Accountancy Mock Test - 3

The correct answer is Old partners' Capital Accounts. 

Key Points

When there is change in partnership between the partners, then treatment of goodwill and reserve can be made in two methods:

• When partners decides to write off goodwill and reserves completely from balance sheet-Amount of goodwill and reserves will distributed between among partners in old ratio.
• When partners decides to retain goodwill and reserves completely in balance sheet- adjusted amount of goodwill and reserves will distributed between among partners in sacrifice ratio/gain ratio to partner’s capital account.

Important Points At the time of admission of partner when there is balance of P&L account then the amount shall be transferred in following way-

• If partners decides to write off P&L account then the amount shall be transferred to old partner's capital account in old ratio.
• If partners decides to retain then new partner shall bring amount equal to his share in P&L account. That amount shall be credited to remaining Partners in sacrifice ratio.

 In absence of any information, it shall be treated as Partners decides to write off P&L account. Thus, if at the time of admission, some Profit and Loss Account balance appears in the books, it will be transferred to Old Partner's account.

Additional Information

Profit & Loss Adjustment Account- All adjustments in respect of partner’s salary, partner’s commission, interest on capital, interest on drawings, etc. are made through P&L Adjustment account. This account is an extension of the Profit and Loss Account of the firm.

Revaluation Account- At the time of admission, retirement or death of Partner, the assets & Liabilities are revalued or recorded are found are recoded in revaluation account.

The correct answer is Authorised Capital, Issued Capital , Subscribed Capital.

Key Points As per Schedule III of the Companies Act ,2013 , Share Capital amount is to be find under Notes to Account in sequence of Authorised Capital ,Issued Capital and Subscribed Capital.

Important PointFormat of Notes to Accounts, according to Schedule III of Companies Act , 2013, are as follows:

Notes to Accounts:

Additional InformationAuthorised Capital : Authorised Capital, often known as the company's registered capital or nominal capital, is the maximum amount of share capital that a business is permitted to issue to its shareholders under its constitutional articles. The financial instruments that make up the aggregate capital are referred to as shares. It's a method of raising money from the general people.

Issued Capital: According to Section 2(50) of the Companies Act of 2013, "Issued Capital" refers to capital that the company issues for subscription from time to time. Typically, companies do not issue all of their shares in order to gain control. It is the portion of a company's Authorized Capital that is made available to the general public for subscription. They can, however, be increased or decreased as the management sees fit.

Subscribed Capital: Section 2(86) of the Companies Act of 2013, Subscribed share capital is the portion of issued share capital for which the company has received investor subscriptions. It is included in the issued capital. 

The correct answer is Rs. 72,00,000.

Key Points

Goodwill Valuation:

• Goodwill is the value of a company's reputation earned through time in terms of predicted future profits over and above typical profits. Goodwill is an intangible real asset that cannot be seen or felt but may be bought and sold in reality.
• Value of Goodwill as per Capitalisation Method = Capitalised Value - Net Assets or Capital Employed
• Capitalised Value = Profits x 100/Normal Rate of Return
• Net Assets = Assets - Liabilities

Important Points Profit = 12,00,000 (given) 

Normal Rate of Return = 15% (given)

Capital Employed = 8,00,000 (given)

Hence, Capitalised Value = 12,00,000 x 100/15 = 80,00,000

Value of Goodwill as per Capitalisation Method = Capitalised Value - Net Assets or Capital Employed

Value of Goodwill = 80,00,000 - 8,00,000 = 72,00,000

The correct answer is ​cash flows from selling activities.

• Cash flows from selling activities is not the major section of the cash flow statement.

Key Points

• Cash Flow Statement is a statement that shows the inflows and the outflows of Cash and Cash Equivalents during the period.
• Inflows are those transactions that increase the Cash and Cash Equivalents and outflows are those transactions that decrease the Cash and Cash Equivalents.
• Such a statement is prepared in accordance with the Accounting Standard-3 (Revised) on Cash Flow Statement.
• As per this accounting standard, cash flows are shown under the following 3 heads:
  • Cash Flow from Operating Activities;
  • Cash Flow from Investing Activities; and
  • Cash Flow from Financing Activities.

Important Points 

• Operating activities are the daily activities of a company involved in producing and selling its product, generating revenues, as well as general administrative and maintenance activities. 
• Investing activities in accounting refers to the purchase and sale of long-term assets and other business investments, within a specific reporting period.
• In the cash flow statement, financing activities refer to the flow of cash between a business and its owners and creditors. It focuses on how the business raises capital and pays back its investors.

The correct answer is 13 : 7 : 4.

Key Points Profit & Loss ratio - ratio in which profit or loss of partner's share are calculated.

Important PointsTo calculate New profit & loss share ratio when sacrificed portion from each partner taken by new partner is given-

Sacrifice ratio = Old ratio - New Ratio

New Ratio= Old ratio - Sacrifice ratio

A's share = 7/12 - 1/24 =13/24

B's share = 5/12 - 1/8   =7/24

C's share =1/6 = 1/24 + 1/8 =4/24 = 1/6

Thus, new profit & loss sharing ratio of A: B: C is  13:7:4.

Additional Information Gaining Ratio = New ratio - Old ratio

The correct answer is Other Current Liabilities.

Key PointsDebentures which are payable within a period of 12 months or say one year are considered as Current Liabilities and it is shown in balance sheet under the sub head Other Current Liabilities.

Important PointsCurrent Liabilities : Current liabilities are obligations or debts owed by a business that are due within a year or within the normal operating cycle. Furthermore, current liabilities are settled using a current asset, either by creating a new current liability or by using cash.

If debentures are payable within a period of 12 months they will be considered as current liabilities. In current liabilities they will be shown under the sub head other current liabilities. Current liabilities are the liabilities which are payable within 12 months.

The correct answer is Amount realised from sale of assets.

Key PointsDissolution of a firm- According to Section 39 of the partnership Act 1932, the dissolution of partnership between all the partners of a firm is called the dissolution of the firm. This brings end to existing business firm. When the firm is dissolved the books of account are to be closed and profits or loss arising on realisation of its assets and discharge of liabilities is to be computed. On Dissolution all Books of accounts are closed Except-

• Realisation Account
• Partner's capital Account
• Cash & Bank Account.​

Important Points

Realisation A/c- prepared on Dissolution of Firm. Following transaction will be recorded in realisation account-

• All assets in balance sheet(except cash & bank balance) 
• All liabilities in balance sheet (except balance of profit & loss, reserves & partner's capital account)   
• Amount realised on assets 
• Discharge of liabilities 
• The profit & loss on realisation account transferred to Partner's capital account.

Thus, according to question only balance realised on sale of assets can only transferred to realisation account. 

Additional Information

• Balance of Cash account in balance sheet are not transferred to realisation account because cash account is closed after cash realisation on assets ,payment paid to liabilities and final payment to the partner's capital account. The aggregate amount paid to the partners is equal to the amount available in bank and cash accounts.
• Balance of Profit & Loss account is directly transferred to Partner's capital account. All profits or losses are transferred to partner's capital account.
• All Reserves funds & general reserves are directly transferred to Partner's capital account.

The correct answer is Non - Current.

Key PointsAccording to prescribed format of balance sheet according to Companies Act, 2013, Schedule III, Part I, under main heading Assets first of all Non-current Asset is shown.

Important Points

Format of Balance Sheet 

The incorrect answer is Fund Flow Statement.

Key PointsAccording to the Schedule III of Companies Act, 2013, Fund Flow Statement is not required to be prepared.

Important Points

• Section 129 (1) of the Companies Act 2013,requires that the financial statements of a company, shall be in the prescribed form given in Schedule III,
• and under Part I of schedule III , the prescribed format of balance sheet has been given and, 
• Statement of P&L has been given in Part II of Schedule III, 
• At each Annual General Meeting of the Company, the Board of Directors shall present the financial statements to the shareholders for approval.
• The auditor's report and the director's report must be attached to the Company's financial statements.

​ Additional Information​Fund Flow Statement : A funds flow statement explains how a company's working capital changes. It takes into account the inflows and outflows of funds (source of funds and application of funds) for a specific time period. The statement can be used to compare the changes in a company's financial position between two balance sheet periods.

The correct answer is Rs. 1,10,000.

Key PointsAmount Received on Share Application Account = 30,000 x 11 = Rs. 3,30,000

Amount due towards Share capital on 20,000 shares including premium of Re 1 per share = 20,00 x 112,20,000 

Excess Money received on Share application refunded = Rs. 3,30,000 - 2,20,000 = Rs. 1,10,000

Important Points 

The correct answer is Loss Rs. 28,000.

Key PointsRevaluation Account- records change in the value of the firm’s assets & liabilities on admission or retirement or Death of the partner. The profit & loss on Revaluation A/c will be distributed in Old profit & loss ratio among the old partners. 

Important Points                            Revaluation A/c

Working Note:

•  Machinery value appreciated = 80,000 x10/100 = 8,000
• Building value depreciated =2,00,000x 20/100 =40,000

Additional Information Format of Revaluation account:

The correct answer is Rs. 1,00,000.

Key Points

Goodwill Valuation:

• Goodwill is the value of a company's reputation earned through time in terms of predicted future profits over and above typical profits. Goodwill is an intangible real asset that cannot be seen or felt but may be bought and sold in reality.
• Value of goodwill by Capitalisation of Average Actual Profits = Capitalised Value of Average Profits - Net Assets 
• Capitalised Value of Average Profits = Average Profits x 100/Normal Rate of Return
• Net Assets = Assets - Liabilities

Important Points

Value of goodwill by Capitalisation of Average Actual Profits = Capitalised Value of Average Profits - Net Assets 

Capitalised Value of Average Profits = Average Profits x 100/Normal Rate of Return 

Average profit = 1,10,000 (given)

Normal Rate of Return = 10% (given) 

Hence, Capitalised value of average profit = 1,10,000 x 100/10 = 11,00,000

Net Assets = Assets - Liabilities 

Net Assets = 11,00,000 - 1,00,000 = 10,00,000

Hence, the value of Goodwill = 11,00,000 - 10,00,000 = 1,00,000

The correct answer is deducting the loss from the book value of the lad to determine the cash flow from investing activities.

• As per AS-3, investing activities are the acquisition and disposal of the long-term assets and other investments, not included in cash equivalents.
• A loss on the sale of land is reflected on the statement of cash flows by deducting the loss from the book value of the land to determine the cash flow from investing activities.
• Investing activities are one of the main categories of net cash activities that businesses report on the cash flow statement.
• Investing activities in accounting refers to the purchase and sale of long-term assets and other business investments, within a specific reporting period.

Key Points

• In the cash flow statement, financing activities refer to the flow of cash between a business and its owners and creditors. It focuses on how the business raises capital and pays back its investors.
• Operating activities are the daily activities of a company involved in producing and selling its product, generating revenues, as well as general administrative and maintenance activities. 
• Cash Flow Statement is a statement that shows the inflows and the outflows of Cash and Cash Equivalents during the period.
• Inflows are those transactions that increase the Cash and Cash Equivalents and outflows are those transactions that decrease the Cash and Cash Equivalents.

The correct answer is 12 times

 Key Points

Inventory turnover Ratio:

• The Inventory Turnover Ratio measures the link between the cost of products sold and the average stock on hand.
• It investigates the frequency with which completed goods inventory is converted into revenue from operations. Thus, it is also called Stock Turnover Ratio.
• It is also an indicator of how fast the stock is sold or used.
• A high ratio is good as it indicates more liquidity and vice versa

Formula: Inventory Turnover Ratio = Sales or Cost of Goods sold/Average Inventory

Important Points

Calculation of Average Inventory:

Opening inventory Rs 28,000 (Given)

Closing inventory Rs 52,000 (Given)

Average Inventory = Beginning Inventory + ending inventory / 2

Average Inventory = (28000 + 52000)/2

Average Inventory = 80000 / 2 = 40000

Calculation of cost of revenue from operation

Revenue from operations Rs 6,00,000 (Given)

Gross profit 25% on cost of revenue from operations

Let cost of revenue from operations = A

Gross profit = 25% of A

Revenue from operations = Cost of revenue from operations + Gross profit

 6,00,000 = A + 25% of A

 6,00,000 = 125% of A

 A = 6,00,000 x 100 / 125

 A = 48000 = Cost of revenue from operations

Calculation of Inventory Turnover Ratio:

Inventory Turnover Ratio = Sales or Cost of Goods sold/Average Inventory

Inventory Turnover Ratio = 4,80,000 / 40000 

Inventory Turnover Ratio = 4,80,000 / 40000

Inventory Turnover Ratio = 12 times

The correct answer is Remaining partners in the ratio in which they have given guarantee.

Key PointsGuarantee Profit -means a minimum fixed amount of profit. The amount of Guarantee is paid by person who gives guaranteeing if any deficiency happen. It is surety for minimizing a person's loss.

 Important Points Treatment of Guarantee amount in partnership if there is any deficiency in three way-

• Guarantee given by firm or all the partners​- first the guarantee amount will be given to that partner whom guarantee is given, then remaining profit and loss will be shared by remaining partners in remaining ratio.
•  Guarantee given by only single partner - then amount of deficiency will be given by guaranteeing partner only.
• Guarantee given by partner's but ratio in which loss will be borne by them is decided, then deficiency will be borne by that decided specific ratio.

In absence of any information, partners have guaranteed profit to the partner and deficiency happens. It is borne by remaining partners in remaining ratio i.e old profit & loss ratio.

The correct answer is 2000 shares.

Key PointsCompany received an amount of Rs. 3,60,000 on allotment, but it should have received (20,000 x 20) = Rs. 4,00,000

Hence, number of shares on which allotment money not received = (4,00,000 - 3,60,000) / 20 = 2000 shares.

Important Points

The correct answer is Statement 1 is true but statement 2 is false.

Important Points

• Cash flow from investing activities is an item on the cash flow statement that reports the aggregate change in a company’s cash position resulting from investment gains or losses and changes resulting from amounts spent on investments in capital assets, such as plant and equipment.
• Operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services and cash payments to suppliers and employees for acquisitions of inventory and expenses.

 Additional Information

• A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.
• Cash flow from operating activities (CFO) indicates the amount of money a company brings in from its ongoing, regular business activities, such as manufacturing and selling goods or providing a service to customers. It is the first section depicted on a company's cash flow statement.
• Investing activities in accounting refer to the purchase and sale of long-term assets and other business investments, within a specific reporting period. It is the second section depicted on a company's cash flow statement.
• Financing activities include transactions involving debt, equity, and dividends. Cash flow from financing activities provides investors with insight into a company's financial strength and how well a company's capital structure is managed. It is the third section depicted on a company's cash flow statement.

The correct answer is ₹12,000.

Key PointsPartner's capital A/c- which all the transactions between the partners and the firm are recorded. Normally, the partner's capital account have credit balance. On Dissolution of firm following are recorded in partner's capital A/c-

• Assets & Liabilities taken over by partner 
• Profit & Loss of realisation account
• Realisation expenses paid by partner on behalf of firm
• Remuneration to partner's
• transfer of reverse fund or general reserve 
• Transfer of Fictitious assets
• The final settlement of partner's accounts in cash.

Important Points                          Partner's Capital A/c

Dr.                                                                            Cr.

Additional Information

Entry for assets taken over by Partner

•  Entry for Profit on realisation a/c

• The settlement amount paid to the partners must equal to the amount available in bank and cash accounts.

The correct answer is 40.83%

Key Points Operating profit Ratio:

• The ratio that is used to define a link between operating profit and net sales is known as the operating profit ratio
•  Earnings before interest and taxes (EBIT) is another term for operating profit, and net sales is another term for revenue generated by operations.
• Operating profit ratio is one type of profitability ratio and is therefore expressed in the form of a percentage.
• Cash and credit sales make up net sales. As a result, the operating profit ratio aids in comparing a company's operational profit to the revenue it will create.

Formula: Operating profit Ratio = Operating Profit / Net Sales × 100

Where, Operating profit = Net profit + Non-operating expenses – Non-operating incomes

Also, operating profit = Net sales – (Cost of goods sold + Administrative and office expenses + Selling and distribution exp.)

Important Points Calculation of Operating profit:

Revenue from operation Rs. 12,00,000

Bad debt Rs. 20,000

Interest on debenture Rs. 50,000

Profit on sale of furniture Rs. 10,000

Dividend received Rs. 70,000

Net profit Rs. 5,00,000

Operating profit = Net profit + Non-operating expenses – Non-operating incomes

Operating profit = 5,00,000 + (50,000 + 10,000) – (70,000) = 4,90,000

 Calculation of Operating profit Ratio:

Operating profit Ratio = Operating Profit / Net Sales × 100

Operating profit Ratio = (4,90,000 / 12,00,000) × 100

Operating profit Ratio = 40.83%

The correct answer is 80.

Key PointsPro-rata Allotment : Pro-rata allotment refers to the distribution of shares in proportion to the number of shares applied for. When a company makes a pro-rata allotment, it first applies the excess money received at the time of application to the allotment and then to call. Pro-rata allotment is done in case of oversubscription of shares.

Formula to calculate Allotted shares = Shares applied x Allotted shares/ Applied shares 

Important PointsRatio of pro rata allotment = 15,000:10,000 = 3:2

Hence, an applicant for 3 shares will receive 2 shares.

Mr. Kumar had applied for 120 shares, shares allotted to Mr. Kumar = 120 x 10,000/15,000 = 80 shares.

The correct answer is Rs. 1,34,000.

Key Points Profit and Loss Appropriation Account-All adjustments in respect of partner’s salary, partner’s commission, interest on capital, interest on drawings, etc. are made through P&L Adjustment account. This account is an extension of the Profit and Loss Account of the firm.

Important Points                 Profit & Loss Appropriation A/c

Dr.                                                                                    Cr.

Additional Information Interest on partner's capital-  No partner is entitled to claim any interest on the amount of capital contributed by him in the firm as a matter of right. However, interest can be allowed when it is expressly agreed to by the partners. Thus, no interest on capital is payable if the partnership deed is silent on the issue.

Interest on partner's drawings-No interest is to be charged on the drawings made by the partners, if there is no mention in the Deed.

The correct answer is Partner's Capital A/c.

Key PointsRealisation A/c- prepared to record the transactions relating to sale & realisation of assets and liabilities.

Partner's capital A/c- which all the transactions between the partners and the firm are recorded.

Important PointsOn dissolution of firm, entries related to creditors will be as follows

First transfer of balance of creditor in balance sheet of firm-

• For a liability which a partner take over responsibility-

         Thus, on the firm's dissolution, the partner voluntarily gives his personal assets to the firm's creditors as payment, the account credited will be Partner's capital A/c.

​The correct answer is EARNING PER SHARE.

• Earnings per Share: EPS is an important financial measure, which indicates the profitability of a company. It is calculated by dividing the company’s net income by its total number of outstanding shares. The formula for earnings per share is a company's net income minus any dividends on preferred shares, divided by the number of common shares outstanding.
• Price Earnings Ratio: The price-earnings ratio, often called the PE or price-to-earnings ratio, is a financial ratio that compares the market value per share with the earnings per share. In other words, it’s a financial measurement that investors can use to evaluate the future cash flows from an investment in relation to the value of the investment
• Net Profit Ratio: Net profit ratio (NP ratio) expresses the relationship between net profit after taxes and sales. This ratio is a measure of the overall profitability net profit is arrived at after taking into account both the operating and non-operating items of incomes and expenses.
• Dividend per Share: Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share outstanding. The figure is calculated by dividing the total dividends paid out by a business, including interim dividends, over a period of time by the number of outstanding ordinary shares issued.

The correct answer is Other incomes

Key Points Statement of Profit and Loss:

• A profit and loss statement is a record of a company's revenue and expenses over a specific time period.
• A profit and loss statement is also known as a P&L, an income statement, a profit and loss statement, an income and expense statement, or a financial outcomes' statement.
• The profit and loss statement (P&L) informs management and investors if a company made a profit or lost money during the reporting period. 

Format of Statement of Profit and Loss

Important Points Since, Interest is earned on bank deposits by a company engaged in manufacturing electronic appliances, the core income does not come from interest.

 Hence, it will be shown under "Other Income" in  Statement of Profit and Loss.

The correct answer is X Rs. 22,750; Y Rs. 5,250 

Key Points

When the new Partner brings goodwill in cash-

• The amount of Goodwill brought in by the new partner is shared by the existing partners in sacrifice ratio.

• Premium for goodwill account is debited and Old Partner's capital account is credited.

When the new Partner does not bring goodwill in cash- 

• New Partner's Current or capital account is debited and Old Partner's capital account is credited.

Important PointsSacrifice ratio= old ratio - New ratio 

X' share = 5/8 - 4/9= 13/72

Y's share =3/8- 3/9= 3/72

Sacrifice ratio = X : Y =13:3

Z' share of goodwill =1,26,000 x 2/9=28,000

Entry on Z's share of Goodwill be -

Working note
Calculation of X & Y capital account credited -

X' share =28,000x13/16 = 22750

Y's share =28,000x3/15 = 5250

The correct answer is Financing.

Important Points

• Financing activities are the activities that result in changes in the size and composition of the owner’s capital (including preference share capital) and borrowings (including debentures) of the enterprise from other sources.
• Financing activities include transactions involving debt, equity, and dividends.
• Cash flow from financing activities provides investors with insight into a company's financial strength and how well a company's capital structure is managed.
   

Key Points

•  The activities that don't have an impact on cash are known as non-cash financing activities. These include the conversion of debt to common stock or discharging of a liability by the issuance of a bond payable. 
• Investing activities in accounting refers to the purchase and sale of long-term assets and other business investments, within a specific reporting period.
• The cash flow from operating activities depicts the cash-generating abilities of a company's core business activities. The daily activities of a company involved in producing and selling its product, generating revenues, as well as general administrative and maintenance activities.
• Non-operating activities are one-time events that may affect revenues, expenses or cash flow but fall outside of the company's routine, core business.

The correct answer is ₹2000.Key PointsRealisation Expenses -expenses incurred for the process of dissolution of a firm. These expenses can be realized in cash or credit.Important PointsTreatment of Realisation expenses-

When some expenses are incurred and paid by the firm in the process of realisation of assets and payment of liabilities: 

When realisation expenses are paid by a partner on behalf of the firm:  
​

When a partner has agreed to bear the realisation expenses:

​     1.If payment of realisation expenses is made by the firm-

      2.If the partner himself pays the realisation expenses,

            [No entry is required]

In above question,

• Partner agreed to bear realisation expenses for which he is paid ₹2000
• But amount actually paid by partner is Rs.2,500, excess Rs.500 will be borne by partner himself. Thus, entry for payment of Rs.2000 as realisation expenses will be

The correct answer is 64,00,000

Key Points Trade receivables turnover ratio

• The trade receivables turnover ratio, also known as the accounts receivable turnover ratio or the debtors turnover ratio, is a crucial accounting ratio.
• It is used to assess the efficiency with which a company manages the credit it extends to its clients and how long it takes for the company to recover the outstanding debt within the accounting period.
• A high receivables turnover ratio shows that the company's collection method is very efficient, and that the company also has a high proportion of customers who pay their bills fast so that the debts can be written off.
• Low receivables, on the other hand, suggest that the company lacks a clear collection method, as well as a defined credit policy.

Formula:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Important Points Calculation of Net credit Sales:

Cash revenue from operation is 25% of credit revenue from operation

Revenue from Operations = 10,00,00,000

Let credit revenue from operation = A

Revenue from Operations = Cash revenue from operation + credit revenue from operation

10,00,00,000 = 25% of A + A

10,00,00,000 = 125% of A 

A = 10,00,00,000 x 100/125 = 8,00,00,000

Credit revenue from operation = A = 8,00,00,000

 Calculation of Average Accounts Receivable:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

5 = 8,00,00,000 / Average Accounts Receivable

 Average Accounts Receivable = 8,00,00,000 / 5 = 1,60,00,000

Calculation of Closing trade receivable

 Average Accounts Receivable = (opening Account Receivable + closing Account Receivable) / 2

 1,60,00,000 x 2 = opening Account Receivable + closing Account Receivable

 3,20,00,000 = opening Account Receivable + closing Account Receivable

Since, closing trade receivables are 1/4th of opening trade receivables

 3,20,00,000 = opening Account Receivable + 1/4th of opening trade receivables

 3,20,00,000 = 5/4 of opening trade receivables

opening trade receivables = 3,20,00,000 x 4/5 = 2,56,00,000

Closing trade receivables = 2,56,00,000 x 1/4 = 64,00,000

The correct answer is 5.

• Financial statements are written records that convey the business activities and the financial performance of a company.
• As per the framework for the preparation of Financial Statements, there are 5 elements of Financial Statements.

Key Points

• Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes.
• Financial statements are the important reports of the entity that provide the entity’s financial information at a specific period of time to be used by many stakeholders such as management, employees, the board of directors investors, shareholders, customers, suppliers, bankers, and other related stakeholders.
• These statements are prepared as the requirement of management, owners, shareholders, governments, and other related authority organizations.
• The completed set of financial statements contain five statements and five elements.
• Here are the five statements:
  • Statement of Financial Position or Balance Sheet,
  • Statement of Financial Performance, or Income Statement,
  • Statement of Change in Equity,
  • Statement of Cash flow, and
  • Noted to Financial Statements

The correct answer is 45,000.

Key PointsAs per SEBI guidelines, a company making public issue of shares must receive at least 90% of Minimum subscription before making any allotment of shares to the public.

Important PointsVinod Ltd invited application for 10,00,000 equity shares, but public applied for 8,55,000 shares which is less than 90% of 10,00,000. Hence, for allotment of shares to public, it is required to fulfil the requirement of minimum subscription.

90% of 10,00,000 = 10,00,000 x 90/100 = 9,00,000

hence, required shares for fulfilling the requirements of minimum subscription = 9,00,000 - 8,55,000 = 45,000

Additional Information Minimum Subscription : The term "minimum subscription" refers to the bare minimum required by the company for its preliminary functions. The Companies Act requires that the company receive applications for a certain minimum number of shares before proceeding with the allotment of shares, in order to prevent companies from starting business with insufficient resources. This is known as the 'minimum subscription.' The minimum subscription amount is set at 90% of the issue size.

The minimum subscription amount must be specified in the prospectus. According to SEBI guidelines, a company making a public issue of shares, debentures, or other securities must receive at least 90% of the Minimum Subscription before issuing shares or debentures to the public

The correct answer is Rs 2,400.

Key Points Partner's Loans -  If Partner's Loan in assets side of balance sheet of firm then Partner take loan from the firm. If Partner's Loan in Liabilities side of balance sheet of firm, then Partner gives loan from the firm. It is treated as a charge against profit.

As the above question is silent about Partnership Deed, Partner is entitled to Interest on loan only. No interest on Capital is allowed

Important PointsInterest on Loan- If any partner has advanced loan to the firm for the purpose of business, Partner shall be entitled to get an interest on the loan amount at the rate of 6 per cent per annum.

In above question, interest on Partner's loan = Partner's Loan x 6/100    

                                                                           =Rs.40,000 x 6/100

                                                                           =Rs.2,400.

Additional InformationInterest on Capital: No partner is entitled to claim any interest on the amount of capital contributed by him in the firm as a matter of right. However, interest can be allowed when it is expressly agreed to by the partners. Thus, no interest on capital is payable if the partnership deed is silent on the issue.

The correct answer is Only A Rs 1,00,000.

Key PointsOld Ratio = 3:2

New Ratio = 2:2:1

Calculation of Sacrifice/Gain Ratio 

Old Ratio - New Ratio

A : 3/5 -2/5 = 1/5

B: 2/5 - 2/5 = 0

On admission of C, he pays Rs 1,00,000 as goodwill for 1/5th share

Hence, total goodwill of the firm = 1,00,000 x 5/1 = 5,00,000

A's share of goodwill = 5,00,000 x 1/5 = 1,00,000

Hence, Only A's account will be credited by Rs. 1,00,000.

Important Points 

The correct answer is 4 types.

Important Points

• A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements.
• Financial ratios are relationships determined from a company's financial information and used for comparison purposes.
• Financial ratios are broadly classified into 4 types. These are:
  • Liquidity ratios
  • Solvency ratios
  • Activity ratios
  • Profitability ratios

Additional Information

• Liquidity ratios are used to measure the level of cash or assets that could quickly be converted into cash belonging to a company or individual.
• A solvency ratio is a key metric used to measure an enterprise's ability to meet its long-term debt obligations and is used often by prospective business lenders. A solvency ratio indicates whether a company's cash flow is sufficient to meet its long-term liabilities and thus is a measure of its financial health.
• An activity ratio is a type of financial metric that indicates how efficiently a company is leveraging the assets on its balance sheet, to generate revenues and cash.
• Profitability ratios assess a company's ability to earn profits from its sales or operations, balance sheet assets, or shareholders' equity. Profitability ratios indicate how efficiently a company generates profit and value for shareholders.

The correct answer is cash equivalents.

• Short term highly liquid assets which are readily convertible into known amount of cash and which are subject to an insignificant rick of change in the value are called Cash equivalents. 
• Cash flow statement shows inflows and outflows of cash and cash equivalents from various activities of an enterprise during a particular period.
• As per AS-3, ‘Cash’ comprises cash in hand and demand deposits with banks, and ‘Cash equivalents’ means short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
• An investment normally qualifies as cash equivalents only when it has a short maturity, of say, three months or less from the date of acquisition.
• Similarly, short-term marketable securities which can be readily converted into cash are treated as cash equivalents and is liquidable immediately without considerable change in value.
• Cash and Cash equivalents include the following : Cash in hand, Cash at bank, Short term marketable securities

The correct answer is Rs. 78,000

Key Points Managerial commission: The amount in addition to salary to motivate managers. Managerial commission is an operating expense.

Important PointsMariya's salary received =4,000 x12 = 48,000

Calculation of Mariya's managerial commission-

Net profit before commission = Profit before charging salary -  Mariya's salary

                                               =6,78,000 - 48,000

                                               =6,30,000

Managerial commission after charging commission= Net Profit before commission x Rate of commission /(Rate of commission+ 100)

Mariya's managerial commission=6,30,000x5/105

                                                           =30,000

Total remuneration of Mariya = salary +  managerial commission

                                               =48,000 + 30,000 

                                               =78,000

Additional InformationManagerial commission (net profit before commission):

         =net profit before commission x Rate of commission/100

The Correct Answer is 40%

Key Points

Operating Ratio -

• This Ratio is used to evaluate efficiency of company's management
• In Operating ratio, operating expenses are compared with net sales
• Formula to Calculate Operation Ratio = \( {Operating\ Expenses\over Net\ sales} \times 100\)

Operating Profit Ratio -

This ratio shows how much profits a company has earned from its operations. 

• It is also known as profitability or performance ratio.
• Formula to calculate operating profit/ operating profit ratio = \( {Operation\ profit\over Net\ sales} \times 100\)
• Operating profit = Net sales - Cost of goods sold - Administrative and Office expenses - Selling and Distribution expenses.

Important Points

 Relation between Operating Ratio and Operating Profit Ratio

Operating Profit Ratio= 100 - Operation Ratio

Operation ratio given in the question is 60%, so Operating Profit Ratio will be 100- 60% i.e. 40%

Additional Information

• Operating profit = Net Profit + Non-Operating expenses-Non Operating incomes
• Operating profit = Gross profit - operating expenses

The correct answer is (I) - (c), (II) - (d), (III) - (a), (IV) - (b).

The correct match is given below

Key PointsSuper Profit = Average Profit - Normal Profit

Normal Profit = Super Profit - Average Profit

Goodwill = Average Profit x No. of year purchase

Weighted Average Profit =Total of Products of Profit / Total Weights

Important PointsAverage profit Method : 

• The average profit method is one of the most basic and widely used methods of valuing goodwill. The value of goodwill is calculated using this method by multiplying the average estimated profit or average future profit by the number of years since purchase.
• There are two methods of calculating average profit, which are as follows: 

Simple Average : The simple average method calculates goodwill by multiplying the average profit by the agreed-upon number of years of purchase. 
Formula: Average Profit x Number of Years of Purchase 

Weighted Average Profit Method : 

• The weighted average method assigns weights to each year's profits, with more weightage given to recent years. The weighted average     profit is multiplied by the number of years since purchase to calculate goodwill. 
• Formula: Weighted Average Profits= Total of Products of Profit/ Total of weights
• Goodwill = Weighted Average Profit x Number of year's of Purchase            

Super Profit Method : 

• The super profit is the difference between the estimated future profit and the normal profit. It is a method of calculating the extra profits earned by the business. Goodwill is calculated by multiplying the value of super profits by a specific number (that number being the number of years of purchase.   
• Normal Profit =(Capital Invested x Normal Rate of Return) /100 
• Super Profit = Average Profit - Normal Profit
• Goodwill = Super Profit x No. of years purchased                                                                                                                                                                                                                                   

The correct answer is trial balance. 

Key Points

• After the company makes all adjusting entries, it then generates its financial statements.
• Financial Statements are the reports that provide the detail of the entity's financial information including assets, liabilities, equities, incomes and expenses, shareholders' contribution, cash flow, and other related information during the period of time.
• Financial statements are used by different stakeholders including entity’s management, shareholders, investors, staff, majors customers, majors suppliers, government authority, stock exchanges, and other related stakeholders.
• A complete set of financial statements is made up of: (1) Statement of Comprehensive Income (Income Statement and Other Comprehensive Income), (2) Statement of Changes in Equity, (3) Statement of Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to Financial Statements.

Additional Information

• A trial balance is a report that lists the balances of all general ledger accounts of a company at a certain point in time.
• The accounts reflected on a trial balance are related to all major accounting items, including assets, liabilities, equity, revenues, expenses, gains, and losses.

The correct answer is Rs 30,000.

Key PointsInvestment Fluctuation Reserve -  created out of firm’s profits to meet market value of Investments. Investment Fluctuation Reserve will be distributed among old partners in old ratio.

Important PointsWhen there is an increase in market value of investment:

In this case, the full Investment Fluctuation Reserve is allocated to old partners in their old profit-sharing ratios, and the increase in value is credited to the Revaluation Account.

Additional Information If market value of investment is less than the book value:

Fall in value is less than IFR: IFR, to the extent of fall in the value , is transferred to Investment Account and the balance is distributed among the old partners in their old profit sharing ratio. The entry is:

Fall in the value is equal to IFR: The amount of IFR is transferred to Investment Account and no amount is distributed among the old partners. The entry is:

If the decrease in value exceeds the IFR: the IFR amount is transferred to the Investment Account, together with the balance of the fall in value. The excess of Investment Fluctuation Reserve is deducted from the Revaluation Account. Losses incurred as a result of such revaluation are allocated to old partners' Capital Accounts in accordance with their old profit sharing ratio. The following are the journal entries are passed:

The correct answer is Rs. 7,90,000.

Key PointsCalculation of Amount of Share Capital 

Amount of Shares which are fully paid up = 78,000 x 10 = Rs. 7,80,000

Only application & allotment money on 2000 shares i.e., ₹5 each

Amount of Shares which are forfeited = 2,000 x 5 = Rs. 10,000 

hence, amount of share capital = Fully paid up shares + Shares Forfeited = 7,80,000 + 10,000 = Rs. 7,90,000

Important Points Notes to Accounts :

The correct answer is no effect in cash and cash equivalents. 

Key Points

• When marketable securities are purchased, cash decreases and marketable securities increases.
• Since both cash and marketable securities come under cash and cash equivalents, there is no effect in cash and cash equivalents. 

Additional Information

• Cash flow statement shows inflows and outflows of cash and cash equivalents from various activities of an enterprise during a particular period.
• As per AS-3, ‘Cash’ comprises cash in hand and demand deposits with banks, and ‘Cash equivalents’ means short-term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
• An investment normally qualifies as cash equivalents only when it has a short maturity, of say, three months or less from the date of acquisition.
• Similarly, short-term marketable securities which can be readily converted into cash are treated as cash equivalents and is liquidable immediately without considerable change in value.

The correct answer is Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of assertion (A).

Key PointsPrepaid Expenses 

• Future expenses that are paid in advance are known as prepaid expenses.
• Prepaid expenses are first recognised as an asset on the balance sheet.
• The sum is recorded as an expense after the assets' benefits are realised over time. 
• Example of Prepaid Expenses: Insurance is an excellent example of a prepaid expense, as it is customarily paid for in advance. If a company pays ₹12,000 for an insurance policy that covers the next 12 months, then it would record a current asset of ₹12,000 at the time of payment to represent this prepaid amount. In each month of the 12-month policy, the company would recognise an expense of ₹1,000 and draw down the prepaid asset by this same amount.

Liquid Assets:

• Liquid assets are those that can be quickly converted into cash.
• While assets are valuable belongings that can be turned to cash, not all of them can be sold for cash immediately or without incurring a loss.
• Cash, Bank balance, Accounts receivable, Treasury bills, notes, and bonds are some examples of liquid assets

Important Points Assertion (A): Prepaid expenses are not considered as liquid assets.

• The assertion is True as prepaid expenses are not considered liquid assets
   

Reason (R): Prepaid expenses cannot be converted into cash.

• The Reason (R) is also true & correctly explains the assertion (A) as prepaid expenses and income tax receivables, cannot be sold for cash, which is why they are not considered liquid assets.
• They are recorded as Other current assets, as prepaid expenses are the expenses that have been paid in advance before they are even due for payment. An obligation that is met in advance is an asset for the company,

The correct answer is 3,000.

Key PointsNumber of Equity shares = (Purchase value - Amount paid in cash)/ Issue price of shares

Number of Equity shares = 3,80,000 - 20,000 /100+20 = 3,000 shares

Important Points 

Working Note:

After payment of cash, remaining amount = 3,80,000-20,000 = 3,60,000

Issue is  at 20% premium, which means 100 x120/100 = 120

The correct answer is Profitability Ratios.

Important Points

• The profitability ratios measure the profitability or the operational efficiency of the firm.
• These ratios reflect the final results of business operations.
• They are some of the most closely watched and widely quoted ratios.
• Management attempts to maximize these ratios to maximize firm value.
• The results of the firm can be evaluated in terms of its earnings with reference to a given level of assets or sales or owner’s interest etc.
• Profitability ratios assess a company's ability to earn profits from its sales or operations, balance sheet assets, or shareholders' equity.
• Profitability ratios indicate how efficiently a company generates profit and value for shareholders.

Key Points

• Liquidity/short-term solvency ratios are used to measure the level of cash or assets that could quickly be converted into cash belonging to a company or individual.
• A Short-term solvency/leverage ratio is a key metric used to measure an enterprise's ability to meet its long-term debt obligations and is used often by prospective business lenders. A solvency ratio indicates whether a company's cash flow is sufficient to meet its long-term liabilities and thus is a measure of its financial health.
• An activity/efficiency/performance ratio is a type of financial metric that indicates how efficiently a company is leveraging the assets on its balance sheet, to generate revenues and cash.

The correct answer is Cr. A by Rs. 50,000; Dr. C by Rs. 50,000

Key PointsWhen there is change in partnership between the partners then treatment of goodwill and reserve can be made in two methods:

When partners decides to write off goodwill and reserves completely from balance sheet-Amount of goodwill and reserves will be distributed between among partners in old ratio.

When partners decides to retain goodwill and reserves completely in balance sheet- adjusted amount of goodwill and reserves will be distributed between among partners in sacrifice ratio/gain ratio to partner’s capital account.

Important PointsSacrifice ratio= old ratio - new ratio 

A's share=1/6 - 1/3 =-1/6(gaining)

B's share=2/6 - 1/3 =0

C's share=3/6 -1/3= 1/6 (sacrificing)

Calculation of Adjustment amount of Goodwill & profit & loss Account =(profit & loss account + Goodwill) x 1/6

                         =(1,20,000 + 1,80,000)x1/6  = 3,00,000 x 1/6 = 50,000

 Entry of Adjustment amount of Goodwill & profit & loss Account-

Hint Here A is gaining A's account will be debited. C's is sacrificing, thus C's account will be credited. B is neither gaining nor losing.

The correct answer is All of the above.

• Comparison of financial statements shows the profit of the company, the financial position of a company, and the company's performance compared to the previous year.
• So this comparison reveals the difference between the previous year's profit and the current year and shows whether the performance of a company is increased or decreased compared to both years and guides management to take corrective managerial actions so that the deviation(difference) do not occur again and they reach maximum level.
• The reason to prepare a financial statement is to know the financial position of the company profitability means earning capacity with the company's performance only we can assess this.

Key Points

•  Financial Statements are the reports that provide the detail of the entity's financial information including assets, liabilities, equities, incomes and expenses, shareholders' contribution, cash flow, and other related information during the period of time.

The correct answer is Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Key Points Window Dressing:

• Actions performed to improve the appearance of a company's financial accounts are known as window dressing.
• Since it is misleading, the entire concept of window dressing is clearly unethical.
• Furthermore, it essentially takes outcomes from a future time in order to make the current period appear better, making it exceedingly short-term.

Important Points Assertion (A): A company has postponed paying suppliers, so that the period-end cash balance appears higher in the books of the company. This is an example of window dressing.

The Assertion(A) is true because postpone paying suppliers will result in the period-end cash balance appearing higher than it should be.

Reason (R): Through window dressing, a company can present a better financial position of the firm than the actual position.

The reason is true because 

• When a corporation has a large number of shareholders, window dressing is common so that management may provide the impression of a well-run company to investors who are unlikely to have much day-to-day contact with the company.
• It can also be utilised when a business has to impress a lender in order to get a loan, as it can present a better financial position of the firm than the actual position.
• When a firm is closely held, the owners are usually more informed about the company's performance, thus there's no need for financial figures to be embellished.

The correct answer is Net sales.

Important Points

•  The net profit ratio shows the relationship between net profits and Net sales.

• The net profit percentage is the ratio of after-tax profits to net sales.

• It reveals the remaining profit after all costs of production, administration, and financing have been deducted from sales, and income taxes recognized.

• As such, it is one of the best measures of the overall results of a firm, especially when combined with an evaluation of how well it is using its working capital.

• The measure is commonly reported on a trend line, to judge performance over time. It is also used to compare the results of a business with its competitors.

• Net profit is not an indicator of cash flows, since net profit incorporates a number of non-cash expenses, such as accrued expenses, amortization, and depreciation.

• The formula for the net profit ratio is to divide net profit by net sales, and then multiply by 100.

Additional Information 

• Gross sales are the grand total of sale transactions within a certain time period for a company.
• Net sales are calculated by deducting sales allowances, sales discounts, and sales returns from gross sales. 
• A sales return is merchandise sent back by a buyer to the seller.
• Cost of sales (also known as "cost of goods sold") refers to the cost required to manufacture or purchase a product that is then sold to a customer.

The correct answer is Both Assertion (A) and Reason (R) are true, and Reason (R) is  not the correct explanation of Assertion (A).

Key PointsPartnership -When two or more persons join hands to set up a business and share its profits and losses is called Partnership. Persons who have entered into partnership with one another are individually called ‘partners’ and collectively called ‘firm’.

Important Points Conditions to form Partnership-

• There should be at least two persons. Minimum limit is two person in the firm.
• According to  Section 464 of the Companies Act 2013, the Central Government is empowered to prescribe maximum number of members in a firm but the number of members can not be more than 100. 
• The Central government has prescribed the maximum number of partners in a firm to be 50. 

According to question,

Assertion (A): Maximum number of partners in a partnership firm is 50.

• assertion is true because central govt. prescribed the maximum limit of Partners is 50.

Reason (R): Maximum number of partners in a partnership firm is prescribed in Companies Act, 2013.

• reason is true the Company Act also prescribe the maximum limit of Partner.

​Here, Reason doesn't  explain the correct explanation of Assertion (A) because the maximum limit in the Company's Act is 100. But the central government has prescribed maximum partners to be 50 as per vide rule of the companies (Miscellaneous Rules, 2014.

Thus, Both Assertion (A) and Reason (R) are true, and Reason (R) is not the correct explanation of assertion (A).

The incorrect answer is Under Subscription .

Key Points

 In the above case

• Yes Ltd issued 2,50,000 equity shares and applications were received for 3,50,000 shares which means shares are oversubscribed, 
•  Applications were received for 3,50,000 shares and the company allotted them 2,50,000 shares. This is the case of Pro Rata allotment 
• Last call on 1,000 shares was not received, and these shares were forfeited. This is the case of Forfeiture of shares.

Therefore, in this question there is no case of under subscription. So the answer to this question is Under Subscription.

Important PointsUnder Subscription : Under Subscription refers to the situation in which the number of shares applied for by the public is less than the number of shares issued by the company. Companies that are new or have a poor reputation will face under-subscription.

Over Subscription : Oversubscription occurs when the number of applications to purchase a particular company's stock exceeds the number of shares issued. ABC Company, for example, has issued 10,000 shares for its initial public offering. They have, however, received 15,000 applications to purchase their shares.

Pro- Rata Allotment : Pro rata allotment refers to the distribution of shares in proportion to the number of shares applied for. When a company makes a pro-rata allotment, it first applies the excess money received at the time of application to the allotment and then to calls. It refunds any excess after adjusting the amount for allotment and contacts applicants.

Forfeiture of Shares : Forfeiture of shares refers to the situation in which the issuing company cancels the allotted shares due to the shareholder's failure to pay the subscription amount as requested by the issuing company. In the event of share forfeiture, the shareholder loses his or her rights and interests as a shareholder and ceases to be a member of the organisation.