares (C) 12%Debenture account ₹1,00,000.
(b) 3,200 Preference shares
(c) 4,160 Preference shares
Company sold ₹30,000 Govt. securities at 110% and redeemed part of (a) 5,90,000
the debentures at a premium of 10%. Closing balance of Sinking Fund (b) 7,90,000
A/c will be – (c) 8,70,000
(a) ₹ 48,000 (d) 8,20,000
(b) ₹ 17,000
(c) ₹ 18,000 28. Following balances appeared in the books of JKJ Ltd.:
(A) Sinking fund account 62,500
(d) ₹ 21,000
(B) Sinking fund investment account 60,000 (10% Govt. securities, nominal
value 56,250)
27. Following balances appeared in the books of R Ltd.:
(C) 12% Debenture account 1,25,000.
12% Debentures - ₹ 8,00,000
Company sold ₹37,500 Govt. securities at 110% and redeemed part of
Sinking fund - ₹ 7,00,000
the debentures at a premium of 10% Closing balance of Sinking Fund A/c
Sinking fund investment - ₹ 7,00,000 will be –
(Represented by 10% ₹ 7,50,000 secured bonds of Government of India) (a) ₹ 60,000
Annual contribution to the sinking fund was 1,20,000 made on 31st March (b) ₹ 21,250
each year. On 31.3.2018, balance at bank was 3,50,000 before receipt
(c) ₹ 22,500
of interest. Company sold the o investments at 90% for redemption of
debenture at a premium 10% on above date. Amount to be transferred (d) ₹ 26,2500
to general reserve after redemption of debentures will be -
Answers
1 c 2 b 3 d 4 b 5 c 6 c 7 b 8 b 9 a 10 d
11 a 12 a 13 d 14 d 15 c 16 c 17 b 18 a 19 a 20 a
21 a 22 a 23 b 24 b 25 b 26 c 27 b 28 c
Topic 5 Related Aspects Of Company Accounts
SEBI REGULATIONS ON ISSUE OF DEBENTURES

1. Credit rating (compulsory) If the issue exceeds Rs. 200 crores, rating must be obtained from two agencies.
2. Put and call options. If FCDs are to be converted before 18 months, they are considered as quasi-equity. If conversion is after
18 months but before 36 months, it is treated as deferred equity. In the case of deferred equity, the conversion will be optional
in the hands of debenture holders. In the case of conversion beyond 36 months, it must be made optional with both put and call
options.
3. Security for debentures - Here, company must obtain certificate from the bankers that the assets are free from
encumbrances or no objection certificate from the bank/financial institution for creating a second charge or pari-passu charge
as per terms of offer of debentures. Normally security must be created within 6 months. If security is not created within 12
months, a penal interest at 2% is payable to debenture holders. If the security is not created, within 18 months, a meeting of the
debenture holders must be called with 21 days’ notice to explain the reasons for the delay in creating the security and the
expected date by which security will be created.
Trustees to debentures will supervise the creation of security. If security is not created, the debentures will be unsecured. As
stated earlier in such a situation, the debentures will be treated as fixed deposits which makes it incumbent to satisfy the
requirements of Sec. 73 & 74.
4. Debenture trustees. If the maturity of debentures is more than 18 months, the company has to appoint debenture trustees
to safeguard the interests of the debenture holders. The trustees should have requisite powers for protecting the interests of
the debenture holders including their rights to nominate a director on the board in consultation with institutional debenture
holders.
The debenture trustees must also ensure the compliance of the following:
1. Lead financial institutions / investment institutions should monitor the progress in respect of debentures raised for project
finance/modernization/ expansion/ diversification/ normal capital expenditure.
2. The lead bank must monitor debentures raised for working capital funds.
3. Obtain a certificate from the company’s auditors.
4. Debenture issued belonging to groups for financing replenishing of funds or acquiring shares in other companies not be permitted.
5. Trustees must supervise implementation of conditions regarding creation of security for debentures & DRR.
Restrictions on Dividends
• In the case of new company, distribution of dividends require approval of trustees & lead institution, if any.
• In the case of existing companies prior permission of the lead institution for declaring dividend exceeding 20% or as per the loan covenants
is necessary, if company does not comply with institutional condition regarding interest and debt coverage ratio.
• Dividends may be distributed out of profits of particular year only after transfer of requisite amount in DRR. If residual profits are
inadequate to distribute reasonable dividends, company may distribute dividend out of general reserve.
• As mentioned already the two modes of provisioning are (1) the sinking fund method, and (2) the insurance policy method.
• It is always prudent for a company to save money to be able to redeeming debentures on the due date. In the absence of such a provision it
becomes difficult for the company to find lumpsum amount to repay the debt.
DIFFERENT METHODS OF REDEMPTION OF DEBENTURES
Conversion: Conversion of debentures means that the debentures are converted into preference shares or equity shares.
For the purpose of conversion debentures are to be classified as FCDs, PCDs, and NCDs. A company cannot issue FCDs having a conversion
period of more than 36 months, unless the conversion is made optional with a put and call option. If conversion takes place 18 months after the
date of allotment but before the 36th months, it is optional for debenture holders to convert them in part or whole. If he does not exercise the
option it will effectively become an NCD. FCDs with conversion period less than 12th months are treated as quasi-equity and at par with the
equity.
Rollover
Rollover means the new debentures in the place of the old ones. Rollover must be with the written consent of the debenture
holders. If he does not given written consent, his claim is settled in cash. Also whenever the debenture liability is rolled over the
company must obtain fresh credit rating. Fresh trust must be executed at the time of rollover. Also fresh security must be
created in respect of rolled over debentures. Subject to the conditions listed rollover can only be done without change in the’
interest rate if the non-convertible portion of PCDs/ NCDs of a listed company exceeds Rs. 50 lakhs.
Redemption from out of Capital
SEBI guidelines require the setting up of a ‘Debenture Redemption Reserve when profits are available and the debentures are
issued for a period beyond 18 months. If the debentures are for a period less than 18 months or profits are not available for
the capital redemption, debentures may be redeemed out of capital. When redemption is carried out of capital only entries
are made for redemption and no entry made to transfer profits to ‘Debenture Redemption Reserve.
Redemption out of Profits
Nowadays it is mandatory to set up a ‘Debenture Redemption Reserve’. Earlier companies could redeem debentures out of
profits without a formal setting up of ‘Debenture Redemption Reserve’. It were the directors who used to decide as to whether
the redemption is from capital or profits.
After carrying out the entire redemption the amount to the credit of debenture redemption reserve will be transferred to
general reserve account.
Conversion or Rollover
In the case of conversion debentures are converted into equity or preference shares. In the case of rollover old debentures or
replaced by the issue of new debentures. The new shares may be issued at par or premium.
Related Aspects of Company
1. Section 68 of the Companies Act, 2013 provides that no buy-back of any 6. Where a company completes a buy-back of its shares or other specified
kind of shares or other specified securities shall be made out of the - securities, it shall not make a further issue of the same kind of shares or other
(A) Securities premium balance as it stood before buyback. securities including allotment of new shares u/s 62(1)(a) [i.e. right issue] or other
(B) Proceeds of an earlier issue of the same kind of shares or same kind specified securities within a period of –
of other specified securities. (A) 6 months (B) 1 year (C) 2 years (D) 10 months
(C) General reserve in excess of 15% balance as per latest audited balance 7. Which of the following is allowed within next 6 months after the buyback of
sheet. share?
(D) Proceeds of issue of specified securities. (A) Bonus issue (B) Conversion of warrants
2. No company shall purchase its own shares or other specified securities, (C) Stock option schemes (D) All of the above
unless buy-back is authorized by its – 8. Which of following is allowed within next 6 months after buyback of share?
(A) Memorandum of Association (B) Registrar of Companies (A) Stock option schemes (
(C) Shareholders agreement (D) Article of Association (B) Sweats equity (
3. For buy-back up to _____ of the company Board resolution is sufficient. (C) Conversion of preference shares or debentures into equity shares
(A) 10% of paid-up capital (D) All of the above
(B) 10% of free reserves 9. As per Section 7 0 of the Companies Act, 2013, the buy-back is not
(C) 10% of paid-up capital or free reserves prohibited, if the various defaults mentioned in that section is remedied and a
(D) 10% of paid-up capital and free reserves period of _____ has lapsed after such default ceased to subsist.
(A) 1 year (B) 3 years (C) 2 years (D) 6 months
4. Buy-back of equity shares in any financial year should not exceed –
(A) 10% of net worth 10. Which of the following is objective of buy back of equity shares?
(B) 25% of the aggregate of paid-up capital & free-reserves of company (1) To improve earnings per share (EPS)
(C) 25% of the paid-up equity capital (2) To increase the sales of the company
(D) 25% of the aggregate of paid-up equity capital and preference capital (3) To prevent unwelcome takeover bids.
5. As per Section 68 of the Companies Act, 2013, post buy back debt equity (4) To improve liquidity ratio. Select the correct answer from the options given
ratio should not exceed below.
(A) 1 (B) 1.5 (C) 2 (D) 3 (A) (2) & (3) ( B) (1) & (3)
(C) (1), (3) & (4) (D) (1), (2), (3) & (4)
CA CS Harish
CA CS Harish A. Mathariya98220
A. Mathariya 98220 93220
93220 YesAcademy
Yes Academy 8888
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5.4
11. Which of the following method for buyback of shares is not allowed? 15. Dec [5] The Escrow account under Regulation 9(xi) of SEBI (Buy back of
(A) Book building process (B) Open market through stock exchange securities) Regulations, 2018 does not include:
(C) Negotiated deals (D) All of the above (a) Cash deposited with a scheduled commercial bank
(b) Bank guarantee in favour of the merchant banker
12. Where a company purchases its own shares out of free reserves or (c) Deposit of acceptable securities with appropriate margin, with the
securities premium account, a sum equal to the nominal value of the shares so merchant banker
purchased shall be transferred to the (d) Deposits of acceptable securities with appropriate margin, with the
(A) Capital Reserve Account company.
(B) General Reserve Account 16. Unmarked application has to be distributed to underwriters in the ratio of
(C) Capital Redemption Reserve Account ………
(D) Equity Shares Redemption Account (a) Gross Liability Ratio (b) Last Agreed Ratio
13. In case of buy-back of shares, passing of the special resolution not (c) Net Liability Ratio (d) Equal Ratio
required if: 17. Applications bearing the stamp of the respective underwriter are called
(a) the buy-back is 10% or less of the total paid-up equity capital of the as ……….
company (a) Firm applications (b) Stamped applications
(b) the buy-back is 25% or less of the total paid-up equity capital of the (c) Underwritten application (d) Marked applications
company
(c) the buy-back is 10% or less of the total paid-up equity capital and 18. Underwriting is a contract of:
free reserves of the company (a) Indemnity (b) Bailment (c) Guarantee (d) Pledge
(d) the buy-back is 25% or less of the total paid-up equity capital and free 19. As per Section 68 of the Companies Act, 2013, post buyback, debt equity
reserves of the company ratio should not exceed ………….
14. Every buy-back shall be completed within a period of __________ from (a) 1 (b) 1.5 (c) 2 (d) 3
the date of the resolution or special resolution, as the case may be, passed by 20. Where a company buys back own shares or other specified securities, it
the Board. shall extinguish and physically destroy the shares or securities so brought back
(a) One month (b) Three months within ………… of the last date of completion of buy-back?
(c) Six months (d) One year (a) 3 days (b) 8 days (c) 7 days (d) 9 days
CA CS Harish
CA CS Harish A. Mathariya98220
A. Mathariya 98220 93220
93220 YesAcademy
Yes Academy 8888
8888545
545545
545 5.2
5.5
21. Declaration of solvency in relation to buy back of shares has to be filed

in-
(a) Form SH-6 (b) Form SH-9 (c) Form SH-4 (d) Form SH-8
22. Paid-up- equity shares capital of Novel Ltd. is Rs. 50,00,000 having face
value of Rs. 10 each fully paid-up. Other details:
General Reserve = Rs. 15,00,000
Capital Redemption Reserve = Rs. 4,00,000
Profit & Loss Account = Rs. 1,00,000
Statutory Reserve = Rs. 6,40,000
Securities Premium = Rs. 1,00,000
The board of directors passed resolution in board meeting to buy back
maximum number of shares as allowed by law. What is the maximum no. of
shares that can be bought back?
(a) 55,000 shares (b) 67,000 shares
(c) 1,25,000 shares (d) 78,000 shares
23. Negi Ltd. had 90,000 equity shares of Rs. 100 each, fully paid up. The
company decided to buy back 10% shares at par by the issue of sufficient
number of preference shares. Company do not have any reserves. How much
preference shares are required to be issued, if new preference shares are to
be issued at Rs. 10 each?
(a) 9,00,000 shares (b) 90,000 shares
(c) 1,00,000 shares (d) 1,20,000 shares
Topic 6 Financial Statements Interpretation
Financial Statement
Statement of Profit & Balance Sheet Cash Flow Statement of Comparative

Loss Stockholder's Equity Information
NOTE DISCLOSURES:
• Information about the basis of preparation of the FS (e.g., going concern or in liquidation) & specific accounting policies used;
• Information required by International Financial Reporting Standards (IFRS),
• Significant accounting policies, including measurement bases and relevant policies to the understanding the financial report;
• Judgments, apart from those involving estimations, that management has made applying the entity’s accounting policies;
• Key assumptions concerning the future and other key sources of measurement uncertainty;
• Information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes.
Interim Statements:
• FS issued for time periods smaller than one year (temporary statements)
• To judge a company’s financial position, until the full annual FS are issued
• Most commonly issued quarterly or semi-annually
Annual Statements
• Prepared once a year and covers a 12-month period
• Issued at the end of a company’s fiscal year instead of a calendar year
PRESENTATION OF FINANCIAL STATEMENT (International Accounting Standard 1) (IAS 1)
• Sets out overall requirements for the presentation, guidelines for their structure and minimum requirements.
• To present a complete set of financial statements at least annually, with comparative amounts for the preceding year
• IAS 1 paragraphs 54 provide the minimum line-items to be included in FS
• Current / Non-current distinction, a of assets and liabilities in increasing or decreasing order of liquidity
• Information to be presented in the notes: about each class of share capital & nature / purpose of each reserve within equity
STATEMENT OF CHANGES IN EQUITY:

For each component of equity, a reconciliation between op & closing balance, separately disclosing changes resulting from:
• profit or loss
• other comprehensive income
• Transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in
ownership interests in subsidiaries that do not result in a loss of control.
STATEMENT OF CASH FLOWS:

IAS 7 Cash flow statement guide in presentation of cash flow statement and related disclosures
NOTE DISCLOSURES –
be included in the notes to the FS:
• Basis of preparation of the FS (e.g., going concern or in liquidation)
• Information required by IFRS,
• Significant accounting policies & measurement bases for understanding the financial report;
• Management’s judgments, related to accounting policies & its effect on FS;
• Key assumptions & uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities
in the next twelve months
DEPRECIATION
Depreciation
Causes of providing depreciation
Objectives of providing depreciation
Methods of providing depreciation
RESERVES – ‘Plough Back of Profits’ (Are created to strengthening the financial positions of the business)
• are the amount set aside out of profits. It is an appropriation of profits and not a charge on the profits.
• reserves are neither expenses nor losses, so these are not charged to P&L A/c (debited to P&L Appropriation)
• Examples of Reserves:-Profit on sale of fixed assets; Profit on revaluation of assets and liabilities; Securities premium
earned
• If the amount of reserve is invested outside the business, it is called ‘Reserve Fund’.
• reserve does not reduce the net profit but reduces only the divisible profits.
PROVISIONS: Provisions is to be made is respect of a liability which is certain to be incurred, but where accurate amount is
not known. It is charged in the Profit and Loss Account on an estimate basis
Examples of Provisions: Provisions for Depreciation on assets, Provision for Repairs and Renewals of assets. Provision for
Taxation. Provision for Discount
DETERMINATION OF MANAGERIAL REMUNERATION

Sec. 196 deals with appointment of MP & is applicable to private as well as public companies;
Sec. 197 deals with MR payable to MP applicable to public companies only. Schedule V is partly applicable to private co.
Sec. 198 deals with calculation of Net Profit required for MR calculation
1 Full Time MP – 5% of Net Profit
FULL time MP
More than 1 full time MP – overall
10% of NP
If adequate profit
With Full time – 1% of NP
Managerial Remuneration Part Time MP
Without Full Time – 3% of NP
No profit / Inadequate profit See Table below
Yearly remuneration payable shall

Yearly remuneration payable shall
Where Effective Capital is not exceed, in case of other
not exceed, in case of MP
director
i) Negative or less than 5 crore 60 lakhs 12 lakhs
ii) 5 Crores and above but less than Rs100 Crores 84 lakhs 17 lakhs
iii) 100 crores and above but less than 250 crores 120 lakhs 24 lakhs
iv) 250 Crores and above 120 lakhs plus 0.01% of effective 24 lakhs plus 0.01% of effective
capital in excess of Rs. 250 crores. capital in excess of Rs. 250 crores.
“Effective Capital”:- Maximum Sitting Fees
paid-up share capital • Shall not exceed one lakh rupees per meeting of the Board
(excluding share application money or advances or committee
against shares); • Further, for Independent Directors and Women Directors,
share premium account; the sitting fee shall not be less than the sitting fee payable
reserves and surplus (excluding revaluation to other directors
reserve); • An Independent Director shall not be entitled to any stock
long-term loans option
deposits repayable after one year (excluding • If MR in excess of the limit in section or without approval, he
working capital loans, overdrafts, interest due on shall refund such sums to the company, within two years or
loans unless funded, bank guarantee, etc., and such lesser period as may be allowed by company (till he
other short-term arrangements) will hold it in trust for company)
(-) aggregate of any investments • Auditor shall, in his report under section 143, make a
(except in case of investment by an investment statement as to whether the remuneration paid by the
company whose principal business is company to its directors is in accordance with the provisions
(-) acquisition of shares, stock, debentures or other of this section is in excess of the limit laid down under this
securities), section and give such other details as may be prescribed.
(-) accumulated losses • If contravention, person shall be liable to a penalty of one
(-) preliminary expenses not written off lakh rupees and If default by a company, the company
(=) Effective Capital shall be liable to a penalty of five lakh rupees.
Corporate Social Responsibility [Section 135(1)]:
Following co. shall constitute CSR Committee of the Board consisting of 3 or more directors, out of which at least one director shall be an
independent director -
- net worth (PFY) of Rs. 500 Crore or more, or
- turnover of Rs. 1,000 Crore or more or
- net profit of Rs. 5 Crore or more
If a company not required to appoint an independent director u/s 149(4), it shall have in its CSR Committee 2 or more directors.
Disclosure in Board's report [Section 135(2)]:
Board's report u/s 134(3) shall disclose the composition of the CSR Committee.
Disclosure of contents of CSR Policy in the Board's report & on company's website
CSR Committee [Section 135(3)]: Shall
(a) Formulate & recommend to the Board, CSR Policy activities, specified in Schedule VII.
(b) Recommend amount of expenditure to be incurred
(c) Monitor the CSR Policy from time to time.
Duties of Board with regard to CSR
• Consider recommendations made by CSR Committee, approve the CSR Policy & disclose contents of such policy in its report and also
place it on the company's website
• Ensure that the activities in CSR Policy are undertaken by the company.
Amount to be spent on CSR: Board of every company shall ensure that company spends, in every financial year, at least 2% of the
average net profits during the 3 immediately PFY. Company shall give preference to local area & areas around it where it operates,
for spending the amount earmarked for CSR activities.
SEGMENT REPORTING (AS-17)
Establish principles for reporting financial information, about the different types of products and services an enterprise produces
and the different geographical areas
Reportable Segment
Segment Revenue Segment Results Segment Assets
segment result, whether profit or loss,

Revenue from sales to external is 10 per cent or more of - (i) the segment assets are 10 per cent or
customers and from transactions with combined result of all segments in more of the total assets of all
other segments is 10 percent or more profit, or (ii)the combined result of all segments
of the total revenue segments in loss, whichever is greater
in absolute amount
AUDIT QUERY
Audit queries are questions asked by an auditor during an investigation. These may be used to gather information to come to
a conclusion in the audit.
Following parameters are looked during audit queries:
1. Any questions related to a company which is being audited either by an internal or external auditor.
2. The final touch of the accounts.
3. It is the matter being investigated while examining financial report of a company.
4. An audit query is a explanation that is required by the audit team on certain points that they may have identified during
an audit e.g., invoice accrual prepayment, etc.
1. As per Section 198 of the Companies (Act, 2013 while calculating net (a) Contributions made u/s 181
profit for managerial remuneration, if gross profit is starting point then (b) Actual bad debts written-off
which of the following is allowed to deducted – (c) Liability arising from a breach of contract
(a) Loss of a capital natures (d) All of the above
(b) Voluntarily compensation
(c) Directors seating fee 5. The arrangement of assets and liabilities in accordance with a particular
(d) Super tax on the income order is known as of balance sheet.
(a) Tallying
2. Net Profit is starting point for the purpose of calculation of managerial (b) Marking
remuneration then which of the following you will add: (c) Ruling
(a) Ex-gratia payment to an employee (d) Marshalling
(b) Capital Profit
(c) Debenture trustee Remuneration 6. In…………… approach assets which are to be used for long-term in the
(d) Revenue profit on sale of plant business and are not meant to be sold are presented first and assets which
are most liquid such as cash in hand, are presented at the bottom.
3. Which of the following are current 'assets of a business? (a) Alphabetical order
(i) Income received in advance (b) Permanence order
(ii) Stock (c) Liquidity order
(iii) Debtors (d) No of the above
(iv) Pre-paid expenses
(v) Accrued income 7. If the Effective Capital of company is ₹250 Crores and above it may,
Select the correct answer from the options given below - without approval of central government pay remuneration to the
(a) Both (i) and (iv) above managerial person not exceeding
(b) Both (ii) and (iii) above (a) ₹ 160 lakhs plus 0.05% of the effective capital in excess of ₹ 250
(c) (i), (ii) and (iii) above Crores
(d) (iv) and (v) above (b) ₹ 180 lakhs plus 0.25% of the effective capital in excess of ₹ 250
Crores
4. As per Section 198 of the Companies Act, 2013 while calculating net (c) ₹ 240 lakhs plus 0.02% of the effective capital in excess of ₹ 250
profit for managerial remuneration, if gross profit is starting point then Crores
which of the following is allowed to deducted –
(d) ₹ 120 lakhs plus 0.01% of the effective capital in excess of ₹ 250 12. Choose the true statement.
Crores (a) Accrued incomes represent income unearned but realized in cash.
(b) Accrued incomes represent income earned but not realized in cash.
8. If the Effective Capital of company is negative and it passes special (c) Accrued income A/c is shown on the liability side.
resolution then it may, without approval of Central Government, pay (d) No tax is payable on accrued income
remuneration to the managerial person not exceeding:
(a) ₹ 60 lakhs per annum 13. Depreciation fund method is also known as –
(b) ₹ 120 lakhs per annum (a) Redemption fund method
(c) No remuneration since effective capital is negative (b) Amortization fund method
(d) ₹ 90 lakhs per annum (c) Sinking fund method
9. Depreciation is a process of –
(a) Valuation 14. Every company fulfilling specified criteria shall constitute Corporate
(b) Allocation Social Responsibility (CSR) Committee of the Board consisting of:
(c) Reduction (a) 5 or more directors, out of which at least 2 directors shall be an
(d) Appreciation independent director
(b) 10 or more directors, out of which at least 3 directors shall be an
10. In the case of downward revaluation of an asset which is for the first time, independent director
the account to be debited is………… (c) 5 or more directors, out of which at least 1 director shall be an
(a) Fixed Asset A/c independent director
(b) Revaluation Reserve A/c (d) 3 or more directors, out of which at least 1 director shall be an
(c) Profit & Loss A/c independent director
(d) General Reserve A/c
15. Net profit after tax of XYZ Ltd. is ₹ 1,00,000 after debiting provisions
11. Revenues affect net income - for tax ₹ 40,000 and. Managing Director's Salary 60,000. Maximum
(a) In the period during which they are earned remuneration payable to Managing Director as per provisions of the
(b) In the period when they are collected Companies Act, 2013 without complying provisions of the Schedule V is –
(c) In the period when they are accounted for (a) ₹ 14,000
(d) Any of the above three which occur first (b) ₹ 8,000
(c) ₹ 10,000
(d) ₹ 12,000 Maximum remuneration payable to MD without complying provisions of
the Schedule V is –
16. Net profit after tax of PQR Ltd. is ₹ 15,48,000. These net profits arrived (a) ₹ 3,643
after debiting P & I. A/c following items: (b) ₹ 5,728
Income Tax: ₹ 3,20,000; (c) ₹ 4,762
Ex-gratia payment to employee: ₹ 50,000 (d) ₹ 1,874
Following items are credited to P & L A/c before arriving above net profit:
Capital Profit: ₹ 75,000 18. Gross profit of. G Ltd. is ₹ 40,38,000 before considering following items:
Profit on forfeiture of shares: ₹ 4,300 Salaries & Bonus 1,80,000
Maximum remuneration payable to MD as per provision of the companies Repairs to Buildings 90,000
act, 2013 without complying provisions of the schedule V is R & D Expenses 15,000
(a) ₹ 91,935 Directors Fees 6,000
(b) ₹ 95,685 Managing Director's Salary 36,000
(c) ₹ 90,425 Interest on Debentures 20,000
(d) ₹ 94,750 Profit on sale of plant 1,20,000
Subsidy from Central Govt. 2,19,000
17. Net. profits before charging the commission - 80,000. Following had been Whole of the R & D expenses has been incurred for purchase of
charged off against the profits as determined as above: equipment. On Plant depreciation provided up to date was ₹ 42,000.
- Depreciation ₹ 31,900 Maximum remuneration payable to MD without complying provisions of
- Provision for bad debts ₹ 920. the Schedule V is –
Other relevant information: (a) ₹ 2,22,440
- Actual bad debts ₹ 800. (b) ₹ 2,12,320
- Depreciation as per Schedule II ₹ 39,160. (c) ₹ 2,48,650
(d) ₹ 2,00,150
Answers
1 C 2 A 3 D 4 D 5 D 6 B 7 A 8 D 9 B
10 B 11 C 12 A 13 B 14 D 15 C 16 A 17 A 18 D
Topic 7 Consolidation Of Accounts
HOLDING COMPANY
DUTY TO PREPARE CONSOLIDATED
• Controls the composition of the Board of Directors; or INANCIAL STATEMENTS [SEC 129 (3)]
• exercises or controls more than one-half of the total
voting power either at its own or together with one or Sec. 129 (3)
more of its subsidiary companies
• Prepare a consolidated financial
SOME DECISIONS OF CASES statement of the company and of all
❑Holding co. not liable for provident dues of Subsidiary the subsidiaries
❑Workmen of subsidiary are not workmen of Holding Co. • shall also be laid before the AGM
❑Holding co. is not liable for wages of Subsidiary under • statement containing the salient
winding up features (AOC-1)
❑Holding not liable for violation of Forex provisions by • “Subsidiary” shall include associate
Subsidiary
company and joint venture
❑Holding and Subsidiary Companies are independent
legal entities • Provisions of this Act for FS shall,
❑Holding and Subsidiary are separate and distinct legal
mutatis mutandis, apply to the
entities. consolidated FS
The Balance Sheets of Hari Ltd. and its subsidiary Suri Ltd. as at 31st March, 2002 are as follows:
Liabilities Hari Ltd. (Rs.) Suri Ltd. (Rs.) Assets Hari Ltd. (Rs.) Suri Ltd. (Rs.)
Share capital Plant and Machinery 4,80,000 90,000

Equity shares of Rs.10 each 4,00,000 1,00,000 Furniture 15,000 27,000
fully paid
General Reserve (1.4.2001) 2,80,000 34,000 Investments 2,00,000
Profit and Loss A/c 1,70,000 42,000 Stock 95,000 42,000

Creditors 70,000 35,000 Debtors 60,000 32,000
Cash at bank 70,000 20,000
9,20,000 2,11,000 9,20,000 2,11,000
(i) Hari Ltd. acquired 8,000 equity shares in Suri Ltd. as at 1st July, 2001 at a cost of Rs 2,00,000.
(ii) Stock of Hari Ltd. includes Rs 6,000 relating to stock purchased from Suri Ltd. which follows the practice of charging 25% extra on the
cost for determining the sale price.
(iii) Creditors of Hari Ltd. include Rs 10,000 on account of purchases from Suri Ltd.
(iv) Profit and Loss Account of Hari Ltd. includes dividend @ 10% for the year 2001-02 received from Suri Ltd., which declared and paid it
after 1st July 2002.
(v) Balance in Suri Ltd.'s Profit and Loss Account on 1st April, 2001 was Rs. 26,000. Dividend @ 10% for the year 2000-01 was declared
out of this balance after 1st July, 2001.
(vi) Profits during the year 2001-02 have been earned on uniform basis throughout the year.
Prepare a Consolidated Balance Sheet of Hari Ltd. and its subsidiary Suri Ltd. as at 31s1 March, 2002.
1. Which of the following treatment of share Capital' of subsidiary company (d) Amount of mutual debt will require adjustment on debtors figure on
is correct? asset side only if amount receivable by subsidiary company is more
(a) Share capital held by the holding company will be added to the cost than amount payable to holding company.
of control statement.
(b) Share capital held by minority will be deducted in minority statement. 4. If less than 100% of a subsidiary's share capital has been acquired then
(c) Share capital of subsidiary held by holding company will be deducted what is the rule for inclusion of the subsidiary's assets on the consolidated
from the cost of Investment to find out goodwill/capital reserve. balance sheet?
(d) Share capital of subsidiary will be set-off against the negative net (a) Only a proportional amount should appear.
worth of other subsidiary. (b) All the assets should appear.
(c) None can appear until all the shares have been acquired.
2. If closing balance of general reserve of subsidiary is less than opening (d) Half the value should appear.
balance of general reserve then it can be concluded that -
(a) Pre-acquisition dividend is declared by the subsidiary company 5. How is a negative goodwill reported on the consolidated statement of
(b) Bonus share capital issued by the subsidiary company financial position?
(c) Some profit must have been transferred to general reserve by (a) As a negative asset i.e. shown on the asset side but as a deduction.
debiting profit & loss account by the subsidiary company (b) A tenth of it is included in consolidated reserves and the remainder
(d) Capital profits are credited to the General Reserve A/c reported as a reserve.
(c) Included fully in the consolidated retained earnings.
3. Which of the following treatment is correct for mutual debts with regard (d) As a reserve, which may preferably be titled a capital reserve
to purchase and sale of goods between holding and subsidiary company?
(a) Amount of mutual debt will be added to the Debtors and Creditors on 6. If stock is sold fora profit from one group member to another, how should
asset side and liability side respectively while preparing the this be dealt with in the final accounts?
consolidated balance sheet. (a) Stock should appear at the original cost.
(b) Amount of mutual debt will be ignored as it is not asset or liability at (b) The profits should be included but stock would appear at the value
all. sold for.
(c) Amount of mutual debt will be deducted from the Debtors and (c) Profit on sale should be eliminated and stock appears at original cost.
Creditors on asset side and liability side respectively while preparing (d) Profits on the sale should be eliminated.
the consolidated balance sheet.
7. Y Company has a receivable from its parent, X Company. Should this (a) Control is intended to be temporary because the subsidiary is
receivable be separately reported on Y's balance sheet and in X's acquired and held exclusively with a view to its subsequent disposal
consolidated balance sheet? in the near future.
Y's balance sheet X's balance sheet (b) Subsidiary company operates under severe long-term restrictions,
(a) Yes No which significantly impair its ability to transfer funds to the parent.
(b) Yes Yes (c) Both (A) and (B)
(c) No No (d) None of the above
(d) No Yes
11. Goodwill = ?
8. Which of the following statement is false? (a) Cost of Investment less Parent's share in the equity of the subsidiary
(a) Minority interest shown in the consolidated balance sheet is the equity on date of investment less Minority interest
held by the outsiders in the subsidiary company. (b) Cost of Investment less Parent's share in the equity of the subsidiary
(b) Cost of control is the excess price paid for investment over and above on date of investment.
proportionate share of net assets acquired by the holding company. (c) Parent's share in the equity of the subsidiary on date of investment
(c) Profit on revaluation of fixed assets is a capital profit and less Cost of investment
depreciation on such amount is a revenue loss. (d) Cost of Investment add Parent's share in the equity of the subsidiary
(d) For calculating cost of control there is no need to distinguish between on date of investment add Minority interest
capital and revenue profits of the subsidiary.
12. H Ltd. acquires 70% of the equity shares of S Ltd. on 1.1.2019. On that
9. Post acquisition dividends received by Holding Company is: date, paid-up capital of S Ltd. was 10,000 equity shares of ₹ 10 each;
(a) Debited to Profit & Loss A/c & Credited to Bank A/c accumulated reserve balance was ₹ 1,00,000. H Ltd. paid ₹ 1,60,000 to
(b) Debited to Bank A/c and Credited to Investment A/c acquire 70% interest in the S Ltd. Assets of S Ltd. were revalued on
(c) Debited to Investment A/c and Credited to Bank A/c 1.1.2019 and a revaluation loss of ₹ 20,000 was ascertained. Which of
(d) Debited to Bank A/c and Credited to Profit & Loss A/c the following is correct in relation to cost of control of group consolidated
financial statement?
10. As Per AS-21, a Consolidated Financial Statement will not be prepared (a) Capital Reserve ₹ 34,000
by the parent company when- (b) Goodwill ₹ 34,00001
(c) Capital Reserve ₹ 1,26,000
(d) Goodwill ₹ 1,26,000
H Ltd. holds 8096 shares of S Ltd. Minority Interest =?
13. H Ltd. holds 7,500 shares of S Ltd. Total shares of S Ltd. are 10,000 of ₹ (a) ₹ 32,500
10 each. General Reserve and Profit & Loss balance of S Ltd. are ₹ (b) ₹ 32,100
35,000 & ₹ 27,500 respectively out of which 40% relates to post- (c) ₹ 40,125
acquisition period. Minority Interest = ? (d) ₹ 38,450
(a) ₹ 40,625
(b) ₹ 34,375 15. Following are the balances of S 1 Ltd. on 31.3.2019:
(c) ₹ 50,525 Equity Share Capital ₹ 10,00,000
(d) ₹ 40,925 General Reserve ₹ 3,50,000
Profit & Loss Account ₹ 7,00,000
14. Balance Sheet of S Ltd. is as follows: H Ltd. acquired 80% shares on 31st July, 2018. Balances of general
Shareholder's Funds: ₹ reserve and profit and loss account on 1.4.2018 of S Ltd. were ₹ 50,000
Equity Shares (₹ 10 each) 1,00,000 and ₹ 2,50,000 respectively. Share of Minority in post-acquisition profit
General Reserve 35,000 will be –
Profit & Loss Account 27,500 (a) ₹ 1,10,000
Current Liabilities: (b) ₹ 1,00,000
Creditors 25,000 (c) ₹ 5,00,000
Bills Payable 15,000 (d) ₹ 2,70,000
2,02,500
Non-Current Assets: ₹ 40,000 16. H Ltd. holds 75% Shares in S Ltd. In January, 2019 S Ltd. sold to its parent
Land & Buildings Machinery 10,000 company H Ltd. goods costing ₹ 15,000 for ₹ 20,000. On 31st March,
Preliminary Expense 2,000 2019 half of these goods were lying as unsold in godowns of H Ltd. Which
Current Assets: of the following is correct treatment for unrealized profit on stock while
Stock 85,500 preparing consolidated financial statement of H Ltd. & S Ltd.?
Debtors 45,000 (a) Stock reserve of ₹ 5,000 will be reduced from 'Stock' on asset side in
Bills Receivable 15,000 balance sheet and ₹ 5,000 will be added to the profit & loss account
Cash & Bank 5,000 of H Ltd.
2,02,500
(b) ₹ 15,000 will be reduced from current asset & current liabilities
(c) Stock reserve of ₹ 5,000 will be reduced from 'Stock' on asset side in Debtors 3,40,000 2,05,000
balance sheet and capital reserve of H Ltd. Creditors 1,95,000 1,10,000
(d) Stock reserve of ₹ 2,500 will be reduced from 'Stock' on asset side in Bills Receivable 50,000 -
balance sheet and ₹ 2,500 will be debited to profit & loss account of Bills Payable - 80,000
H Ltd. Bills accepted by S Ltd. were all shown by H Ltd. and H Ltd. had got bills
amounting to ₹ 30,000 discounted with bank. On 31.3.2019, S Ltd. owed
17. General reserve of S Ltd. on 1.3.2020 was ₹ 90,000. Break-up of its ₹ 30,000 to H Ltd. for goods purchased from it. After setting-off mutual
profit and loss account is given below: debts
Balance as on 1.4.2019 10,000 A. Net Account Receivables and
(+) Profit for year 2019-2020 3,20,000 B. Net Account Payables will appear in consolidated financial statement
3,30,000 at –
(-) Transfer to general reserve (40,000) Account Receivables Account Payables
2,90,000 (a) ₹ 3,85,000 ₹ 1,95,000
(-) interim dividend paid (40,000) (b) ₹ 5,45,000 ₹ 2,55,000
Balance on 31.3.2020 2,50,000 (c) ₹ 5,15,000 ₹ 2,25,000
On 1.7.2019, H Ltd. acquired interest in S Ltd. by acquiring 72,000 fully
(d) ₹ 5,65,000 ₹ 2,75,000
paid equity shares of ₹10 each for ₹ 8,00,000. Total paid-up share
capital of S Ltd. is ₹ 8,00,000. H Ltd. credited the entire amount of interim
19. A parent owns two third of the subsidiary's equity. As at a year end the
dividend received to its profit and loss account.
subsidiary's inventory includes goods sent to it by the parent invoiced at
How much goodwill or capital reserve will be shown in consolidated
balance sheet? ₹ 3,60,000. Parent has purchased these goods for ₹ 3,00,000. Which of
the following are the correct entries for eliminating unrealized profit?
(a) Goodwill ₹ 46,000
(a) Debit the parent's retained earnings and credit the subsidiary's
(b) Capital reserve ₹ 10,000
inventory with ₹ 60,000
(c) Goodwill ₹ 80,000 (b) Debit the subsidiary's retained earnings and credit the subsidiary’s
(d) Capital reserve ₹ 46,000 inventory with ₹ 45,000
(c) Debit the subsidiary's retained earnings and credit the subsidiary’s
18. Following are the balances of H 'Ltd. & S Ltd. on 31.3.2019: inventory with ₹ 60,000
Particulars H Ltd S Ltd
(d) Debit the parents retained earnings and credit subsidiary's inventory of unrealized profit that needs to be eliminated from the parent's retained
with ₹ 45,000 earnings would be:
(a) ₹ 37,500
20. Subsidiary's inventories at the yearend included ₹ 1,80,000 purchased (b) ₹ 36,000
from its parent. Further goods invoiced by the parent at ₹ 45,000 were (c) ₹ 38,333
in transit. The parent invoices the subsidiary at cost plus 20%. The amount (d) ₹ 30,000
Answers
1. c 2. b 3. c 4. b 5. d 6. c 7. a 8. d 9. d 10. c
11. b 12. b 13. a 14. b 15. b 16. d 17. d 18. c 19. a 20. a
Topic 8 Corporate Financial Reporting
CORPORATE FINANCIAL REPORTING CFR - OBJECTIVES
• Communication of published financial statement and • that is useful to present / potential investors
related information to interested parties. (Both • about the economic resources of an enterprise
qualitative and quantitative information) • about the enterprise’s financial performance
• about how management of an enterprise obtains and
• Most common and statutorily required reports are as spends cash
under: • about how management discharged its stewardship
• Auditor’s report • that is useful to management and directors in making
• Directors’ report decisions
• Corporate governance report and within that or
Disclosure of Significant
separately, management discussion, and analysis Accounting Policies
report.
1.All significant accounting policies adopted. (At one
• Report on corporate social responsibility (CSR) place)
activities. • Disclosure should form part of financial statements
• Change in accounting policies which has material
Features of CFR effect should disclosed
• Relevance • Reliability • Where such amount is not ascertainable, the fact
should be indicated
• Comparability • Understandability • If the fundamental accounting assumptions, viz., Going
• Timelines • Benefit vs. Cost Concern, Consistency and Accrual are followed, no
specific disclosure is required. (otherwise required)
• Balancing of Qualitative Characteristics
AUDITORS REPORT
❑Section 143 of the Companies Act, 2013 deals with the Auditor's Report which should fulfil following requirements
❑shall make a report to the members of the company on the accounts examined by him
❑shall state whether, in his opinion said books of accounts: Give the information required by the Companies Act; Give a true
and fair view in case of B/S, P&L & CFS
Shall also state: Whether; • any director is disqualified;

• he has sought & obtained all information & • Any qualification, reservation or adverse remark;
explanations; • company has adequate financial control;
• In his opinion, proper books of account; report on the • If person being appointed as a company director if
accounts of any branch audited by a person other than such person is already a director of a public
company’s auditor has been forwarded to him, & how company which. Has not filed the annual accounts and
he has dealt with the same; annual returns for any continuous three financial
• company’s Balance Sheet and Profit and Loss Account years; or Has failed to repay its deposit or interest
are in agreement with books & return; thereon or redeem its debentures or pay dividend on
• financial statements comply with the accounting due date & such failure continues for one year or
standards; more
• observations or –ve comments of the auditor’s if any;
Co-owned/ Controlled by CG/SG/Both
• Appointment of Auditor in Government company
• By C & AG. (CAG)
• In respect of F.Y.
• Who, duly qualified
• Within 180 days from commen of FY (Or within 60 days from
registration of company if 1st auditor)
• Auditor shall submit audit report to CAG
• Within 60 days of receipt of audit report
CAG may conduct supplementary May require comment or

audit or require additional supplement such audit report
information
• Every auditor shall comply A.S

• C.G may prescribes as or any addendum there to, as recommended by
ICAI
• C.G may in Consultation with NFRA – Direct auditor to include statement
– If auditor believes that fraud being/has been committed in company
shall report C.G if not reported to CG Then disclose such fraud
boards reports
– If CA/CS/CMA contravenes above provisions
– 1 lakh to 25 lakhs penalty
– He shall report on excess M.R
BOARD’S REPORT • The amount, if any, which it recommends should be paid by way of
dividend.
Section 134 of Companies Act, 2013 mandates certain disclosures to be
• Material changes and commitments, if any, affecting the financial
made in the Board’s Report if Listed co then also comply SEBI disclosures
position occurred between end of FY & date of report.
guidelines:
• The conservation of energy, technology absorption, foreign exchange
The web address where annual return has been placed.
earnings and outgo, in prescribed manner.
• Number of meetings of the Board.
• A statement of development & implementation of a risk management
• Directors' Responsibility Statement.
policy; elements of risk, if any, which threaten the existence of
• Details in respect of frauds reported by the auditor u/s 143(12) other
company.
than those which are reportable to the Central Government.
• The details about the policy developed and implemented by the
• A statement on declaration given by independent directors u/ s 149(6).
company on corporate social responsibility initiatives taken during the
• Company's policy on directors appointment & remuneration, for
year.
determining qualifications, independence of director & other matters
• A statement on formal annual evaluation by BOD of its own
• Explanations or comments by the Board on every qualification,
performance & that of its committees and individual directors. (for
reservation or adverse remark or disclaimer made: by auditor and by
Listed & other pub. Co.)
CS.
• Such other matters as may be prescribed.
• Particulars of loans, guarantees or investments under Section 186.
• If the above disclosures are included in the financial statements then
• Particulars of contracts or arrangements with related parties referred
such disclosures need not be again repeated in the Board's report.
to Section 188(1) in the prescribed form.
• Where the policy referred to in clause (e) or (o) is available on
• The state of the company's affairs.
company's website, it shall be sufficient compliance of requirements
• The amounts, if any, which it proposes to carry to any reserves.
under such clauses.
COMPANY AUDITOR’S REPORT ORDER (CARO), 2020
Is applicable for audit of FS of eligible companies (including foreign co.) for the FY commencing on or after 1st April, 2020.
• MCA was of objective that certain

issues are important to be reported
CARO certain entities as a part of their audit
reports. Auditor required to report on
the points under this order after
performing verification of the same.
• A. Banking Companies
• B. Insurance Companies
Applicability • C. Companies registered for Charitable Purposes
• D. One Person Company
(Negative List) • E. Small Companies
• Sp. Pvt. CO. (PC <=1Cr, B<=1Cr, Rev. <=10Cr)
CORPORATE GOVERNANCE Objectives of Corporate Governance
• Is how a corporation is administered or controlled. • To create social responsibility
• Is a set of processes, customs, policies, laws, etc
• create a transparent working system
affecting the way a corporation is, administered.
• Participants in process include employees, suppliers, • To create a management accountable
partners, customers, government, communities, etc in • To protect and promote interest of SH
which the organization has presence. • develop efficient organization culture
• Main theme of corporate governance is to integrate • aid in achieving social & economic goals
sound management policies in the corporate
• To improve social cohesion
framework in such a manner to bring economic
efficiency. • To minimise wastages, corruption etc
Corporate Governance under Companies Act, 2013 Woman Director

Independent Director In following classes of companies to have atleast
one woman director;
All listed companies; Non-listed public companies
pd.up SC 100 cr or more; or turnover of 300 cr or
more.
Audit Committees (AC) Corporate Social Responsibility
AC shall consist of a minimum of 3 directors with independent directors • Every company having networth of Rs.500 crores or more,
forming a majority. turnover of Rs.1000 crore or more, or net profit of Rs.5
Majority members of AC including its Chairperson with ability to read & crores or more during any immediately preceding financial
understand, FS. Shall be applicable to all the listed companies or non- listed year shall constitute CSR Committee.
public companies having pd up SC Rs.10 crores or more, Turnover of Rs.100 • It constitutes three or more directors with at least one
crores or more, aggregate outstanding loan of Rs. 50 crores or more independent director.
Internal Audit (Section 138) • Provided that where a company is not required to appoint
Internal audit for certain co. includes: an independent director, it shall have in its CSR Committee
• all the listed companies, two or more directors
• all the non-listed companies having paid up SC of Rs.50 crores or • Board’s report shall disclose the composition of the
more, turnover of Rs.200 crores or more in preceding FY, outstanding Corporate Social Responsibility Committee.
loans or borrowings from banks or public financial institutions of Rs.100
VALUE ADDED STATEMENT
crores or more outstanding deposits of twenty five crore rupees or more
Value added can be defined as the value created by the
at any point of time during the preceding FY
activities of a firm, that is, sales less the cost of bought in
• Every private company having turnover of two hundred crore rupees or
goods and services and its allocation
more during preceding FY; or outstanding loans or borrowings from
Advantages of Value Added Statement:
banks or public financial institutions exceeding one hundred crore
(1) It helps in the comparison of performance of company.
rupees or more at any point of time during preceding FY
(2) It helps in judging the productivity of the company.
Serious Fraud Investigation Office (SFIO) (3) Provides a better alternative by focusing other factors
CG shall establish an office called the SFIO to investigate fraud relating to rather than just profit.
Company. SFIO can investigate into affairs of company on receipt of report (4) It also helps in devising the incentives schemes for the
of Registrar or inspector or on intimation of a special resolution passed by employees.
a company that its affairs are required to be investigated or in the public (5) It reflects a broader view of the company’s objectives
interest or on request from any Department of Central Govt. or State Govt. and responsibilities.
VAS VALUE APPLIED:
VALUE ADDED: Towards employees
Sales less returns
- Wages & Salaries
Less: (Cost of bought out goods & services)
- Audit Fees - Salaries and commission to directors
- Material consumed/Decrease in Stock Towards Management: Director’s salary & commission
- Administration Cost/Stationery/etc.
- Selling & Distribution Expenses Towards Government
- Interest on short term loan - Local Tax/Cess
- General Expenses (Other Exp.) - Provision for tax
- Hire Charges for Equip./Rent/Rates/Taxes
- Provision for Doubtful Debt Towards providers of finance
- Excise duty - Interest on fixed loan/Intt. on Debenture
- Purchase
- Dividend paid/Proposed Dividend
- Manufacturing & Other Expenses
- Depreciation (If NET VALUE ADDED) Toward replacement & expansion
Value added from operations - Depreciation (If GROSS VALUE ADDED)
Add:
- Replacement Reserve/Trf. to any Reserve
- Other Income (Interest/Rent received)
Add/Less Extra Ordinary Items: - Deferred tax account
- (-) Loss by theft, etc. - Retained Profit (CURRENT YEAR ONLY)
- (+) Surplus on sale of Assets
Total Value Added: TOTAL VALUE APPLIED
Reconciliation of Value Added with Profit Before Tax (PBT):
Sr. No. Particulars Rs. Rs.
(A) Profit Before Tax (PBT) XXX
(B) Add: Items of Application of Value Added (2nd Statement) {EXCEPT: FOLLOWING XXX XXX
ITEMS, SINCE THESE ITEMS ARE ALREADY INCLUDED IN PBT SO NO NEED
TO ADD THESE ITEMS AGAIN}
Example of items NO NEED TO ADD:
- Provision for Tax
- Proposed Dividend
- Transfer to Reserve
- Retained Earnings
- Dividend Paid
- Surplus transferred to Balance sheet
(C) (=) Value Added XXX
1. which of the following matters are required to be covered in Management 4. Which of the following is not a objective of financial reporting given by
Discussion & Analysis Report? Financial Accounting Standard Board (FASB)?
I. Industry Structure & Developments (a) The information should be useful to both, the present and potential
II. Opportunities and threats investors.
III. Auditors negative remarks (b) It should provide information about how management of an enterprise
IV. Product-wise performance has discharged its stewardship responsibilities to owners for the use
V. Risks and concerns
of enterprise resource entrusted to it.
VI. Notes to financial statements
(c) It should provide information about the enterprise's financial
VII. SEBI Directions
Select the correct answer from the options given below — performance during a period.
(a) IV, DI, V & I only (d) It should forecast future performance and financial positron of the
(b) I, II, III & VII only enterprise using past data.
(c) IV, II, V & I only
(d) I, II IV, VI & VII only 5. _____ can be defined as the value created by the activities of a firm,
that is, sales less the cost of bought in goods and services.
2. ______ represents the economic profits generated by a business above (a) Economic value added
and beyond the minimum return required by all providers of capital. (b) Value added
(a) Shareholder Value Added (SVA) (c) Market value added
(b) Economist Value Added (EVA) (d) Shareholders value added
(c) Market Makers Value Added (MMVA)
(d) Debt holders Value Added (DVA) 6. Which of the following is advantage of Value-Added Statement?
(a) It helps in judging the productivity of the company.
3. The auditor of a company is required to give his report in accordance with (b) It helps in ascertaining result i.e. profit earned or loss suffered in
the provisions of _____ of the Companies Act, 2013. business during a particular period.
(a) Section 148 (c) It provides up to date information about the various assets that the
(b) Section 143 firm possesses and the liabilities the firm owes.
(c) Section 149 (d) It measures past performance of the business entity and depicts its
(d) Section 147 current financial position.
7. Statement I: 1. A private limited company being a subsidiary or holding company of
EVA measures whether the operating profit is sufficient enough Ito cover a public company, having a paid-up capital and reserves & surplus
cost of capital. more than ₹ 2 Crore as on the balance sheet date.
Statement II: 2. A private limited company which have total borrowings exceeding ₹ 2
If a company's EVA is negative it is destroying shareholders, wealth even Crore from any bank or financial institution at any point of time during
though it may be reporting positive and growing EPS or return on capital the financial year.
employed. 3. A private limited company which have a total revenue as disclosed in
Which statement is correct and which statement is false? Scheduled III to the Companies Act, 2013 (including revenue from
Statement I Statement II discontinuing operations) less than ₹ 10 Crore during the financial year
(a) True False as per the financial statements.
(b) False True Select the correct answer from the options given below –
(c) True True (a) 1 and 2 only
(d) False False (b) 2 and 3 only
(c) 1 and 3 only
8. CARO, 2016 applies to a private {limited company which has total
(d) None of the 1, 2 or 3
revenue as disclosed in Scheduled III to the Companies Act, 2013 including
revenue from discontinuing operations exceeding during the financial 10. CARO, 2016 shall not apply to the auditor's report on –
year as per the financial statements. (a) income statement
(a) ₹ 15 Crore (b) Financial statements
(b) ₹ 100 Crore (c) Consolidated financial statements
(c) ₹ 10 Crore (d) None of the above
(d) ₹ 25 Crore
11. As per CARO, 2016 auditor's report must state whether the company has
9. To which type of company the (Companies (Auditor's Report) Order, 2016 entered into any non-cash transactions with directors or persons connected
(CARO) applies? with him as contained in _____ of Companies Act, 2013
(a) Section 192
(b) Section 195
(c) Section 292 (b) Legal and business system
(d) Section 295 (c) Social and regulatory system
12. A copy of the financial statements and Board's report duly adopted at
the AGM shall be filed with the Registrar within _____ of the date of 16. Corporate governance can be defined as:
AGM. (a) The system used by firms to control the actions of their employees.
(a) 60 days (b) The election process used to vote in a new Board of Director.
(b) 30 days (c) The corporate compliance system used by the firm.
(c) 90 days (d) The system used by firms to identify who the critical stakeholders a or
(d) 21 days the firm
13. As per Rule 8 of the Companies (Accounts) Rules, 2014, the Re rt of the 17. The company shall obtain a certificate from either the _____ regarding
Board shall contain the particulars of contracts or arrangements with compliance of conditions of corporate governance of the listing
related parties Section 188 (1) in the – agreement and annex the certificate with the director's report, which is
(a) Form AOC-1A sent annually to all the shareholders of the company.
(b) Form A0C-2 (a) Auditors
(c) Form A0C-3 (b) Practicing Company Secretary
(d) Form A0C-4A (c) Both (A) and (B)
(d) Either (A) or (B)
14. Directors' responsibilities are unlikely to include:
(a) A duty of care 18. Which type of director should be the head of the Stakeholders Grievance
(b) A duty to propose high dividends for shareholders Committee?
(c) A fiduciary duty (a) Executive director
(d) A duty to keep proper accounting records (b) Non-executive director
(c) Senior most director
15. The corporate governance (structure of a company reflects the individual (d) Chairman appointed for share-holders meetings
companies:
(a) Cultural and economic system
19. R Ltd. has disbursed a dividend of ₹ 75 on each equity share of ₹ 25. Equity Capital ₹ 400 lakh
The market price of share is ₹ 200. Corporate tax rate is 40%. Its cost of Reserves & Surplus ₹ 325 lakh
equity is – 10% Debentures ₹ 1,000 lakh
(a) 30.0% Current Assets ₹ 82 lakh
(b) 37.5% Cost of Equity 17.5%
(c) 35.7% Income Tax Rate 30%
(d) 33.5% Economic Value Added =?
(a) ₹ 43.75 lakh
20. NSZ Ltd. has equity of 15 Million kind 10% debentures of 20 Million. Cost
(b) ₹ 40.75 lakh
of equity is 18% and pre-tax cost of debt is 10% Company estimates its
(c) ₹ 43.57 lakh
EBIT for 7 Million. Applicable tax rate is 30%. What is the Economic value
added of NSZ Ltd. (d) ₹ 45.37 lakh
(a) 0.088 Million
(b) 0.678 Million 23. An analyst has calculated economic (value added of ₹ 43,750 for Z Ltd.
(c) 0.798 Million WACC of the company is 11.5% and applicable tax rate is 30%. The
(d) 0.533 Million company paid interest of ₹ 1,00,000 during the year. Total assets of the
company are ₹ 17,50,000. What is profit after tax (PAT) of the
21. H Ltd. β 1.8025. Dividend paid by the company last year was ₹ 9 per company?
share on face value of ₹ 30. The risk-free rate is 0.061275. Risk premium (a) ₹ 2,45,000
is 0.0825. Calculate cost of equity capital. (b) ₹ 1,45,000
(a) 21% (c) ₹ 1,75,000
(b) 6.28% (d) ₹ 3,15,000
(c) 14.77%
(d) 12% 24. Ramola Ltd. report its NOPAT ₹ 25,00,000. Its capital employed and
economic value added is ₹ 60,00,000 & ₹ 19,00,000 respectively. What
22. Following details are submitted by Rajlakhami Ltd.: is overall cost of capital of Ramola Ltd.?
EBIT ₹ 350 lakh (a) 10.9%
(b) 11% (d) 9.8%
(c) 10%
Answers
1. c 2. a 3. b 4. d 5. b 6. a 7. c 8. c 9. a 10. c
11. a 12. b 13. b 14. b 15. d 16. c 17. d 18. b 19. b 20. c
21. a 22. a 23. c 24. c
Topic 9 Cash Flow Statement
CASH FLOW STATEMENT (AS - 3)
Advantages OF CASH FLOW
• Is Statement of Changes in Cash and Cash STATEMENT
equivalents during a particular accounting • Helps in ascertaining Net Cash flows
period. • to evaluate Cash Financial Performance
• It shows Net Cash flows from Operating, • Facilitates to evaluate Cash Financial Position
Investing & Financing Activities • Facilitates Efficient Cash Management
• Not a substitute for Income Statement (P&L • Facilitates Comparison
A/c) & Position Statement (Balance Sheet) • Facilitates Capital Budgeting Decisions
• Historical in nature • Facilitates Capital Structure Decisions
• Facilitates Planning
Applicability of AS-3 Cash Flow Statements • Answers important financial questions
• As per Companies Act 2013; to be prepared by all

companies LIMITATIONS
• BUT, the act also specifies a certain category of
companies which are exempted:- • Ignores Non-cash transactions
• One Person Company (OPC), • Secondary Data Based Statement
• Small Company and • Historical Statement
• Dormant Company • Ignores Accrual Concept
CASH AND CASH EQUIVALENTS
• Cash comprises Cash on hand
CASH and Demand Deposits with
banks
• Eg. Cash in hand, Cash at Bank
• are short term, highly liquid investments

that are readily convertible (Short term
CASH maturity 3 M or less) into known
amounts of cash & very low risk of
EQUIVALENTS changes in value
• Eg. Treasury Bills, Commercial Papers,
Commercial Bills, Call Money,
Certificate of Deposit
TRANSACTIONS NOT CONSIDERED
AS CASH FLOWS
SOURCES OF CASH
Movements Logic:
between Since
items of these
Cash or Cash are, part
• Depreciation
Equivalents
are not
of the
cash Internal • Amortization of intangible
considered as manage
Cash Flows ment sources •
•
Loss on sale of fixed assets
Creation of reserves
NON-CASH TRANSACTIONS :
Ignore in CFS
1. Issue of Equity Shares or Debentures against the
• Issue of New Shares
purchase of an Asset
2. Issue of Equity Shares on conversion of Convertible External • Raising Long-term Loans
• Purchase of Plant and Machinery
3.
Debentures
Charging of Depreciation
Sources on deferred payments
• Sale of Fixed Assets, Investments
4. Amortization of a Fixed Intangible Asset
5. Written off of an old Fixed Tangible Asset
6. Declaration of Final Dividend on Shares
ACTIVITIES DISTINCTION BETWEEN FUNDS FLOW STATEMENT AND CASH FLOW
STATEMENT
1. A cash flow analysis is concerned only with the change in the cash position.
Fund flow analysis concerned with change in working capital position,
OPERATING ACTIVITIES between two balance sheet dates. Cash is only one of the constituents
2. A cash flow statement is merely a record of cash receipts and
• principal revenue-producing activities disbursements. While studying the short-term solvency of a business one is
of the enterprise & interested not only in cash balance but also in the assets which can be
• other activities that are not investing easily converted into cash like in FFS.
or financing activities 3. Cash flow analysis is more useful to the management as a tool of financial
analysis in short-periods
INVESTING ACTIVITIES 4. Funds flow analysis, helps to find out firm’s capacity to meet its long-term
obligations, if changes in working capital position on account of operations
are observed.
• are the acquisition and disposal of
5. Cash is part of working capital and therefore, an improvement in cash
Long-term Assets and other
position results in an improvement in the funds position, but the reverse is not
Investments not included in Cash
Equivalents true. In other words ‘inflow of cash’ results in ‘inflow of funds’ but inflow of
funds may not necessarily results in ‘inflow of cash.’
6. Method of preparation. Techniques of preparing the cash flow statement
FINANCING ACTIVITIES and funds flow statement are different. In funds flow statement, an increase
in a current liability brings a decrease in the current asset resulting in
• changes in owners’ capital and decrease in net working capital and vice-verse. In a cash flow statement an
Borrowings (whether ST or LT) increase in a current liability or decrease in a asset (other than cash) might
result in an increase in cash and vice versa.
CLASSIFY THE FOLLOWING ACTIVITIES AS (I) OPERATING ACTIVITIES;
(II) INVESTING ACTIVITIES; (III) FINANCING ACTIVITIES
(i) Purchase of Machinery (Vi) Receipt of Dividend
(ii) Sale of Land (vii) Payment of Interest on Debenture
(iii) Payment of Income Tax (viii) Receipt of Interest on Debenture
(iv) Refund of Income Tax (ix) Issue of Debentures
(v) Payment of Dividend (x) Buy-back of Equity Shares
SOLUTION
(i) Investing Activity, (ii) Investing Activity
(iii) Operating Activity, (iv) Operating Activity
(v) Financing Activity, (Vi) Investing Activity
(vii) Financing Activity, (viii) Investing Activity
(ix) Financial Activity, (x) Financing Activity
CLASSIFY THE FOLLOWING ACTIVITIES
1. Bank Overdraft 15. Wages & Salaries paid
2. Issue of Equity Share Capital 16. Sale of Patents
3. Cash Sales 17. Interest received on Debentures
4. Interest on Short-term Borrowings 18. Interest paid on borrowings
5. Sale of Machinery 19. Office & Adm. Expenses paid
6. Cash receipts from Debtors 20. Manufacturing Overheads paid
7. Commission and Royalty received 21. Dividend received on Shares
8. Purchase of Current Investments 22. Rent received on property
9. Redemption of Preference shares 23. Cash Credit
10. Cash Purchases of Goods 24. Income Tax paid
11. Brokerage - purchase of Investments 25. Dividend paid on Pref. Shares
12. Purchase of Goodwill 26. Underwriting Commission paid
13. Cash paid to suppliers of Goods. 27. Rent paid
14. Interim Dividend paid on Equity Shares 28. Brokerage paid on issue of shares
Classify the following activities as (i) operating activities; (ii)
investing activities; (iii) Financing activities in case of a
(A) MANUFACTURING ENTERPRISE
(B) FINANCIAL ENTERPRISE
1. Purchase of Investments.
2. Proceeds from Sale of Investments.
3. Brokerage paid on purchase & sale of Investments.
4. Interest received on Debentures held as Investments.
5. Dividend received on shares held as Investments.
6. Loans & Advances made to third parties.
7. Receipts from the repayments of loans & advances made to third parties.
8. Receipt of Interest on loans & advances made to third parties.
Indirect Method: Operating activities is determined by
METHODS – CASH FLOW STATEMENT making necessary adjustments in the net profit (or loss) as
disclosed by profit and loss account
Direct Method: Cash receipts from operating CASH FLOW STATEMENT (INDIRECT METHOD)
revenues and cash payments for operating expenses Particulars
are calculated and shown in the cash flow (A) Cash flows from operating activities
statement. Net profit before working capital changes
CASH FLOW STATEMENT (DIRECT METHOD) (+) Decrease in CA
-
Particulars (-) Increase in CA
(A) Cash flows from operating activities -
Cash receipt from customers (+) Increase in CL
Cash paid to suppliers & employees -
(-) Decrease in CL
Cash generated from operation
Cash generated from operation
Other/misc. income / Exp Other/misc. income
Other/misc. expenses Other/misc. expenses
Income tax/ advance tax paid Income tax/ advance tax paid
Cash before extraordinary item Cash before extraordinary item
Extraordinary item Extraordinary item
CASH FLOW FROM OPERATING ACTIVITIES
CASH FLOW FROM OPERATING ACTIVITIES
(B) Cash flow from investing activities: (C) Cash flows from financing activities :
Sale of Fixed Assets Issue of share capital / Debentures
Purchase of Fixed Assets Redemption of preference shares / Debentures
Investment in subsidiary Securities premium
Interest received on investment Long-term borrowing
Dividend received on investment Long term borrowing paid
Dividend paid
Interest paid on debenture/long term loans
Tax on dividends/corporate dividend tax
Interim dividend paid
Total (a) + (b) + (c)
Cash and cash equivalent at the beginning
Cash and cash equivalent at the end
1. From the following data, the value of building sold during the year: (a) Financing activity
Particulars 31.3.2013 31.3.2014 (b) Investing activity
Land & building 2,00,000 1,70,000 (c) Operating activity
Capital reserve Nil 20,000 (d) None of the above
A piece of land has been sold during the year and the profit on sale has
been credited to capital reserve. Depreciation charged on building during 4. Net profit before working capital changes of Super Ltd. is ₹ 4,35,000.
the year is ₹ 5,000; no additions have been made under this head during Changes in working capital during the year are as follows:
the year. Particulars ₹
(a) ₹ 30,000 Decrease in stock 2,58,000
(b) ₹ 50,000 Decrease in bills payable 8,400
(c) ₹ 40,000 Increase in bills receivable 38,800
(d) ₹ 45,000 Increase in prepaid expenses 2,500
Increase in outstanding expenses 7,800
2. The following information pertains to Expert Ltd.: Cash generated from operation for Super Ltd. will be
Particulars 31.12.2013 31.22014 (a) ₹ 2,18,900
Creditors 86,600 98,400 (b) ₹ 7,45,500
Outstanding expenses 85,000 1,15,000 (c) ₹ 6,51,100
Provision for tax 1,50,000 1,60,000 (d) ₹ 2,34,500
Debtors 2,68,000 2,54,000
Stock 1,40,000 1,75,000 5. Match the following:
Net profit before working capital changes is ₹ 5,56,000. The cash flow List I List II
from operating activities will be P. Cost accounting 1.change in working capital
(a) 4,26,800 Q. Funds Flow statement 2. Deals with the cost production selling &
(b) 5,76,800 distribution
(c) 5,35,200 R. cash flow statement 3. Is an important technique of financial
(d) 416,800 analysis
S. Ratio analysis 4. cash and cash equivalents
3. In case of a financial enterprise, interest received on debentures held as
investment is Select the correct answer from the option given below-
P Q R S (d) Statement of income & expenditure
(a) 4 3 2 1
(b) 2 1 4 3 9. Income from investments is a cash flow from —
(c) 4 3 1 2 (a) Operating activities
(d) 3 4 2 1 (b) Investing activities
(c) Financing activities
6. Assertion (A): (d) None of the above
Cash flow statement enhances the comparability of report.
Reason (R): 10. A cash flow statement is based upon ______while fund flow statement
Cash flow statement eliminates the effect of using different treatments for recognizes______
same transactions. (a) Cash basis of accounting; accrual basis of accounting
Select the correct answer from the following- (b) Accrual basis of accounting; conventional basis of accounting
(a) Both A and R are True and R is the correct explanation of A (c) Mercantile basis of accounting; cash basis of accounting
(b) Both A and R are True but R is not the correct explanation of A (d) Cash basis of accounting; cash basis of accounting
(c) A is true but R is false
(d) A is False but R is true 11. In cash flow, income tax paid ls treated as:
(a) Operating activity
7. The purchase of machinery by issuing long-term notes payable should be (b) Investing activity
reported as a — (c) Financing activity
(a) Non-cash investing and financing activity (d) Not shown any where
(b) Cash outflow in the operating activity
(c) Cash outflow in the investing activity 12. Arrange the following categories of cash inflows and cash outflows in a
(d) Cash outflow in the financing activity correct order:
1. Cash from investing activities
8. Which statement contains opening as well as closing balances of cash and 2. Cash from financing activities
cash equivalents and prepared on accrual basis — 3. Cash from operating activities
(a) Cash flow statement Select the correct answer from the options given below —
(b) Fund flow statement (a) 2, 1 and 3
(c) Both (A) and (B) above (b) 1, 3 and 2
(c) 3, 2 and 1
(d) 3, 1 and 2 15. The following information of non-financial enterprise is given;
Purchase of fixed assets ₹ 40,000 proceed from sale of equipment’s ₹
13. Some of the account balances of KK Ltd. are as follows in its balance 35,000 interest received ₹3000
sheet: Interest paid ₹ 6,000, Dividend received ₹ 4,000 and Dividend paid ₹
2016 (₹) 2017 (₹) 15,000. Amount of cash from investing activities will be -
Share Capital 2,50,000 4,50,000 (a) ₹ 1,000
10% Debenture 2,00,000 1,50,000 (b) ₹ (4,000)
Share Premium 25,000 50,000 (c) ₹ 2,000
If the interest paid on debentures was ₹ 20,000, the net cash flows from (d) ₹ (2,000)
financing activities were:
(a) ₹ 1,75,000 16. PQR Ltd. have the following balances:
(b) ₹ 1,55,000 Investment at the end of the year 2017-2018 ₹ 85,000, Investment at the
(c) ₹ 2,05,000 end of the year 2018-2019 ₹ 70,000. During the year the company had
(d) ₹ 2,25,000 sold 40% of its original investment at a profit of 50%. What will be the
amount of cash inflow and cash outflow from the investment?
14. In cash flow statement, proceeds from sales of an asset will be considered (a) ₹ 51,000 and ₹ 36,000
as: (b) ₹ 51,000 and ₹ 19,000
(a) Investing activity (c) ₹ 1,21,000 and ₹ 85,000
(b) Financing activity (d) ₹1,21,000 and ₹19,000
(c) Operating activity
Answers
1. d 2. a 3. c 4. c 5. a 6. a 7. a 8. a 9. b 10. a
11. a 12. d 13. b 14. a 15. c 16. b
Topic 10 Accounting Standards
ACCOUNTING STANDARDS WHY ACCOUNTING STANDARDS?
Written policy documents issued by expert accounting
• To ensure transparency, consistency, comparability,
body or by government or other regulatory body
adequacy and reliability of financial reporting, it
AS covers following aspects
• recognition,
is essential to standardize the accounting principles
• measurement, and policies.
• presentation and • Accounting Standards (ASs) provide framework
• Disclosure of accounting transactions and standard accounting policies for treatment of
• reduce the accounting alternatives transactions and events so that the financial
statements of different enterprises become
ACCOUNTING STANDARDS DEAL WITH comparable
1. Recognition of events and transactions in the financial • Are written policy documents issued by the expert
statements; accounting body or by the government or other
2. Measurement of these transactions and events; regulatory body covering the aspects of
3. Presentation of these transactions and events in the recognition, measurement, presentation and
financial statements in a manner that is meaningful and disclosure of accounting transactions and events in
understandable to the reader; and the financial statements
4. Disclosure requirements for better understanding of F.S.
by SH & potential investors
PROCESS OF FORMULATION OF BENEFITS OF ACCOUNTING STANDARDS
ACCOUNTING STANDARDS 1. Standardization of alternative accounting treatments
2. Certain areas where important information are not
Ascertainme statutorily required to be disclosed. Standards may call
Identificatio Constitution Preparation nt of views
of study of draft and of different for disclosure beyond that required by law.
n of area group its circulation bodies on 3. Facilitate comparison of financial statements of
draft companies situated in different parts of the world and
also of different companies situated in the same
country.
Finalization Comments
of exposure received on Modification Issue of AS
draft (E.D.) exposure of the draft
draft (E.D.)
LIMITATIONS OF ACCOUNTING
STANDARDS
OBJECTIVES OF ACCOUNTING STANDARDS 1. Difficulties in making choice between different
1. Eliminate the non-comparability of financial statements & treatments
thereby improving the reliability of financial statements; 2. Restricted scope: Accounting standards cannot
2. Provide a set of standard accounting policies, valuation override the statute
norms and disclosure requirements. 3. Lack of flexibilities
3. Accounting standards reduce the accounting alternatives
in the preparation of financial statements
ACCOUNTING STANDARD & AUDITORS LEVEL 1 ENTITIES
1. Securities are listed or are in the process of listing
1. It is the duty of the auditors to ensure that the AS are 2. Banks (including cooperative banks), financial
compiled with institutions or entities carrying on insurance
2. (Section 143(3)(e)) requires auditor to report whether in business.
his opinion the financial statements comply with the AS 3. (All C/I/BR) whose turnover (excluding other
referred in section 133 of the Companies Act, 2013. income) exceeds rupees fifty crore in PY.
4. (All C/I/BR) having borrowings (including public
deposits) more than ten crore @ any POT in PY.
APPLICABILITY OF ACCOUNTING STANDARDS 5. Holding and subsidiary entities of any one of the
1. Entities were classified into three levels I, Level II entities above.
and Level III entities
2. But, according to Government, there are two levels, LEVEL 2 ENTITIES
namely, Small and Medium-sized Companies (SMCs) 1. (All C/I/BR) whose turnover (excluding other
and companies other than SMCs. income) exceeds rupees 10 crore in PY.
3. Non-SMCs are required to comply with all the 2. (All C/I/BR) having borrowings (including public
Accounting Standards in entirety, while certain deposits) more than 1 crore @ any POT in PY.
exemptions/ relaxations have been given to SMCs. 3. Holding and subsidiary entities of any one of the
above.
LEVEL III ENTITIES (SMES)
Non-corporate entities which are not covered under Level I and Level II are considered as Level III entities.
SMALL-AND MEDIUM-SIZED COMPANY ENTERPRISES TO WHICH THE

1. whose equity or debt securities are not listed or are not in the ACCOUNTING STANDARDS APPLY
process of listing on any stock exchange, whether in India or 1. Commercial, industrial or business
outside India; activities, whether or not profit oriented
2. which is not a bank, financial institution or an insurance and even if established for charitable
company; or religious purposes
3. whose turnover (excluding other income) did not exceed 2. however, do not apply to enterprises
rupees fifty crore in the immediately preceding accounting solely carrying on the activities, which
year; are not of commercial, industrial or
4. which does not have borrowings (including public deposits) in business nature
excess of rupees ten crore at any time during the immediately 3. Even if a very small proportion of the
preceding accounting year; and activities of commercial nature, AS will
5. which is not a holding or subsidiary company of a company apply
that is not a small-and medium-sized company.
AS 1 Disclosures of Accounting Policies AS 22 Accounting for Taxes on Income
AS 2 Valuation of Inventories AS 24 Discontinuing Operations
Contingencies and Events Occurring After the AS 25 Interim financial Reporting
AS 4
Balance Sheet Date AS 26 Intangible Assets
Net Profit or Loss for the Period, Prior Period Items AS 27 Financial Reporting of Interest in Joint Venture
AS 5
and Changes in Accounting Policies AS 28 Impairment of Assets
AS 6 Depreciation Accounting AS 29 Provisions, Contingent Liabilities & Contingent
AS 7 Construction Contracts (revised 2002) Assets.
AS 9 Revenue Recognition AS 30 Financial Instruments: Recognition and Measurement
AS 10 Accounting for PPE AS 31 Financial Instruments: Presentation
The Effects of Changes in Foreign Exchange Rates AS 32 Financial Instruments: Disclosures
AS 11
(revised 2003)
AS 12 Accounting for Government Grants INDIAN ACCOUNTING STANDARDS
AS 13 Accounting for Investments (GLOBAL STANDARDS)
AS 14 Accounting for Amalgamations 1. Convergence towards Global Standards
AS 16 Borrowing Costs 2. Transparency of financial statements
AS 18 Related Party Disclosures
3. Comparability of financial statements
AS 19 Leases
4. Enhanced Disclosure requirements
AS 20 EPS
NEED FOR CONVERGENCE INTERNATIONAL ACCOUNTING
TOWARDS GLOBAL STANDARDS STANDARD BOARD (IASB)
1. Each country has its own set of rules and reg. for 1. London-based group, International Accounting Standards
accounting and financial reporting Committee (IASC), developed International Accounting
2. when an enterprise wants to raise capital from the Standards.
markets of other country 2. Presently known as International Accounting Standards
3. In turn will require understand the differences Board (IASB).
between the rules governing financial reporting in 3. IASC comprises professional accountancy bodies of over 75
the foreign country as compared to its own country countries (including the Institute of Chartered Accountants of
4. Hence, translation and re-instatements are India).
important in a world that is rapidly globalising 4. Primarily, IASC was established, in the public interest, to
5. International analysts and investors would like to formulate and publish, International Accounting Standards
compare financial statements based on similar 5. The members of IASC responsible to support standards
accounting standards issued by IASC.
6. Also a strong need was felt by legislation to bring 6. Then, IASB publishes its Standards in a series of
about uniformity, rationalization, comparability, pronouncements called IFRS.
7. However, IASB has not rejected the standards issued by the
transparency and adaptability in F.S.
IASC. Those pronouncements continue to be designated as
7. For free flow of global investment and achieves
“International Accounting Standards” (IAS).
benefits for all capital market
INTERNATIONAL FINANCIAL REPORTING
STANDARDS BENEFITS OF
• To achieving convergence towards global reporting, a London based
group (IASB) responsible for developing International Accounting CONVERGENCE WITH IFRS
Standards, was established in June, 1973. 1. The Economy: benefits the economy by increasing
• IASB publishes its Standards in a series of pronouncements called growth of its international business. It facilitates
International Financial Reporting Standards (IFRS). However, IASB has maintenance of orderly and efficient capital markets
not rejected the standards issued by the ISAC. Those pronouncements
and also helps to increase the capital formation and
continue to be designated as “International Accounting Standards” (IAS).
• The term IFRS comprises IFRS issued by IASB; IAS issued by International thereby economic growth
Accounting Standards Committee (IASC); Interpretations issued by the 2. Investors: Investors want the information that is more
Standard Interpretations Committee (SIC) and the IFRS Interpretations relevant, reliable, timely and comparable across the
Committee of the IASB. jurisdictions. Financial statements prepared using a
common set of accounting standards help investors
INTERNATIONAL FINANCIAL REPORTING better understand investment opportunities as
STANDARDS COMPRISE opposed to financial statements prepared using a
• 9-International Financial Reporting Standards (IFRS) – standards issued
different set of national accounting standards
after 2001 by IASB. 3. The Industry: The industry is able to raise capital
• 29-International Accounting Standards (IAS) – standards issued before from foreign markets at lower cost if it can create
2001by IASC which are still valid. confidence in the minds of foreign investors that their
• 16-Interpretations issued by International Financial Reporting financial statements comply with globally accepted
Interpretations Committee (IFRIC) after 2001. accounting standards
• 11–interpretations issued by Standing Interpretations Committee (SIC)
before 2001.
1. Accounting Standards _______ the statue: (a) All commercial, industrial and business reporting enterprises having
(a) Can over-ride borrowings, including public deposits, in excess of ₹1 Crore but not in
(b) Cannot over-ride excess of ₹10 Crore.
(c) May over-ride (b) All commercial, industrial and business reporting enterprises, whose
(d) None of the above turnover for the immediately preceding accounting period exceeds
2. The original cost at which an asset or liability is acquired is known as – ₹50 Crore.
(a) Carrying cost (c) All commercial, industrial and business reporting enterprises, whose
(b) Replacement cost turnover for the immediately preceding accounting period ₹5 Crore
(c) Amortization but not in excess of ₹25 Crore.
(d) Historical cost (d) None of the above
3. The council of ICAI has so far issued ______ accounting standards. 6. Which of the following is Level-II enterprise?
However, AS-8 has been withdrawn. Thus, effectively there are _____ I. Listed enterprises outside India.
accounting standards II. All commercial, industrial and business reporting enterprises, whose
(a) 33; 32 turnover for the immediately preceding accounting period exceeds
(b) 32; 31 ₹50 Crore.
(c) 31; 30 III. Financial institutions
(d) 34; 33 IV. Enterprises carrying on insurance business.
Select the correct answer from the options given below.
4. Which section of the Companies Act, 2013 provides that the financial (a) I&III
statements of every company shall comply with the accounting standards? (b) II & IV
(a) Section 129 (c) III only
(b) Section 130 (d) II only
(c) Section 131
(d) Section 132 7. Consider following cases:
(i) A (P) Ltd., a subsidiary of a multinational company listed on London
5. Which of the following is Level-1 enterprise? Stock Exchange. It has a turnover of ₹12 Crores and borrowings of
₹5 Crores.
(ii) B (P) Ltd. has a turnover of ₹45 Crores, other income of ₹7 Crores (a) Prudence
and bank borrowings of ₹9 Crores. (b) Substance over from
(iii) C Ltd. has appointed Merchant Bankers to prepare a Red-herring (c) Materiality
prospectus for the purpose of filing the same with SEBI. (d) Realization
Classify above enterprises as SMC or NON-SMC and select the correct
option given below: 11. Provisions for doubtful debts, (provision for discount on debtors are based
(i) (ii) (iii) on:
(a) Non-SMC Non-SMC SMC (a) Prudence
(b) SMC Non-SMC Non-SMC (b) Substance over from
(c) Non-SMC SMC Non-SMC (c) Materiality
(d) Non-SIMC SMC SMC (d) Realization
8. As per the Companies (Accounting (Standards) Rules, an existing company, 12. As per AS-2, the historical cost of inventories should normally be deter-
which was previously Non-SMC and subsequently becomes an SMC, shall mined by using _____
not be qualified for exemption or relaxation in respect of Accounting (a) FIFO and LIFO Method
Standards available to an SMC until the company remains an SMC for: (b) LIFO and Weighted Average Cost Method
(a) Three consecutive accounting periods (c) FIFO and Weighted Average Cost Method
(b) Four consecutive accounting periods (d) FIFO and Simple Average ‘Cost Method
(c) Two consecutive accounting periods 13. As per AS-3, an investment normally qualifies as a cash equivalent only
(d) Five consecutive accounting periods when it has a short maturity of, say, _______ from the date of acquisition.
(a) Two months or less
9. Which of the following is included in cost of inventory as per AS-2?
(b) Four months or less
(a) Duties and taxes subsequently re-coverable from taxiing authorities
(c) Three months or less
(b) Freight inwards
(d) Six months or less
(c) Rebates
(d) Duty drawbacks
14. Due to which of the following concept inventory is valued at cost or net
realizable value, whichever is less?
10. Payment of penalties/fines for (violation of law should be disclosed
(a) Going Concern
separately. It should not be clubbed with "Office Expenses" or
(b) Separate Entity
"Miscellaneous Expenses". This the example of –
(c) Prudence (c) Both (A) and (B)
(d) Matching (d) Neither (A) or (B)
15. Which of the following method of inventory valuation is not recommended 19. AS-13 deals with:
by AS - 2? (a) Accounting for borrowings
(a) Specific Identification Method (b) Accounting for investments
(b) Last-in-First Out Method (c) Finance lease
(c) Weighted Average Cost Method (d) Operating lease
(d) First-in-First Out Method
20. As per AS-13, where, long-term investments are reclassified as current
16. Which of the following is 'revenue' as per AS-9? investments, transfers are made at the:
(a) Realized gains from the disposal of non-current assets (a) Higher of Cost or Fair Value at the date of transfer.
(b) Natural increases in herds and agricultural and forest products (b) Lower of Cost or Carrying Amount at the date of transfer.
(c) Realized or unrealized gains resulting from changes in foreign (c) Lower of Cost or Fair Value at the date of transfer.
exchange rates (d) Higher of Cost or Carrying Amount at the date of transfer.
21. X Ltd. purchased goods at the cost of ₹40 lakhs in October, 2018. Till
17. Which of the following statements is correct with respect to inventories? March, 2019, 75% of the stocks were sold. The company wants to disclose
(a) The FIFO method assumes that the costs of the earliest goods acquired closing stock at ₹10 lakhs. The expected sale value is ₹11lakhs and a
are the last to be sold. commission at 10% on sale is payable to the agent. What is the correct
(b) It is generally good business management to sell the most recently closing stock to be disclosed as at 31.3.2019 as per AS-2?
acquired goods first. (a) 10 lakhs
(c) Under FIFO, the ending inventory is based on the latest units (b) 9.9 lakhs
purchased. (c) 11 lakhs
(d) FIFO seldom coincides with the actual physical flow of inventory. (d) 12 lakhs
18. Revenue from service transactions usually recognized as the service is 22. On 31.3.2018 a business firm finds that cost of a partly finished unit on
'performed, by the: that date is ₹530. The unit can be finished in 2018-2019 by an additional
(a) Proportionate completion method expenditure of ₹310. The finished unit can be sold for ₹750 subject to
(b) Completed service contract method
payment of 4% brokerage on selling price. The firm seeks your advice (c) ₹ 1,406
regarding the amount at which the unfinished unit should be valued as at (d) ₹ 863
31.3.2019 preparation of final accounts?
(a) 530 per unit 25. HM Ltd. Operates retails business; For the financial year following data
(b) 410 per unit given.
(c) 440 per unit At Retail Price At Cost
(d) 720 per unit Opening Stock ₹ 80,000 ₹ 60,000
Purchases ₹ 1,40,000 ₹ 1,20,000
23. X Ltd. manufactures a product and details of cost areas under: Calculate the cost of closing stock; if sales made during the year is ₹
Raw material ₹ 4,00,000 2,00,000
Direct labour ₹ 2,50,000 (a) ₹16,436
Variable production over-heads ₹ 1,50,000 (b) ₹14,366
Fixed production overheads ₹ 2,90,000 (c) ₹16,364
(including interest ₹1,00,000) (d) ₹14,346
Normal production capacity is ₹55,000 units. At the year end closing stock
was ₹2,500 units. Compute the value of closing stock. 26. Books of T Ltd. revealed the following information:
(a) ₹45,000 Opening inventory ₹ 6,00,000
(b) ₹40,000 Purchases during the year ₹ 34,00,000
(c) ₹55,000 Sales during the year ₹ 48,00,000
(d) ₹50,000. At year end, the value of inventory as per physical stock-taking was
₹3,25,000. The company's gross profit on sales has remained constant at
24. In process, 100 units of raw materials were introduced at a cost of 1,000. 25%. The management of the company suspects that some inventory might
The other expenditure incurred by the process was ₹600. Of the units have been pilfered by a new employee. What is the estimated cost of
introduced, 10% are normally lost in the course of manufacturing and they missing inventory?
possess a scrap value of ₹3 each. The output of Process was only 75 units. (a) ₹ 75,000
Calculate the value of final output. (b) ₹ 25,000
(a) ₹ 262 (c) ₹ 1,00,000
(b) ₹ 1,308 (d) ₹ 1,50,000
(d) ₹ 1,88,562
27. HM Ltd., a dealer in second-hand cars has the following five vehicles of
different models and makes in their stock at the end of the financial year 29. HM-Ltd. purchased 10,000 shares of N Ltd. @ ₹300. Brokerage @ 2%
2018-2019: and stamp duty was 10 paisa per ₹100. What is the value of investment
Car Cost NRV as per AS-13?
Fiat 90,000 95,000 (a) 30,63,000
Ambassador 1,13,000 1,55,000 (b) 30,60,000
Maruti Esteem 2,75,000 2,65,000 (c) 30,00,000
Maruti 800 1,00,000 1,25,000 (d) 30,93,000
Zen 2,10,000 2,00,000
Value of stock included in the balance sheet of the company as on March 30. HM Ltd. acquired certain investment by giving its machinery having WDV
31, 2019 was: ₹47,000 and cash ₹16,000. Realizable value of machinery was
(a) ₹ 7,62,500 ₹20,000. Calculate the cost of investment acquired as per AS-13.
(b) ₹ 7,70,000 (a) ₹ 31,000
(c) ₹ 7,90,000 (b) ₹ 36,000
(d) ₹ 8,70,000 (c) ₹ 27,000
(d) ₹ 11,000
28. An amount of ₹ 9,90,000 was incurred on a contract work up to
31.3.2018. Certificates have been received to date to the value of ₹ 31. On 1.1.2019, 7,200 equity shares outstanding in the books of X Ltd.
12,00,000 against which ₹ 10,80,000 has been received in cash. The cost On 31.5.2019, 2,400 shares issued for cash.
of work done but not certified amounted to ₹ 22,500. It is estimated that 1.11.2019, the company made buy back of 1,200 shares.
by spending an additional amount of ₹ 60,000 the work can be Net profit for the year ended 31.12.2019 is ₹6,30,000.
completed in all respects in another two months. Agreed contract price of Basic EPS as per AS-20 =?
work is ₹ 12,50,000. Compute a profit to be taken to the P&L A/c as per (a) 75 per share
AS-7. (b) 80 per share
(a) ₹ 1,88,625 (c) 35 per share
(b) ₹ 1,65,288 (d) 55 per share
(c) ₹ 1,62,885
Answers
1. b 2. d 3. b 4. a 5. d 6. d 7. c 8. c 9. b 10. c
11. a 12. c 13. c 14. c 15. b 16. d 17. c 18. c 19. b 20. b
21. b 22. b 23. a 24. b 25. c 26. a 27. b 28. a 29. a 30. b
31 a
Topic 11 National & International Accounting Authorities
INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI) INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI)
1. Only professional body in India to develop and regulate National professional accounting body of India
profession of Company Secretaries. It was established on 1st July 1949 as a statutory body
2. Set-up under an act of Parliament, the Company Secretaries under the Chartered Accountants Act, 1949 enacted by
Act, 1980. Parliament to regulate the profession of CA in India.
3. Functions under jurisdiction of MCA, Government of India. Second largest professional Accounting & Finance body in
4. Provides top-quality education to students of CS Course & set the world. Also advising economic policy formulation
quality standards to CS Members. Only licensing cum regulating body of the financial audit and
5. Contributing to the social economic growth of India accountancy profession in India.
6. A CS is in a senior position (Managerial position or above) in a It recommends AS to be followed by companies in India to
private or public sector organization National Advisory Committee on Accounting Standards
7. CS is responsible for efficient administration of a company (NACAS) & sets AS to be followed by other organizations.
(compliance with law) & ensuring that decisions of BOD are ICAI is solely responsible for setting the Standards on
implemented. Auditing (SAs) to be followed in the audit
8. Role is not clerical or secretarial. It also issues other technical standards like Standards on
9. Ensures that an organization complies with relevant legislation & Internal Audit (SIA), Corporate Affairs Standards (CAS) etc.
keeps BOD informed of their legal responsibilities. to be followed by practicing Chartered Accountants.
10. CS are company's representative on legal documents & ensure It works closely with the Government, RBI & SEBI in
that company and its directors operate within the law. formulating and enforcing such standards.
11. Responsibility to communicate with shareholders, to ensure that Only a member of ICAI can appointed as statutory auditor It
dividends are paid & to maintain company records, such as lists also examines various taxation laws, rules, regulations,
of directors and shareholders, and annual accounts. circulars, notifications, etc.
INSTITUTE OF COST ACCOUNTANTS OF INDIA WHAT ARE THE OBJECTIVES OF THE INSTITUTE OF COST
ACCOUNTANTS OF INDIA (ICMAI)
Previously known as Institute of Cost & Works Accountants of India (ICWAI), is a premier statutory professional
accountancy body, with the objects of promoting, regulating & developing the profession of Cost Accountancy.
On 28th May, 1959, established by a special act of Parliament, namely, the Cost and Works Accountants Act, 1959
It is the only licensing cum regulating body of Cost & Management Accountancy profession in India.
It recommends the Cost Accounting Standards to be followed by companies in India.
ICMAI is solely responsible for setting the auditing and assurance standards for statutory Cost Audit
It also issues technical guidelines on Internal Audit, Management Accounting etc. to be followed by P Cost A/ctant
It works closely with the industries, various departments of Government of India, State governments in India & other
Regulating Authorities in India e.g. RBI, Insurance Regulatory and Development Authority, Securities and Exchange Board
of India etc. on several aspects of performance, cost optimization and reporting.
Objectives of the Institute of Cost Accountants of India:

• To develop this profession as a powerful tool of management control
• To promote and develop the adoption of scientific methods in cost and management accountancy.
• To keep abreast of the latest developments in the cost and management accounting principles
• To exercise supervision for the entrants to the profession
• To organize seminars and conferences on subjects of professional interest
• To carry out research and publication activities
IFRS FOUNDATION - is a not-for-profit international organization developing a single set of high-quality global accounting
standards, known as IFRS Standards, that bring transparency, accountability and efficiency to financial markets
IFRS Standards are now required in more than 125 jurisdictions, with many others permitting their use.
IFRS Foundation's Three-Tier Governance Structure, based on an independent standard-setting Board of experts
(International-Accounting Standards Board), governed and overseen by Trustees from around the world (IFRS Foundation
Trustees) who in turn are accountable to a monitoring board of public authorities (IFRS Foundation Monitoring Board).
IFRS Advisory Council provides advice and counsel to Trustees & Board
Trustees of the IFRS Foundation (Trustees); responsible for governance and oversight of the IASB; Trustees are not involved
in any technical matters relating to IFRS Standards. This responsibility rests solely with the Board. The Trustees are
accountable to the Monitoring Board, a body of publicly accountable market authorities.
Trustees are appointed for a renewable term of three years.
Michel Prada was appointed Chairman of the IFRS Foundation Trustees, effective 1 January 2012, and his second term ran
until 31 December 2017. He will remain in position until a successor is in his place.
The Trustees' responsibilities include, but are not limited to:
• Appointing members of the Board, the IFRS Interpretations Committee and the IFRS Advisory Council.
• Establishing operating procedures, consultative arrangements & due process for Board, Committee & Advisory Council.
• Reviewing annually the strategy of the Board and assessing its effectiveness.
• Ensure the financing of the IFRS Foundation and approve annually its budget.
Trustees to undertake a formal, public review of the structure of the IFRS Foundation every 5 years.
Trustees are accountable to a Monitoring Board of public authorities. The Trustees' reports to the Monitoring Board are
available on the Trustees' meeting pages.
1. Profession of Company Secretaries is regulated in India by provisions of of India, Ministry of Corporate Affairs, Ministry of Finance and other
the – stakeholders.
(a) Companies Act, 2013 (a) 20; 12; 4
(b) Company Secretaries Act, 1988 (b) 40; 32; 8
(c) SEBI Regulations (c) 30; 20; 6
(d) All of the above (d) 50; 38; 9
2. ICSI functions under the jurisdiction of the - 6. Institute of Cost Accountants of India was established on –
(a) Prime Minister of India (a) 10th May, 1960
(b) Ministry of Company Affairs (b) 28th May, 1960
(c) NCLT (c) 28th May, 1959
(d) Ministry of Corporate Affairs (d) 10th May, 1959
3. Company Secretary is also known as – 7. Objective of the Institute of Cost Accountants of India is –
(a) Legal Officer (a) To promote and develop the adoption of scientific methods in cost and
(b) Chief Company Law Officer management accountancy.
(c) Compliance Officer (b) To compete with the Chartered Accountants.
(d) Ethical Officer (c) To 'Implement the 'FRS in India.
(d) To develop high-quality public sector financial reporting standards.
4. At present near about persons are the members of ICSI.
(a) 55,000 8. Member of which organization can be appointed as statutory auditor of
(b) 1,05,000 a company under the Companies Act, 2013.
(c) 2,02,000 (a) Member of ICSI
(d) 3,48,000 (b) Member of ICAI
(c) Member of ICWAI
5. The Council of ICAI constitutes of ______ members of whom ______ are (d) Any of the above
elected by the Chartered Accountants and remaining _________ are
nominated by the Central Government generally representing the 9. IFRS Foundation is a ______ responsible for developing a single set of
Comptroller and Auditor General of India, Securities and Exchange Board high-quality global accounting standards, known as IFRS Standards.
(a) Not-for-profit organization (d) Codes & Standards Committee; Executive Committee; Conduct
(b) Statutory organization Committee
(c) Nominee organization
(d) None of the above 13. Approval of exposure drafts, re-exposure drafts, and IPSASs are made
by the affirmative vote of at least ____ of the International Public Sector
10. The IFRS Foundation ____ has a governance structure Accounting Standards Board (IPSASB) members.
(a) Three-tier (a) one-third
(b) Two-tier (b) two-thirds
(c) Four-tier (c) one-half
(d) Five-tier (d) three-fourth
11. Financial Reporting Council (UK) is a: 14. The European Financial Reporting Advisory Group (EFRAG) is a private
(a) Company limited by guarantee association established in –
(b) Unlimited company (a) 1901
(c) Subsidiary company of IFRS (b) 2001
(d) Associate company of the Institute of Chartered Accounts of England (c) 1991
(d) 2011
12. The Financial Reporting Council (UK) board is supported by three
committees, namely: 15. Professional Oversight Board (POB) is a:
(a) Presidents Committee; Professional Committee; Implementation (a) Accountancy & Actuarial Discipline Board of UK
Committee (b) Australian regulatory body
(b) Core Standards Committee; Conduct Committee; Standby Committee (c) UK regulatory body
(c) Official Committee; Subsidiary Committee; Professional Committee (d) Canadian accounting body
Answers
1. D 2. D 3. C 4. A 5. B 6. C 7. A 8. B 9. A 10. A
11. A 12. D 13. B 14. B 15. C
Topic 12 IFRS & AS In India
DEVELOPMENT IN INDIAN GOVERNMENT OF INDIA COMMITMENT
TO IFRS CONVERGED IND AS
ACCOUNTING STANDARDS (IND AS) Initially Ind AS were expected to be implemented from the
• ICAI initiated the process of moving towards IFRS in 2006 with view to year 2011
enhance acceptability & transparency of financial information But due to certain issues MCA decided to postpone the date
• The Government of India in consultation with the ICAI decided to of implementation
converge and not to adopt IFRSs issued by the IASB In July 2014, the Finance Minister of India (Shri Arun Jaitely
• While formulating IFRS converged Indian Accounting Standards (Ind AS) ji) announced an urgency to converge the existing accounting
standards with IFRS
certain changes have been made considering the economic environment
Then, various steps have been taken to facilitate the
of the country
implementation of IFRS-converged Indian Accounting
Standards (Ind AS).
WHAT ARE INDIAN ACCOUNTING MCA issued revised roadmap of implementation of Ind AS
STANDARDS (IND AS)? for companies other than Banking companies, Insurance
Companies and NBFCs and Indian Accounting Standards (Ind
• Indian Accounting Standards (Ind-AS) are the;
AS).
• IFRS converged standards issued by the Central Government of India;
As per the Notification, Ind AS converged with IFRS shall be
• under the supervision and control of Accounting Standards Board (ASB) of implemented on voluntary basis from 1st April, 2015 and
ICAI & in consultation with National Advisory Committee on Accounting mandatory from 1st April, 2016.
Standards (NACAS) Later on, in 2016 MCA notified roadmap for NBFC
• NACAS recommend these standards to the MCA. announcing implementation date for Ind AS. Similarly,
• MCA has to spell out the standards (AS) applicable for companies in India. Banking and Insurance regulatory authority have issued
• The Ind AS are named and numbered in the same way as the separate roadmaps for implementation of Ind AS for Banking
corresponding IFRS and Insurance companies respectively
• IAS-1-Presentation of Financial Statements • IAS-26- Accounting and reporting by retirement
• IAS-2- Inventories benefit plans
• IAS-7- Cash Flow Statements • IAS-27- Consolidated and Separate Financial
• IAS-8- Accounting Policies, Change in Accounting Statements
estimates and Errors • IAS-28- Investment in Associates
• IAS-10- Events after balance sheet date • IAS-29- Financial Reporting in Hyperinflationary
• IAS-11- Construction Contracts Conditions
• IAS-12- Income Taxes • IAS-31- Interest in Joint Ventures
• IAS-16-Property, Plant and Equipment's • IAS-32- Financial Instruments- Presentation
• IAS-17- Leases • IAS-33- Earning Per Share
• IAS-18- Revenue • IAS-34- Interim Financial Reporting
• IAS-19- Employee Benefits • IAS-36- Impairment of Assets
• IAs-20-Accounting for Govt Grant and Disclosure of • IAS-37- Provisions, Contingent Liabilities and
Govt. Assistance Contingent Assets
• IAS-21- Effect of Changes in Forex Rates • IAS-38- Intangible Assets
• IAS-23-Borrowing Costs • IAS-39- Financial Instruments: Recognition and
• IAS-24- Related Party Disclosures Measurement
• IAS-40-Investment Property
• IAS-41- Agriculture
• Ind AS 17 Leases
LIST OF IND AS • Ind AS 18 Revenue
• Ind AS 101 First-time Adoption of Indian Accounting • Ind AS 19 Employee Benefits
Standards • Ind AS 20 Accounting for Government Grants and Disclosure
• Ind AS 102 Share based Payment of Government Assistance
• Ind AS 103 Business Combinations • Ind AS 21 The Effects of Changes in Foreign Exchange Rates
• Ind AS 104 Insurance Contracts • Ind AS 23 Borrowing Costs
• Ind AS 105 Non-current Assets Held for Sale and • Ind AS 24 Related Party Disclosures
Discontinued Operations • Ind AS 27 Consolidated and Separate Financial Statements
• Ind AS 106 Exploration for and Evaluation of Mineral • Ind AS 28 Investments in Associates
Resources • Ind AS 29 Financial Reporting in Hyperinflationary Economies
• Ind AS 107 Financial Instruments: Disclosures • Ind AS 31 Interests in Joint Ventures
• Ind AS 108 Operating Segments • Ind AS 32 Financial Instruments: Presentation
• Ind AS 1 Presentation of Financial Statements • Ind AS 33 Earnings per Share
• Ind AS 2 Inventories • Ind AS 34 Interim Financial Reporting
• Ind AS 7 Statement of Cash Flows • Ind AS 36 Impairment of Assets
• Ind AS 8 Accounting Policies, Changes in Accounting • Ind AS 37 Provisions, Contingent Liabilities and Contingent
Estimates and Errors Assets
• Ind AS 10 Events after the Reporting Period • Ind AS 38 Intangible Assets
• Ind AS 11 Construction Contracts • Ind AS 39 Financial Instruments: Recognition & Measurement
• Ind AS 12 Income Taxes • Ind AS 40 Investment Property
• Ind AS 16 Property, Plant and Equipment • IAS-41- Agriculture
ADOPTION, CONVERGENCE & INTERPRETATION OF IFRS & ACCOUNTING STANDARDS IN INDIA
Objective of International Accounting Standards
1. To formulate & publish international accounting standards
2. To promote their worldwide acceptance and observation.
3. To develop in public interest global accounting standards (with high quality).
4. To promote the use and rigorous application of those standards.
5. To bring convergence of national accounting standards & international accounting standards.
Non-acceptability of international Accounting Standards- Reasons
1. Accounting practices in different countries are different
2. Worldwide contradictions of views have been noticed in national & International standard setting bodies
3. This require harmonization for evolving uniform accounting standard for world wide application.
ROAD MAP FOR THE APPLICATION OF IND. AS BY MCA

Phase 1: Mandatory for accounting periods beginning on or after 1st April 2016
Companies whose equity and/or debt securities are listed (A)
Companies who are in the process of listing on any stock exchange in India or outside India
Companies having a net worth of Rs. 500 Crore or more. (B)
Unlisted companies having a net worth of Rs. 500 Crore or more (C)
Holding, subsidiary, joint venture or associate companies of companies covered in (A) and
Comparative information required for the period ending 31st March 2016 or thereafter. The roadmap does not mention the net worth
criteria for holding, subsidiary, joint venture or associate companies covered in (C) above. Accordingly, it appears that even smaller
sized companies in this category will get covered in Phase 1.
…..ROAD MAP FOR THE APPLICATION OF IND.
AS BY MCA
Phase 2: Mandatory for accounting periods beginning on or after 1st April 2017
(D)
Companies whose equity and / or debt securities are listed
Companies who are in the process of listing on any stock exchange in India or outside India
Companies having a net worth greater than or equals to 250 crores but less than Rs. 500 Crore.
(E)
Unlisted companies having a net worth of Rs. 250 Crore or more but less than Rs. 500 Crore and not
covered in any of the other categories.
(F)
Holding, subsidiary, joint venture or associate companies of companies covered in (D) and (E)
IFRS & IGAAP
Points IFRS IGAAP
First time adoption Full retrospective application of IFRS to Profit & Loss A/ c and No needs to prepare reconciliation on first time adoption
Balance Sheet.
Reconciliation of Profit & Loss A/c and Balance Sheet in respect
of last year reported numbers under previous GAAP.
Components of Financial Comprises of Balance Sheet, Profit & Loss A/c, Cash Flow Comprises of Balance Sheet, Profit and Loss A/c. Cash Flow
Statements Statement, changes in equity and accounting policy and notes Statement (if applicable), and Notes to Accounts.
to Accounts
Balance Sheet No particular format, a current/non-current presentation of As per Format Prescribed in Schedule to the Companies Act for
assets and liabilities is used. Companies, adherence to Banking Regulation for Banks etc.
Income Statement No particular format prescribed (IAS-1) As per Format Prescribed in to the Companies Act (AS-1).
Cash Flow Statements Mandatory for all entities (IAS-7) Level 3 entities are exempted (AS-3)
IFRS & IGAAP
Points IFRS IGAAP
Dividends Liability to be recognized in the period when Recognized as an appropriation against the profit, and recorded as
dividend is declared. (IAS-10) liability at BS date even if declared subsequent to reporting period
but before the approval of Financial statements (AS-4)
Cost of major repairs & overhaul Recognized in carrying amount of the assets (IAS- Expensed off. Only expenses which increase the FEB are to be
expenditure on fixed assets 16). capitalized (AS-10).
Revaluation Revaluation (if done) to be updated periodically No specific requirement for revaluation. Revaluation can be done on
so that carrying amount does not differ from fair systematic basis like for one location leaving aside the assets of other
value at the end period. Revaluation to be done location (AS-10).
for entire class of assets (IAS-16).
Change in the method of Considered as a change in accounting estimate. To Considered as change in accounting policy, retrospective computation
depreciation Be applied prospectively. (IAS-16 and IAS 8) and excess or deficit is adjusted in same period. Required to be
disclosed (AS-6)
IFRS & IGAAP
Points IFRS IGAAP
Earnings Per Share Disclosure to be made in only consolidated financials Disclosure of EPS in both consolidated and separate financials. (AS-20)
of the parent Co. (IAS-33)
Intangible Intangible assets can have Ind.efinite useful life and There is no concept of Indefinite useful life. Assets have definite life,
Assets hence such assets are tested for impairment and not (usually 10 years)
amortized.
Reporting Requires the measurement of profit using the Schedule to the Companies Act specifies Indian Rupees as the reporting
Currency functional currency. Entities may, however, present currency. (AS-11)
financial statements in a different currency. (IAS-21)
Key Management Includes Executive as well as non-executive directors Excludes non-executive directors. (AS-18)
Personnel (KMP) (IAS-24)
IFRS & IGAAP

Points IFRS IGAAP
Compensation to Disclosure to be made for total compensation such as AS-18 does not require the break-up of compensation
KMP short term employee benefits and post-employment cost.
benefits.
Fringe Benefits Tax Included as part of related expense (fringe benefit) Disclosed as a separate item after profit before tax on
which gives rise to incurrence of the tax. the face of the income statement.
Uniform Accounting Prepared using uniform accounting policies across all Policies may differ due to impracticability. (AS-21)
Policies entities in a group. (IAS-27)
Disclosure of Prohibits such disclosure (IAS-1). No such term in IFRS Disclosure to be made in notes (AS-5)
extraordinary items
1. Under Ind AS-1, presentation of any items of income or expense as (a) Inventories
extraordinary is – (b) Statement of Cash Flows
(a) Separately disclosed (c) Accounting Policies, Changes in Accounting Estimates and Errors
(b) Shown as a part of statement of profit and loss (d) Events after the Reporting Period
(c) Prohibited
(d) None of the above 6. The main objective of the Ind AS-10 is:
(a) When a entity should adjust its financial statements for events after
2. Ind AS-11 requires contract revenue to be measured at – reporting period
(a) Net realizable value (b) To prescribe the accounting treatment for income taxes
(b) Fair value of consideration received/receivable (c) To prescribe the criteria for selecting and changing accounting policies
(c) Consideration received/receivable (d) To prescribe, for lessee and lessor, the appropriate accounting
(d) None of the above policies
3. Ind AS-20 requires government grants of the nature of promoters 7. Match the following:
contribution to be – List-A List-A
(a) Credited directly to capital re-serve and treated as a part of (i) Ind AS-21 1. Effects of Changes in Foreign Exchange Rates
shareholders funds (ii) Ind AS-24 2. Related Party Dis-closures
(b) Recognize as income over the periods (iii) Ind AS-33 3. Earnings per Share
(c) Do not recognize any such grants (iv) Ind AS-40 4. Investment Property
(d) None of the above Select the correct answer from the options given below:
(i) (ii) (iii) (iv)
4. Ind AS-34 requires the following in the contents of an interim financial
(a) 4 3 2 1
report in addition to what was required under previous standard AS-25
(b) 2 1 4 3
condensed balance sheet, a condensed statement of profit and loss, a
(c) 1 2 3 4
condensed cash flow statement –
(d) 1 2 4 3
(a) A condensed balance sheet
(b) A condensed statement of profit and loss 8. Ind AS-1 requires disclosure of critical assumptions about the future and
(c) A condensed cash flow statement other sources of measurement uncertainty –
(d) A condensed statement of changes in equity (a) That can affect earning capacity of the business
5. Ind AS-7 deals with:
(b) That can affect carrying amounts of assets and liabilities within next (a) Cost
financial year. (b) Replacement cost
(c) That can affect carrying amounts of intangibles in current financial (c) Net realizable value
year. (d) Net realizable value limited to the amount of original write-down
13. hid AS-2
9. Ind AS-1 requires that classification of expenses be presented on the basis (a) Defines fair value
of – (b) Provides an explanation in respect of distinction between net
(a) Nature of enterprises realizable value and fair value
(b) Ability of accountant (c) Provides explanation with regard to inventories of service providers
(c) Nature of expenses (d) All of the above
(d) Reference to last year expenses
14. Ind AS-7:
10. IAS-1 requires: (a) Prohibits presentation of extraordinary items
(a) Separate statement of changes in equity (b) Uses the term 'reporting currency'
(b) Changes in equity to be shown as a part of balance sheet. (c) Do not provide option to classify interest and dividend paid/interest
(c) Separate statement of changes in minority and dividend received as part of operating cash flow
(d) Changes in equity to be shown as a part of income statement. (d) All of the above
11. IAS-1 allows classification of expenses based on within the equity. 15. Ind AS-11 deals with:
(a) their nature (a) Accounting for service concession arrangements and agreements for
(b) their function construction of real estate
(c) either their nature or their function (b) Measurement of contract revenue at consideration
(d) none of the above received/receivable
(c) Both (A) and (B)
12. Ind AS-2 provides for reversal of the write-down of inventories to: (d) None of the above
Answers
1. c 2. b 3. c 4. d 5. b 6. a 7. c 8. b 9. c 10. a
11. c 12. d 13. d 14. a 15. a
Topic 13 Overview Of Cost
Cost Objects:
COST: Amount of resource (in money or money’s worth) given up in exchange for some
Cost object is anything for which a separate measurement
goods expenditure may be (actual or notional)
of cost is required. Cost object may be product, a service,
COSTING: Costing is defined as “the techniques and processes of ascertaining costs”
a project, a customer, a brand category, activity, a
(processes of ascertaining costs
department or a programme etc.
COST ACCOUNTING: is defined as “the process of accounting for cost which begins
with the recording of income and expenditure or the bases on which they are
Cost Drivers:
calculated and ends with the preparation of periodical statements and reports for
A Cost driver is a factor or variable which effect level of
ascertaining and controlling costs.”
cost. Generally, it is an activity which is responsible for cost
COST UNITS:
incurrence.
It is a unit of product, service or time (or combination of these ) in relation to which
costs may be ascertained or expressed. Automobile :- Numbers; Cement:- Tonne/per
Cost Control:
bag etc.; Chemicals:- Litre, gallon, kilogramme, tonne etc.
It is a process to ensure that appropriate action is taken if
Cost Centres
costs exceed estimated or actions to be taken if costs are
defined as a location, person or an item of equipment ( or group of these) for which
expected to exceed the expected levels.
cost may be ascertained and used for the purpose of Cost Control. Two types: Personal
Cost Centre: It consists of a person or group of persons e.g. Mr. X, doctor, accountant,
Cost Reduction:
engineer etc. Impersonal Cost Centres: It consists of a location or an item of equipment
It may be defined “as the achievement of real and
( or group of these) e.g. canteen, boiler house etc.
permanent reduction in the unit cost of goods
Cost Centres in a manufacturing concern: Production Cost Centre: It is a cost centre
manufactured or services rendered without impairing
where raw material is handled for conversion into finished product. Here both direct
quality of the product.
and indirect expenses are incurred. e.g. Machine shops, welding shops assembly shops
etc. Service Cost Centres: It is a cost centre which serves as an ancillary unit to a Permanent and genuine savings in the cost of manufacture,
production cost centre. e.g. Power house, Plant maintenance centres, Payroll processing administration, distribution and selling brought about by
department, HRD etc. elimination of wasteful and inessential elements
Importance of Costing
Aid to Management Aid to Creditors Aid to Employees Aid to National Economy
OBJECTIVES: COST & MANAGEMENT A/Cing FACTORS TO BE CONSIDERED BEFORE INSTALLATION OF A COSTING
1. To ascertain the cost per unit SYSTEM
2. To provide analysis of cost Know the objectives of organization to install such system.
3. To disclose sources of wastage
Know the nature of product & industry in which organization is operating.
4. To provide requisite data
5. To ascertain the profitability Know the organization hierarchy and their needs of information.
6. To exercise effective control on
7. To reveal sources of economy Know the production process
8. To advise management
Synchronization of information required in different departments.
9. Present and interpret data for management
10. To help in the preparation of budgets Methods of maintenance of cost records.
11. incentive bonus plans based on cost savings;
Cost Helpful to Formation Proper Aids to Limitations of Cost Expensive

Ascertain Internal of Rules & matching Managem Accounting
ment Manage- Regulation of cost wi- ent Required Reconciliation
ment th revenue
Duplication Work
Scope of Cost & Management Accounting Inefficiency
1. MATERIAL:
ELEMENTS OF COST
Direct Material: Materials which become major part of finished product & can be easily traceable to units, it includes
▪ All materials specifically purchased for a particular job/process.
▪ All material acquired and latter requisitioned from stores. (primary packing material)
▪ Components purchased or produced.
▪ Material passing from one process to another.
Indirect Material:
Which is used for purposes ancillary to production & which can be conveniently assigned to specific physical units is termed as indirect
materials. Examples, oil, grease, consumable stores, printing and stationary material etc.
2. LABOUR: Labour cost can be classified into direct labour and indirect labour.
Direct Labour:
Wages paid to workers who are engaged in production process whose time can be conveniently and economically traceable to units
of products. For example, wages paid to to workers in the foundry in cast iron works etc.
Indirect Labour:
Labour employed for carrying tasks incidental to goods or services provided, is indirect labour. It cannot be practically traced to specific
units of output. Examples, wages of store-keepers, foreman, time-keepers, supervisors, inspectors etc.
3. EXPENSES: Expenses may be direct or indirect.

o Direct Expenses: expenses are incurred on a specific cost unit & identifiable on it. E.g. cost of special layout, design or
drawings, hiring of a particular tool or equipment for a job; etc.
o Indirect Expenses: Are expenses which cannot be directly, conveniently & wholly allocated to cost centre or units. E.g. rent,
rates & taxes, insurance, power, lighting and heating, depreciation etc.
DIRECT
MATERIAL
INDIRECT
PRODUCTION
OVERHEAD
DIRECT PRIME COST
ADMINISTRATIVE
ELEMENTS OF COST LABOUR
OVERHEAD
INDIRECT OVERHEADS
SELLING OVERHEAD
DIRECT
DISTRIBUTION
EXEPNSES
OVERHEAD
INDIRECT
PREPARATION OF COST SHEET
Cost sheet is one of the methods of unit costing. The format of cost sheet is as under: -
Cost Sheet for the Period___________Production_________________Units
Particulars Total Cost ₹ Add: Opening stock of Finished Goods
Cost per Unit Amount Opening Stock of Raw Material Less: Closing stock of Finished Goods
Add: Purchase of Raw Materials Add: Purchase Expenses Cost of Goods Sold
Less: Closing stock of Raw Materials Add: - Selling and Distribution OH: - Sales Man
Raw Materials Consumed Direct Wages (Labour) Direct Commission
Charges Sales man salary Traveling Expenses Advertisement
Delivery man expenses Sales Tax
Prime cost (1)
Bad Debts
Add: - Factory Over Heads: Cost of Sales (5)
Factory Rent Factory Power Indirect Material Indirect Profit (balancing figure)
Wages Supervisor Salary
Sales
Drawing Office Salary
Factory Insurance
Factory Asset Depreciation
Works cost Incurred
Add: Opening Stock of WIP Less: Closing Stock of WIP
Works cost (2)

Add: - Administration Over Heads: -
Office Rent
Asset Depreciation General Charges Audit Fees
Bank Charges Counting House Salary Other Office
Expenses
Cost of Production (3)
Procedure for Estimation of Material Cost: Time Recording: Recording of time has two purposes - time-keeping and
1. Break up the final product into simple parts. time-booking. It is necessary for both type of workers: direct and indirect.
2. Neglect small fillets and rounded comers but take into Time-Keeping: The purpose of time-keeping is to provide basic data for:
consideration scrap involved. i. payroll preparation;
3. Calculate area and volume of each part (Using ii. finding out the labour cost for a job/product/service;
mensuration) then add the volume of all parts iii. attendance records to meet statutory requirements;
4. Calculate weight: Multiply the product volume by the iv. determining productivity and controlling labour cost;
density of material v. calculating overhead cost of a job, product or service;
Material cost: Multiplying the cost per unit weight to the vi. maintaining discipline in attendance;
weight of material. vii. distinguishing between normal and overtime, late attendance and early
leaving; and
Aspects of Material Control viii. providing internal check against dummy workers.
The time-keeping office records the attendance of workers. Depending on
1. Accounting aspect: Maintaining documentary evidence
the number of workers, a separate department may be established or it
of movement of materials of every stage right from the
may form part of the personnel department.
time sales and production budgets are approved to the
point when materials are purchased and actually used in Time-Booking
production operation. Objectives :
2. Operational aspect: Maintenance of material supplies (i) to apportion overheads against jobs;
at a level so as to ensure that material is available for use (ii) to calculate the labour cost of jobs done;
in production as and when required by minimizing (iii) to ascertain idle time for the purpose of control;
investment in materials. (iv) to find out that the time during which a worker is in the factory is
properly utilised;
(v) to evaluate labour performance, to compare actual and budgeted time
Accounting Treatment of Direct Expenses
• Direct expenses are chargeable expenses & are debited to Direct Expenses a/c in financial books.
• The term ‘direct expenses’ has been excluded from prime cost as per latest CIMA terminology,
• i.e., according to CIMA, prime cost is “the total cost of direct material and direct labour”.
Control of Direct Expenses
Items under this head are few. The actual should be compared with these standard. The causes of variations, if any, may be
ascertained, and necessary corrective action should be taken.
Expenses excluded from costs
(a) Matters of pure finance including interest paid or received, dividend received on investments, rent received, profit or loss
on sale of investments or company’s property, transfer fees received, etc.
(b) Appropriation of profits including income-tax paid, dividends paid, transfer to sinking fund, general reserves, excessive
depreciation, goodwill or other fictitious, assets written off, etc.
Notional Expenses
Expenses that are usually incurred should be included in costs even if not required to pay for such expenses. Rent for own
premises, but for costing purposes, an appropriate amount being included in costs.
Accounting Treatment of Indirect Expenses
Indirect expenses may or may not be allocated.
Office administrative costs are indirect expenses, but they are rarely allocated to anything, unless it is corporate overhead
and is being allocated to subsidiaries. These types of indirect expenses are charged to the expense in the period incurred.
Factory overheads will be allocated to those units produced in the factory during the same period that the indirect expenses
were incurred, and so will eventually be charged to expense when the products to which they were allocated are sold.
OVERHEADS
• Defined as cost of indirect material, indirect labour & such other expenses, including
services, which cannot be conveniently charged direct to specific cost centres. (But,
direct costs are associated with individual jobs or products)
• Overheads are not associated with individual jobs or products; they represent the cost
of facilities required for carrying on operations.
Generally, overheads are classified on the following basis:
1. Functional Analysis
• M/F or production or factory overheads
• Administration overheads
• Selling and distribution overheads
• Research and development overheads
2. Behavioural Analysis: classified, depending on their tendency to vary with the
volume or activity levels.
(a) Fixed Overhead; (b) Variable Overhead; (c) Semi-Variable Overhead
1. The term used for 'process of ascertaining the cost' is known as — (d) Cost computation
(a) Cost
(b) Costing 6. Expenditure on labour and materials that cannot be economically identified
(c) Cost accounting with a specific saleable cost unit is known as —
(d) Cost accountancy (a) Prime cost
(b) Overheads
2. Which element of total cost is common in prime cost and conversion cost (c) Direct cost
(a) Variable overheads (d) Abnormal loss
(b) Fixed overheads
(c) Direct materials 7. Which of the following is known as full costing —
(d) Direct labour (a) Variable costing
(b) Differential costing
3. The cost that increases as volume of activity decreases within 'the relevant (c) Marginal costing
range, is known as — (d) Absorption costing
(a) Average cost per unit
(b) Average variable cost per unit
8. According to Section 2(13) of the Companies Act, 2013, 'books of account' does
(c) Total fixed cost
not require maintenance of which of the following records —
(d) Total variable cost
(a) All sums of money received and expended by a company and matters in
4. Relevant costs are — relation to which the receipts and expenditure take place
(a) Future costs (b) All sales and purchases of goods and services by the company
(b) Standard costs (c) The assets and liabilities of the company
(c) Controllable costs (d) Cash flow statement
(d) Historical costs
9. The establishment of budgets, standard costs and actual costs of operations,
5. Which of the following is not considered as a function of management processes, activities or products and the analysis of variances, profitability or
accounting? the social use of funds is known as —
(a) Financial planning (a) Costing
(b) Decision making (b) Cost Accounting
(c) Reporting (c) Cost Accountancy
(d) Financial Accounting
14. Statement-I:
10. Costs which are constant for a given level of output and then increase by a The activities or operations of every cost centre should be homogeneous so as
fixed amount at a higher level of output are called — to ensure uniform basis of charging expenses within the centre.
(a) Step costs Statement-II
(b) Differential costs The activities or operation of each cost centre must be well defined and clearly
(c) Committed costs identified
(d) Opportunity costs Select the correct answer from thil cost unit: following —
(a) Both statements are correct
11. Fixed cost is a cost — (b) Both statements are incorrect
(a) Which remains fixed for each unit of output (c) Statement-I is correct, but Statement-II is incorrect
(b) Which remains fixed in total during a given period despite changes in (d) Statement-I is incorrect, but Statement-II is correct
output
(c) Which is partly fixed and partly variable in relation to the output 15. Match the following:
(d) Which changes in total in proportion to the changes in output List-I List-II
P. Cost control purposes 1. ___is a predetermined cost
Q. Standard cost 2. Responsibility accounting fixes responsibility for
12. Cost accounting is —
R. Integrates 3. Cost accounting guides future
(a) Nothing more than a detailed analysis of expenditure S. Production policies 4. Budgeting system ___ key managerial functions
(b) An instrument of management control Select the correct answer from the options given below —
(c) Useful only in such organization which has profit as the aim P Q R S
(d) Not needed if prices are beyond the control of the firm. (a) 4 3 2 1
(b) 2 1 4 3
13. A cost centre which is engaged in production activity by conversion of raw (c) 2 3 4 1
material into finished product is called — (d) 3 2 4 1
(a) Production cost centre
(b) Impersonal cost centre 16. Match the following industry/ products with appropriate cost unit;
(c) Process cost centre Industry product cost unit
(d) Production unit (i) Toy Industry (a) Per batch
(ii) Steel Industry (b) Tonne-kilometre
(iii) Chemical (c) Tonne 20. Which of the following which are tool (s) and technique(s) of management
(iv) Transport (d) Gallon accounting?
Select the correct answer using the codes given below — (a) Ratio analysis
(i) (ii) (iii) (iv) (b) Linear programming
(a) a c d b (c) Trend analysis
(b) a b d c (d) All of the above
(c) a d c b
(d) b a c d 21. Statement – I
sunk cost is one that has already been incurred and cannot be avoided by
17. Identify the cost which is not relevant or useful for decision making ____ decisions in the future.
(a) Shut down cost Statement - II
(b) Marginal cost For decision making. it is required that such cost should be incurred.
(c) Imputed cost and replacement cost Select the correct answer from the options given below —
(d) Sunk cost (a) Both statements are correct
(b) Both statements are incorrect
18. Section ______ of the Companies Act, 2013 gives the cost auditor same power (c) Statement-I is incorrect, but Statement-II is correct
as the financial auditor has under section______ of the Companies Act, 2013. (d) Statement-I is correct, but Statemen II is incorrect
(a) 148, 143
(b) 143, 148 22. The prime function of management accounting is to____
(c) 147, 148 (a) Record business transactions
(d) 143, 144 (b) Interpret financial data
(c) Assist the management in per-forming its functions effectively
19. A direct cost is a cost Which can be classified on the basis of - (d) Assist tax authorities.
(a) Behavior
(b) Traceability 23. Match the following:
(c) Controllability List - I List - II
(d) Relevance (A) Advertising (1) Operating costing
(B) Sugar company (2) Job costing
(C) Readymade (3) Process costing garments (d) ₹ 864
(D) Transport (4) Batch costing
Select the correct answer from the options given below — 26. In case of rising prices, FIFO method will provide –
(A) (B) (C) (D) (a) Lowest value of closing stock and profit
(a) 2 3 4 1 (b) Highest value of closing stock and profit
(b) 4 3 2 1 (c) Highest value of closing stock but lowest value of profit
(c) 1 2 3 4 (d) Lowest value of closing stock but highest value of profit
(d) 3 4 2 1
27. In a situation of rising prices, profit and tax liability would be lower under
24. Which of following method is based on the assumption that costliest materials __method than under___ method of material issue pricing.
are issued first & inventory is valued at the lowest possible price
(a) FIFO; LIFO
(a) FIFO method
(b) LIFO; FIFO
(b) UFO method (c) LIFO; Average
(c) Highest-in-first-out method (d) FIFO; Average
(d) Weighted average method
28. The technique of economic order quantity is losing significance since the
25. Following information is available regarding a product-X: development of —
1st January, 2015:
(a) Perpetual inventory
Opening balance : 50 units @ 4
(b) Just-in-time
Receipts:
5th January, 2015 : 100 units @ 5
(c) First-in-first-out
12th January, 2015 : 200 units @ 5.50 (d) ABC analysis
Issues:
2nd January, 2015 : 30 units 29. Amaze Ltd. had an ''opening inventory of 5,000 units costing ₹ 5 per unit on
18th January, 2015 : 170 units 1st April, 2016. Following receipts and issues took place in April, 2016
the value of closing stock according to FIFO method is — 5th April, 2016: Purchased 800 units @ ₹ 8 per unit
(a) ₹ 660 12th April, 2016: Purchased 200 units @ ₹ 8 per unit
(b) ₹ 770 15th April, 2016: Issued 3,000 units 25th April, 2016: Purchased 1,000 units
(c) ₹ 825 @ ₹ 9 per unit
Cost of inventory as on 30th April, 2016 under weighted average basis will be (c) Over-absorption of ₹ 16,800
— (d) Over-absorption of ₹ 14,000
(a) ₹25,500
(b) ₹ 27,000 33. The following data elates to two activity levels of production:
(c) ₹ 20,000 Level I Level II
(d) ₹ 23,500 No. of units 4,000 5,500
Overheads (₹) 2,80,000 3,50,000
30. Which of the following are not a purpose of time keeping — Variable cost per unit would be —
(i) Ascertaining labour cost of a job/ product/activity (a) ₹ 46.67
(ii) Evaluating labour performance by comparing actual & budget-ed time (b) ₹ 133.33
(iii) Providing internal check against dummy workers. (c) ₹ 70
Select the correct answer from the options given below — (d) ₹ 64
(a) (i) and (ii)
(b) (ii) and (iii) 34. The following particulars elate to production department of a factory:
(c) (i) and (iii) Material used : 20,000 Direct labour : 10,000
(d) (ii) only Overheads : 7,500
On an order carried out in the department, material consumed was ₹ 4,000
31. If the actual expenses fall short of the amount absorbed, it is known as — and direct wages paid amounted to ₹ 2,000. The amount of overheads
(a) Under absorption chargeable to this order on the basis of prime cost would be
(b) Over absorption (a) ₹ 1,500
(c) Allocation (b) ₹ 1,510
(d) Apportionment (c) ₹ 1,700
(d) ₹ 1710
32. The budgeted fixed overheads amounted to ₹ 84,000. The budgeted and
actual production amounted to 20,000 units and 24,000 units respectively. This 35. Allotment of the entire Costs to a cost centre or unit is known as
means that there will be an — (a) Cost apportionment
(a) Under-absorption of ₹ 16,800 (b) Cost allocation
(b) Under-absorption of ₹ 14,000 (c) Cost absorption
(d) Machine hour rate 38. Direct material cost ₹ 45,000; Direct labour cost is 40% of direct material cost;
Royalties on production ₹ 4,000; Other direct expenses are 20% of prime cost.
36. Cost of production plus opening stock of finished goods minus closing stock of Prime cost will be —
finished goods is equal to — (a) ₹ 78,750
(a) Cost of goods sold (b) ₹ 83,750
(b) Cost of sales (c) ₹ 80,400
(c) Sales (d) None of the above
(d) Prime cost
39. Following information is given:
37. The following information is extracted from the job ledger in respect of Job No. Direct material purchased 6,00,000
404: Material: ₹ 3,400 Wages: 80 hours @ ₹ 2.50 per hour Direct material consumed 7,00,000
Variable overheads incurred for all jobs: ₹ 5,000 for ₹ 4,000 labour hours Direct labour 3,00,000
If the job is billed for ₹ 4,200 the profit will be — Direct expenses 2,50,000
(a) ₹ 600 Manufacturing overheads 3,00,000
(b) ₹ 500 Prime cost will be –
(c) ₹ 700 (a) ₹ 14,50,000
(d) ₹ 650 (b) ₹ 11,50,000
(c) ₹ 12,50,000
(d) ₹ 15,50,000
Answers
1. b 2. d 3. a 4. a 5. b 6. b 7. d 8. d 9. b 10. a
11. b 12. b 13. a 14. a 15. b 16. a 17. d 18. a 19. b 20. d
21. d 22. c 23. a 24. c 25. c 26. b 27. b 28. b 29. a 30. a
31 b 32 a 33 a 34 a 35 b 36 a 37 b 38 b 39 c
Topic 14 Cost Accounting Records & Cost Audit
INTRODUCTION
1. Companies Act, 2013 empowers CG
(Section 148) RULE 1: SHORT TITLE &
2. to make the RULES for companies COMMENCEMENT
engaged in specified industries,
manufacturing, providing goods and PYAR SE :- called the Companies (Cost
rendering services
Records and Audit) Rules, 2014
3. to maintain their cost records & its Cost
audit
COMMENCEMENT:- publication in the
Cost Audit is : Official Gazette issued on 30.06.2014
i. Verification of the correctness of cost
accounts and
ii.Checking that cost accounting plan is
adhered to.
RULE 2: DEFINITIONS PROVISIONS OF COMPANIES ACT,
1. Cost Accountant in practice:- who holds
2013 RELATING TO COST AUDIT
a valid certificate of practice (Cost and
Works Accountants Act, 1959) 1. Maintenance of costing records
2. Cost Auditor: Cost Accountant in practice 2. Cost Audit
3. Cost Audit Report:- duly signed Cost 3. Appointment of cost auditor
Auditor’s report on the cost records 4. Qualifications, disqualifications,
examined rights, duties
4. Cost Records: Books of account relating 5. Submission of cost audit report to
to utilization of materials, labour and the CG
other items of cost as applicable to the
production of goods or provision of 6. Further information and
services under the provisions of Section explanation
148 of the Act
RULE 3: APPLICATION OF RULE 4: APPLICABILITY
COST RECORDS FOR COST AUDIT
Applicability for Maintenance for Cost 1. Industries in Regulated Sectors - overall annual
Records
turnover of PY - Rs. 50 Crore or more - individual
product or service Rs. 25 Crore or more
Domestic or Foreign Company
2. Industries in Non-Regulated Sectors - Rs. 100
Crore or more - individual product or service - Rs.
Listed in Table of Rule 3 35 Crore or more
3. Exemption from cost audit:-
Regulated & Non - Regulated Sector
❑Revenue from exports, in foreign exchange,
exceeds 75% of its total revenue or
Engaged in Production of Goods or Providing
Services ❑Operating from a Special Economic Zone;
Overall Turnover from all of its products & ❑Engaged in generation of electricity for captive
Services ?=Rs. 35 crore (Preceding Financial consumption through Captive Generating Plant
Year)
Regulated Sectors Non-Regulated Sectors
1. Telecommunication services 1. Machinery & mechanical 18. Inorganic chemicals
2. Generation, transmission, distribution appliances used in defence, 19. Jute and Jute Products
and supply of Electricity space, 20. Edible Oil
3. Petroleum products 2. Turbo jets and turbo propellers 21. Construction Industry
4. Drugs and pharmaceuticals 3. Arms and ammunitions and 22. Health services
5. Fertilisers Explosives 23. Education services
6. Sugar and industrial alcohol 4. Propellant powders; 24. Milk powder
5. Radar apparatus 25. Insecticides
6. Tanks & other armoured fighting 26. Plastics and polymers
vehicles 27. Tyres and tubes
7. Port services 28. Pulp and Paper
8. Aeronautical services 29. Textiles
9. lron and Steel 30. Glass
10. Roads and other infrastructure 31. Other machinery and Mechanical
11. Rubber and allied products Appliances
12. Coffee and tea 32. Electricals or electronic
13. Railway or tramway locomotives machinery
14. Cement 33. medical devices (Not apply to
15. Ores and Mineral products foreign companies having only
16. Mineral fuels liaison offices)
17. Base metals
Overall Annual Turnover Aggregate turnover of
during immediately the individual product or Required Cost Audit
preceding financial year products or services under Rule 4
>=Rs 50 crore >=25 crore
If Revenue from Export

Regulatory Sector (Foreign Rule 4 will not apply only
(A) Exchange)>=75% of Rule 3 will apply
total revene
If operating from Special Rule 4 will not apply only

Economic Zone (SEZ) Rule 3 will apply
Applicability of Cost
Audit
(Rule 4) If Revenue from Export
(Foreign Rule 4 will not apply only
Exchange)>75% of total Rule 3 will apply
revenue
Non-Regulatory Sector If Operating from Rule 4 will not apply only

Special Economic Zone Rule 3 will apply
(B) (SEZ)
Overall Annual Turnover Aggregate turnover of

during Immediately the individual product or Required Cost Audit
Preceding Financial year products or services >= under Rule 4
> =100 crore 35 crore
RULE 5: MAINTENANCE RULE 6: COST AUDIT
1. companies specified in rule 3 and the thresholds limits laid down in
OF COST RECORDS rule 4, shall Appointment of cost auditor: Within 180 days of the
commencement FY, appoint a cost auditor.
2. Before such appointment - written consent and a certificate that,
1. Specified company & its branches eligible for appointment not disqualified & satisfies the criteria
thereof shall maintain cost records in provided in section 141
3. appointment is within the limits
Form CRA-1 4. list of proceedings against the cost auditor
5. Company shall inform the cost auditor concerned of his appointment
2. On regular basis 6. Intimation of appointment of cost auditor to Central Government -
within a period of 30 days of the Board meeting in which such
3. To facilitate calculation of per unit appointment or or within a period of one hundred and eighty days
of the commencement of the financial year, whichever is earlier,
cost of production or cost of through electronic mode, in Form CRA-2
operations, cost of sales and margin 7. shall continue till the expiry of 180 days from the closure of the
financial year or till he submits the cost audit report
4. To enable the company to exercise, 8. Causal vacancy in the office of a cost auditor, whether due to
resignation, death or removal, shall be filled by the Board of
as far as possible, control over the Directors within 30 days of occurrence (CG Info in CRA 2)
various operations and costs 9. Submit the cost audit report along with his or its reservations in CRA
3
10. Auditor to BOD within 180 days from closure of FY – BOD to CG in
Form CRA-4 in XBRL within 30 days from receipt
COST AUDIT (RULE 6)
BOARD MEETING (Appointment within 180 days of the

commencement of Financial Year)
The Company shall inform the Cost Auditor concerned

Whichever is earlier
of his or its appointment
File a notice of such appointment within a period of 30 File a notice of such appointment with a CG within a period
days of Board meeting in which such appointment is made. of 180 days from the commencement of the Financial year
Auditor shall continue in office till the expiry of 180 days

from the closure of Financial year or till the submit the report
Casual vacancy can be filled by BOD within 30 days
Inform the CG in CRA -2 within 30 days of such

appointment
Submit Cost Audit Report by Cost Auditor in CRA - 3
Cost Audit report submit to BOD within 180 days
Company within 30 days from the date of receipt of a

copy of Cost Audit Report furnished to the CG in CRA - 4
PURPOSE OF COST AUDIT
(1) Verification of cost accounts whether compiled with cost accounting system followed by enterprise.
(2) Ensuring that prescribed procedures of cost accounting records rules are followed.
(3) Detection of errors and fraud.
(4) Verification of cost of each “cost unit” & “cost centre”
(5) Determination of inventory valuation.
(6) Facilitating the fixation of prices of goods & services.
(7) Periodical reconciliation between cost & financial accounts.
(8) Ensuring optimum utilization of resources of the enterprise.
(9) Detection and correction of abnormal loss.
(10) Inculcation of cost consciousness.
(11) Advising management
(12) Promoting corporate governance through various operational disclosures
SOCIAL PURPOSES OF COST AUDIT

1. Fixation of reasonable prices of goods and services.
2. Improvement in productivity of human, physical and financial resources
3. Channelize enterprise resources to most optimum areas.
4. Availability of audited cost data as regards contracts containing escalation clauses.
5. Facilitate in settlement of bills in the case of cost-plus contracts entered into by the Government.
6. Pinpointing areas of inefficiency and mismanagement
CRA
CRA-1: FORMS IN WHICH COST RECORDS SHALL BE MAINTAINED: prescribes the form in which cost records shall be maintained in proper details
as per 30 headings.
CRA-2: FORM OF INTIMATION OF APPOINTMENT OF COST AUDITOR BY THE COMPANY TO CENTRAL GOVERNMENT:
(1) Corporate Identity Number (CIN) or Foreign Company Registration Number (FCRN) of the company
(2) General Information
(3) Product(s)/Service(s) to which Cost Audit relates
(4) Details of all the Cost Auditor(s) appointed
(5) Financial year to be covered under the Cost Audit
(6) Details of previous Cost Auditor which has not been reappointed
(7) Attachments • Copy of the Board resolution of the company • Optional attachment - if any
CRA-3: FORM OF COST AUDIT REPORT
Detailed unit wise and product/service wise cost statements and schedules thereto In respect of the product/ services under reference
of the company duly audited and certified by me/us are/are not kept in the company
CRA-4: FORM FOR FILING COST AUDIT RE PORT WITH THE CENTRAL GOVERNMENT
1. Corporate Identity Number (CIN) or Foreign Company Registration Number (FCRN) of the company. 2. General Information. 3.
Details of industries/ sectors/product(s)/ service(s) (CETA heading level, wherever applicable as per Rules for Regulated and Non-
regulated sector) for which cost audit report is being submitted. 4. Details of industries/ sectors/product(s)/ service(s) (CETA heading
level, wherever applicable as per Rules for Regulated and Non-regulated sector) not cover in cost audit report. 5. Details of cost
auditor(s) appointment. 6. Details of observation of cost audit report. 7. Attachments : • XBRL document in respect of the cost audit
report and Company’s information and explanation on every qualification and reservation contained therein. • Optional attachment, if
any
Annexure to Cost Audit Report (Four Parts)
Part-A
• General Information General Details of Cost Auditors,
• Cost Accounting Policy,
• Product/Service Details – of the company as a whole.
Part-B
• for Manufacturing Sector
• Quantitative Information, Abridged Cost Statement, Details of Materials Consumed, Details of Utilities
Consumed, Details of Industry Specific Operating Expenses.
Part-C
• for Service Sector
• Quantitative Information, Abridged Cost Statement, Details of Materials Consumed, Details of Utilities
Consumed, Details of Industry Specific Operating Expenses.
Part-D
• Product and Service Profitability Statement, Profit Reconciliation, Value Addition and Distribution of
Earnings, Financial Position and Ratio Analysis, Related Party Transactions, Reconciliation of Indirect taxes
1. The o
2. bjective of CAS-1 (a) Recording Cost
(a) Collection, allocation, apportionment and absorption of over-heads (b) Ascertaining Cost
(b) Determination of capacity (c) Control of Cost
(c) Preparation of cost statement (d) Reporting of Cost
(d) Determination of average/equalized transportation cost
6. Match the following Cost Accounting Standards with the titles
3. Cost Accounting Standard ______ is related to bringing uniformity and CAS Title
consistency in the principles and methods of determining the selling and (A) CAS-2 (1) Material Cost
distribution overheads with reasonable accuracy. (B) CAS-6 (2) Direct Expenses
(a) 10 (C) CAS-10 (3) Pollution Control Cost
(b) 12 (D) CAS-14 (4) Capacity Determination
(c) 15 Codes:
(A) (B) (C) (D)
(d) 4
(a) 2 3 1 4
4. Match the following statements with prescribed forms: (b) 1 3 4 2
Statements Forms (c) 4 2 3 1
Cost Audit Report to Central Government by the company CRA 3 (d) 4 1 2 3
Cost Auditor to submit report to the Board of Directors CRA 2
Intimation of appointment of Cost Auditor to MCA by the CRA 4 7. Every PSU company, with in a period of 30 days from the (date of receipt of
company cost audit report, furnish to the Central Government with such report full
Select the correct answer using the codes given below — explanation on every reservation or qualification contained in the report in:
A B C (a) Form CRA-3
(a) 1 2 3 (b) Form CRA-4
(b) 3 1 2 (c) Form CRA-5
(c) 2 1 3 (d) Form CRA-6
(d) 3 2 1
8. Section 148 of the companies Act, 2013 gives:
5. Cost accounting differs from financial accounting respect of:
(a) No powers to the cost auditor as the financial auditor has u/s 143 of (a) CAS-21
Companies Act, 2013 (b) CAS-19
(b) Same powers to the cost auditor as the financial auditor has u/s 143 of (c) CAS-14
Companies Act, 2013 (d) CAS-8
(c) More powers to the cost auditor than the financial auditor has u/s 143 of
Companies Act, 2013 12. Which of the following Cost Accounting Standards (CAS) is related to
(d) Lesser powers to the cost auditor than the financial auditor has u/s 143 of "Depreciation and Amortization"?
Companies Act, 2013 (a) CAS-4
(b) CAS-12
9. Every cost auditor, shall submit the cost audit report along with his or its (c) CAS-16
reservation or qualification or suggestions, if any, in form: (d) CAS-21
(a) CRA-1
(b) CRA-2 13. Every cost auditor, who conducts an audit of the cost records of a company,
(c) CRA-3 shall submit report in:
(d) CRA-4 (a) General form
(b) Form CRA-1
10. Which of the following (is not an objective of the Cost Accounting Standards (c) Form CRA-2
issued by the Institute of Cost and Works Accountants of India? (d) Form CRA-3
(a) Provide better guidelines on standard cost accounting practices.
(b) Enable the comparability of financial statements and improve reliability 14. ______is concerned with historical records, while _______ is concerned with
and usefulness of financial statements. historical cost with pre-determined cost.
(c) Assist cost accountants in preparation of uniform costs statements. (a) Cost Accounting, Financial Accounting
(d) Help Indian industry and the Government towards better cost management (b) Financial Accounting, Cost Accounting
(c) Financial Accounting, Management Accounting
11. The Cost Accounting Standard concerned with quality control cost is: (d) Management Accounting, Cost Accounting
Answers
1. c 2. c 3. b 4. d 5. b 6. b 7. b 8. c 9. b 10. a
11. c 12. d 13. b
Topic 15 Budgets
A budget is :- a precise statement of financial & quantitative FORECAST BUDGET
policy to follow a course of action that management decide to follow Is an analysis & interpretation of Is a financial or quantitative statement,
in immediate next period of time. future conditions in relation to prepared & approved prior to a defined
operations of the enterprise. period of time of the policy to be
• It translate the policy into a concrete from, in order to implement pursued in period
it successfully Forecast is a mere estimate of what Budget displays the policy & programme
• quantitative expression of a proposed plan of action by is likely to happen (statement of to be followed in future period under
management & aid to coordinate probable events) planned conditions.
• is a method for translating goals & strategies of an organization Forecasts, being statements of Tool of control since it represents actions
into operational terms future events, do not connote any which can be shaped
sense of control.
Forecasting is a preliminary step it begins where forecasting ends.
ESSENTIALS OF BUDGET for budgeting. It ends with forecast Forecasts get converted into budgets.
of likely events.
• It is statement expressed in money / units prepared for Forecasts have wider scope Budgets have limited scope.
implementation of policy.
BUDGETING
• Objectives & degree of responsibility should be clearly Is process of designing, implementing and operating budgets. Main emphasis in
stated and communicated to the management. budgeting process involved provision of resources to support plans which are
• A budget is prepared in advance and is based on the being implemented.
future plans of actions. BUDGETARY CONTROL
• It relates to a future period and is based on objectives to Is system of management control & accounting in which all operations are
be obtained. forecasted and planned & the actual results are compared with the forecasted
• A budget should be monitored periodically. and planned ones. Thus, budgetary control involves:
• Different types of budgets are prepared by an industrial (a) Establishment of budgets;
concern for different purposes. (b) Continuous comparison of actual result with the previous made budget and
(c) Revision of budget in light of changed circumstances.
LIMITATIONS OF BUDGETARY CONTROL
1. Budgets are mere estimates.
2. Budgets are meant to deal with business conditions which are constantly changing.
3. It is based on quantitative data & represents only an impersonal appraisal to the conduct of business activity unless it is supported by
proper management of personal administration.
4. Budgetary control system is heavy & costly, specially from point of view of small terms.
5. Myth - Budgets and budgetary control is the solvent of all business problems
STEPS IN BUDGETARY CONTROL

Organization for Budgeting Budget Manual Responsibility for Budgeting Budget procedure
• Setting up of a definite • Decide how much an • Budget controller • Determination of key factor
plan of organization organization spend and in • Budget Committee • Making of forecasts
what manner • Fixation of Budget period • Consideration of alternative
combination of forecasts
• Preparation of budgets
Points Budget Period Control Period

Is a period for which various reports are submitted to
Meaning Is a period for which the budget is prepared.
take corrective actions
Period This may be monthly, quarterly or yearly. Is generally specified by management.
Nature Budget period may be short or long term. Control period is generally of short term.
Zero Base Budgeting
Sale Budget It requires each budget to be prepared and justified from zero.
Zero base budgeting may be defined as, "planning and
Production budgeting processes which requires each manager to justify his
Budget Material Budget entire budget request in details from scratch (hence zero base)
Production Cost and shifts the burden of proof to each manager to justify why he
Budget Labour Budget should spend any money at all.
Plant Utilization Characteristics of Zero-base budgeting:

1. It deals with all the elements of the budget proposals.
Factory overhead 2. A critical evaluation of all the activities done afresh.
Functional Budget
Budget 3. It is superior to the traditional budgeting.
Selling & Distribution 4. Provides systematic approach for evaluation of different
TYPES OF BUDGETS
Master Budget Overhead Budget activities

Budget 5. It ensures that the functions undertaken are critical for the
Administration Budget achievement of the objectives.
6. Ensure allocation resources to various activities.
Research &
Development Budget 7. Helps in identification of wasteful expenditure & then their
elimination.
Cash Budget 8. It helps in the introduction of management by objectives
Financial Budget
Capital Expenditure
Budget Disadvantage of ZBB:
Fixed Budget (a) Requires more paper work & more personnel
Capacity wise (b) It is more time & Cost consuming.
Flexible Budget (c) Work involved in ZBB is much more.
Budgets may be classified into different categories:
Coverage or scope Capacity or efficiency Conditions Period
• Functional Budget • Fixed Budget • Basic Budget • Long-Period Budget

• Master Budget • Flexible Budget • Current Budget • Short-Period Budget
Points Flexible Budget Fixed Budget

"a budget which is designed to change in accordance with This remains unchanged, whatever irrespective
Meaning
levels of activity attained". of level of activity or output.
Levels of Under this method, a series of budgets would be prepared at It does not change with actual volume of activity
activity varying levels of activity, e.g. 80%, 90% & 100% capacity. achieved. (rigid or inflexible budget)
Costs It is most suited for variable costs. It is most suited for fixed costs.
It helps in making variance analysis which will enable It does not consider the variances due to change
Variance
management to take appropriate action. in the volume.
Price fixation It helps in fixation of price. Fixation of prices becomes difficult.
PRODUCTION BUDGET STATEMENT SHOWING COST OF NET PROFIT
Product & Period PRODUCTION
Items of Cost Particulars
Particulars
Variable Cost A Sales
A. Budgeted Sales
Direct Materials at Rs 1 per unit B Variable Cost of Sales:
B. (+) Closing Stock (a) Direct Materials
Direct Wages at Rs 4 per Unit
C. (-) Opening Stock (b) Direct Labour
Prime Cost
D. Units to be produced (A+ B -C) (c) Direct E4xpenses
Factory Overheads Variable
(d) Mfg. Expenses
CASH BUDGET Indirect Labour
(e) Adm. Expenses
Consumable Stores
PARTICULARS (f) Selling Expenses
Opening balance
CASH RECEIPTS: Semi- Variable: C Contribution (A - B)
Debtors Power-Fixed Rs 1,100 variable @ 25 paise per unit D Fixed Costs:
Inspection-Fixed Rs 60 variable 25 paise per unit (a) Mfg. Expenses
CASH PAYMENTS: Repair & Maintenance Fixed Rs 290 Variable 7.5 (b) Adm. Expenses
Creditors Wages paise per unit (c) Selling Expenses
Manufacturing expenses Fixed:
Office expenses Depreciation E Net Profit before tax (C - D)
Selling expenses Plant Salaries
Advance tax TOTAL
Closing balance Total Cost of Production
CONTROL RATIOS
Ratios are used to determine the production efficiency and the costs. It tells the ratio of actual level of activity attained, degree of
efficiency attained and the actual capacity utilized during a budgeted period. Three important ratios are commonly used by the
management to find out whether the deviations of actuals from budgeted results are favorable or otherwise.
These ratios are expressed in terms of percentages. They are:
A. Activity Ratios: It is a measure of the level of activity B. Capacity Ratio: This ratio indicates whether and to what
attained over a period. This ratio expresses relationship extent budgeted hours of activity are actually utilized. The object
between standard hours for actual production and is to show whether or not the available hours are being fully
budgeted hours. The formula is: utilized. The formula is:
Standard hours for actual output Actual Hours Works Ratio
Activity Ratio = x100 Capacity Ratio = x100
Budgeted Standard hours Budgeted hours
C. Efficiency Ratio or Productivity Ratio: This ratio is an Calendar Ratio: This ratio indicates if the actual working days
important measure of the level of efficiency attained by the have been equal to more than or less than the budgeted number
productive processes. It indicates the efficiency attained in of days in the period under study. The formula is:
producing a stated output. The formula is Standard Hrs for Actual working days in the period
Actual Production Calendar Ratio = Working days on the basis of x100
Standard hours for actual output budget during the period
Efficiency Ratio = x100
Actual hours Worked
1. The budgeting system designed to change in relation to level of activity actually (d) Budget center
attained is known as —
(a) Fixed budgeting 5. A budget that gives a summary of all the functional budgets and budgeted
(b) Flexible budgeting statement of profit and loss is called —
(c) Performance budgeting (a) Flexible budget
(d) Functional budgeting (b) Master budget
(c) Performance budget
2. Following information s available: (d) Zero base budget
Wages for January : ₹ 20,000
Wages for February : ₹ 22,000 6. X Ltd. has forecast its -sales for the next three months as follows:
Delay in payment of wages: 1/2 month The amount of wages paid during the May : 12,000 units, June : 20,000 units, July : 25,000 units
month of February is — Opening stock as on 1st April is expected to be 5,000 units. Closing stock should
(a) ₹ 11,000 equal 2096 of the coming month's sales needs. How many units should be
produced in June
(b) ₹ 22,000
(a) 20,000 Units
(c) ₹ 20,000
(b) 11,000 Units
(d) ₹ 21,000
(c) 21,000 Units
3. Under which of the following method of budgeting, all activities are re- (d) 25,000 Units
evaluated each time a budget is set —
(a) Materials budget 7. Which one of the following would not form part of master budget —
(b) Zero base budgeting (a) Cash budget
(c) Sales budget (b) Statement of profit and loss
(d) Overheads budget (c) Statement of financial position
4. A factor which limits the activities of an undertaking and which is taken into
account while preparing budget is known as — 8. The budget which usually takes the form of budgeted profit and loss account
and balance sheet is known as —
(a) Budget manual
(b) Budget controller (a) Cash budget
(c) Budget key factor (b) Master budget
(c) Flexible budget 12. The budget which usually takes the form of profit and loss account and balance
(d) Sa budget sheet is known as:
(a) Cash budget
9. While preparing cash budget, which of the following items would not be (b) Master budget
included — (c) Flexible budget
(a) Interest paid to debenture holders (d) Labour budget
(b) Salaries and wages
(c) Bonus shares issued 13. One of the most significant tools in cost planning is:
(d) Income-tax paid (a) Direct material
(b) Budget
10. A plant produces a product in the quantity of 10,000 units at a cost of ₹ 3 per (c) Marginal costing
unit. If 20,000 units are produced, the cost per unit will be ₹ 2.50. Selling price (d) Direct labour
per unit is ₹ 4. The variable cost per unit will be:
(a) ₹ 2 14. The following 7-Information extracted from the records of P. Ltd.
(b) ₹ 3 Sales for October, November and December, 2018 are ₹ 90,000, ₹ 1,10,000
(c) ₹ 4 and ₹ 80,000 respectively. 40% of its sales are expected to be for cash. Of
(d) ₹ 1 its credit sales 70% are expected to pay in the month after sales and take 2%
discount on it. Balance is expected to pay in second month after sales and 3%
11. When demand forecasting is difficult, budget which is prepared: of it is expected to bad debts. What are the sales receipts to be shown in cash
(a) Sales Budget budget for the month of December?
(b) Production Budget (a) ₹ 92,990
(c) Financial Budget (b) ₹ 1,23,174
(d) Flexible Budget (c) ₹ 95,609
(d) ₹ 1,25,793
Answers
1. B 2. D 3. B 4. C 5. B 6. C 7. D 8. B 9. C 10. A
11. D 12. B 13. B 14. -
Topic 16 Ratio Analysis
FINANCIAL STATEMENT ANALYSIS
Is examination of the relationship between financial statement numbers and the trends in those numbers over a period of time
Help in preparing budgets Comparative comparative study of different

Share Holders
Statements items of financial statements
Users of financial statements

Inter firm comparison Lenders Common – Size all items on statement are
Techniques used for analyzing

Objective of financial
Statements expressed as a percentage

statement analysis
financial statements
Management defined as index numbers of
Study the short-term and
long-term solvency the movements of various
Trend Analysis
financial items over a period
Public
Helps in calculation of
present earning capacity Relationship between 2
as well as future Ratio Analysis
Government accounting figures is ratio
Provides department wise statement of “Source and

financial information Labour & Trade Fund Flow Analysis
Union Application of Funds
Information about the sources of cash and its uses

available resources Cash Flow Analysis
ADVANTAGES OF RATIO ANALYSIS during a particular period
Simplifies FS Analyze & Decision- Summaries A/c Overall Liquidity Long-term Cost Control
Forecast Making Figures Profitability Position Solvency
LIMITATIONS OF RATIO ANALYSIS
Ignore qualitative Trends are not Defective Change in Variations in Single ratio not Disclose what
factors actual ratios accounting accounting general operating sufficient happened in past
information procedures conditions
CLASSIFICATION OF RATIOS (According to purpose)
Profitability Turnover or Financial or Market Test Ratios

Ratios Activity Ratios Solvency Ratios
To measure profit (end results) Measure the effectiveness of the To judge financial position of Some profitability ratios,
with reference to sales, assets use of capital/ assets on the basis organization from short-term as well having a bearing on the
or capital employed of sales or cost of goods sold as long-term solvency point of view market value of the shares
1. Gross Profit Ratio 1. Stock Turnover Ratio Short-term Solvency ratios 1. Earnings Per Share
2. Net Profit Ratio 2. Debtors Turnover ratio 1. Current Ratio 2. Price Earnings Ratio
3. Cash Profit Ratio 3. Creditors Turnover ratio 2. Liquidity Ratio 3. Dividend Pay-out
4. Return on Investment 4. Fixed Assets Turnover ratio 3. Cash Ratio 4. Dividend Yield Ratio
5. Return on Net Worth 5. Total Assets Turnover ratio Long-term Solvency ratios
6. Debt service Coverage 6. Working Capital turnover 1. Debt – Equity Ratio
7. Sales to Capital Employed 2. Capital Gearing Ratio
3. Fixed Asset Ratio
4. Proprietary Ratio
5. Interest Cover
6. Dividend Cover
I. FINANCIAL / SOLVENCY RATIOS
SHORT-TERM SOLVENCY LONG-TERM SOLVENCY RATIOS
RATIOS/LIQUIDITY RATIOS 1. Debt-Equity Ratio/ External-Internal Equity Ratio
1. Current Ratio/Working Capital Ratio Long Term Debts
Debt-Equity Ratio =
Equity
Current Assets OR
Current Ratio = Total Liabilities
Current Liabilities Debt-Equity Ratio =
Shareholders Fund
• Ideal current ratio is as 2:1 (Ideal Ratio preferred by
• The ideal ratio is 2:1 if calculated by first formula; and 0.67:1 if
Banks 1.33:1)
calculated by second formula
• measures the short-term solvency of the company.
• Significance: The debt-equity ratio is used to ascertain the
• Significance: A very high ratio will have adverse
soundness of long-term financial policies of the business. The main
impact on the profitability of the organization. A high
purpose of this ratio is to determine the relative stakes of outsiders
current ratio may be due to high level of inventory,
and shareholders.
inefficiency in collection of debtors, high balance in
cash and bank accounts without proper investments. 2. Capital-Gearing Ratio
Fixed Income / Dividend Bearing Funds
Capital - Gearing Ratio =
Equity Shareholders Fund
2. Liquid Ratio / Quick Ratio / Acid Test Ratio • Fixed Income Bearing Funds = Debentures + Long Term Loans +
Preference Share Capital.
Liquid Assets • Equity Shareholders Funds = Equity share capital + Reserves &
Liquid Ratio = Surplus – Dr. bal. of P&L – Fictitious Assets
Current Liabilities
• The ideal liquid ratio is taken as 1:1 • Significance: It is a very important ratio. Gearing should be kept in
• Prepaid expenses and stock are not taken as liquid assets. such a way that the company is able to maintain a steady rate of
dividend. High gearing ratio is not good for a new company or a
company for which future earnings are uncertain.
LONG-TERM SOLVENCY RATIOS…
2. Fixed Assets Ratio
Fixed Asset Ratio =
Fixed Assets II. MARKET TEST RATIOS
Long Term Funds
Significance: This ratio indicates the proportion of long-term funds deployed in 1. Earnings Per Share (EPS)
fixed assets. The higher the ratio indicates the safer the funds are available in case of To judge the overall profitability of the organization. The
liquidation. It also indicates the proportion of long- term funds that is invested in
working capital.
ratio measures the profit available for the equity
shareholders on a per share basis
3. Proprietary Ratio
Proprietary Funds Profit available for Equity Shareholders
Proprietary Ratio = EPS =
Total Assets No. of Equity Shares
• Proprietary Funds = Equity share capital + Preference share capital + Reserves
– Fictitious Assets 2. Price-Earnings Ratio (P/E Ratio)
• Total Assets = Fixed Assets + Current Assets (Excluding Fictitious Assets) Measures the number of times the earning of the latest
• Significance: A high proprietary ratio is indicative of strong financial position of a year, at which the share price of the company is
business. The higher the ratio, the better it would be. quoted. barometer of the market sentiment.
4. Interest Cover / Debt Service Ratio /Fixed Charges Cover Market Price per share
Earnings Before Interest And Taxes (EBIT) P/E Ratio =
Interest Cover Ratio = EPS
Interest Expenses
• An interest cover of 7:1 is considered reasonable by financial institution. 3. Dividend Pay-out Ratio
• Significance: The Interest Coverage Ratio shows how many times interest charges Dividend Per Share (DPS)
are covered by funds that are available for payment of interest. A very high ratio
Dividend Pay-out Ratio =
EPS
indicates that the firm is conservative in using the debt, and a very low ratio indicates
4. Dividend Yield Ratio
excessive use of debt.
Reflects the percentage yield that an investor receives on
5. Dividend Cover
Profit After Tax (PAT) his investment at the current
Dividend Cover = Dividend Per Share x 100
Dividend Dividend Yield Ratio =
• This ratio indicates number of times the dividend is covered by net profit. Market Price per share
III. PROFITABILITY RATIOS
1. Gross Profit Ratio 5. Return on Net Worth
The ratio measures the gross profit margin on the total Profit after Tax (PAT)x 100
net sales made by the company. Return on Net Worth =
Net Worth
Gross Profit x 100
Gross Profit Ratio =
Sales
2. Net Profit Ratio 6. Operating Ratio
Operating Cost x 100
This ratio measures the efficiency of operation of the Operating Ratio =
Sales
company.
Profit after Tax (PAT) x 100
Net Profit Ratio = • Operating cost = Material cost + Labour cost +Factory
Sales
overheads + office & selling expenses
3. Return on investment
• Material Cost Ratio = Material consumed/Sales*100
How much a company is earning on its investment i.e.
• Labour Cost Ratio = Labour Cost/Sales *100
Operating Profit (EBIT) x 100
Return on Investment =
Capital Employed • Factory overheads cost ratio=Overheads Cost/Sales*100
• Administrative expenses Ratio=Administrative
4. Return on Assets expenses/Sales*100
Profit After Tax (PAT) x 100
Return on Assets = • Selling and distribution expenses ratio=Selling and
Net Assets
The firm is measured by establishing the relation of net distribution expenses/Sales*100
profit with the total assets of the organization. This ratio • All these add up to the Operating Ratio.
indicates the efficiency of utilization of assets in
generating revenue.
IV. TURNOVER RATIOS
1. Stock Turnover Ratio / Stock Velocity
This ratio measures how many times a company’s inventory has been sold during the year. If inventory turnover ratio is low, it
means either the inventory is growing or the sale are dropping.
Average Stock x 365 days or 12 months
Stock Velocity =
Cost of goods sold
Raw Material Consumed
Stock Turnover Ratio =
Average stock of Raw Material
Cost of goods sold
Stock Turnover Ratio =
Average Stock
Opening stock + closing stock
Average Stock =
2
2. Debtors Turnover Ratio / Debtors Velocity
Credit Sales
Debtors Turnover Ratio =
Average accounts receivables
Higher the ratio, the better the position
Average Accounts Receivables
Debtors velocity = x 365 days or 12 months
Credit sales
OR
Months/Days in a year
Debtors velocity =
Debtors Turnover ratio
It shows the speed at which the money is collected from the Debtors. The lower the velocity, the better is the position
3. Creditors Turnover Ratio / Creditors Velocity
This Ratio indicates the speed at which the payments for credit purchases are made to creditors.
Credit Purchases
Creditors Turnover Ratio =
Average Accounts payable
Accounts payable include creditors and bills payable
Average Accounts Payable
Creditors velocity = x 365 days or 12 months
Credit Purchases
OR
Months/Days in a year
=
Creditors Turnover ratio
Longer Credit period or velocity is considered better, because it means that the company’s operations financed interest free by the suppliers.
I don’t fully agree to the above statement. However a low payment period shows that the creditors are being paid promptly
4. Working Capital Turnover Ratio 6. Total Assets Turnover Ratio
indicates the extent of working capital employed in achieving This ratio indicates the number of times total assets are being
sales of the firm: turned over in a year:
Sales A high ratio indicates overtrading of total assets while a low
Working capital Turnover Ratio =
Working Capital ratio reveals idle capacity.
Sales
5. Fixed Asset Turnover Ratio Total Assets Turnover Ratio =
ratio indicates the number of times fixed assets are being Total Assets
turned over in a year: This ratio indicates the extent to which 7. Sales to Capital Employed Ratio/Capital Turnover Ratio
investment in Fixed Assets contributes to generate sales. Fixed This ratio indicates the efficiency in utilization of capital
Assets are to be taken net of depreciation. Higher the ratio employed in generating revenue.
the better is the performance. Sales
Sales Capital employed ratio =
Fixed Asset Turnover Ratio = Capital employed
Fixed Assets Higher the ratio, greater the profits.
1. Find the current liability from the following: (a) ₹ 12,000
Current ratio - 2:5 (b) ₹ 6,500
Liquid ratio - 1:5 (c) ₹ 8,000
Prepaid expenses - Nil (d) ₹ 10,000
Stock - ₹ 4,000
(a) ₹ 20,000 5. In an organization, working capital is ₹ 1,00,000 and current ratio 3:1.
(b) ₹ 40,000 The value of current assets is –
(c) ₹ 80,000 (a) ₹ 1,50,000
(d) ₹ 4,000 (b) ₹ 1,00,000
(c) ₹ 50,000
2. In an organization, profit after interest, tax and dividend on reference (d) ₹ 15,000
shares is ₹ 4,00,000. The number of equity shares is ₹ 40,000 and the
dividend payout ratio is 40%. The dividend per share is 6. Working capital ratio is also known as -
(a) ₹ 4 (a) Quick ratio
(b) ₹ 25 (b) Debt-Equity ratio
(c) ₹ 10 (c) Current ratio
(d) ₹ 6 (d) Liquid ratio
3. The net profit of a company is ₹ 2,00,000, preference dividend ₹ 25,000 7. Credit sales of Jump Ltd. for the year is ₹ 12,00,000 and debtors at the
and taxes paid ₹ 15,000. Number of equity shares is 1,00,000. The end of year ₹ 2,40,000. Assuming 360 days in a year, average collection
earnings per share (EPS) is – period will be-
(a) ₹ 1.5 (a) 60 Days
(b) ₹ 1.6 (b) 72 Days
(c) ₹ 2 (c) 180 Days
(d) ₹ 1.75 (d) 80 Days
4. The current ratio of Brave Ltd. is 2:1, while quick ratio is 1:8:1. If the 8. For the financial year I ended 31st March 2015, the figures a extracted
current liabilities are ₹ 40,000, the value of stock will be - from the balance sheet of Excel Ltd. are as under:
Opening stock ₹ 29,000 (c) Comparison of the ratios of the firm relating to the performance of
Closing stock ₹ 31,000 the firm
Purchases ₹ 2,42,000 (d) Comparison of the firm's past and current ratios with future ratios to
The stock turnover ratio will be - ascertain the relative strengths and weaknesses in the past and future
(a) 12 Times
(b) 15 Times 12. Which of the following pairs is correctly matched
(c) 9 Times (a) Administrative expenses + Selling and distribution expenses =
(d) 8 Times Operating expenses
(b) (Gross profit ÷ Net sales) X 100 = Net profit ratio
9. _______ necessary for the study of trends and direction of movements in (c) Both (A) and (B) above
the financial position and operating results of a concern. (d) None of the above
(a) Trend ratios
(b) Cash flow statements 13. Which of the following pairs is not ( correctly matched
(c) Common size statements (a) Dividend per equity share/Earnings per share = Payout ratio
(d) Comparative statements (b) [Operating profit/Capital employed] X 100 = Return on capital
employed
10. Net income of a company after payment of preference dividend was ₹ (c) [(Cost of goods sold + operating expenses)/net sales] X 100 =
63 lakh. The number of equity shares was ₹ 1,40,000. The P/E ratio of Operating profit ratio
the company was 8.50 times. Earnings per share and market value per (d) None of the above
share would be-
(a) ₹ 45 & ₹ 382.50 respectively 14. Which of the following pairs is correctly matched
(b) ₹ 45 & ₹ 308.20 respectively (a) Profitability ratios - Expenses ratios
(c) ₹ 33.16 & ₹ 281.86 respectively (b) Activity ratios - Total assets turnover ratio
(d) ₹ 45 & ₹ 5.29 respectively (c) Both (A) and (B) above
11. In ratio analysis, proforma analysis' implies-
(a) Making a list of all the present ratios of the firm 15. Assertion (A):
(b) Comparison of liquidity ratios with other kind of ratios of the firm Higher the gross profit ratio, the better it is.
Reason (R):
A low gross profit ratio indicates un favorable trend in the form of (c) ₹ 2,50,000
reduction in selling prices. (d) ₹ 1,50,000
Select the correct answer from the following —
(a) Both A and R are true and R is the correct explanation of A 19. Which of the following statement(s) is/are true:
(b) Both A and R are true, but R is not the correct explanation of A (i) Common size balance sheet is vertical financial analysis
(c) A is true, but R is false (ii) Financial analysis performed on behalf of shareholders is called
(d) A is false; but R is true internal analysis
(iii) Trend percentage may be used for both balance sheet and profit and
16. Equity share capital: ₹ 30 lakh (30,000 shares of ₹ 100 each); 9% loss account.
preference shares: ₹ 10 lakh; profit before tax: ₹ 24.46 lakh and tax Select the correct answer from the options given below -
rate 30%. Earnings per share will be (a) (i) and (ii)
(a) ₹ 54.07 (b) (ii) and (iii)
(b) ₹ 81.53 (c) (ii) and (iii)
(d) (ii) only
(c) ₹ 78.53
(d) ₹ 57.07 20. Return on investment (ROI) is calculated to measure -
(a) Long-term solvency of business
17. If average collection period is 15 days and average account receivables (b) Earning power of net assets of business
is ₹ 45,000, the total amount of credit sales will be (assume 360 days in (c) Short-term liquidity position of business
a year) - (d) Goods sold and inventory level of business
(a) ₹ 10,80,000
(b) ₹ 16,20,000 21. If price-earnings ratio is 0.05 and earnings per share is ₹ 8, the market
(c) ₹ 6,75,000 price of share will be -
(d) ₹ 1,87,500 (a) ₹ 120
(b) ₹ 100
18. Current liabilities of a firm are ₹ 1,50,000. Its current ratio is 3:1 and (c) ₹ 160
liquid ratio is 1:1. The value of stock will be (d) ₹ 0.40
(a) ₹ 3,00,000
(b) ₹ 4,50,000
22. From the books of Raja & Co., following details as on 31st March, 2016 Reason (R):
are collected: It is difficult to determine the value of assets, as value of assets changes
Equity share capital Retained earnings ₹ 20,00,000 with change in time.
10% Debentures ₹ 10,00,000 Select the correct answer from the options given below
Current liabilities ₹ 20,00,000 (a) Both A and R are true and R is the correct explanation of A
Profit before interest & tax ₹ 12,00,000 (b) Both A and R are true but R is not the correct explanation of A
Interest ₹ 1,60,000 (c) A is true, but R is false
Tax ₹ 3,12,000 (d) A is false, but R is true
The rate of return on capital employed will be
(a) 30% 25. Gross profit ratio for a firm was 20% in the year 2015 and 2016 but the
(b) 24% net profit ratio was 15% in the year 2015 and 12% in the year 2016.
(c) 14.56% The reason for such behavior could be-
(d) 17.76% (a) Increase in manufacturing expenses
(b) Increase in indirect expenses
(c) Increase in cost of goods sold
23. A company has annual sales of ₹ 150 lakh entirely on credit. It keeps an
(d) Decrease in sales
average inventory sufficient to meet sales demand for half a month and
gives its customers one month credit. Its average current liabilities are ₹
10 lakh. The company must maintain cash and bank balance to have 26. Total sales: ₹ 24,00,000; Inventory turnover: 4.80 times on basis of cost
current ratio of 2. ratio of goods sold; Gross profit ratio: 25% on cost of goods sold; Closing
The amount of cash balance will be- inventory is ₹ 60,000 more than opening inventory. The amount of
(a) ₹ 1,25,000 opening stock and purchases respectively will be
(b) ₹ 3,00,000 (a) ₹ 3,70,000 & ₹ 19,80,000
(c) ₹ 13,75,000 (b) ₹ 3,45,000 & ₹ 18,60,000
(d) ₹ 7,50,000 (c) ₹ 3,75,000 & ₹ 19,20,000
24. Assertion (A):
Accountants do not take into consideration the price level changes while 27. Owners equity : ₹ 1,00,000
valuing various assets in different period. Current debt to total debt : 0.40
Total debt to owners' equity : 0.60
Fixed assets to owners' equity : 0.60 Cost of goods sold ₹ 2,40,000
Total assets turnover : 2 times The stock turnover ratio will be:
Inventory turnover : 8 times (a) 12 times
Fixed assets will be - (b) 10 times
(a) ₹ 70,000 (c) 8 times
(b) ₹ 60,000 (d) 9 time
(c) ₹ 65,000
(d) ₹ 72,000 31. Long term solvency is indicated by:
(a) Debt equity ratio
28. Fill in the blank space. (b) Proprietary ratio
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (c) Fixed assets ratio
𝑋 100 = ________ (d) All of the above
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
(a) Payout ratio 32. If Working Capital is ₹ 24 Lakh, Total Debt is ₹ 52 Lakh and Long-term
(b) Earning yield ratio
Debt is ₹ 40 Lakh, then current ratio will be:
(c) Dividend yield ratio
(a) 2:1
(d) Dividend ratio
(b) 3:1
29. Credit sales ₹ 3,00,000, Opening balance of accounts receivable ₹ (c) 0.6:1
(d) 1.9:1
50,000 and Closing balance of accounts receivable ₹ 70,000 (assuming
360 days in a year). Debtors turnover ratio will be: 33. If current ratio is 2.5 : 1 and Working Capital is ₹ 120 Lakh, then current
(a) 5 liabilities are:
(b) 6
(a) ₹ 48 Lakh
(c) 4
(d) 7 (b) ₹ 200 Lakh
(c) ₹ 80 Lakh
30. For the financial year ended 31st March, 2017, the figures extracted (d) ₹ 180 Lakh
from the balance sheet of EXE Ltd. are as follow:
Opening stock ₹ 29,000 34. Cost of Goods Sold is ₹ 90 Lakh, Purchases are ₹ 96 Lakh and Closing
Closing stock ₹ 31,000 Stock is ₹ 18 Lakh, then Stock Turnover Ratio will be:
(a) 5 times 20%, Market price of equity shares ₹ 25 each. What will be the earnings
(b) 6 times per share?
(c) 6.4 times (a) 3.50
(d) 4.29 times (b) 3.20
(c) 5.40
35. If Market Price per share, Earning per share and Dividend per share are (d) 9.60
₹ 150, ₹16.50 and ₹ 15 respectively, then Price Earnings Ratio are
74,000 will be: 38. A company has an inventory of ₹ 58,400, Debtors of ₹ 48,000 and
(a) 10 times inventory turnover 6 times. The gross profit margin is 20% on sales and
(b) 9.09 times its credit sales are 40% of the total sales. What will be the credit sales?
(c) 1.1 times (a) ₹ 3,50,400
(d) 0.91 times (b) ₹ 3,53,440
(c) ₹ 4,38,000
36. Dividing net credit sales by average debtors would yield.__ (d) ₹ 1,75,200
(a) Current ratio
(b) Return on sales ratio 39. Closing debtors are ₹ 8,00,000 which are 125 percent of opening
(c) Debtors turnover ratio debtors. Cash sales are 25 percent of total sales. If the debtor's turnover
(d) Average receivables ratio is 4 times then the amount of total sales will be _____
(a) ₹ 36,00,000
37. 9% preference shares of ₹ 10 each ₹ 4,00,000, Equity shares of ₹ 10 (b) ₹ 28,80,000
each ₹ 12,00,000, Profit after tax ₹ 4,20,000, Equity dividend paid (c) ₹ 38,40,000
(d) ₹ 48,00,000
Answers
1. a 2. a 3. b 4. c 5. a 6. c 7. b 8. d 9. a 10. a
11. d 12. d 13. d 14. b 15. a 16. a 17. a 18. a 19. c 20. b
21. d 22. b 23. a 24. a 25. b 26. a 27. b 28. c 29. a 30. c
31 d 32 b 33 c 34 a 35 b 36 c 37 b 38 d 39 c
Topic 17 Management Reporting
INTRODUCTION The three Guiding Principles to be followed are:
Management needs information for decision making & for 1. Lower the level of management, the more detailed should the
evaluating performance, such information provided report; & vice versa.
through reports in an appropriate manner. 2. Lower the level of management, should get the report its more
Importance of Reporting frequently & vice versa.
3. Lower the level of management, less should be number of reports &
1. Provides Information
vice versa
2. Helps in Selection
MEANING OF MANAGEMENT REPORTING:
3. Role in Control System
Is a mechanism for monitoring the ‘mission’ of an organization in terms of
4. Helpful in Profitable Operations objectives set out in planning.
5. Follow the Principle of Management by Exception
6. Helpful in Achieving Overall Objectives The Need for Management Reporting
LEVEL OF MANAGEMENT AND REPORTING To produce timely and reliable information in order to make high-quality
business decisions & to understand problems, for comparisons with
First Line competitors & implement controls to hold employees accountable for
Management budgets.
Common challenges in way include:
Middle • Selecting appropriately and correctly using the right system.
Management
• Manipulating data in order to display the best metrics.
Top • Implementing an inefficient accounting does not allow for timely
Management report
• Ensuring the integrity of the data.
• Adopting reporting processes at incorrect stakeholder levels
ESSENTIAL COMPONENTS TO MANAGEMENT GENERAL PRINCIPLES OF REPORT PRESENTATION
REPORTING • Report should have a proper title subheadings &
• Begin with accurate healthy data & metrics to support paragraph.
business strategies • Relate to certain period,
• Data should support both the long- and short-term • Should be factual.
visions, & should be trustworthy • Should be brief and concise but clear.
• For example, failing to remove data for a discontinued • Report should be prompt
product will negatively skew remaining data • It should distinguish between controllable & non-
controllable factors
Developing a Successful Management Reporting Programme • Appropriate remarks should be given.
• Should be periodically reviewed.
• Discovery: Identify stakeholders & communicate mission to • The report must be correct within the permissible
them
degree of inaccuracy.
• Analysis: Develop data definitions to ensure everyone
interprets it the same way. Keep the data tight and prioritize • Should draw manager’s attention immediately to
• Report Creation & Delivery: Create concise reports and exceptional matters.
determine the appropriate delivery method • Visual reporting through graphs, charts and diagrams
• Implementation: establish a governance process and policies preferred
to ensure data health across the organization • Be ensured that comparisons between same matters.
• Access Point: Create a common place for users to access data
• Analysis should be given for comparison between
• Feedback: Collect comments and suggestions actual and budgeted.
• Inhouse IT Cabalities: ensure that IT personnel can manage
necessary systems and issues if they arise • Format of report should remain unchanged from
period to period.
CLASSIFICATION OF REPORTS Reports
Forms Contents Frequency
descriptive tabular graphical production sales cost finance routine or special

irregular
SPECIAL REPORTS:
Are to be presented after thoroughly investigation of problem.
Matters to covered by special reports:
1. Effect of idle capacity on the cost. 7. Most suitable method of raising funds.
2. Make or buy decision. 8. Most suitable method of investing surplus cash.
3. To replace labour by machines or not. 9. Whether to purchase on higher fixed assets.
4. To explore the new market. 10. Research and development expenditure problems.
5. Whether to continue the sale of the product at a very low 11. Effect of labour disputes on production.
rate during depression. 12. Price fixation problems.
6. Cost reduction schemes.
FORMS OF PRESENTATION OF INFORMATION
1) Verbal (or oral): Group meetings, seminars, conferences, or interviews
2) Written: Most usual form of reporting, information takes the form of a written report.
1. Which of the following is a kind of in report? (d) All of the above
(a) Trend reports
(b) Analytical report 6. ________ are to be presented after making and investigation of the
(c) Activity reports problem which requires to be investigated.
(d) All of the above (a) Memorandum
(b) Special reports
2. Management reporting can be performed as – (c) Summary
(a) Internal reporting (d) Special facts
(b) External reporting
(c) Both (A) & (B) 7. ______ is very important method of presenting information to the
(d) None of the above management in a pictorial manner and attracts the eye of the recipient
more quickly and forcibly.
3. The back bone of any organization is – (a) Tabular Reports
(a) Information (b) Descriptive Reporting
(b) Employee (c) Graphic Presentation
(c) Management (d) All of the above
(d) Capital
8. ______ are presented in the form of comparative statements.
4. Which of these is usually written in a form of a memorandum? (a) Descriptive Reports
(a) Informal reports (b) Graphic Presentation
(b) Formal reports (c) Transactional Analysis
(c) Professional reports (d) Tabular Reports
(d) Business reports
9. Which of the following general Principle that is required to be followed
5. Which of the following is a type of matter may be covered in a special while reporting?
report? (i) Report should have a proper title.
(a) Feasibility study for a project (ii) Report should be in good form and should have subheadings and
(b) Cost reduction schemes information paragraph.
(c) Data on make or buy decision (iii) Format of report should be changed frequently.
(iv) Report should factual. (b) Right choice of instruments
(v) Report need not to save time of the management. (c) Nature of work
Select the correct answer form the options given below. (d) Amount of work left
(a) (i) and (iii) only
(b) (ii) & (iv) only 14. Which of these is not a parameter of a formal report?
(c) (ii), (iii) and (v) only (a) Presentation
(d) (iv), (i) and (ii) only (b) Complaint
(c) Information
10. Collecting comments and suggestions from users to discover ways to (d) Request
continuously improve the data and process can be described as –
(a) Implementation 15. Which of these reports is written before starting a new project?
(b) Exception (a) Feasibility report
(c) Feedback (b) Periodic report
(d) Order (c) Trouble report
(d) Progress report
11. Which of these reports provide information without any evaluation?
(a) Informative 16. Which of these must never be a basis for a technical report?
(b) Interpretative (a) Facts
(c) Routine (b) Tests
(d) Progress (c) Personal prejudices
(d) Experiments
12. _____ report provides rational findings.
(a) Informative 17. Reports present conclusions based on:
(b) Interpretative (a) Intuition
(c) Routine (b) Belief
(d) Progress (c) Impression
(d) Investigation
13. Which of these is not mentioned in a progress report?
(a) Name of project 18. Which of these is not a parameter of a report?
(a) Ability to acquire additional information (c) Choice of the writer
(b) Quality of additional information acquired (d) Collection of data
(c) Ability to arrive at subjective evaluation
(d) Ability to provide Worthwhile recommendations 20. Which of there must be avoided in a technical report?
(a) Facts
19. The chronological development of information in the body of the report is (b) Logical conclusion
done according to the: (c) Objective evaluation
(a) Logical sequence of events (d) Subjective evaluation
(b) Order in which events occurred
Answers
1. d 2. c 3. a 4. a 5. d 6. b 7. c 8. d 9. d 10. c
11. a 12. b 13. b 14. b 11. a 12. b 13. b 14. b 11. a 12. b
Topic 18 Decision Making Tools
BEP Units
After BEP sales there is Margin of
S.N. Particulars 1 unit 10 Units 200 Units 300 Units Safety sales, where actually we
A Sales 10 100 2,000 3,000 earn profit. Like in present case
100 units (After BEP)
B (-) V.C. 6 60 1,200 1,800
C (=) Contribution 4 40 800 1,200 Profit
Margin of safety =
P/V Ratio
D (-) Fixed Cost 800 800 800 800 Profit
E (=) Profit / (Loss) (796) (760) 0 400 MOS in units = Contribution p.u.
At BEP F.C
BEP Units =
1. No Profit, No Loss Contribution p.u.
2. Contribution = Fixed Cost F.C
BEP (₹) =
3. We have recovered all FC P/V Ratio
MARGINAL COSTING (Variable Costing)
• Marginal cost: Is an Amount at any given volume of output by which aggregate costs are changed, if volume of output is
changed even by one unit.
• It is a variable cost of one unit, i.e., a cost which could be avoided if that unit was not produced or provided.
• Marginal costing is the ascertainment of marginal cost & effect on profit because of changes in volume by differentiating
between fixed costs and variable cost
• Concept of Marginal costing, is based on behaviour of costs that vary with the volume of output.
FEATURES OF MARGINAL COSTING FORMULAS USED IN MARGINAL COSTING
1. All costs are divided into fixed and variable costs.
2. Variable cost per unit is constant. Fixed costs in total remain constant. Sales = Variable cost + Fixed cost + Profit
3. Fixed costs are period costs & not included in product cost, only Sales – Variable = Contribution
variable costs included product costs. Sales – Variable cost = Fixed cost + Profit Contribution
4. Stock of work-in-progress and finished goods are valued at marginal
cost of production. Contribution = Fixed cost + Profit
5. Here products transferred from one process to another are valued at Contribution – Fixed = Profit
marginal costs only. Profit = Contribution – Fixed Cost
6. Prices are determined with reference to marginal cost and
Fixed Cost = Contribution – Profit
contribution margin.
7. Profitability of departments, products, etc., is determined with
reference to their contribution. CONTRIBUTION MARGIN ANALYSIS
Contribution Margin = Sales – Variable Cost
LIMITATIONS OF MARGINAL COSTING (Selling Price-Variable Cost) X 100
1. Difficulty in classifying fixed and variable cost CM Raito =
2. Scope for low profitability: Sales staff may mistake marginal cost for (Selling Price)
total cost & sell at a price; which will result low profits.
3. Faulty valuation: Overheads of fixed nature cannot altogether be BREAK EVEN POINT
excluded particularly in large contracts F.C
BEP Units =
4. Unpredictable nature of Cost: assumptions regarding the behaviour Contribution p.u.
of various costs are not necessarily true
5. Marginal costing ignores time factor and investment: cost of two F.C
jobs may be the same but the time taken for their completion and the BEP (₹) =
P/V Ratio
cost of machines used may differ.
(F + Desired profit)
PROFIT-VOLUME RATIO Desired Sales =
C.M. Ratio
Marginal Contribution Change in Profit
P / V Raito =
(Sale) PV Ratio =
Sales Value-Variable Cost Change in Sales
OR = (difference in fixed cost)
Sales Value
Cost indifference point =
(difference in P/V ratio or contribution per unit)
1 - Variable Cost
OR = (Total fixed cost of all the products)
Sales Value Overall BEP (all products) =
(Overall P/V ratio)
Fixed Cost + Profit
OR = COST-VOLUME-PROFIT (CVP) ANALYSIS: technique used by
Sales Value
management to evaluate how costs & profits are affected by changes in
Change in profits/ contributions
OR = the volume of business activities
Change in sales
Techniques of CVP Analysis:
1. Contribution Margin Analysis, & 2. Break-Even Analysis:- Break Even
analysis further divided in Mathematical & Graphical approach
Marginal Cost Equation: S - V = C = F ±P/L
MARGIN OF SAFETY Contribution Margin Analysis: Sales – Variable Cost
Margin of safety = Total sales – Break even sales IMP Question:
Profit Find, P/V ratio, BEP, Profit if
Margin of safety =
P/V Ratio sales 1,80,000; Sales to
Profit earn profit 12,000 & MOS
Margin of safety in units.: =
Contribution p.u.
1. Which of the following formula cannot be used for calculating P/V ratio- 5. A product is sold at a price of ₹ 120 per unit and its variable cost is ₹ 80
(a) (Sales value minus variable cost)/ Sales value per unit. The fixed expenses of the business are ₹ 8,000 per year. Break-
(b) (Fixed cost plus profit)/Sales value even point is —
(c) Change in profits /Change in sales (a) ₹ 24,000
(d) Profit/Sales value (b) ₹ 20,000
(c) ₹ 16,000
2. The costing method in which fixed factory overheads are added to (d) ₹ 28,000
inventory is known as-
(a) Direct costing
6. A company sells its product at ₹ 15 per unit. In a period, if it produces
(b) Marginal costing
(c) Absorption costing and sells 8,000 units, it incurs a loss of ₹ 5 per unit. If the volume is raised
(d) Activity based costing to 20,000 units, it earns a profit of ₹ 4 per unit. The break-even point of
the company in rupee terms will be-
(a) ₹ 1,60,000
3. When the volume is 3,000 units, the average cost is ₹ 4 per unit. When
(b) ₹ 2,00,000
the volume is 4,000 units, the average cost is ₹ 3.50 per unit. The break-
even point is 5,000 units. (c) ₹ 1,80,000
What is the P/V ratio of the firm- (d) ₹ 2,20,000
(a) 35%
(b) 37.5% 7. Which of the following costs are treated as product cost under variable
(c) 40% costing:
(d) 32.5% (a) Only direct costs
(b) Only variable production costs
4. Which of the following formula cannot be used for calculating (c) Only material and labour costs
contribution- (d) All variable and fixed manufacturing costs
(a) Fixed cost plus profit
(b) Fixed cost minus loss 8. What is the margin of safety, if profit is equal to ₹ 40,000 and P/V ratio
(c) Sales minus variable cost is 25%-
(d) Fixed cost plus loss (a) ₹ 1,60,000
(b) ₹ 1,00,000
(c) ₹ 16,000
(d) ₹ 10,000 13. HM Ltd. recorded sales of ₹ 60 lakh in 2014 as compared to ₹ 45 lakh
in 2013. Profit for 2014 was ₹ 5 lakh higher than that in 2013. If the
9. When the sales increase from ₹ 45,000 to ₹ 60,000, the profit increases annual fixed costs amount to ₹ 12 lakh, the profit on projected sales of ₹
by ₹5,000. P/V Ratio would be 90 lakh will be —
(a) 20% (a) ₹ 15 lakh
(b) 30% (b) ₹ 14 lakh
(c) 33.33% (c) ₹ 12 lakh
(d) 66.67% (d) ₹ 18 lakh
10. Margin of safety can be calculated using the formula — 14. HM Ltd. manufactures three products P, Q and R. The unit selling price of
(a) Total sales - Break-even sales these products are ₹ 100, ₹ 160 and ₹ 75 respectively. The
(b) Fixed cost ÷ P/V ratio corresponding unit variable costs are ₹ 50, ₹ 80 and ₹ 30. The
(c) P/V ratio ÷ Profit proportions (quantity-wise) in which these products are manufactured and
(d) Fixed cost ÷ Contribution sold are 20%, 30% and 50% respectively. Total fixed costs are ₹
14,80,000. Overall break-even quantity is —
11. Profit-Volume ratio can be improved by – (a) 26,195 Units
(a) Increasing selling price per unit (b) 27,195 Units
(b) Reducing the direct and variable costs (c) 27,165 Units
(c) Switching the production to products showing higher profit volume (d) 28,165 Units
ratio
(d) All of the above 15. Profits in a company can be increased by:
(1) Decreasing the selling price per unit
12. Make or buy decisions are made by comparing _______ cost with outside (2) Increasing the selling price per unit
purchase price. (3) Decreasing the volume of sales
(a) Fixed (4) Increasing the volume of sales
(b) Variable (5) Decreasing the fixed or variable expenses
(c) Sunk (6) Increasing the fixed or variable expenses
(d) Joint
(7) Giving more weightage for products having higher P/V ratio (c) 3 1 4 2
(8) Giving less weightage for pro-ducts having higher P/V ratio (d) 4 3 2 1
Select the correct answer from the options given below —
(a) (1), (3), (5) and (7) 18. Match the following:
(b) (2), (4), (6) and (8) List-I List-II
(c) (2), (4), (5) and (7)
P. Excess of actual sales over 1. Contribution
(d) (1), (3), (6) and (8)
breakeven sale volume
16. If sales revenue at 60% capacity is ₹ 4,50,000, sales revenue at 70% Q. Sum of fixed cost & profit 2. Cost-volume profit analysis
capacity on ,a fall in selling price by 5% would be — R. Break-even analysis 3. No profit, no loss
(a) ₹ 4,98,750 S. Break-even point 4. Margin of safety
(b) ₹ 7,50,000 Select the correct answer from the options given below —
(c) ₹ 5,25,000 P Q R S
(d) ₹ 7,12,000 (a) 4 1 2 3
(b) 4 3 2 1
(c) 4 2 1 2
17. Match the following:
(d) 3 1 4 2
List-I List-II
P. Classification of costs into fixed 1.Contribution 19. Cost volume profit (CVP) analysis is based on serval assumptions. Which
and variable costs one of the following is not relevant for such an analysis
Q. Difference between sales and 2. P/V ratio (a) Inventory quantity changes in the year
variable costs (b) Sale mix of the products is constant
R. Both fixed and variable costs are 3. Marginal (c) Material price and labour rates do not change
charged to product costing (d) Behavior of both sales and variable cost is liner throughout the year
S. Relative profitability 4. Absorption
Select the correct answer from the following options — 20. Profit : ₹ 50,000
P Q R S Contribution : ₹ 70,000
(a) 4 3 1 2 Sales : ₹ 7,00,000
(b) 3 4 1 2 The amount of margin of safety will be
(a) ₹ 4,00,000 Fixed expenses at 50% ₹ 15,000, Fixed expenses when factory is close
(b) ₹ 5,00,000 down ₹ 10,000, Additional expenses in closing down ₹ 1,000, Production
(c) ₹ 2,50,000 at 50% capacity 5,000 units, contribution per unit1. Advise whether to run
(d) ₹ 1,45,000 the factory or close it down:
(a) Close
21. Following information is related to product A (b) Run
In 2015 variable cost ₹ 200 per unit and fixed cost ₹ 40 per unit. (c) Continue
Production was 1,20,000 units. It is expected that production in 2016 will (d) None of the above
increase to 1,60,000 units. The variable cost will increase by 25% and
fixed cost by 10% in 2016 the amount of fixed cost in 2016 will be 24. Reliance Furniture house places before you the following trading results.
(a) ₹ 52,80,000 Year Units Total cost (₹) Sales (₹)
(b) ₹ 70,40,000 2015 10,000 80,000 1,00,000
(c) ₹ 64,00,000 2016 12,000 90,000 1,20,000
(d) ₹ 48,00,000 Fixed cost will be
(a) ₹ 15,000
22. A radio manufacturer finds that it costs ₹ 6.25 per unit to make component (b) ₹ 10,000
M-140 and the same is available in the market at 5.75 each. Continuous (c) ₹ 30,000
supply is also fully assured. The break-down cost per unit as follows: (d) ₹ 60,000
Materials ₹ 2.75, Labour ₹ 1.75 other variable expenses ₹ 0.50,
Depreciation and other fixed cost ₹ 1.25. What would be your decision, 25. The cost accountant of HM Ltd. has ascertained the selling price of a
if the supplier offered the component at ₹ 4.85 per unit? product is ₹ 20 per unit. Variable? cost is ₹ 15 per unit and break-even
(a) Make point is 21,600 units. Management has decided to treat 12,000 units of
(b) Buy B.E.P. because production department cannot produce more than this at
(c) Sell the moment. The selling price for ₹ 12,000 units B.E.P. will be:
(d) None of the above (a) ₹ 20 per unit
(b) ₹ 24 per unit
23. A firm has given the following data: (c) ₹ 26 per unit
(d) ₹ 28 per unit
30. When the sales increase from ₹ 40,000 to ₹ 60,000 and profit increases
26. P/V ratio 25%, sales ₹ 1,20,000 and fixed costs ₹ 17,500 profit will be by ₹ 5,000, the P/V ratio is:
(a) ₹ 12,500 (a) 20%
(b) ₹ 30,000 (b) 30%
(c) ₹ 17,500 (c) 25%
(d) ₹ 20,000 (d) 40%
27. Under marginal costing system, product costs are: 31. ABC Ltd. shows break even sales ₹ 40,500 and budgeted sales ₹ 50,000.
(a) Equal to fixed cost plus variable cost Compute the margin of safety ratio?
(b) Equal to only marginal costs (a) 19%
(c) Equal to semi-variable costs (b) 81%
(d) None of the above (c) 1.81%
(d) Require more data to calculate
28. If the P/V ratio of a product is 25% and selling price is ₹ 25 per unit, the
marginal cost of the product would be: 32. If standard output for 8 hours is 200 units and actual output in 10 hours is
(a) ₹ 18.75 350 units, the efficiency level will be:
(a) 175%
(b) ₹ 16
(b) 140%
(c) ₹ 15 (c) 57.14%
(d) ₹ 20 (d) 71.42%
29. A company, which has a margin of safety of ₹ 2,00,000 makes profit of 33. P/V Ratio for the firm is 60%, Total fixed costs are ₹ 10,40,000 and
₹ 40,000. If the fixed cost is 2,50,000, break-even sales of the company variable cost per unit is ₹ 720. If the sales are 20,000 units, then selling
would be: price per unit will be:
(a) ₹ 15,00,000 (a) ₹ 1,200
(b) ₹ 12,50,000 (b) ₹ 772
(c) ₹ 10,00,000 (c) ₹ 1,930
(d) ₹ 20,00,000
(d) ₹ 1,800 (c) Differential Costing
34. If the P/V Ratio is 30%, Margin of Safety is 40% and BEP is ₹ 48 Lakh,
then profit will be: 36. The following information is given:
(a) ₹ 9.60 Lakh Sales (₹) Profit (₹)
(b) ₹ 14.40 Lakh Period 1 20,000 4,000
(c) ₹ 5.76 Lakh Period 2 30,000 8,000
(d) ₹ 24 Lakh Sales to earn a profit of ₹ 16,000 will be:
(a) ₹ 40,000
35. Based on cost accounting information, which is the tool of Management (b) ₹ 60,000
Accounting for decision-making? (c) ₹ 50,000
(a) Marginal Costing
(d) ₹ 75,000
(b) Standard Costing
Answers
1. d 2. c 3. b 4. d 5. a 6. c 7. b 8. a 9. c 10. a
11. d 12. b 13. d 14. a 15. c 16. a 17. c 18. a 19. a 20. b
21. a 22. b 23. b 24. c 25. b 26. a 27. b 28. a 29. b 30. c
31 a 32 b 33 - 34 35 d 36 c
Topic 19 Valuation Principles & Framework
INTRODUCTION Voluntary Assessment: key value drivers and key risk areas
• Corporate valuations form the basis of corporate finance - Nature of Business,
activities capital-raising, mergers & acquisitions (M&A) also to - Promoters and management background
meet regulatory/accounting requirements for voluntary purpose. - Core Team
• valuation is not an exact science; it depends upon a number of - Competitive landscape and differentiation
factors purpose, stage of business, past financials, industry - Profitability
scenario, management and promoter’s strengths. - Economic outlook and trend
- Purpose of valuation
AREAS WHERE VALUATION IS USED
Areas Description GENERALLY ACCEPTABLE
Mergers &
only assists business owners to maximize the value of their METHODOLOGIES OF VALUATION
business considering a sale, merger, acquisition, joint A number of business valuation models can be constructed that utilize
Acquisitions various methods. Valuer’s choice of methods is determined by the
venture,
characteristics of the business to be valued, the purpose and use of the
Succession to family members, Succession to employees: valuation and its report, the pattern of historical performance and
Succession
Succession to outside parties: It comprises mergers, earnings of the subject company. Factors to consider:-
Planning
acquisitions, - History and nature
- Industry and general economic
Going when a new company goes for an Initial Public Offering
- Book value and financial condition
Public (IPO), to evaluate the fair value of such a stock.
- Earning capacity
Before deciding how to manage a dispute, it is necessary - Dividend-paying
Dispute
to determine the likelihood of a successful outcome and - Prior sales and size
Resolution
the potential stake involved. - Comparisons to similar
CONCEPTUAL FRAMEWORK OF VALUATION APPROACHES OF VALUATION
‘Valuation’ implies the task of estimating the worth/value of an asset, a security or a
business. two different buyers may not have the same valuation the valuation is required
not only of tangible assets but also of intangible assets
Approaches for Valuation
1) Book Value: Book values of Assets (excludes fictitious assets & losses) – Liabilities • Income Approach
2) Market Value: Market value refers to the price at which as asset can sold in the • NAV
market. (If from view of business as whole then, No. of shares X quoted price in stock • Price to B.V multiple
market) • Market Approach
3) Intrinsic/Economic Value: the present value of incremental future cash inflows after • DCF
taxes likely to accrue to the acquiring firm, discounted at the relevant risk adjusted • Capitalization of earning methods
discount rate, present value indicates the maximum price at which the business can be
• Assets Approach
acquired.
4) Liquidation Value: price at which each individual asset can be sold if business • Fair market value
operations are discontinued sum of (i) realizable value of assets and (ii) cash and bank
balances minus payments required to discharge
5) Replacement Value: is the cost of acquiring a new asset of equal utility and the
usefulness.
6) Salvage Value: represent realizable scrape value on the disposal of assets I. ASSET APPROACH
7) Value of Goodwill: in case it earns rate of return(ROR) on invested funds higher than Focuses on the company’s net asset value
the ROR earned by the similar firms (with the same level of risk). goodwill results when (NAV), or the fair-market value of its total
the firm earns excess
8) Going Concern Value: For business firm as an operating unit. based primarily on how assets minus its total liabilities, is best used
profitable its operations would be as a continuing entity. (FMP/Capialization Rate) when a business is non-operating or has been
9) Fair Value: book value, intrinsic value and market value; the fair value is hybrid in generating losses
nature and often is the average of these three values. It is further classified into:
A. Net Asset Value II. INCOME OR EARNING APPROACH
Total assets xx
(excluding miscellaneous expenditure & debit balance in P&L) (a) Discounted Cash Flow Method (DCF)
Less: Total Liabilities xx All future cash flows are estimated and discounted by using cost of
NAV xx capital to give their present values (PVs). The sum of all future cash
OR flows, both incoming and outgoing, is the net present value (NPV)
Share Capital xx
Add: Reserves xx PV of future sum = FV/(1+r)n
Less: Miscellaneous expenses xx OR
P& L (Dr balance) xx = FV x PVF(r,n)
NAV xx
NAV PV of a series of Equal Future cash flows or Annuity
value per share =
No. of shares = Annuity Amount x PVAF (r,n)
B. Price to Book Multiple Method b) Capitalization of Earning Method

Is similar to that of the P/E multiple method • Capitalization method basically divides the business expected
This method can be used for: earnings by the so-called ‘capitalization rate’.
• companies in manufacturing sector which have significant • When it appears that a company’s current operations are indicative
capital requirements; of its future operations, assuming of course, a normal growth rate.
• companies which are not in technical default (negative book • Under this method a stable level of earnings is divided by a
value of equity) capitalization rate
STEPS to calculate:-
Step 1- Weighted Average Market Price
Step 2- Divide by-Value per share as per NAV method
Step 3- Price/Book Value Multiple
III. MARKET BASED APPROACH
(Relative Valuation Method)
Arriving at the value of a company by comparing it to the market value of
similar publicly listed companies.
Fair Market Value (FMV)
Fair market value is the current price at which that same asset can be sold.
Fair Value = Expected or Standard P/E X Expected EPS
Numerator: Adjust after tax effect of potential ordinary shares
IND AS – 33: EARNINGS PER SHARE of dividend, interest, other changes in income and expenses
The conversion of potential ordinary shares may lead to
Objective:
consequential changes in income or expenses.
This standard prescribes the principles for determination and presentation
Denominator: The number of ordinary shares shall be the
of EPS. If an entity discloses the EPS, then it should be calculated in
weighted average number of ordinary shares plus the weighted
accordance with this standard. If an entity presents both CFS and SFS then
average number of ordinary shares that would be issued on the
EPS shall be presented in both FS.
conversion of all the dilutive potential ordinary shares into
Scope: ordinary shares.
Key-Terms :An entity that discloses earnings per share shall calculate and Retrospective adjustment: If the number of ordinary or
disclose earnings per share in accordance with this Standard potential ordinary shares outstanding increases as a result of a
• Anti dilution is an increase in earnings per share or a reduction in loss per capitalisation, bonus issue or share split, or decreases as a
share resulting from the assumption that convertible instruments are result of a reverse share split, the calculation of basic and
converted, that options or warrants are exercised, or that ordinary shares diluted earnings per share for all periods presented shall be
are issued upon the satisfaction of specified conditions. adjusted retrospectively.
• Dilution is a reduction in earnings per share or an increase in loss per
share
Disclosure – IND AS 33
• When a contract is readily convertible in cash
• The amounts used as the numerators in calculating basic and diluted
• A written option can only be settled in cash not otherwise.
earnings per share.
Classification / Presentation of financial instrument:
• The weighted average number of ordinary shares used as the
Should be classified as either a financial liability or an equity
denominator in calculating basic and diluted earnings per share.
instrument according to the substance of the contract, not its
• Instruments (including contingently issuable shares) that could potentially
legal form, & the definitions of financial liability and equity
dilute basic earnings per share in the future, but were not included in the
instrument.
calculation of diluted earnings per share because they are antidilutive for
The classification is not subsequently changed based on
the period(s) presented.
changed circumstances.
IND AS – 32: FINANCIAL INSTRUMENT PRESENTATION
Objective: A financial instrument is an equity instrument only if
Is to establish principles for presenting financial instruments as liabilities or
a. The instrument includes no contractual obligation to
equity & for offsetting financial assets / liabilities.
deliver cash or another financial asset to another entity
Financial Instrument: Any contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument of another entity and
Equity Instrument: Any contract that evidences a residual interest in the b. if the instrument will or may be settled in the issuer’s
assets of an entity after deducting all of its liabilities. own equity instruments, it is either:
Scope: Applicable to all financial instruments A non-derivative that includes no contractual
EXCEPT:- obligation for the issuer to deliver a variable number
• Subsidiaries, joint ventures, associates, etc. of its own equity instruments;
• Employees’ benefits OR
• Insurance contracts A derivative that will be settled only by the issuer
• Instruments where share-based payments are involved exchanging a fixed amount of cash or another
• The standard applies to contracts to buy or sell non-financial instruments financial asset for a fixed number of its own equity
which can be settled in cash by some other financial instruments instruments.
Example:
IND AS 113 - FAIR VALUE MEASUREMENT
If an entity issues preference (preferred) shares that pay a fixed Objective: This Ind AS defines FV, sets out in a single Ind AS a framework
rate of dividend and that have a mandatory redemption feature at for measuring FV, requires disclosures about fair value measurements.
a future date, the substance is that they are a contractual obligation Scope: This Ind AS applies when another Ind AS requires or permits FV
to deliver cash and, therefore, should be recognized as a liability. measurements or disclosures about FV measurements.
In contrast, preference shares that do not have a fixed maturity, Not apply to the following:
and where the issuer does not have a contractual obligation to 1. Share-based payment transaction as per Ind AS 102;
make any payment are equity. 2. Leasing transactions within as per Ind AS 47, and
In this example even though both instruments are legally termed 3. Measurements that have some similarities to fair value but are not fair
value, such as net realisable value (NRV) in Ind AS 2, Inventories, or value
preference shares they have different contractual terms and one is
in use in Ind AS 36, Impairment of Assets.
a financial liability while the other is equity.
Key Terms:
Fair Value: The price that would be received to sell an asset or paid to
Contingent Settlement Provisions - requires a financial instrument transfer a liability in an orderly transaction between market participants at
to deliver cash or another financial asset on the happening of a the measurement date.
certain event in the future which will render the instrument as a Fair value measurement approach:The objective of fair value measurement
financial liability. Such events are beyond the control of the entity is to estimate the price at which an orderly transaction to sell the asset or to
transfer the liability.
Offsetting a Financial Asset and a Financial Liability- A financial FV measurement requires an entity to determine:
asset and a financial liability shall be offset and the net amount 1. Particular asset or liability
presented in the BS when, and only when, an entity: 2. For a non-financial asset, the valuation premise that is appropriate for
a. Currently has a legally enforceable right to set off the measurement
recognised amounts; and 3. principal [market with greatest volume and the highest level of activity] or
b. Intends either to settle on a net basis, or to realise the asset and most advantageous market[that maximizes the amount that would be
settle the liability simultaneously. received to sell the asset, or minimizes the amount in case of liability]
4. valuation technique(s)
Fair Value Measurement – Valuation Techniques
Market approach– uses prices & other relevant information generated by market transactions involving identical or
comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. A business)
Cost approach– reflects the amount that would be required currently to replace the service capacity of an asset (For non
financial asset=current replacement cost- Obsolescence)
Income approach– converts future amounts (cash flows or income and expenses) to a single current (discounted) amount,
reflecting current market expectations about those future amounts.
Fair Value Measurement – Fair Value Hierarchy

(i) Input Level 3 (unobservable) Inputs that reflect management’s own assumptions about the assumptions that a market
participant would make (E.g. Projected cash flows used to value a business or non-controlling interest in an unlisted entity)
(ii) Input Level 2 (Indirectly observable) • Prices in active markets for similar assets / liabilities, quoted prices for identical /
similar items in markets that are not active • Inputs other than quoted prices (e.g. – interest rates, yield curve)
(iii) Input Level 1 (Directly observable) Quoted prices in active markets for identical assets / liabilities (e.g. Quoted prices for
an equity security on the BSE/ NSE).
Disclosures In Financial Statements –

Shall disclose information that helps users of its FS assess both of following:
(a) For assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the balance sheet after
initial recognition, the valuation techniques are used to develop those measurements.
(b) For recurring fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on
profit or loss or other comprehensive income for the period.
1. Discounted cash flow valuation is based upon –
(a) Expected future discount that likely to be earned. 5. Which of the following is required to be taken into consideration while
(b) Real worth of the business valuing equity shares of the company?
(c) Expected future cash flows and discount rates. (a) Size of the block of shares
(d) Earning capacity of the company (b) Restricted transferability aspect
(c) Dividends
2. Statement I: (d) All of the above
Net Asset Method can be fairly used to value shares when the firm is
liquidated. 6. In which of the following cases valuation is essential?
Statement II: (a) Conversion of debt instruments into shares.
This method does not give any weight to earning capacity of the company. (b) On directions of Tribunal or Authority or Arbitration Tribunals.
Select the correct answer from the options given below: (c) When issuing shares to public either through an Initial Public Offer or
(a) Statement I is correct but Statement II is incorrect by offer for sale.
(b) Statement I is incorrect but Statement II is correct (d) All of the above
(c) Both Statement I and Statement II are incorrect
(d) Both Statement I and Statement II are correct 7. Which of the following is equal to the present value of all cash proceeds
received by a stock investor?
3. Which of the following is normally used as discounting factor under the (a) Value
discounted cash flow valuation? (b) Retention ratio
(a) Cost of equity (c) Dividend pay-out ratio
(b) Cost of debt (d) Discount rate.
(c) Annuity factor
(d) Overall cost of capital 8. Which of the following do financial analysts consider least important when
assessing the long-run economic and financial outlook of a company?
4. Present value means – (a) Expected return on equity
(a) Value in use (b) Prospects of the relevant industry
(b) Value of future cash flows (c) Expected changes in EPS
(c) Value calculated using IRR (d) General economic conditions
(d) Present value that buyer is ready to pay
9. Analysts commonly consider all of the following to be indicators that the Current assets 440 lakh (470 lakh)
market is overvalued except Current liabilities 55 lakh
(a) High average P/E ratio Dividend payable 6 lakh
(b) High average price-to-book ratio Figures in bracket indicates market prices of the assets/liabilities.
(c) High average dividend yield (a) 1,665 lakh
(d) All of the above (b) 1,629 lakh
(c) 1,420 lakh
10. As per Section 247 of the Companies Act, 2013, where a valuation is (d) 1,720 lakh
required to be made in respect of any property, stocks, shares,
debentures, securities or goodwill or any other assets or net worth of a 13. Following details are available for two companies:
company or its liabilities, it shall be valued by a person having such (₹ in lakh)
qualifications and experience and registered as a valuer in such manner,
LIABILITIES X Ltd Y Ltd
on such terms and conditions as may be prescribed and appointed by the
(a) Audit committee Equity Shares capital 1,215 3,000
(b) Board of Directors of the company. General Reserves 403.5 1,285
(c) Board of Directors on recommendation of audit committee. Profit & Loss Account 15 35
(d) Audit committee or in its absence by the Board of Directors of that
company. Sundry Creditors 55 65
1,688.5 4385
11. Which of the following best defines the market capitalization for a ASSETS
company's shares? Sundry Assets 1,685 4,357.5
(a) When a company is listed i.e. goes 'public'
(b) When a company issues new shares and thus increases its capital Cash in Hand 3.5 27.5
(c) Current share price
1,688.5 4385
(d) Share price X number of shares in issue
X Ltd. has 9 lakh Equity Shares of ₹ 150 each, ₹ 135 paid-up.
12. From the following details calculate the net asset value: Y Ltd. has 40 lakh Equity Shares of ₹ 75 paid-up.
Fixed assets 1,000 lakh (1,215 lakh) What is the intrinsic value per share for these companies?
Cash in hand 35 lakh (a) ₹ 185.10 & ₹ 180 per share
(b) ₹ 118.50 & ₹ 102 per share 16. A large chemical company has been expected to grow at 14% per year
(c) ₹ 181.50 & ₹ 108 per share for next 4 years and then to grow indefinitely at the same rate as national
(d) ₹ 185.10 & ₹ 102 per share economy i.e. 5%. The required rate of return on equity share is 12%.
Assume that company paid a dividend of ₹ 2 per share last year (Do =
14. The shares of company are selling at ₹ 20 per share. The firm had paid 2). Determine the market price of the shares today.
dividend @ ₹ 2 per share last year. The estimated growth of the (a) ₹ 42.60 per share
company is approximately 8% per year. Required rate of return is (b) ₹ 46.20 per share
15.5%. Market value of equity shares as per dividend growth model will (c) ₹ 40.62 per share
be: (d) ₹ 45.46 per share
(a) ₹ 32.4 per share
(b) ₹ 28.8 per share 17. Anurag has invested in a share whose dividend is expected to grow @
(c) ₹ 25.5 per share 15% for 5 years and thereafter @ 5% till life of the company. Find out
(d) ₹ 29.1 per share the value of the share, if current dividend is ₹ 4 per share and investors
required rate of return is 6%.
15. ZPA Ltd. is foreseeing a growth rate of 12% p.a. in the next two years. (a) ₹ 656.93 per share
The growth rate is likely to fall to 10% for the third year and fourth year. (b) ₹ 665.39 per share
After that growth rate is expected to stabilize at 8% p.a. If the last (c) ₹ 666.99 per share
dividend (Do) paid was ₹ 1.5 per share and the investor's required rate (d) ₹ 693.56 per share
of return is 16%, find out the intrinsic value per share of ZPA Ltd. as of
date. 18. Zensar Ltd. issued 5 year 12% Bond. Face value of the bond is ₹ 1,000
Years 1 2 3 4 5 which is redeemable in 5 equal installments. What would be the current
PVF 16% 0.86 0.74 0.64 0.55 0.48 price of the bond if the YTM is 10%?
(a) ₹ 22.33 per share (a) ₹ 1,170.60
(b) ₹ 23.32 per share (b) ₹ 1,080.30
(c) ₹ 33.22 per share (c) ₹ 1,048.13
(d) ₹ 23.23 per share (d) ₹ 1,238.30
19. What is value of deep disco bond issued by IDBI for a maturity period of 20. A Zero Coupon Bond (ZCB) was issued at a face value of ₹ 2,50,000 and
15 years and having a par value of ₹ 1,00,000 if the required rate of has-maturity of 5 years. Its YTM is 8%. What would be fair price of bond
return is 12% today?
(a) ₹ 12,000 (a) ₹ 1,70,250
(b) ₹ 15,400 (b) ₹ 1,80,520
(c) ₹ 22,600 (c) ₹ 1,60,750
(d) ₹ 18,300 (d) ₹ 1,90,140
Answers
1. c 2. d 3. d 4. b 5. d 6. d 7. a 8. d 9. c 10. d
11. d 12. a 13. c 14. b 15. a 16. c 17. a 18. c 19. d 20. a
Topic 20 Valuation Of Shares, Business & Intangibles
A. GOODWILL VALUATION NEEDS FOR VALUATION OF

GOODWILL
Introduction • To sale Business
• ‘Extra Future earning capacity of business’ • When share exchange quotations not
available
• Is an intangibles but not fictitious • When largely of shares to sale/buy
• It is has some realizable value • When co. has already write off its
• Due to Goodwill business earns extra profit over goodwill and wants to right back
normal returns
“FACTORS TO CONSIDER FOR
Factors affecting Goodwill VALUATION”
• Location of business • Nature of industry
• Promoters reputation • Risk in business
• After sales service • Prospects of company
• Possession of favorable contracts. • Ratio of liability to capital
• Size location & reputation of company
• Possession of trademarks, patents, tec. • Yield on share
GOODWILL
Internally generated Purchased
Should not be recognized as ab Should be recognized initially @

asset cost
Classification - phase-wise
Development
Research phase
phase
No asset Only expenses Can recognized if following condition fulfilled
Availability of
Technical Intention to Ability to sell or
FEB adequate Can measure exp.
feasibility complete use
recourses
Methods of valuation
Average profit Super profit Method Capitalisation of Annuity Method
method super profit (Extra)
Goodwill =Avg. profit Purchase of super Sliding scale valuation Goodwill = Goodwill = super
(x) No. of years of profit of super profit
𝑆𝑢𝑝𝑒𝑟 𝑝𝑟𝑜𝑓𝑖𝑡 profit (x) Annuity
purchase 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 factor
Higher the amount of Capitalization of avg.

Goodwill = super super profit more
profit (x) no. of years difficult to maintain it profit
of purchase
Here super profit Goodwill =
divided into 2-3 Avg. Annual profi𝑡
divisions 𝑁𝑅𝑅
Each division
multiplied by different
no. of year profit 40,000 x 5 year = 2,00,000
40,000 x 4 year = 1,60,000
E.g. Super profit = 40,000 x year = 1,20,000
1,20,200
= 4,80,000 Goodwill
B. VALUATION OF SHARES
• Assessment under wealth tax act, gift tax etc.
• Amalgamation/Reconstruction scheme.
REASONS FOR • Purchase/sale shares of Pvt. Co.
VALUATION •
•
Loan against shares
Conversion of shares
• Purchase of block shares
• Earning/stability of profits
• Yield of similar co.
• Dividend policy
FACTORS AFFECTING • Net asset
VALUATION • Unfavorable financial ratios
• Size of block of share to be valued
• Govt. policy
METHODS OF VALUATION OD SHARES
“Methods of Valuation of Share”
Net Asset Based Fair Value Earning based

[Avg. of NAV & Earning based method]
A Realisable Value of Assets Dividend Yield Earning Yield
B (-)3rd party liab.
C (=)Balance Value 𝐸𝑅𝑂𝐷 𝑋 𝑝𝑑.𝑢𝑝 𝑐𝑎𝑝 𝑝𝑒𝑟 𝑆ℎ
= 𝑥 100 𝑉𝑎𝑙𝑢𝑒 = 𝑅𝑎𝑡𝑒 𝑥 𝑝𝑑 𝑜𝑓 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑢𝑝 𝑐𝑎𝑝 𝑝𝑒𝑟 𝑠ℎ.
D (-)Pref. sh. Cap (pd. Up value) per Sh. 𝑁𝑜𝑟𝑚𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐷𝑖𝑣𝑖
𝑝. 𝑆ℎ 𝑁𝑜𝑟𝑚𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐸𝑎𝑟𝑛𝑖𝑛𝑔
E (=)Balance available for Eq. S. H. 𝑶𝑹

Value 𝐷𝑖𝑣𝑖.𝑝𝑒𝑟 𝑆ℎ But Rate 𝑃𝑟𝑜𝑓𝑖𝑡
F (÷)No. of Eq. Sh. With same pd. = 𝑁𝑜𝑟𝑚𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐷𝑖𝑣𝑖 𝑥 100 = 𝐶.𝐸 𝑥 100
p. sh. of Earning
Up value
But ,
G(=) Value per Eq. Sh. 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
EROD = 𝑥 100
𝑃𝑎𝑖𝑑 𝑢𝑝 𝑒𝑞.𝐶𝑎𝑝𝑖𝑡𝑎𝑙
❖ Profit available For Dividend = PBT(-) Tax (-) Transfer to reserve fund (-) Preference Dividend
“ONE MORE APPROACH
FOR NET ASSET BASED”
Equity Share Capital
(+) Reserve and surplus
(-) Losses
(-) Fictitious assets
(+) Profit on revolution (Adj.)
(-) Loss on revolution (Adj.)
(=) Net Equity
(÷) No. of equity share with same paid up value
(=) Value per equity share
❖ Valuation of Shares – Based on Price Earning Ratio
Market value P. share = P/E ratio X EPS
Market value P. share
But, P/E Ratio =
EPS
EPS = Profit + available for Eq. share
No. of Eq. shares
❖ Based on Capitalization Factor
P + available for Eq. Shares
Value P. Share = X 100
NRR
No. of Eq. Shares.
❖ Valuation of Preference Shares
Yield based This method useful if

1. Regular dividend paid
Value per = Total Yield preference share
2. Total = 4 to times assets of
X 100
Pref. share NRR PSC
C. VALUATION OF BUSINESS
Methods/Approach
Asset based approach Earning Value Market value

Approach Approach
Can be done on Value =

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 Comparing market of
𝐶𝑎𝑝.𝑟𝑎𝑡𝑒 similar companies
Going concern asset Liquidation basis

based
B.V. of Asset Realisable value of assets
(-) B.V. of Liabilities (-) Liabilities
(=) Net Asset Value (=) Value of Business
of Business
Valuation Guidelines & Regulatory
In Bound Tr./issue of share by IR to NRI Out Bond Tr./issue of share by NRI to IR
By RBI Under FEMA

If, Listed company If, Unlisted If, trf. of Funds more If No specific
company than 5 million USD guidelines by RBI
(1.4.2014) Equity Share
Value of shares under FDI route For value For
As per RBI As per RBI price of minority controlling
based on acceptable market policies Market price
Price per per share RBI states that stake stake
per share fair value
share (as per SEBI) Fair value
price
All Indian company issuing By of share by
Guideline
1. Equity Shares Preference Share pub. Co.
2. Fully & mandatory convertible Category I method
Price per Higher of Category I OR CA Merchant
share following merchant Banker • DCF method
Any other case RBI
[ method by FEMA:- DCF ] guidelines will state • M & A method
Preference share Debenture price
IR shall not pay
Are Subject to pricing norms under FEMA OR more than
Avg. of weekly high and low of cl Avg. of weekly high and low of cl
prices on stock exchange during 6 Prices om stock exchange during
month proceeding relevant at. preceding 2 weeks or relevant at
In Bond Transfer Out Bond Transfer
(Money Coming to India ) (Going out of india)) OR
Category I CA
merchant Banker
VALUATION GUIDELINES BY SEBI
Pricing of Frequently Traded Shares
If, listed on recognize stock If less than 26 weeks

each for 26 weeks or more
Then, price Than, higher of following
Equity share
Price
than higher
shall Price at which share were issued under
of following
IPO/Amalgamation any scheme
Average of weekly of the high & low of Average of weekly high & low of volume wt.
the volume wt. average price during average price during 26 weeks
Average of weekly high & low of volume wt.
average price during 2 weeks
26 proceeding 2 proceeding
weeks weeks
Pricing of infrequently traded shares:
Regulation 165 of Valuation of shares as per SEBI: Price determined by issuer shall take into account the valuation
parameters including book value, comparable trading multiples, Provided that the issuer shall submit a certificate stating that
the issuer is in compliance of this regulation, obtained from an independent valuer to the stock exchange where the equity
shares of the issuer are listed.
VALUATION UNDER SEBI REGULATIONS
(SUBSTANTIAL A/C OF SHARES AND TAKE OVERS REG. 2011)
(Pricing Frequently Trade) ( In Frequently Trade )
10% (in last 12 calendar 10% (in last 12 calendar
Traded Traded
months proceeding the month of months proceeding the month
turnover Turnover
public announcement) of public announcement)
Valuation by merchant banker or CA with 10 years Experience Valuation done by merchant banker
or CA with 10 year expense
Offer Price shall highest of
a. Highest negotiated price for acquisition from public in open
offer
b. The volume weighted avg. price during preceding 52 weeks
from public acquisition
c. Highest price paid/payable by acquirer or by any person
during last 26 weeks
d. Volume weighted avg price for last 60 trading days
VALUATION UNDER INCOME TAX ACT, 1961
Determining the fair market value (FMV) of shares is difficult in unquoted shares
Rule 11UA (Income Tax Rules) prescribes a specific formula “Net Asset Value Approach” ( From FY 17-18)
Unquoted equity shares: FMV of unquoted equity shares on the valuation date = (A+B+C+D - L)× (PV)/(PE)
A=book value of assets (other than jewellery, artistic work, shares, securities and immovable property) as reduced by,- i)
any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; & ii) any amount shown as
asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;
B= Realizable value of jewellery and artistic work;
C= FMV of shares and securities;
D= the value of immovable property (as per stamp duty paid);
L= book value of liabilities, but not including: i) paid-up equity capital; ii) amount set apart for payment of dividends iii)
reserves and surplus, iv) amount representing provision for taxation, other than amount of income-tax paid, less refund v)
any amount representing provisions; vi) contingent liabilities
PE = amount of paid up equity share capital
PV= the paid up value of equity shares
Quoted shares and securities: FMV as recorded on such recognised stock exchange.
1. If the intrinsic value of a share of common stock is less than its market value, (a) Proposed preference dividend
which of the following is the most reasonable conclusion? (b) Share suspense account
(a) The stock has a low level of risk. (c) Know-how
(b) The stock offers a high dividend payout ratio. (d) Non-trading investment
(c) The market is undervaluing the stock.
(d) The market is overvaluing the stock. 6. When controlling shares are to be sold then which of the following will be the
appropriate base for valuation of shares:
2. Market value method is generally the most preferred method in case of (a)Rate of dividend
(a) Frequently traded shares of companies listed on stock exchanges having (b)Rate of earning
nationwide trading (c)Rate of gross profit
(b) Valuation of a division of a company (d)Rate of risk free return
(c) Where the share arc not listed or are thinly traded 25.1
(d) Where there is an intention to liquidate it and to realize the assets and 7. As per valuation of equity shares based on price-earnings ratio, the shares are
distribute the net proceeds. valued on the basis of _____ multiplied by price earnings ratio.
(a) Dividend per share
3. Which of the following is required to be taken into consideration while valuing (b) Earnings per share
equity shares of the company? (c) Bonus per share
(a) Size of the block of shares (d) Interest per share
(b) Restricted transferability aspect
(c) Dividends 8. Which of the following Accounting Standard deals with Intangible Assets?
(d) All of the above (a) AS-22
(b) AS-24
4. Which of the following shall not be taken into consideration while calculating (c) AS-26
Capital Employed? (d) AS-28
(a) Discount on issue of debentures
(b) Preliminary expenses 9. As per AS-26, there is a rebuttable presumption that the useful life of an
(c) Fictitious assets intangible asset will not exceed _______ from the date when the asset is
(d) All of the above available for use.
5. Which of the following is deducted while calculating net assets available to (a) Ten years
equity shareholders? (b) Five years
(c) Eight years
(d) Six years 12. Find the goodwill of the company from the following information:
Total Capital Employed = ₹ 8,00,000
10. It is agreed that goodwill of the company is to be valued at 3 years purchase Reasonable Rate of Return = 15%
of average profits for the last 5 years. Profits for the year = ₹ 12,00,000
Use capitalization method.
Year ended Profit/(loss) in ₹ ‘000 (a) ₹ 82,00,000
31st March, 2015 16,110 (b) ₹ 12,00,000
31st March, 2016 11,850 (c) ₹ 72,00,000
31st March, 2017 8,145 (d) ₹ 42,00,000
31st March, 2018 (600) 13. A company has a total capital investment of ₹ 3,60,000. The company earned
31st March, 2019 12,750 net profit during the last four years as ₹ 56,000, ₹ 64,000, ₹ 96,000 & ₹
Value of goodwill will be – 80,000. The fair return on the net capital employed is 15%. Value of goodwill
(a) ₹ 28,953 thousand if it is based on 3 years purchase of the average super profits of past 4 years.
(b) ₹ 29,673 thousand (a) ₹ 37,500
(c) ₹ 28,673 thousand (b) ₹ 50,000
(d) ₹ 29,953 thousand (c) ₹ 60,000
(d) ₹ 40,000
11. It is agreed that goodwill of the firm is valued at 2 years purchase of weighted
average profits for the last 3 years. 14. The net profits after tax of Z Ltd. for the past 5 years are as follows:
Year ended Profits Weight Year Profit
31st March, 2011 45,000 1 2007-2008 2,56,000
31st March, 2012 52,500 2 2008-2009 2,64,000
31st March, 2013 72,000 3 2009-2010 3,76,000
Value of goodwill will be – 2010-2011 4,86,000
(a) ₹ 1,22,000 2011-2012 5,30,500
(b) ₹ 2,22,000 The capital employed is ₹ 16,00,000. Rate of normal return is 15%. Calculate
(c) ₹ 1,22,222 the value of the goodwill on the basis of annuity method on super-profits basis,
(d) ₹ 1,20,000
taking the present value of an annuity of ₹ 1 for the 4 years at 15% as ₹ non.. trading investment of ₹ 8,000 per year. At the end of year 2008-2009
2.855. closing stock was overvalued by ₹ 25,000. Calculate goodwill on weighted
(a) ₹ 7,65,000 average super profit basis at 3 years purchase. Ignore taxation.
(b) ₹ 8,67,800 (a) ₹ 2,74,671
(c) ₹ 5,70,000 (b) ₹ 2,47,671
(d) ₹ 4,06,838 (c) ₹ 2,74,167
(d) ₹ 2,47,716
15. Profits & losses for the last years are:
2011-2012 Losses ₹ 10,000 17. Profit after tax of Z Ltd. for the 3 financial years are as follows:
2012-2013 Losses ₹ 2,500 2013 ₹ 4,41,000
2013-2014 Profits ₹ 98,000 2014 ₹ 6,45,000
2014-2015 Profits ₹ 76,000 2015 ₹ 4,80,000
The average capital employed in the business is ₹ 2,00,000. The rate of interest Capital employed is ₹ 29,25,000. Normal rate of return is 10%. Tax rate is
expected from capital invested is 12%. The remuneration of partners is 40%. 10% of profits for the year 2014 arose from a transaction of non-
estimated to be ₹ 1,000 per month. Calculate the value of goodwill on the basis recurring nature. A provision of ₹ 31,500 on sundry debtors was made in the
of four years purchase of super profits based on the annuity of the four years. financial year 2005 which is no longer required. A claim of ₹ 16,500 is to be
Take discounting rate as 10%. provided against profit for year 2015. Goodwill may be calculated at 3 times
(a) ₹ 13,500 adjusted average profits of 3 years.
(b) ₹ 13,568 (a) ₹ 6,33,000
(c) ₹ 13,668 (b) ₹ 15,10,500
(d) ₹ 13,868 (c) ₹ 7,22,667
(d) ₹ 15,50,100
16. Following information is available for N Ltd.:
Year Weight ₹ 18. Average net profit of a business as adjusted for valuation of goodwill
2007-2008 1 ₹ 1,28,000 amounted to ₹ 2,35,000. Net tangible assets employed were of the value of ₹
2008-2009 1.5 ₹ 1,44,000 4,50,000. But upon valuation, they amounted to ₹ 15,00,000. Assuming that
2009-2010 2 ₹ 1,72,000 10% represented a fair commercial return, value of goodwill by capitalizing
2010-2011 2.5 ₹ 1,80,000 super profits will be –
Capital employed is ₹ 5,40,000. Standard rate of return on capital employed (a) ₹ 8,75,000
in this type of business is 12%. Above net profit included a fixed income on (b) ₹ 8,25,000
(c) ₹ 8,90,000
(d) ₹ 8,50,000 21. Capital Structure of SZ Ltd. is as follows:
Types of Capital ₹
19. Compute the amount of goodwill based on 3 years purchase of super profit 2,500 Equity shares (₹ 10) fully paid-up 25,000
from the following: 2,500 Equity shares (₹ 10) ₹ 8 paid-up 20,000
Future maintainable profit after tax: ₹ 15,00,000; Normal pre-tax rate of 2,500 Equity shares (₹ 10) ₹ 6 paid-up 15,000
return: 20%; Capital employed: ₹ 60,00,000; Tax rate: 30% 12% Debentures 5,000
(a) ₹ 12,30,000 100. 9% preference shares (₹ 100) 10,000
(b) ₹ 21,40,000
(c) ₹ 19,80,000 Expected profit per year before interest & tax: ₹ 30,600
Rate of tax: 40%
(d) ₹ 14,70,000 Transfer to reserve: 10% of profit
Normal rate of dividend: 15%
20. Total assets of X Ltd. are ₹ 23,00,000 and total liabilities are ₹ 12,00,000. What is value per share as per yield method for
Expert valued goodwill of the company at ₹ 6,50,000. The company has two (A) ₹ 10 fully paid-up shares
types of equity shares:
(B) ₹ 8 paid-up shares
25,000 shares of ₹ 10 each fully paid-up
(C) ₹ 6 paid-up shares?
25,000 shares of ₹ 5 each, ₹ 3 paid-up. (A) (B) (C)
Intrinsic value per share of ₹ 3 paid-up is: (a) ₹ 17 15 ₹ 13
(a) ₹ 22 per share (b) ₹ 15 ₹ 12 ₹9
(b) ₹ 8 per share (c) ₹ 17 ₹ 13.6 ₹10.2
(c) ₹ 6 per share (d) ₹ 18 ₹ 14.4 ₹ 10.8
(d) ₹ 4 per share
Answers
1. d 2. a 3. d 4. d 5. a 6. a 7. b 8. c 9. a 10. a 11. a
12. c 13. c 14. d 15. d 16. a 17. b 18. d 19. c 20. a 21. c
Topic 21 Accounting for Share Based Payments
A. OBJECTIVE Accounting for Share Based Payments [SBP] (IND AS 102)
Specify the financial reporting in SBP transaction.
It requires an entity to reflect effects (in FS) of SBP transactions, including associated expenses SCOPE -
B. What is SBP Transaction & Arrangement?? Applicability
=> SBP TRANSACTION in which the entity:
• receives goods or services from supplier in a SBP arrangement, or Equity-Settled SBP Cash-Settled SBP
• incurs an obligation to settle the transaction with the supplier in a SBP arrangement
Transactions Transactions
=> SBP ARRANGEMENT is an agreement between the entity & another party that entitles the other party to receive;
• cash or other assets of the entity for amounts that are based on the price of equity instruments or
• equity instruments of entity, provided the specified vesting conditions, if any, are met.
C. Determining the Fair Value (FV) of Equity Instruments Granted:
• At the measurement date, based on market prices if available, taking into account the terms and conditions
• If market prices are not available, then estimate fair value using a valuation technique. (arm’s length transaction between
knowledgeable, willing parties)
D. SBP transaction may be settled by another group entity (or a shareholder of any group entity) on behalf of the entity receiving or
acquiring the goods or services. This AS applicable to entity receives goods & sevices & has the obligation to settle the share-based
payment transaction, or vice-versa
IMPORTANT CONCEPTS
Grant Date
• The date at which entity and another party (including an employee) agree to a SBP arrangement
• On grant date, entity confers on counterparty the right to cash, other assets or equity instruments if vesting conditions are met
Date of Receipt of Goods and Services:
Recognise employee stock compensation expense on date of receipt of goods & services; such date & grant date may not
be same
Does the condition determine whether entity receives the services that entitle the counter
party to the
No Yes
Non-vesting condition is the condition a specified

period of service
Yes No
Service vesting condition Performance vesting condition
Does the condition on which the exercise price, vesting or Exercise ability of an equity instrument
depends relate to the market price of the entity's equity instruments, either directly or indirectly?
No Yes
Market vesting Condition Non-Market vesting Condition
Example - Cash-settled awards
Exercise Date: Date of exercise An entity grants 100 cash-settled awards to each of its 500 employees, on
condition that the employees remain in its employment for the next three
years. Cash is payable at the end of three years based on the share price
of the entity’s shares on such date.
Grant Date Vesting Period: Vesting Date: Date Exercise Year 1 - 35 employees leave. The entity estimates that 60 additional
Period Required to On which conditions Period employees will leave during years 2 and 3 (i.e., the award will vest for 405
satisfy conditions satisfied employees). The share price at year-end is ₹40.
Example: Award with market condition only Year 2 - 40 employees leave and the entity estimates that 25 additional
Illustration 1. Q. An entity granted share options to a director on the employees will leave during year 3 (i.e., the award will vest for 400
condition that the market price of the related shares increases by at employees). The share price at year-end is ₹50.
least 15% each year over the next five years. At the end of year five, Year 3 - 22 employees leave, so that the award vests for 403 employees.
this target as not met. The share price at year-end is ₹52.
Solution: . The entity cannot reverse the expense recognized in the Example - Cash-settled awards
The entity recognizes the cost of this award as follows:
current or previous years and cannot revise the grant date fair value
since the condition is market-based. Expense for
Year Calculation of liability Liability
Period
Example: Award with non-vesting condition only 405 employees x 100 awards
Illustration 2. An entity grants share options to a director on the condition that 1 5,40,000 (Cr) 5,40,000 (Dr)
x Rs 40 x 1/3
the director does not compete with the reporting entity for a period of at least
400 employees x 100 awards
three years. The fair value of the award at the date of grant, including the effect 2 13,33,333 (Cr) 7,93,333 (Dr)
x Rs 50 x 2/3
of the ‘non-compete’ clause, is Rs. 150,000.
Solution: The ‘non-compete’ clause is a non-vesting condition, because the entity 403 employees x 100 awards x
3 20,95,600 (Cr) 7,62,267 (Dr)
Rs 52 x 3/3
does not receive any services. On the grant date, the entity immediately
recognizes a cost of Rs. 150,000, as the director is not providing any future Entry at the end of 3rd year (Final cash settlement)
services. The entity cannot reverse the expense recognized, even if the director Liability A/c……………Dr 20,95,600
goes to work for a competitor and loses the share options, because the condition To Cash Cr 20,95,600
is a non-vesting condition.
Share-Based Payment Awards with a Cash Alternative
• If counterparty has right to choose the mode of settlement, then treat the award as a compound award. Split into a liability component
(for component to settle in cash) and an equity component (for component to settle in shares). Accounts for two components separately.
• If entity has to choice – If present obligation to settle in cash treat whole award as cash settled & treat it as a liability or else account
for transaction as equity settled.
Modification, Cancellation or Settlement

Modifications:
Entity to recognize, the minimum services received measured at the grant date at fair value of the equity instruments granted, unless those
equity instruments do not vest becausanye of failure to satisfy a vesting condition (other than a market condition) that was specified at grant
date. This applies irrespective of modifications to the terms and conditions on which the equity instruments were granted, or a cancellation
or settlement of that grant of equity instruments.
The entity shall also recognize the effects of modifications that increase the total fair value of the share-based payment arrangement or
are otherwise beneficial to the employee.
Cancellation or Settlement:
If a grant of equity instruments is cancelled or settled during the vesting period:
o Entity shall recognize immediately the amount that otherwise would have been recognized for services received over the
remainder of the vesting period.
o Any payment made to employee on the cancellation or settlement shall be accounted for as a deduction from equity, except to the
extent that the payment exceeds the fair value of the equity instruments granted, measured at the repurchase date.
➢ If new equity instruments are granted to the employee and entity identifies the new equity instruments granted as replacement equity
instruments for the cancelled equity instruments, the entity shall account for in the same way as a modification of the original grant of
equity instruments.
Disclosures: IND AS 102 Requires Entities to disclose the following:
• Type and scope of agreements existing during the reporting period.
• Description of agreements (settlement methods, vesting conditions, etc.).
• Number & weighted-average exercise price of share options (outstanding at beginning & at the end of reporting period, granted,
vested, exercised and forfeited).
• Average share price of exercised options.
• Range of exercise prices and remaining contractual life at the end of reporting period.
• Valuation method used to estimate the fair value of the awards (model and input values, etc.).
• Impact on income statement (i.e., total expense) & financial position (e.g., carrying amount of liabilities) of SBP awards.
Difference between IGAAP & IND-AS 102

IGAAP IND-AS 102
Share-based payment to employees have an option to measure Share-based payment to employees are measured based on the
based on grant date fair value or intrinsic value of the equity grant-date fair value of the equity instruments issued. intrinsic value
instruments issued. approach is permitted only when the fair value of the equity
instruments cannot be estimated reliably.
For measuring share-based payment to nonemployees there is no Share-based payment to employees are generally, measured based
specific guidance. on the fair value of the goods or services received.
In case of graded vesting i.e. where share options or other equity Awards with graded vesting is measured as, in substance, multiple
instruments granted vest in instalments over the vesting period, entity awards.
may choose to measure on a straight-line basis as a single award or
an accelerated basis as though each separately vesting portion of
the award is a separate award.
1. ………means the option given to the whole-time directors, officers or Select the correct answer from the options given below.
employees of a company, which gives such directors, officers or (a) (1) only
employees the benefit or right to purchase or subscribe at a future date, (b) (1) and (2) only.
the securities offered by the company at a pre-determined price. (c) (2) and (3) only
(a) Employee Stock Purchase (d) (1), (2) and (3)
(b) General Employee Benefits
(c) Employee Stock Option 5. Which of the following persons is covered under the provisions relating to
(d) Retirement Benefits share based payment regulation made by the SEBI?
(a) Permanent employee
2. Which of the following section of the, 'Companies Act, 2013 allows a (b) Whole time director
company to offer shares to employees under a scheme of employee's (c) Employee of a subsidiary
stock option? (d) All of the above
(a) Section 61
(b) Section 65 6. Which of the following person can be treated as 'employee' and hence
(c) Section 62 eligible for employees share based payment benefits?
(d) Section 68 (a) Relative of the director who holds more than 10% of the outstanding
equity shares of the company
3. As per Section 62(2) of the Companies, 2013, a company can offer shares (b) Temporary employee of the company who has been working in India
to employees under a scheme of employee stock option by passing – (c) Employee of Associate Company
(a) Board Resolution (d) Norte of the above
(b) Special Resolution
(c) Ordinary Resolution 7. SEBI (Share Based Employee Benefits) Regulations, 2014 applies to:
(d) Extraordinary Resolution (1) Employee Stock Option Schemes
(2) Employee Stock Purchase Schemes
4. A listed company can offer various benefits to employees such as ESOS (3) Stock Appreciation Rights Schemes
or ESPS by complying provisions of the – (4) General Employee Benefits Schemes
(1) Companies Act, 2013 (5) Retirement Benefit Schemes
(2) SEBI (Share Based Employee Benefits) Regulations, 2014 Select the correct answer from the options given below.
(3) Companies (Share Capital & Debentures) Rules, 2014 (a) (2) and (1)
(b) (3) and (4) exercised between 15.3.2020 & 31.3.2020. The employees exercised
(c) (4) and (5) their options for 16,000 shares only and the remaining options lapsed.
(d) All of the above are correct The company closes its books
on 31st March every year. Which of the following is correct?
8. Under ESPS employees are given an option to purchase shares on the (a) No entry is passed when Stock Options are granted to employees.
spot at a – Hence, no entry will be passed on 1.1.2020.
(a) Discounted price (b) The difference ₹120 - ₹50 =₹ 70 per share is employee
(b) Special price compensation expense and will be charged to Profit & Loss A/c for
(c) Discount price the number of options exercised i.e. 16,000 shares by ₹11,20,000.
(d) Floor price (c) Securities Premium A/c will be credited by ₹17,60,000
9. On 1.4.2019, a company offered 300 shares to each of its 1,200
employees at ₹75 per share. The employees are given a month to accept
the shares. The shares issued under the plan shall be subject to lock-in to 11. On 1.4.2019, GP Ltd. offered 100 shares to each of its 500 employees
transfer for 3 years from the grant date i.e. 30.4.2019. Market price of at ₹50 per share. Employees are given a year to accept the offer. Shares
shares on the grant date is ₹90 per share. Due to post-vesting restrictions, issued under the plan shall be subject to lock-in on transfer for 3 years
fair value of shares issued under the plan is estimated at ₹84 per share. from the grant date. Market price of shares on the grant date is ₹60 per
Up to 30.4.2019, 50% of employees accepted the offer and paid ₹ 75 share. Due to post-vesting restrictions on transfer, the fair value of shares
per share. Face value of share is ₹10. Expenses to be recognized in year issued under the plan is estimated at ₹56 per share. On 31.3.2020, 400
2019-2020 = ? employees accepted the offer and paid ₹50 per share. (a) Expenses to
(a) ₹5,40,000 be recognized = ? & (b) Securities Premium A/c will be credited by = ?
(b) ₹32,40,000 (a) (A)₹3,40,000; ₹20,40,000
(c) ₹16,20,000 (b) (B)₹2,40,000; ₹18,40,000
(d) ₹10,800'' (c) ₹2,40,000; ₹22,40,000
(d) ₹3,40,000; ₹18,40,000
10. X Ltd. has its share capital divided into equity shares of ₹10 each. On
1.1.2020 it granted 20,000 employees stock option at ₹50 per share, 12. A company has its share capital k divided into shares of ₹10 each. On
when the market price was ₹120 per share. The options were to be 1.4.2018, it granted 5,000 shares as employee's stock options at ₹40
per share, when the market price was ₹130 per share. The options were (b) Equity Share Capital A/c will be credited by 5,00,000 (5,000 shares
to be exercised between 16.12.2018 and 15.3.2019. The employees X ₹10)
exercised their options for 4,500 shares only; the remaining options (c) Securities Premium A/c will be credited by ₹5,40,000 (4,500 shares
lapsed. Which of the following is correct? X ₹120)
(a) Bank A/c will be debited by ₹5,85,000 (4,500 shares X ₹130) (d) All of the above
Answers
1. c 2. c 3. b 4. b 5. d 6. d 7. d 8. c
9. c 10. d 11. b 12. c
Topic 22 Methods of Valuation
INTRODUCTION MULTIPLE YEAR HOLDING PERIOD
• Investor is interested in knowing the intrinsic value or fair value of securities Po = D x PVFA(Ke, n) + Pn x PVF (Ke, n)
before taking any investment decision. Where
• Valuation of securities can be based book value or liquidation value or on D = Expected dividend
discounted cash flow value. Pn = Expected selling price at the end of period n
• But Cash flows logically comparable when they are appropriately adjusted E.g. An investor wants to invest in XYZ Ltd for five years. The company is
for their differences in timing and risk expected to declare a dividend of Rs. 2 at the end of every year for five/
years. Further a leading analyst has projected the expected price of this
METHODS OF VALUATION company’s shares after five years would be Rs. 150. Do you think the stock
A. DISCOUNTED CASH FLOW MODEL (DCF) is a good buy at Rs. 110 now? Assume that the required rate of return is
total present value of all future expected cash inflow using discount rate (eg 10%.
ke) B. ASSET APPROACH
Intrinsic value of share is also called as theoretical value of fair price • Company’s net asset value (NAV), or the fair market value of its total
If market price is lower than its intrinsic value, then the share is undervalued or assets minus its total liabilities
under-priced in the market, good to buy (v.v) • This approach is used when a business is non-operating or has been
ONE YEAR HOLDING PERIOD generating losses
Po = D1 + P1/(1+ Ke) NET ASSET VALUE
Where Total value of the assets of a company less its liabilities
Po = Present value of share (Fair value) PRICE TO BOOK MULTIPLE METHOD
D 1 = Expected yearend dividend used for
P1 = expected year end selling price – companies in the manufacturing sector which have significant capital
Ke = Required rate of return requirements.
Eg. An investor wants to invest in the equity shares of XYZ Ltd for one year. The – companies which are not in technical default (negative book value of
company is expected to declare a dividend of Rs 2 per share. Further a leading equity).
security analyst has projected the year-end target price of this company’s share at Step 1- Weighted Average Market Price
Rs 120. Do you think the stock is a good buy now at Rs.100? Assume that the Step 2- Divide by: Value per share as per Net Assets Value
required rate of return is 10%. Step 3- Price/Book Value Multiple
C. EARNING -BASED MODEL CAPITAL ASSET PRICING MODEL (CAPM)
when it appears that a company’s current operations are indicative of Relationship between risk and return established by the security market
its future operations, assuming of course, a normal growth rate. line is called the capital asset pricing model
𝐍𝐞𝐭 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝑰𝒏𝒄𝒐𝒎𝒆 Return(Er) = Rf + β(Rm – Rf)
𝐕𝐚𝐥𝐮𝐞 =
𝐂𝐚𝐩𝐢𝐭𝐚𝐥𝐢𝐳𝐚𝐭𝐢𝐨𝐧 𝑹𝒂𝒕𝒆 Expected Return = Risk Free Rate + Market Risk Premium x Systematic
{Capitalization rate = discount rate – growth rate} Risk
Expected Return = Risk Free Rate + Risk Premium
P/E multiple method: MPS = EPS x P/E ratio Expected Return = Reward for Time + Reward for Risk
Uses of CAPM
E.g. In the current year, a corporate firm has reported a profit of To find out securities which are underpriced or overpriced
Rs. 65 lakh, after paying taxes @ 35 percent. On close Capital budgeting decision in Financial Management
examination, the analyst ascertains that the current year’s income Limitations of CAPM
includes; (i) extraordinary income of Rs 10 lakh and (ii) Based on many simplified and unrealistic assumptions
extraordinary loss of Rs. 3 lakh. Apart from existing operations, Estimation of β factor is not a simplified task
which are normal in nature and are likely to continue in the future, AN INDICATOR OF SYSTEMATIC RISK
the company expects to launch a new product in the coming year. • If a security has β< 1 then it is less responsive to changes in market
returns.
Revenue and cost estimates in respect of the new product are as
• If a security has β> 1 then the security is more responsive to changes in
follows:
market returns.
Sales 360; Material cost 15; Labour cost (additional) 10; • A risk free asset is not responsive to changes in market returns and
Allocated fixed costs 5; Additional fixed costs 8; From the above hence the β of a risk free asset is always 0.
information determine the market price per equity share (based on • β of market portfolio is always 1. This is because here we are relating
future earnings). For this purpose, you are provided the following market portfolio with itself, and therefore it must be 1. β =
Cov (S,M)
date: (i) The company has 1,00,000 11% Preference shares of Rs. σM2
where as; Cov (S, M) = covariance between returns of security S and
100 each, fully paid-up. (ii) The company has 4,00,000 Equity market return σM2 = variance of market returns or simply market
shares of Rs.100 each, fully paid-up. (iii) P/E ratio is 8 times variance
D. EQUITY VALUATION MULTIPLES
Multiple Definition
P/E ratio Share price / Earnings per
share (EPS).
- EPS is net income/weighted average no of shares in issue.
- EPS may be adjusted to eliminate exceptional items (core EPS) and/or outstanding dilutive
elements (fully diluted EPS).
Price / cash Earnings Share price / earnings per share plus depreciation amortization and changes in non-cash
provisions.
Price / book Ratio Share price / book value per share.
PEG ratio Prospective PE ratio / prospective average earnings growth.
Dividend yield Dividend per share / share price.
Price / Sales Share price / sales per share.

E. Fair Market Value (FMV)
Value per share = value as per Earning basis + value as per Net Asset basis / 2
FOLLOWING CONCEPTS COVERED IN TOPIC 8 CFR:-

1. ECONOMIC VALUE ADDED
2. MARKET VALUE ADDED
3. SHARE
CA CS Harish A. Mathariya HOLDERS
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Academy 8888 545 545 22.3
1. Beta is measure of – (a) Return and total risk
(a) Non-diversifiable risk (b) Risk and covariance
(b) Diversifiable risk (c) Return and non-diversifiable risk
(c) Total risk (d) Return and diversifiable risk
(d) Covariance
6. Which of the following investment advice will you provide to your client
2. A beta of 1.15 for a security would indicate that – investor if CAPM Return > Expected return?
(a) Security is trading 15% higher than market index (a) Sell
(b) Security is 15% riskier than index/market. (b) Buy
(c) Security is 15% less risky than index/market. (c) Hold
(d) Security and market have covariance of 0.15. (d) None of the above
3. A beta of 0.8 for a security would indicate that – 7. The Security Market Line (SML) is a line drawn on a chart that serves as a
(a) Security is 20% riskier than index/ market. graphical representation of the Capital Asset Pricing Model, which shows
(b) Security is 80% less risky than index/market. different levels of ______ of various marketable securities plotted against
(c) Security is 20% less risky than index/market. the expected return.
(d) Security is 80% riskier than index/ market (a) Systematic risk
(b) Unsystematic risk
4. Which of the following is correct formula to calculate beta (β)? (c) Total risk
(d) Free risk
8. Which of the following investment advice will you provide to your client
investor if CAPM Return = Expected return?
(a) Sell
(b) Buy
(c) Hold
(d) Put
5. Capital Asset Pricing Model (CAPM) provides the link between – 9. According to the CAPM, overpriced securities have:
(a) Negative alphas (d) 64.85%
(b) Positive alphas (e) 0.895
(c) Zero betas
(d) Zero alphas 13. Pavan has invested in four securities. Amount invested and beta of each
security is as follows:
10. Negative alpha value indicates that – Security ₹ β
(a) Expected return is less than required return as per CAPM and hence A 25,000 0.80
security is overvalued. Such security should be sold.
(b) Expected return is less than required return as per CAPM and hence B 50,000 1.20
security is undervalued. Such security should be bought. C 40,000 1.40
(c) Expected return is more than required return as per CAPM and hence D 35,000 1.75
security is undervalued. Such security should be bought. Compute portfolio beta
(d) Expected return is equal to required return as per CAPM and hence (a) 1.525
security is correctly valued. Such security should be hold. (b) 1.874
(c) 0.789
11. Suppose risk free rate is 4% and ʎ. is 2.5%. If an investor takes 13% risk, (d) 1.315
he can expect a return of –
(a) 32.5% 14. ABC Ltd. beta is 1.45. Rate of market return is 16%. Rate of return on
(b) 52% government securities is 8%. What is the expected return as per Capital
(c) 10% Asset Pricing Model? If the risk premium on the market goes up by 2.5%
(d) 36.5% points, what would be revised expected return on this stock?
(a) 16.9%; 32.32%
12. Return on XM Ltd. shares has a standard deviation of 23%, as against the (b) 18.7%; 24.28%
standard deviation of the market at 19%. Correlation co-efficient (c) 19.6%; 23.23%
between market and stock of XM Ltd. is 0.8. Compute the systematic risk (d) 19.6%; 16.7%
of XM Ltd.'s shares.
(a) 96.84% 15. A financial consultant has gathered following facts for H Ltd.
(b) 18.4% Systematic risk of the firm is 1.4.
(c) 25.78% 182 days Treasury bill yield is 8%
Expected yield on market portfolio is 13%. Calculate expected return 16. Expected return of Security A is 22% while that of Security B is 24%. Beta
based on capital asset pricing model (CAPM). of Security A is 0.86 while that of Security B is 1.24. What is risk free
(a) 18% rate?
(b) 17% (a) 14.74%
(c) 16% (b) 17.47%
(d) 15% (c) 14.71%
(d) 14.00%
Answers
1. a 2. b 3. c 4. d 5. c 6. a 7. a 8. c 9. a 10. a
11. d 12. b 13. d 14. c 15. d 16. b
CA CS Harish Mathariya
Founder - Onlylectures
Co-Founder - Yes Academy
Harish Mathariya is a Chartered Accountant as well as a Company
Secretary by profession. He specializes in extending services in the areas
of Finance & Auditing. He is also a visiting faculty to the most reputed
Management Institutes in & around Pune. His core lies in routing accounts
through the very basics, for which, he has been the most loved face for
Accounts. Having taught students for over 10 years, he is well known for
taking Accounts in a very conceptual way. To his credit, he as 100+ All India
Rankers, which also includes AIR 1 twice. His students acknowledge his
simplification in Accounts as "Don't worry Bol Hari". He is a Founder of
onlylectures.com and is also a Co-Founder of YES Academy, most loved
academy for CS.
Address: Office 27, 1st Floor, Gate No. 1, Kumar Prestige Point, Shukrawar Peth, Pune - 411 002
Mob.: +91 8888 235 235, 8888 545 545
Email: yesacademypune@gmail.com | Website: www.yesacademy.co.in
8888 078 078 csvikasvohra@gmail.com www.vikasvohra.com youtube/Vikas Vohra, Corporate Baba /csvikasvohra /vikasvohra

Cs Executive: Corporate & Management Accounting

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Cs Executive: Corporate & Management Accounting

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CS EXECUTIVE

12 IFRS & AS In India 12.1 - 12.9 22 Methods Of Valuation 22.1 - 22.6

CA CS Harish A. Mathariya 98220 93220 Yes Academy 8888 545 545

Using the rules of 4. To communicate information to users.(Reporting)

Condition 1 Condition 1 Condition 1

Transactions are those activities of a business, which involve

Capital Expenditure is debited to Respective

PRINCIPLES OF DOUBLE ENTRY

2 A/c: One Personal Accounts Real Accounts Nominal Accounts

If One A/c GOLDEN RULES OF DEBIT AND CREDIT (TRADITIONAL APPROACH):

Arithmetical Accuracy Not Disclose all

Limitations of Double Entry System

Common Acceptance CLASSIFICATION OF ACCOUNTS (MODERN APPROACH)

Trial Balance does

First Step(Identifica- Second Step Third Step

PREPARATION & PRESENTATION OF FINANCIAL STATEMENT; SECTION 129

Equity & Liabilities Assets

Short Term Provisions

APPLICATION OF MINIMUM SEBI GUIDELINES RELATING TO ISSUE OF SHARES

When fair value of assets is less than value of

Buyback of Invest in more than 2:1

PRICING OF SWEAT EQUITY SHARE 2. shall not exceed 25% of paid-up

3. convene the GM and Pass a SR

Follow specific Accounting Standards 2. To employees under a scheme of

An alternative formula is:

PARTIAL UNDERWRITING FIRM UNDERWRITING

BENEFIT OF FIRM UNDERWRITING BENEFIT OF

FIRM UW TREATED AS FIRM UW TREATED AS

ISSUE OF RIGHT & BONUS SHARES

REDEMPTION OF PREFERENCE SHARES

UNDERWRITING OF SHARES & DEBENTURES

WHY ISSUE OF DEBENTURE??

CONDITIONS FOR ISSUE OF DEBENTURES No Voting Voting

it may issue its own debentures to the lender as collateral

Lender has right over debentures until and unless the

On allotment of Vendor A/c Dr.

SEBI REGULATIONS ON ISSUE OF DEBENTURES

21. Declaration of solvency in relation to buy back of shares has to be filed

Statement of Profit & Balance Sheet Cash Flow Statement of Comparative

STATEMENT OF CHANGES IN EQUITY:

STATEMENT OF CASH FLOWS:

DETERMINATION OF MANAGERIAL REMUNERATION

Yearly remuneration payable shall

Segment Revenue Segment Results Segment Assets

segment result, whether profit or loss,

Share capital Plant and Machinery 4,80,000 90,000

Profit and Loss A/c 1,70,000 42,000 Stock 95,000 42,000

Shall also state: Whether; • any director is disqualified;

CAG may conduct supplementary May require comment or

• Every auditor shall comply A.S

• MCA was of objective that certain

Corporate Governance under Companies Act, 2013 Woman Director

(C) (=) Value Added XXX

• As per Companies Act 2013; to be prepared by all

• are short term, highly liquid investments

(ix) Financial Activity, (x) Financing Activity

SMALL-AND MEDIUM-SIZED COMPANY ENTERPRISES TO WHICH THE

Objectives of the Institute of Cost Accountants of India:

ROAD MAP FOR THE APPLICATION OF IND. AS BY MCA

IFRS & IGAAP

Aid to Management Aid to Creditors Aid to Employees Aid to National Economy

Cost Helpful to Formation Proper Aids to Limitations of Cost Expensive