Unit 2 Accounting and Auditing PYQ’s 26th Nov 2021 Shift 1

The correct answer is – 3 : 2

Key Points

A’s old share= 3 /6

B’s old share= 2/6

C’s old share= 1/6

Share for D – 1/6

Remaining share = 1 – 1/6 = 5/6

Share retained by C = 1/ 6

Remaining Share = 5 / 6 – 1/ 6 = 4 / 6

This remaining share will be shared by A and B in their old ratio, i.e, 3 : 2

A’s new share = 46 × 35 = 1230

B’s new share = 46 × 25 = 830

New Ratio of A : B : C : D = 12 : 8 : 5 : 5

Sacrificing ratio = old Ratio – New Ratio

Sacrifice by A = 3/5 – 12/30 = 6/30

Sacrifice by B = 2/5 – 8/30 = 4/30

Sacrificing Ratio = 6 : 4 = 3 : 2

Alternate Method

When the new ratio is not given in the question, the old ratio itself is the sacrificing ratio.

Hence, the correct answer is 3 : 2

The correct answer is – C/S 50% and Profit = ₹30,000

Key Points

Contribution to Sales Ratio:

• Contribution to sales (c/s) ratio is a tool used in profit management.
• C/S ratio = (Sales revenue – Variable cost of sales)/Sales revenue x 100

Break Even point:

• The quantity of units that must be sold in order to provide no profit no loss (but will recover all associated costs).
• The break-even point, in other words, is the point at which your product stops costing you money to produce and sell and begins to make money for your business.

Important Points

Break − even point = Fixed CostContribution × Sales

40000 = 20000Contribution × 100000

Contribution = 2000040000 × 100000

Contribution = 50000

C/S Ratio = ContributionSales × 100

C/S Ratio = 50000100000 × 100 = 50%

Fixed Cost = Sales × C/S Ratio − Profit

20000 = 100000 × 50% − Profit

Profit = 30000

Hence, C/S 50% and Profit = ₹30,000

Additional Information

Profit:

• Profit = Sales – Fixed Cost – Variable Cost
• We can rewrite this as: Sales = Profit + Fixed Cost + Variable Cost

Contribution to Sales Ratio (C/S Ratio):

• C/S Ratio = (Sales – Variable Cost) / Sales
• Substituting the first equation, we get: C/S Ratio = (Profit + Fixed Cost) / Sales

Calculation:

• Fixed Cost = ₹20,000
• Profit = ₹30,000
• Break-even Point = Fixed Cost + Contribution Margin x Sales
• 40,000 = 20,000 + 0.50 x Sales (assuming C/S Ratio is 50%)
• Sales = 40,000 / 0.50 = ₹80,000

Therefore, the correct values are:

• C/S Ratio: 50%
• Sales: ₹80,000
• Profit: ₹30,000

The correct answer is – Management audit

Key Points

Management audit:

• An independent and systematic analysis and evaluation of a company’s overall operations and performances constitutes a management audit.
• It is a useful tool for evaluating the effectiveness, roles, successes, and accomplishments of the business.
• The main goal of a management audit is to spot mistakes in management processes and recommend potential improvements.
• It directs management to oversee activities in the most efficient and effective manner possible.

Important Points

Objectives Of Management Audit:

• Verify Efficiency- It aims to boost productivity at all levels of management and policy implementation.
• Evaluates the Potential of Policies and Planning: It examines and assesses the management-structured policies and plans to see whether they are being properly carried out.
• Increase Profit – By offering ways to effectively maximise the company’s resources, it helps to raise the profit margin.

The correct answer is – capital profits/losses, revenue profit/losses

Key Points

Holding Companies:

• A holding company is a business entity-usually a corporation or limited liability company.
• Typically, a holding company doesn’t manufacture anything, sell any products or services, or conduct any other business operations.
• Rather, holding companies hold the controlling stock in other companies. Although a holding company owns the assets of other companies, it often maintains only oversight capacities.

Important Points

Pre-acquisition profits and losses:

• Pre-acquisition profit or losses is the profit or loss earned/incurred by the company before it has been acquired. It is treated as capital profits or losses and is not available for distribution of dividend. It is included in the capital reserves to be adjusted against goodwill.
• Profits or losses that are earned/incurred after the date of acquisition by the holding company are known as post acquisition profits. It is treated as revenue profits or losses and is added to the surplus of the holding company.

Hence, pre-acquisition profits are treated as capital profits/losses, post acquisition profits are treated as revenue profit/losses.

The correct answer is – A – lll, B – lV, C – l, D – ll

Key Points

Important Points

Indian Accounting Standard (Ind AS) 1:

• This Standard prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities.
• It sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content.

Indian Accounting Standard (Ind AS) 29:

• This Standard shall be applied to the financial statements, including the consolidated financial statements, of any entity whose functional currency is the currency of a hyperinflationary economy
• In a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not useful.

Indian Accounting Standard (Ind AS) 37:

• The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.

Indian Accounting Standard (Ind AS) 110:

• The objective of this Indian Accounting Standard (Ind AS) is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

The correct answer is – A, B, and C only

Key Points

Marginal Costing:

• The term “marginal cost” describes the rise or fall in price associated with producing or providing services to an additional consumer. It is also known by the name incremental cost.
• The concept technically refers to additional charges that are added to the manufacturing cost as a result of more unit (s)
• Marginal Cost (MC) = (Change in Total Costs) / (Change in Quantity)

Important Points

Assumption Of Marginal Costing

• There is a segregation of cost into fixed and variable cost.
• The volume of goods produced is the only factor which influences the cost.
• The selling price is constant.
• Selling price is not influenced by change in volume, competition, etc.
• The fixed cost is constant.
• The variable cost per unit is constant.
• There is no closing stock.

The correct answer is – Both A and R are correct and R is the correct explanation of A

Important Points

Assertion A : Quick ratio is a more penetrating test of liquidity than the current ratio, yet a high quick ratio does not necessarily imply sound liquidity.

Explanation:

• The quick ratio is a tougher test of liquidity than the current ratio.
• It eliminates certain current assets such as inventory and prepaid expenses that may be more difficult to convert to cash.
• The higher the ratio, the more liquid it is, and the better able the company will be to ride out any downturn in its business.
• A high quick ratio does not always mean that a company enjoys sound liquidity.
• Hence, the Assertion is true.

Reason R : A company with a high value of quick ratio can suffer from a shortage of funds if it has slow-paying, doubtful and long duration outstanding debtors

Explanation:

• A company with a high value of quick ratio can suffer from a shortage of funds if it has slow-paying, doubtful and long duration outstanding debtors.
• A quick ratio that is too high means that some of your money is not being put to work.
• This indicates inefficiency that can cost your company profits.
• If your accounts receivable is difficult to collect, you will want to raise your quick ratio by putting aside additional cash.
• Hence, Reason is also true and correct explanation of Assertion.

The correct answer is – A, C, and D only

Key Points

GAAP (Generally Accepted Accounting Principles) –

The framework for more intricate and thorough accounting regulations, standards, and other sector-specific accounting procedures is provided by generally accepted accounting principles (GAAP), which are fundamental accounting concepts and recommendations.

Important Points

IGAAP, are Indian Generally Accepted Accounting Principles. In India, accounting standards published by the Institute of Chartered Accountants of India (ICAI) and the laws outlined in the relevant applicable statutes are used to generate financial accounts.

Indian Companies Act, 2013-

• An Act of the Indian Parliament on Indian company law, the Companies Act 2013, governs the incorporation of a company, its duties, its directors, and its dissolution.
• For example, Schedule III of Companies Act, 2013 should be compulsorily followed by all companies and gives the format of financial statements.
• Thus, Indian Companies Act, 2013 includes in IGAAP.

Accounting standards-

• A unified collection of guidelines that serve as the foundation for financial accounting rules and practices is known as an accounting standard.
• Accounting Standards are mandatory to followed by all firms & companies.
• There are total 32 Accounting standards in India which should be followed by every single firms and companies.
• Accounting standard are also included in IGAAP.
• Recently to meet international accounting standards ICAI also includes Ind ASs (Indian Accounting Standards).
• Thus, Accounting Standards are included in IGAAP.

ICAI’s pronouncements-

• It is an official or authoritative statement or announcement.
• These pronouncements include Engagement and Quality Control Standards, Guidance Notes on accounting and Statements on Accounting.
• The ‘Handbook of Accounting Pronouncements’ is issued by ICAI with a view to provide the text of all these pronouncements to the members at one place.
• These statements gives guidance to the companies to follow Accounting Standards.
• Thus, these are also includes for IGAAP.

The correct answer is – B and D only

Key Points

Accounting for price level changes – Accounting for price-level changes, commonly known as inflation accounting, is a financial reporting technique that, based on the assumption of stable currency, records the effects of inflation on the financial statements that a firm produces and publishes at the end of the fiscal year.

Important Points

The following are the commonly accepted techniques for accounting for changes in price level –

1.Current Purchasing Power Method(CPP) –

• The values of various items in the balance sheet and profit and loss account are converted using this procedure using any recognised and approved general price index.
• This method accounts for changes in the value of products as a result of the overall price level, but it does not take individual item value changes into account.
• For the conversion of historical expenses, the Reserve Bank of India’s consumer price index or wholesale pricing index can be used.

2.Current Cost Accounting Method(CCA) –

• The creation of financial statements using the current values of individual things rather than the historical or original costs is the current cost accounting technique.
• The current purchasing power technique can be replaced with the current cost accounting approach.
• The financial statements created using this technique give more accurate information and distinguish between gains attributable to changes in price levels and profits made through business operations.
• The strategy avoids overstating earnings and maintains capital because depreciation under CCA is provided on current costs.
• The influence of holding monetary things on the business’s finances in terms of earnings and losses is also underlined.