FINANCIAL ACCOUNTING

TUTORIAL - SESSION 1

REVENUE PRINCIPLE
Therevenue principle,also known as the realization principle, states that revenue is earned when the
which is typically when goods or services are provided.

EXPENSE PRINCIPLE
Theexpense principlestates that an expense occurs when the business uses goods or receives service

MATCHING PRINCIPLE
Thematching principleis related to the revenue and the expense principles.
The matching principle states that when you recognize revenue, you should match related expenses w
In other words, match the expense of the item with the revenue of the item

BALANCE SHEET ITEMS

Current Assets:
Cash andcash equivalents
Trade and other receivables
Prepaid expenses
Investments
Inventories

Current Liabilities:
Trade and other payables
Accrued expenses
Deferred revenues
Current portion of loans payable
Taxes payable

Non-Current Assets:
Property, plant, and equipment
Intangible assets
Goodwill

Non-Current Liabilities:
Loans payable
Bonds payable
Equity:
Capital stock
Additional paid-in capital
Retained earnings

INCOME STATEMENT ITEMS

Net sales
Cost of goods
Depreciation
Selling and administrative expenses
Interest
Income taxes

1. Net effect on assets, liabilities and owners equity when $9400 worth of inventory
was bought on credit is
a)
b)
c)
d)

Inventory
Inventory
Inventory
Inventory

+
+
+
+

9400
9400
9400
9400

and
and
and
and

owners equity +9400

owners equity -9400
cash +9400
accounts payable +9400

2. KMP can be considered as a manager

e)
f)
g)
h)

Yes
No
Majority shareholders can while others cannot
It depends on the company

3. Net effect on assets, liabilities and owners equity when $2000 dividends are declared
a)
b)
c)
d)

Retained earnings +2000 and dividends payable +2000

Retained earnings +2000 and dividends payable +2000
Cash -2000 and dividends payable -2000
Retained earnings -2000 and cash -2000

4. ABC Co. had bought $4000 worth of goods. It sold $2000 worth of goods for $3000
and out of which $1500 was collected in cash. Increase in reserves will be
e)
f)
g)
h)

($1000)
We cannot calculate from given data
$1000
$1500

5. Shareholders invest in a company, inspite of the risk of losing all their investment,
due to
a)
b)
c)
d)

They can sell their share at a higher price

Shareholding gives them ownership rights
Unlimited upside benefits
They can control the company

6. ABC co. has bought land by paying Rs. 1 crore. Subsequently guideline value of the
land (value fixed by government for slamp duty) was enhanced to Rs. 2 crores. This will
be recorded in balance sheet as
e)
f)
g)
h)

Land
Land
Land
Land

at
at
at
at

notional value of Rs.1 crore and cash reserve at Rs. 2 ccrore

Rs. 2 crore and retained earnings at additional Rs. 1 crore
Rs. 1 crore and retained earnings at additional Rs. 1 crore
Rs. 1 crore and no change in retained earnings

7. Reserves and surplus are also known as

a)
b)
c)
d)

Internal source of fund

Free source of fund
Shareholders claim on assets of the company
Emergency money available to the company

8. Mr. Ram an employee of SBI, has some fixed deposit in SBI, has some shares of SBI as
well as he has taken some loans from SBI. Mr. Ram wants the bank to waive his loan, as
he is a owner of the company. What is wrong with tis statement.
e)
f)
g)
h)

An employee cannot be a shareholder

Shareholders are not owners
There is nothing wrong with this statement
Ram should not have been given the loan as he is a shareholder

9. ABC co. supplies material to XYZ co. on credit. For XYS co. it is a case of
a)
b)
c)
d)

Source of money
Use of money
Account receivables
It is a borrowing

10. We prepare financial statements as at the end of every accounting period, because
e)
f)
g)
h)

It is easy to keep track of annual performance

Shareholders want periodic payment
We cannot predict the life of an organization
Governments follow annual system

11. IIM T collects the fees in advance. If the balance sheet is prepared before the end of
the term, then this will be shown as
a)
b)
c)
d)

Reserves and surplus

Cash balance
Revenue
Current liabilities

12. ABC company received a grant of Rs. 10 Lakhs from govt. when the company was
started
e)
f)
g)
h)

Grants from govt. under long term liability

Grants from govt. under owners equity
Grants from govt. under long term assets
Other income

13. Accrued expenses are

a)
b)
c)
d)

Current assets
Deferred revenue expenditure
Current liabilities
Retained earnings

14. Profit and loss account is captured in balance sheet as

e)
f)
g)
h)

Change in retained earnings plus dividends

Increase in assets
Change in retained earnings
Difference between assets and liabilities

15. Day to day recording of events in books of accounts is known as

a)
b)
c)
d)

Financial accounting
Book keeping
Final accounts
Preparation of balance sheet and profit and loss account.