Institute of Chartered Financial Analysts of India %28ICFAI%29 University 2007 C.A Chartered Accountant Solved PCC ACCOUNTS II - exam paper

The partners decided to admit Chaplin as a partner with effect from 1.4.2007. It was decided that Chaplin would be allotted 20% share in the firm and he must bring 20% of the combined capital of Laurel and Hardy.

Following is the Balance sheet of the firm as on 31.3.2007 before admission of Chaplin and before adjustment of revised profits between Laurel and Hardy.

Balance Sheet of LH & Co. as at 31.3.2007 Liabilities    Rs. Assets

2.11.500

1.51.500

2.27.000

5.90.000

(iii) Balance Sheet of the firm after the admission of Chaplin.    (20 Marks)

Answer

(i)    Profit and Loss Adjustment Account*

Rs.    Rs.

To Expenses not provided for    By Income not considered

(years 2004-2007)    1,10,000    (for years 2004-2007)    66,000

By Partners' capital accounts (loss)

Laurel    22,000

__Hardy    22,000

1,10,000 1,10,000

(ii)    Partners Capital Accounts

Laurel Hardy Chaplin Laurel Hardy Chaplin Rs. Rs. Rs. Rs. Rs. Rs. To P & L Adjustment A/c 22,000 22,000 - By Balance b/d 2,11,500 1,51,500 - To Hardy 60,000 By Laurel - 60,000 - To Balance c/d 1,29,500 1,89,500 63,800 By Cash - - 63,800 2,11,500 2,11,500 63,800 By Balance b/d 2.11.500 1.29.500 2.11.500 1.89.500 63.800 63.800

(iii)    Balance Sheet of LH & Co. as on 1.4.2007 (After admission of Chaplin)

Liabilities Rs. Assets Rs. Capital accounts: Plant and machinery 60,000 Laurel 1,29,500 Sundry debtors 2,05,000 Hardy 1,89,500 Stock in trade 3,10,000 Chaplin 63,800 Accrued income 66,000 Sundry creditors 2,27,000 Cash on hand (10,000 + 63,800) 73,800 Outstanding expenses 1,10,000 Cash at bank 5,000 7,19,800 7,19,800

* It is assumed that expenses and incomes not taken into account in earlier years were fully ignored.

Working Notes:

1. Computation of Profit and Loss distributed among partners

Profit for the year ended

Total Profit

Laurel Hardy Rs. Rs. Profit shared in old ratio i.e 5:4 6,00,000 4,80,000 Profit to be shared as per new ratio i.e. 1:1 5,40,000 5,40,000 Excess share 60,000 Deficit share (60,000) Laurel to be debited by Rs.60,000 and Hardy to be credited by Rs.60,000.

2. Capital brought in by Chaplin

Capital to be brought in by Chaplin must be equal to 20% of the combined capital of

Laurel and Hardy    Rs.

Capital of Laurel (2,11,500 - 22,000 - 60,000)    1,29,500

Capital of Hardy (1,51,500 - 22,000 + 60,000)    1,89,500

Combined Capital    3,19,000

20% of the combined capital brought in by Chaplin (20% of Rs. 3,19,000)    63,800

Question 2

P and Q have been carrying on same business independently. Due to competition in the market, they decided to amalgamate and form a new company called PQ Ltd.

Following is the Balance Sheet of P and Q as at 31.3.2007:

Following are the additional information:

(i)    The authorised capital of the new company will be Rs.25,00,000 divided into 1,00,000 equity shares of Rs.25 each.

(ii)    Liabilities of P includes Rs.50,000 due to Q for the purchases made. Q made a profit of 20% on sale to P.

(iii)    P has goods purchased from Q, cost to him Rs.10,000. This is included in the Current asset of P as at 31^st March, 2007.

(iv)    The assets of P and Q are to be revalued as under:

Plant and machinery Building

The purchase consideration is to be discharged as under:

Issue 24,000 equity shares of Rs. 25 each fully paid up in the proportion of their profitability in the preceding 2 years.

Profits for the preceding 2 years are given below:

P Rs.

1^st year    2,62,800

II^nd year    2,12,200

Total

,75,000

Issue 12% preference shares of Rs. 10 each fully paid up at par to provide income equivalent to 8% return on capital employed in the business as on 31.3.2007 after revaluation of assets of P and Q respectively.

You are required to:

(i)    Compute the amount of equity and preference shares issued to P and Q.

(ii)    Prepare the Balance Sheet of P & Q Ltd. immediately after amalgamation. (16 Marks) Answer

(c)

(i) Calculation of amount of equity shares issued to P and Q

Profits of    P

Rs.

|s^t year    2,62,800

II^nd year    2,12,200

Total    4,75,000

No. of shares to be issued = 24,000 equity shares in the proportion of the preceding 2 years' profitability

24000 x 475/1000    11,400 equity shares

24000 x 525/1000    12,600 equity shares

Equity Shares

12% Preference shares

Total

Balance Sheet of PQ Ltd. (after amalgamation)

Liabilities Authorised share capital: 1,00,000 Equity Share of Rs.25 each Issued and subscribed share capital: 24,000 Equity Shares of Rs.25 each 1,17,600 12% Preference shares of Rs.10 each (All of the equity and preference shares have been issued for consideration other than cash) Current Liabilities (W.N. 3)

Rs. Assets Rs. 14,000 Fixed assets: 25,00,000 Goodwill (W.N.1) Plant and Machinery 6,00,000 Building 11,76,000 Current Assets (W.N.2) 11.31.100 29.07.100

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Working Notes:

1. Goodwill

2.

P Q Rs. Rs. Plant and machinery 5,25,000 6,75,000 Building 7,75,000 6,48,000 Current assets 1,63,500 1,58,600 14,63,500 14,81,600 Less: Current liabilities 6,23,500 5,57,600 Net assets taken (capital employed) 8,40,000 9,24,000 Less: Purchase consideration 8,45,000 9,31,000 Goodwill 5,000 7,000 Total purchased goodwill 12,000 Add: Unrealised profit of Rs.10,000 @ 20% = Rs.2,000 is adjusted from current assets and from goodwill (since P & L A/c is not given) 2,000 Total Goodwill 14,000 Current Assets P Q Rs. Rs. Balances before amalgamation 1,63,500 1,58,600 Less: Liabilities of P due to Q - 50,000 Less: Unrealised Profit on stock i.e.Rs.10,000 x 20% 2,000 Total 1,61,500 1,08,600 Grand Total 2,70,100 Current Liabilities P Q Rs. Rs. Balances before amalgamation 6,23,500 5,57,600 Less: Liabilities of P due to Q 50,000 - Total 5,73,500 5,57,600 Grand Total 11,31,100

(a)    S Ltd. has a Hire-purchase department. Goods are sold on hire-purchase at cost plus 60%.

From the following particulars draft Hire-purchase trading account and compute profit or loss for the year ended 31^st March, 2007:

Rs.

Goods with customers on 1.4.2006 (instalments are not due)    3,20,000

Instalments due on 1.4.2006 (customers are paying)    20,000

Goods sold on hire-purchase during the year (i.e., from 1.4.2006 to    16,00,000 31.3.2007)

Cash received from customers    11,20,000

Goods re-possessed from customers valued at 40%    16,000

Unpaid instalments in respect of re-possessed goods    40,000

Goods with customers as on 31.3.2007 (at hire-purchase price)    7,20,000

(b)    On 2.6.2007 the stock of Mr. Black was destroyed by fire.    However, following particulars were furnished from the records saved:

Rs.

Stock at cost on 1.4.2006    1,35,000

Stock at 90% of cost on 31.3.2007    1,62,000

Purchases for the year ended 31.3.2007    6,45,000

Sales for the year ended 31.3.2007    9,00,000

Purchases from 1.4.2007 to 2.6.2007    2,25,000

Sales from 1.4.2007 to 2.6.2007    4,80,000

Sales upto 2.6.2007 includes Rs.75,000 being the goods not dispatched to the customers. The sales invoice price is Rs. 75,000.

Purchases upto 2.6.2007 includes a machinery acquired for Rs.15,000.

Purchases upto 2.6.2007 does not include goods worth Rs.30,000 received from suppliers, as invoice not received upto the date of fire. These goods have remained in the godown at the time of fire.

Value of stock salvaged from fire Rs.22,500 and this has been handed over to the insurance company.

The insurance policy is for Rs. 1,20,000 and it is subject to average clause. Ascertain the amount of claim for loss of stock.    (8+8 = 16 Marks)

Answer

(a)

Rs.

To Hire Purchase Stock 3,20,000 By Hire Purchase Stock 1,20,000 Reserve (W.N.1) To Instalments due 20,000 By Bank A/c (Cash received) 11,20,000 To Goods sold on Hire 16,00,000 By Goods Repossessed A/c 16,000 Purchase To Hire Purchase Stock By Goods sold on hire Reserve (W.N.3) 2,70,000 purchase (loading) (W.N.2) 6,00,000 To Profit and Loss A/c 4,26,000 By Hire purchase stock 7,20,000 (balancing figure) By Instalments due (W.N.4) 60,000

26,36,000 Working Notes: 26,36,000

1.    Opening H.P. Stock reserve 2.    Loading on goods sold on H.P. 3.    Closing H.P. Stock reserve

3.20.000    x Rs. 1,20,000 6,00,000 2,70,000 160 16,00,000 x 160 7.20.000    x 160

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4. Calculation of Instalments due at the end of the year

Opening H.P. Stock + Opening Instalments due + H.P. Sales

during the year (i.e., 3,20,000 + 20,000 + 16,00,000)    19,40,000

Less: Cash received from customers    11,20,000

Instalments unpaid for repossessed goods    40,000

Closing balance of H.P. Stock    7,20,000 18,80,000

10,80,000

Memorandum Trading A/c for the period from 1.4.2007 to 02.06.2007

Calculation of Insurance Claim

Claim subject to average clause = Actual loss of stock x Amount of Policy / Value of stock on the date of fire

= 1,50,000¹ x ( ^1,20,000 | = Rs.1,20,000 1,50,000 )

Working Note:

3,0(

900,000    3

₁

Amount of Gross Profit = Rs. 4,05,000 x 33 % = Rs. 1,35,000

3

Mr. Y keeps his books under single entry system. On 31^st March, 2006 his Balance Sheet was as follows:

Liabilities	Rs. Assets	Rs.
Capital of Mr. Y	4,50,000 Fixed assets	2,25,000
Creditors	8,70,000 Stock	9,15,000
Bills payable	1,87,500 Debtors	2,22,000
Expenses outstanding	67,500 Bills receivable	90,000
	Prepaid insurance	3,000
	Cash / Bank balance	1,20,000
	15,75,000	15,75,000

(i) Following are the summary of cash and bank transactions for the year ended 31 ^st March, 2007:

Cash sales

Collection from debtors

Payments to creditors

Paid for bills payable

Sundry expenses paid

Drawings for domestic expenses by Mr. Y

Cash and bank balance as on 31.3.2007

(ii)    Following further details are furnished:

Gross profit on sales @ 10%

Bills receivable from debtors during the year Discount allowed to debtors Discount received from creditors Bills receivable endorsed to creditors Annual fire insurance premium paid (This is paid on 1^st August every year) Depreciate fixed assets @ 10%

(iii)    Balances as on 31.3.2007 are given below:

Stock in hand

Debtors

Bills receivable

Bills payable Outstanding expenses

Prepare Trading, Profit and Loss Account for the year ended 31^st March, 2007 and Balance Sheet on that date.    (16 Marks)

Answer

Trading and Profit and Loss Account of Mr. Y for the year 31.3.2007

Rs.

To Opening stock To Purchases (W.N.5) To Gross profit 9,15,000 1,27,02,750 14.04.750 1,50,22,500 8,71,050 54,000 22,500 4,99,200 14.46.750 To Expenses (W.N.6) To Discount allowed To Depreciation To Net profit

By Sales: Cash 1,10,70,000 Credit (W.N.2) 29,77,500 By Closing stock 1.40.47.500 9,75,000 1.50.22.500 14,04,750 42,000 14,46,750 By Gross profit By Discount received

---

Liabilities Capital 2,25,000 22,500 Add: Net profit Less: Drawings Bills payable Creditors Outstanding expenses Working Notes: 1. To Balance b/f To Debtors

Balance Sheet of Mr. Y as on 31st March, 2007 Rs. Assets Rs. 2,02,500 2.28.000 2,10,000 4.50.000    Fixed assets 4.99.200    Less: Depreciation 9.49.200    Stock 3.60.000    5,89,200 Debtors 2,10,000 Bills receivable 10,02,750 Prepaid insurance 7,500 Cash on hand/bank 18,09,450 Bills Receivable Account 90,000 By Cash (Balancing figure) 5.10.000 22,500 2.10.000 7,42,500 6.52.500    By Creditors (Bills endorsed) _ By Balance c/f 7.42.500

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2.    Debtors Account

Rs.    Rs.

To Balance b/f 2,22,000 By Cash/Bank    22,65,000

To Credit Sales 29,77,500 By Discount allowed    54,000 (Balancing figure)

By Bills receivable    6,52,500

_ By Balance c/f    2,28,000

31,99,500    31,99,500

3.    Bills Payable Account

To Bank 12,22,500 By Balance b/f    1,87,500

To Balance c/f 2,10,000 By Creditor (Balancing figure)    12,45,000

14,32,500    14,32,500

4.		Creditors Account
To	Cash/Bank	1,12,60,500	By	Balance b/f
To	Discount	42,000	By	Purchases
To	B/R endorsed	22,500
To	B/P	12,45,000
To	Balance c/f (Balancing figure)	10,02,750 1,35,72,750

5.    Stock Account

To Balance b/f    9,15,000 By Cost of goods sold    1,26,42,750

To Purchases    (Rs.1,40,47,500 x 90%)

(Balancing figure) 1,27,02,750 By Balance c/d    9,75,000

8.71.050

Add: Prepaid Insurance as on 1.4.2006    3,000

8.74.050

Less: Prepaid Insurance as on 31.3.2007 (9,000 x 4/12)    3,000

Expenses shown in the profit and loss account for the year ended 31.3.2007 8,71,050

Question 5

Answer any eight out of the following:

(i)    In X Co. Ltd., theft of cash of Rs.5 lakhs by the cashier in January, 2007 was detected only in May, 2007. The accounts of the company were not yet approved by the Board of Directors of the company.

Whether the theft of cash has to be adjusted in the accounts of the company for the year ended 31.3.2007. Decide.

(ii)    A machinery costing Rs. 10 lakhs has useful life of 5 years. After the end of 5 years, its scrap value would be Rs. 1 lakh. How much depreciation is to be charged in the books of the company as per Accounting Standard-6?

(iii)    In X Bank Ltd., the doubtful assets (more than 3 years) as on 31.3.2007 is Rs.1,000 lakhs. The value of security (including DICGC 100% cover of Rs.100 lakhs) is ascertained at Rs.500 lakhs. How much provision must be made in the books of the Bank towards doubtful assets?

(iv)    A and B are equal partners. They admit C and D as partners with 1/5 and 1/6 share respectively. What is the profit sharing ratio of all the partners?

(v)    A promissory note executed by Mr. X is due on 12.8.2007. What is the maturity date of the promissory note including grace days?

(vi)    X, Y and Z are partners. X became insolvent on 15.4.2007. The Capital account balance of partner Y is on the debit side. Partner Y is solvent. Should partner Y bear the loss arising on account of the insolvency of partner X?

(vii)    Alphs & Co., having head office in Mumbai has a branch in Nagpur. The branch at Nagpur is an independent branch maintaining separate books of account. On 31.3.2007, it was found that the goods dispatched by head office for Rs.2,00,000 was received by the branch only to the extent of Rs. 1,50,000. The balance goods are in transit. What is the accounting entry to be passed by the branch for recording the goods in transit, in its books?

(viii)    Garden Ltd. acquired fixed assets viz. plant and machinery for Rs.20 lakhs. During the same year it sold its furniture and fixtures for Rs.5 lakhs. Can the company disclose, net cash outflow towards purchase of fixed assets in the cash flow statement as per AS-3?

(ix)    ABC Ltd. gave 50,000 equity shares of Rs.10 each (fully paid up) in consideration for supply of certain machinery by X & Co. The shares exchanged for machinery are quoted on Bombay Stock Exchange (BSE) at Rs. 15 per share, at the time of transaction. In the absence of fair market value of the machinery acquired, how the value of machinery would be recorded in the books of the company?

(x) A company took a construction contract for Rs.100 lakhs in January, 2006. It was found that 80% of the contract was completed at a cost of Rs.92 lakhs on the closing date i.e. on 31.3.2007. The company estimates further expenditure of Rs.23 lakhs for completing the contract. The expected loss would be Rs. 15 lakhs. Can the company recognise the loss in the financial statements prepared for the year ended 31.3.2007?

(8x2 = 16 Marks)

Answer

(i)    As per paragraph 13 of AS 4 (revised) 'Contingencies and Events occurring after the Balance Sheet Date', an event occurring after the balance sheet date may require adjustment to the reported values of assets, liabilities, expenses or incomes.

If a fraud of the accounting period is detected after the balance sheet date but before approval of the financial statements, it is necessary to recognize the loss amounting Rs.

5,00,000 and adjust the accounts of the company for the year ended 31^st March, 2007.

(ii)    As per paragraph 20 of AS 6 'Depreciation Accounting', the depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset. In the given case, the depreciation amount can be calculated as follows:

Rs.

Cost of machinery

Less: Scrap value at the end of useful life

Amount to be written off during useful life of machinery

Useful life of the asset

Depreciation to be provided each year (Rs.9,00,000 / 5 years)

(Rs. in lakhs)

Doubtful Assets (more than 3 years)

Less: Value of security (excluding DICGC cover)

Less: DICGC cover Unsecured portion Provision:

for unsecured portion @100%

for secured portion @ 100% w.e.f 31.3.2007 Total provision to be made

(iv) Let total profits or losses of the firm be 1

Shares of C and D is ¹ and ¹ respectively.

5 6

_{B l i i 1 (}1 1 ₎ 11 19

Balance remaining: 1- ( + ) =1--=

5 6 30 30

19    9 5 9 5

to be shared equally by A and B as 30    30 30

New profit sharing ratio will be A: B: C: D

Thus new profit sharing ratio of all the partners will be 19:19:12:10.

(v)    Where the promissory note is due (including grace days) on public holiday, the preceding day shall be the due date. Hence, the due date is 14.8.2007.

(vi)    If some partner is having debit balance in his capital account and is not insolvent, then he cannot be called upon to bear the loss on account of the insolvency of the other partner.

Hence, Y need not bear the loss due to insolvency of partner X.

(vii)    Nagpur branch must include the inventory in its books as goods in transit.

The following journal entry must be made by the branch:

Goods in transit A/c Dr. 50,000

To Head office A/c    50,000

[Being Goods sent by Head office is still in transit on the closing date].

(viii)    According to Para 21 of AS 3 (Revised) 'Cash Flow Statements', an enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis. Acquisition and disposal of fixed assets is not prescribed in para 22 and 24 of the standard.

Hence, the company cannot disclose net cash flow in respect of acquisition of plant and machinery and disposal of furnitures and fixtures.

(ix)    As per paragraph 22 of AS 10 'Accounting for Fixed Assets' , fixed asset acquired in exchange for shares or other securities in the enterprise should be recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident. Since, the market value of the shares exchanged for the asset is more clearly evident, the company should record the value of machinery at Rs.7,50,000. (i.e., 50,000 shares x Rs.15 per share being the market price)

(x) As per paragraphs 31 and 35 of AS 7 on Construction Contracts, an expected loss on the construction contract should be recognized as an expense immediately irrespective of (i) whether or not the work has commenced on the contract; or (ii) the stage of completion of the contract; or (iii) the amount of profits expected to arise in other contracts.

Hence, the company must recognize the loss immediately.

Question 6

Answer any four out of the following:

(a)    What are the qualitative characteristics of the financial statements which improve the usefulness of the information furnished therein?

(b)    What are the advantages and disadvantages of ERP package?

(c)    How Government grant relating to specific fixed asset is treated in the books as per AS-12?

(d)    Explain the accounting treatment of donation received for specific purpose in the case of charitable society.

(e)    What is meant by Cash and Cash equivalents as per AS-3?

(f)    When can a company change its accounting policy?    (4x4 = 16 Marks)

Answer

(a) The qualitative characteristics are attributes that improve the usefulness of information provided in financial statements. The framework suggests that the financial statements should observe and maintain the following four qualitative characteristics as far as possible within limits of reasonable cost/ benefit.

1.    Understandability: The financial statements should present information in a manner as to be readily understandable by the users with reasonable knowledge of business and economic activities. It is not right to think that more disclosures are always better. A mass of irrelevant information creates confusion and can be even more harmful than non-disclosure. No relevant information can be however withheld on the grounds of complexity.

2.    Relevance: The financial statements should contain relevant information only. Information, which is likely to influence the economic decisions by the users, is said to be relevant. Such information may help the users to evaluate past, present or future events or may help in confirming or correcting past evaluations. The relevance of a piece of information should be judged by its materiality. A piece of information is said to be material if its omission or misstatement can influence economic decisions of a user.

3.    Reliability: To be useful, the information must be reliable; that is to say, they must be free from material error and bias. The information provided are not likely to be reliable unless:

(a)    T ransactions and events reported are faithfully represented.

(b)    Transactions and events are reported in terms of their substance and economic reality not merely on the basis of their legal form. This principle is called the principle of 'substance over form'.

(c)    The reporting of transactions and events are neutral, i.e. free from bias.

(d)    Prudence is exercised in reporting uncertain outcome of transactions or events.

4.    Comparability: Comparison of financial statements is one of the most frequently used and most effective tools of financial analysis. The financial statements should permit both inter-firm and intra-firm comparison. One essential requirement of comparability is disclosure of financial effect of change in accounting policies.

5.    True and Fair View: Financial statements are required to show a true and fair view of the performance, financial position and cash flows of an enterprise. The conceptual framework does not deal directly with this concept of true and fair view, yet the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements portraying true and fair view of information about an enterprise.

(b) Larger organisations often go for an ERP package where finance comes as a module. An

ERP is an integrated software package that manages the business process across the

entire enterprise.

Advantages of using an ERP

The advantages of using an ERP for maintaining accounts are as follows:

1.    Standardised processes and procedures : An ERP is a generalised package which covers most of the common functionalities of any specific module.

2.    Standardised reporting : Majority of the desired reports are available in an ERP package. These reports are standardised across industry and are generally acceptable to the users.

3.    Duplication of data entry is avoided as it is an integrated package.

4.    Greater information is available through the package.

Disadvantages of an ERP

The disadvantages of an ERP are the following:

1.    Lesser flexibility : The user may have to modify their business procedure at times to be able to effectively use the ERP.

2.    Implementation hurdles : Many of the consultants doing the implementation of the ERP may not be able to fully appreciate the business procedure to be able to do a good implementation of an ERP.

3.    Very expensive : ERP are normally priced at an amount which is often beyond the reach of small and medium sized organisation. However, there are some ERP coming into the market which are moderately priced and may be useful to the small businesses.

4. Complexity of the software : Generally an ERP package has large number of options to choose from. Further the parameter settings and configuration makes it a little complex for the common users.

(c)    In accordance with AS 12, government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed asset equals the whole, or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should be recognized in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. Grants related to non-depreciable assets are credited to capital reserve under this method, as there is usually no charge to income in respect of such assets. However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income is suitably disclosed in the balance sheet pending its apportionment to profit and loss account.

(d)    Donations may have been raised either for meeting some revenue or capital expenditure; those intended for the first mentioned purpose are credited directly to the Income and Expenditure Account but others, if the donors have declared their specific intention, are credited to special fund account and in the absence thereof, to the Capital Fund Account. If any investments are purchased out of a special fund or an asset is acquired therefrom, these are disclosed separately. Any income received from such investments or any donations collected for a special purpose are credited to an account indicating the purpose and correspondingly the expenditure incurred in carrying out the purpose of the fund is debited to this account. On no account any such expense is charged to the Income and Expenditure Account. The term "Fund" is strictly applicable to the amounts collected for a special purpose when these are invested, e.g. Scholarship Fund, Prize Fund etc. In other cases, when the amounts collected are not invested in securities or assets distinguishable from those belonging to the institution, the word "Account" is more appropriate e.g. Building Account, Tournament Account etc.

(e)    As per AS 3 'Cash Flow Statements', the term 'Cash' and 'Cash equivalents' mean the following:

Cash: It includes cash on hand and demand deposits with banks.

Cash Equivalents: It means short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to insignificant risk of changes in value. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.

(f) A change in accounting policy should be made in the following conditions:

(i)    If the change is required by some statute or for compliance with an Accounting Standard.

(ii)    Change would result in more appropriate presentation of the financial statement.

Change in accounting policy may have a material effect on the items of financial statements. For example, if depreciation method is changed from straight-line method to written-down value method, or if cost formula used for inventory valuation is changed from weighted average to FIFO, or if interest is capitalized which was earlier not in practice, or if proportionate amount of interest is changed to inventory which was earlier not the practice, all these may increase or decrease the net profit. Unless the effect of such change in accounting policy is quantified, the financial statements may not help the users of accounts. Therefore, it is necessary to quantify the effect of change on financial statement items like assets, liabilities, profit / loss.

1

Salvaged stock amounting Rs.22,500 handed over to the insurance company is also a loss to Mr. Black.

Attachment: institute-of-chartered-financial-analysts-of-india--icfai--university-2007-c-a-chartered-accountant-21150-1.pdf

Earning:   Approval pending.