Unit 2 Accounting and Auditing PYQ’s 3rd Sept 2024 Shift 1

The correct answer is C, B, D, E, A.

Key Points

• Process Specification (C):
  • This initial step involves detailing the essential processes within the organization. This includes mapping out each process to understand its components, workflow, and the sequence of activities involved.
  • It helps in understanding the integral aspects of operations, which is crucial for accurate activity identification and cost allocation.
  • Detailed process specification ensures consistency and completeness in documenting how tasks are performed.
• Identify Main Activities (B):
  • After the processes are specified, the next step is to identify the main activities within those processes. Main activities are the core functions or operations such as production, order processing, customer service, etc.
  • This identification distinguishes between primary activities that add value and become the focal point for cost analysis.
  • Main activities are essential for allocating direct costs accurately to various cost objects (products, services, etc.).
• Identify Non-value Adding Activities and Cost Pools (D):
  • Once the main activities are identified, it is important to evaluate all activities and distinguish non-value adding activities which do not contribute directly to the customer’s perception of worth.
  • Non-value adding activities often involve waste, redundancy, or inefficiencies. Examples include rework, inspections, and waiting time.
  • Creating cost pools involves grouping costs related to similar non-value adding activities, helping to focus on areas where cost reduction can be significantly impactful.
• Selection of Activity Cost Drivers and Tracing of Costs with Objects (E):
  • The fourth step involves selecting the most appropriate activity cost drivers, which are factors that drive the cost associated with an activity. These can include the number of hours worked, units produced, machine hours, or any measurable event that correlates with cost generation.
  • Tracing costs with objects means associating the costs incurred in activities with specific cost objects, such as products, services, projects, or departments. This is done using the identified cost drivers to assign costs accurately.
  • This step ensures that overhead costs are allocated based on actual consumption rather than arbitrary averages, leading to more precise product costing.
• Staff Training and Review Follow-up (A):
  • The final step is to implement training programs for staff to ensure they understand how to use the ABC system effectively. This includes learning how to identify activities, select cost drivers, and allocate costs.
  • Ongoing review and follow-up are also critical to ensure that the ABC system remains accurate and effective. Regular reviews help in identifying areas for improvement, ensuring data accuracy, and maintaining the relevance of the cost drivers and activity analysis.
  • Review and follow-up activities also help in refining the system over time based on feedback and changing organizational needs.

Additional Information

• Activity Based Costing (ABC): This is a comprehensive costing method that provides a more accurate reflection of costs incurred by an organization in the production of its goods and services. It does this by tracing costs to activities and then to products based on their use of these activities, rather than just spreading costs uniformly.
• Benefits of ABC: The main advantages include more precise product costing, a better understanding of overheads, stimulated process improvements, and valuable data for strategic decisions. It helps companies identify and eliminate waste, better manage spending, and improve profitability.
• Implementation Challenges: Implementing ABC can be complex and resource-intensive. It requires detailed data collection and continuous monitoring to ensure accuracy. However, the insights gained typically justify the effort and expense.

 The correct answer is B, C & E Only.

Key Points

• B: No new company is formed:
  • This point confirms that during internal reconstruction, the existing company undergoes restructuring but is not dissolved or liquidated.
  • Internal reconstruction mainly involves reorganizing the financial structure of the same legal entity, without any necessity to create a new company.
• C: There is certain reduction of capital and sometimes liabilities are also reduced:
  • Internal reconstruction often involves altering the existing capital structure. This might include reducing share capital, writing off accumulated losses, or modifying debt obligations.
  • Such measures are taken to present a healthier financial state of the company and potentially make it more attractive to investors and creditors.
  • Reduction of liabilities can help in improving the company’s balance sheet and financial ratios.
• E: It is done as per section 66 of the Companies Act, 2013:
  • Section 66 of the Companies Act, 2013, governs the reduction of share capital, which is a key aspect of internal reconstruction.
  • This section outlines the legal framework and procedures required for a company to reduce its capital, ensuring that it is done in compliance with statutory regulations and safeguards the interests of creditors and shareholders.

Additional Information

• Internal Reconstruction: It refers to the reorganization of a company’s financial structure without dissolving the existing company. The purpose is typically to reduce liabilities, adjust capital structure, and write off accumulated losses to rejuvenate the company financially.
• Key Features:
  • Involves actions such as reduction of share capital, rearrangement of company debts, and sometimes change in ownership stakes.
  • Does not involve the creation of a new company but focuses on reshaping the financial framework of the existing entity.
  • Requires approval from shareholders and compliance with relevant sections of the Companies Act to ensure the legality of the processes.
• Legal Framework: Section 66 of the Companies Act, 2013, is pivotal as it details the procedures and legal requirements for the reduction of share capital, ensuring that the interests of stakeholders are protected and the company adheres to statutory compliance during its reconstruction efforts.

The correct answer is6000 units.

Key Points

• To achieve a profit of ₹84,000, the total revenue must cover both the total fixed costs and the desired profit.
• Total fixed cost is ₹60,000.
• Desired profit is ₹84,000.
• Contribution per unit = Selling price per unit – Variable cost per unit = ₹56 – ₹32 = ₹24.
• Number of units to be sold = (Total fixed cost + Desired profit) / Contribution per unit = (₹60,000 + ₹84,000) / ₹24 = 6000 units.

 The correct answer is C, E, B, D, A.

Key Points

• Raw Material Conversion Period (C):
  • This is the initial phase where raw materials are procured and converted into work-in-progress items.
  • It marks the beginning of the manufacturing process where raw materials are prepared for production.
• Work-in-progress Conversion Period (E):
  • During this phase, raw materials are further processed and converted into finished goods.
  • This stage includes all activities involved in transforming raw materials into completed products.
• Finished Goods Conversion Period (B):
  • In this period, the finished goods are stored before being sold.
  • It involves managing inventory until the products are ready for delivery to customers.
• Receivables Conversion Period (D):
  • This phase involves the time taken to collect payments from customers after the goods have been sold.
  • It is crucial for maintaining cash flow and ensuring liquidity for the firm.
• Payables Deferral Period (A):
  • This final phase involves the time period in which the firm can defer payments to its suppliers.
  • It helps in managing cash outflows and maintaining a balance between receivables and payables.

The correct answer is to Pay a current liability

Key Points

• Option 1: Purchase of stock for cash
  • This transaction decreases cash (a current asset) and increases inventory (another current asset).
  • The total current assets remain unchanged.
  • Therefore, the current ratio remains the same.
  • This does not improve the current ratio.
• Option 2: Cash collection from debtors
  • This transaction increases cash (a current asset) and decreases debtors (another current asset).
  • The total current assets remain unchanged.
  • Therefore, the current ratio remains the same.
  • This does not improve the current ratio.
• Option 3: Pay a current liability
  • This transaction decreases cash (a current asset) and decreases current liabilities.
  • As a result, the numerator (current assets) decreases, but the denominator (current liabilities) decreases as well.
  • This generally results in an improvement in the current ratio.
  • Therefore, this option improves the current ratio.
• Option 4: Purchase of fixed assets
  • This transaction decreases cash (a current asset) and increases fixed assets (a non-current asset).
  • The total current assets decrease.
  • Therefore, the current ratio decreases.
  • This does not improve the current ratio.

The correct answer is Vouching.

Key Points

• Vouching:
  • Vouching is the process of verifying the authenticity of accounting entries recorded in the books of accounts. It involves cross-checking transactions with supporting documents like invoices, receipts, and vouchers.
  • It ensures that all recorded transactions are genuine and have been authorized properly, providing a strong foundation for accurate financial reporting.
  • As the backbone of auditing, vouching helps auditors detect errors, frauds, and discrepancies in financial statements, ensuring their reliability and accuracy.

Additional Information

• Verification of assets:
  • This involves confirming the existence, ownership, and valuation of assets recorded in the financial statements. While important, it is not considered the backbone of auditing as it is more specific to asset management.
• Internal check:
  • Internal check refers to the system of controls within an organization aimed at preventing errors and fraud. Although crucial for internal controls, it is not as comprehensive as vouching in terms of auditing.
• Internal audit:
  • Internal audit is an independent, objective assurance activity designed to add value and improve an organization’s operations. It focuses on evaluating and improving the effectiveness of risk management, control, and governance processes. While significant, it supports the audit process rather than being the backbone itself.

The correct answer is Value = Price > Costs.

Key Points

• A manufacturer prefers the scenario where Price = Value > Costs:
  • This ensures that the price the customer is willing to pay (Value) is equal to the price set by the manufacturer, and both are greater than the production costs.
  • This condition maximizes profitability while ensuring that customers perceive the product as worth its price.

Additional Information

• Value > Price > Costs:
  • While this option indicates that the customer perceives high value in the product (Value > Price), it suggests the manufacturer could potentially charge a higher price, leaving money on the table.
• Price > Value > Costs:
  • This suggests the price is higher than the perceived value, which could lead to customer dissatisfaction and reduced sales.
• Price > Costs > Value:
  • This is an undesirable scenario where the production cost exceeds the perceived value, indicating inefficiency and likely leading to losses.
• Price = Value > Costs:
  • This ensures equilibrium where the price charged matches the customer’s perceived value, both exceeding production costs. This scenario is ideal for maintaining profitability and customer satisfaction.

 The correct answer is ₹120.

Key Points

• The shares were originally forfeited with ₹300 received for 100 shares, meaning ₹3 per share was received.
• When 60 shares are reissued at ₹9 per share, the company receives ₹540 (60 shares * ₹9).
• The original amount received for these 60 shares was ₹180 (60 shares * ₹3).
• The total amount received on these 60 shares now is ₹720 (₹540 + ₹180).
• The face value of 60 shares is ₹600 (60 shares * ₹10).
• The capital reserve is the excess received over the face value, which is ₹120 (₹720 – ₹600).

The correct answer is A, C & D only.

Key Points

• A. Payment of trade creditors by sale of Land
  • This statement represents a case of funds flow. The sale of land is a non-current asset being converted into cash, which is then used to settle current liabilities (trade creditors). This transaction affects both the non-current assets and current liabilities on the balance sheet, indicating a flow of funds. Therefore, this is a correct option for funds flow.
• B. Cash collection from debtors
  • This statement does not represent a funds flow but a simple conversion within current assets. Collecting cash from debtors changes the composition of current assets, increasing cash while decreasing accounts receivable. There is no flow of funds between different categories (non-current to current, etc.), just a movement within the same category of current assets. Hence, this is not considered a funds flow and is incorrect in this context.
• C. Purchase of Furniture by issue of bills payable
  • This statement represents a case of funds flow. The purchase of furniture, which is a non-current asset, by issuing bills payable (a liability) indicates a flow of funds. The transaction affects the non-current assets (increase in furniture) and the liabilities (increase in bills payable), showing a change in different parts of the financial statement. Therefore, this is a correct example of funds flow.
• D. Payment of long term loan by cash
  • This statement represents a case of funds flow. The payment of a long-term loan involves the use of cash (a current asset) to settle a long-term liability. This affects both the current assets section and the long-term liabilities section of the balance sheet, indicating a transfer of funds between different categories. Thus, this is a correct example of funds flow.
• E. Payment of bills payable by cash
  • This statement represents a simple settlement of a current liability using a current asset (cash). Though it involves the use of funds, it remains within the realm of current liabilities and current assets, without affecting other sections of the balance sheet. Therefore, it does not meet the criteria of funds flow, which involves a transfer affecting different categories like non-current to current or vice versa. Hence, this is not correct in the context of funds flow.

To summarize, funds flow refers to transactions that cause a transfer of funds between different parts of the balance sheet, indicating a movement of funds rather than just a conversion within the same category. Options A, C, and D meet this criterion as they demonstrate movements between different sections (current assets to non-current assets, or liabilities, etc.), which is why option 3 (A, C & D only) is the correct choice.

 The correct answer is  A-IV, B-I, C-III, D-II.

Key Points

• Ind AS-12 (A) matches with Income Taxes (IV).
  • Ind AS-12 deals with accounting for income taxes, including how to account for current and deferred tax liabilities and assets.
  • The standard ensures that financial statements reflect the current and future tax consequences of transactions and other events.
  • It aims to provide a clear understanding of the tax implications on financial performance and position.
• Ind AS-17 (B) matches with Leases (I).
  • Ind AS-17 provides guidelines on how to account for leases, both for lessees and lessors.
  • This standard helps in identifying lease arrangements and distinguishing between finance and operating leases.
  • It ensures that lease-related transactions are accurately reflected in the financial statements.
• Ind AS-19 (C) matches with Employee Benefits (III).
  • Ind AS-19 addresses the accounting for employee benefits, including short-term benefits, post-employment benefits, and other long-term benefits.
  • The standard aims to provide a clear and consistent method for measuring and recognizing employee benefits in financial statements.
  • It ensures that the costs and obligations associated with employee benefits are transparently reported.
• Ind AS-23 (D) matches with Borrowing Costs (II).
  • Ind AS-23 deals with the accounting for borrowing costs, which are interest and other costs that an entity incurs in connection with borrowing funds.
  • The standard provides guidance on when and how to capitalize borrowing costs as part of the cost of a qualifying asset.
  • It ensures that the financial statements reflect the true cost of borrowing and the impact on asset valuation.