Accountancy Test - 27

Interpretation refers to explaining the meaning and significance of the financial data analyzed, helping stakeholders understand its relevance.

Financial statement analysis involves simplifying and interpreting data, not gathering raw data, which is typically handled by accountants.

Financial statement analysis focuses on evaluating the operational efficiency and profitability of a company.

Financial statement analysis is the method used to evaluate a firm's financial health by examining its financial statements.

A) Realisation Account: The Realisation Account is used during dissolution to record the realization of assets, payment of liabilities, and expenses. At the end, any remaining balance (assets minus liabilities) is transferred to partners’ capital accounts. Description (I) fits this role: "Account used to transfer the remaining assets and liabilities when the firm is dissolved."

B) Transfer of liabilities: In dissolution, liabilities are not "transferred" to another entity but are settled. However, in the context of the Realisation Account, liabilities are brought into the account by crediting them (as they are obligations). Description (II) states "Transferred to the credit of Realisation Account," which aligns with this accounting treatment.

C) Payment of creditors: Creditors are paid from the proceeds of asset sales during dissolution. If those proceeds are insufficient, partners may need to contribute from their capital accounts. Description (III) states: "Creditors are paid from the sale of assets and if necessary, the partners' capital accounts," which is an exact match.

D) Realisation Expenses: These are expenses incurred during dissolution (e.g., legal or administrative costs) and are debited to the Realisation Account as they reduce the net realizable amount. Description (IV) states: "Expenses incurred during the dissolution process, typically debited to the Realisation Account," which is a perfect fit.

A) Capital Account: This represents each partner’s contribution or stake in the firm. Matches (I) "Account representing the contribution of each partner to the firm."

B) Profit on Realisation: This is the gain when assets are sold above their book value during dissolution. Matches (II) "The gain resulting from the sale of assets in excess of their book value."

C) Dissolution Expenses: Costs like legal or administrative fees incurred during winding up. Matches (III) "Costs incurred for winding up the firm, including administrative and legal fees."

D) Partner’s Loan Account: This reflects a loan given by a partner to the firm, settled separately during dissolution. Matches (IV) "Amount a partner lends to the firm, which must be settled during dissolution."

A) Transfer of Assets: During dissolution, all assets are transferred to the Realisation Account at their book value. Matches (II) "All assets are transferred at their book value to the Realisation Account."

B) Payment to Partners: After settling liabilities, the remaining balance is distributed to partners. Matches (I) "After liabilities are settled, the remaining balance is paid to the partners."

C) Settlement of Unrecorded Liabilities: These are liabilities not in the books, paid from available funds during dissolution. Matches (III) "Liabilities not previously recorded are paid from available funds."

D) Transfer of Profits or Losses: Profits or losses from realisation are transferred to partners’ capital accounts. Matches (IV) "Profits or losses from the dissolution process are transferred to the partners' capital accounts."

A) Creditors: Typically settled during dissolution, but (I) "Amount paid as a discount" doesn’t align logically (discounts are rare). No perfect match.

B) Dissolution Expenses: Costs incurred while closing the firm. Matches (II) "Costs incurred while closing down the firm."

C) Unrecorded Assets: Assets not in the books, realised during dissolution. Matches (III) "Assets not previously documented in the firm’s books."

D) Partner's Capital Account: Shows each partner’s share after liabilities are paid. Matches (IV) "Account showing the share of each partner after liabilities are paid."

Fluctuating Capital Method

In the fluctuating capital method, each partner's capital account changes over time. Key points include:

• Each partner has a separate capital account.
• Initial investments and any additional capital introduced are credited to this account.
• Adjustments that decrease capital, such as drawings and share of losses, are debited.
• Adjustments that increase capital, like interest on capital, partner salaries, and share of profits, are credited.

The balance of each partner's capital account is shown in the balance sheet:

• Debit balances appear on the asset side.
• Credit balances appear on the liability side.

Explanatory Note: Unless stated otherwise, the fluctuating capital method is the default method for maintaining capital accounts.

Because it is not related to the admission or retirement of the partners. Goodwill is calculated only during these events.

Key points to consider:

• The profit from the contract will not affect the profit sharing of the partners.
• Goodwill is assessed at the time of partner admission or retirement.
• Thus, this profit is excluded from the calculation of goodwill.