Unit 2 Accounting and Auditing PYQ’s 7th Dec 2023 Shift 1

The correct answer is A, B and D Only

Key Points

• Sales price variance is unfavorable: The decrease in selling price from Rs. 80 to Rs. 78 per unit results in reduced revenue per unit sold, indicating an unfavorable variance. Despite selling more units, lower prices lead to lower total revenue compared to the budgeted amount, impacting profitability negatively.
• Sales volume variance is favorable: Selling 1000 units more than budgeted boosts revenue, indicating a favorable variance. The increase in sales volume exceeds expectations, contributing positively to total revenue and potentially enhancing profitability.
• Sales activity variance is Rs. 80000 (favorable): Combining the effects of changes in selling price and sales volume, the overall impact on revenue is positive, resulting in a favorable variance of Rs. 80000. This indicates that the company's sales strategies have effectively increased revenue beyond the budgeted amount, reflecting successful performance in generating sales.
• By considering these factors, the manager can gain insights into the performance of the sales department and the overall profitability of the business.
• Understanding the variances helps identify areas where performance deviates from expectations, allowing management to take corrective actions or make strategic decisions to improve future outcomes.
• Therefore, options A, B, and D collectively provide important insights into the different aspects of sales performance, helping the manager make informed decisions about resource allocation, pricing strategies, and sales targets.

Additional Information

• By analyzing these variances, the sales manager can gain valuable insights into the performance of the sales department and the overall profitability of the business.
• Understanding the reasons behind these variances can help management make informed decisions regarding pricing strategies, resource allocation, and sales targets, ultimately contributing to the company's success.

The correct answer is Rs. 4000

Key Points

• When shares are forfeited, the shareholder loses the right to the shares and any amount already paid on those shares. The company then forfeits the shares and may later reissue them.
• Let's calculate the amount credited to the share forfeiture account when Mr. X's 200 shares are forfeited:
• Amount paid on application per share = Rs. 20
• Total amount paid on application for 200 shares = Rs. 20 *200 = Rs. 4000.
• Since Mr. X paid only the application money and no further amounts, when his shares are forfeited, the company will credit the share forfeiture account with the amount received on application.

Additional Information

• Forfeited shares refer to shares that were originally issued to a shareholder but are subsequently taken back or forfeited by the company due to non-payment of required amounts or failure to fulfill certain obligations by the shareholder.
• This typically occurs when a shareholder fails to pay calls (installments) on the shares as required by the terms of the share issuance.

The correct answer is Gaining ratio 

 Key Points

• When a partner retires from a partnership, the remaining partners usually compensate the retiring partner for their share of goodwill.
• Goodwill represents the value of the reputation, customer base, brand recognition, and other intangible assets of the partnership.
• The ratio in which the remaining partners compensate the retiring partner for their share of goodwill is the gaining ratio.
• This ratio essentially represents the extent to which each remaining partner gains from the retirement of the outgoing partner, in terms of acquiring a share of future profits that had previously been attributable to the retiring partner.

Additional Information

• The profit-sharing ratio determines how profits and losses are distributed among the partners. It does not necessarily reflect the value of goodwill or the compensation paid to a retiring partner.
• The sacrificing ratio is used to determine how the existing partners' profit-sharing ratios change when a new partner is admitted to the partnership. It does not directly relate to compensating a retiring partner for goodwill.
• The capital ratio represents the proportion of capital contributed by each partner to the partnership. While the capital ratio may influence the distribution of profits and losses, it is not directly used to compensate a retiring partner for their share of goodwill.

The correct answer is Pacman defense 

Key Points 

• When a target company makes a counter bid for the stock of the bidder, the defensive strategy in reference is called Pacman defense 
• The Pacman defense is a strategic maneuver employed by a target company to lend off a hostile takeover bid by turning the tables on the would-be acquirer.
• The term is derived from the popular arcade game Pac-Man, where the titular character turns the tables on its pursuers by consuming them instead. Similarly, in the context of corporate takeovers, the target company attempts to "devour" or acquire the entity that initially sought to acquire it.
• Initially, a company (the bidder) launches a hostile takeover bid to acquire the target company.
• In response to the hostile takeover attempt, the target company adopts the Pacman defense strategy.
• By making a counter bid, the target company gains several strategic advantages
• Implementing a Pacman defense requires careful consideration of legal and regulatory implications.
• The Pacman defense can lead to negotiation and dialogue between the target company and the bidder.
• Both parties may seek to reach a mutually beneficial agreement, such as a merger or acquisition on favorable terms, to resolve the standoff.

Additional Information 

• Greenmail is a defensive strategy where a target company repurchases its own stock from a potential acquirer at a premium, thus making the takeover attempt less financially attractive for the acquirer.
• A poison pill is a strategy used by a target company to defend itself against an unwanted takeover bid. It involves the issuance of new shares or rights to existing shareholders, which dilutes the ownership stake of the acquirer, making the acquisition more expensive and less attractive.
• Golden parachute refers to a compensation package offered to top executives of a company in the event of a change in ownership or control, typically following a merger or acquisition. This package provides lucrative benefits to key executives if they are terminated or if there is a change in control of the company.

The correct answer is Going concern convention 

Key Points

• The going concern convention assumes that a company will continue its operations indefinitely.
• This allows the business to spread the cost of an asset over its expected lifespan.
• As a result, it is considered reasonable under the going concern convention to use the historical cost (the original cost at which the asset was acquired) to record long-lived assets.
• This is because under this convention, assets are not generally intended to be liquidated immediately, but are used over a period of time to generate revenues.

Additional Information

• The entity concept, also known as the entity assumption or separate entity concept, is a fundamental accounting principle that separates the finances of the business from those of its owners or other entities. It treats the business as a distinct economic entity, independent of its owners.
• The materiality convention states that only items that significantly affect financial decisions or the economic condition of the business need to be reported. This convention guides accountants in determining which transactions or events should be recorded in the financial statements.
• The periodicity convention, also known as the time period assumption, assumes that the economic activities of a business can be divided into discrete time periods for financial reporting purposes.

Key Points

• XBRL( extensible Business Reporting Language) is an open international standard for digital business reporting.
• It enables the companies to report their financial statements in a structured and machine readable format which makes it easier to analyse complex business information, thus improving transparency, accuracy, efficiency of financial reports.
• XBRL has been widely adopted across the world as an open standard for financial reporting purposes.
• It offers multiple benefits to all the producers and Consumers of financial data in terms of  cost saving, accuracy, reliability, flexibility and efficiency in handling business and financial information.

Additional Information

• CSR reporting (Corporate social responsibility reporting ) is used to report the firm's CSR policy, composition of CSR committee and the allocation of CSR expenditure to various social projects and programmes.
• TBL ( Triple bottom Line) reporting is used to measure the financial, social and environment performance of a company over a period of time.
• PPP ( Public private partnership reporting) refers to reporting the information about the public private partnership projects so that the stakeholders can assess the performance of the PPP projects.

Correct answer is A, B and C Only

Key Points

• Debt Equity ratio = Debt Equity ratio reveals the relationship between the internal and external sources of the funds of a firm. Ideal debt equity ratio is 1:1. A debt equity ratio is helpful to assess the company's financial leverage and risk and in turn this ratio will be helpful to the investors that weather to invest in the company or not. A low debt equity ratio provides sufficient safety margin to creditors and a high debt equity ratio shows that the claims of the creditors are greater then those of the owners hence lesser safety. To summarize the debt to equity ratio is valuable to the stakeholders or the investors to see and study the company's financial structure and suitability for investment and lending.
  • Formulae = External Equities / Internal Equities
    • External Equity = Total outside liabilities that is short term and long term loans.
    • Internal equities = Equity and preference share capital + total amount of reserves and surplus - accumulated losses and deferred expenses.
• Price earning ratio = Price earning ratio helps in the assessment of the profitability of the firm from the point view of the shareholders or the investors. With the help of this ratio one will come to know that weather the share is overvalued or undervalued. If the price earning ratio is high it means the share is overvalued and in case if the price earning ratio is less then the share is undervalued.
  • Formulae = Market price of the share / Earning per share
• Dividend yield = This ratio shows the rate of return to the shareholders in the form of dividend on market price of the share. In other words dividend yield ratio is an useful tool for investors to assess the income potential of a stock relative to its market price.
  • Formulae = (Dividend per share / Market price per share) * 100
• Assets turnover ratio = Assets turnover ratio is a type of activity ratio which indicates the number of times the assets are turned over in a year in relation to sales which is used by the business to see that its assets are effectively utilized or not. A high ratio indicates an effective utilization of investment in assets and a low ratio indicates that the assets are not properly utilized in comparison to sales.
  • Formulae = Net sales or COGS / Total assets
    • Total assets = Fixed assets - depreciation + Current assets
• Debtor turnover ratio = Debtors turnover ratio is a valuable tool for assessing the efficiency of the company's credit and collection policies. It also provides knowledge about the cash flow management and help to identify the potential credit risk. A high ratio indicates efficiency in collection from the debtors and a low ratio indicates the inefficiency in collection of payments.
  • Formulae = Net credit sales / Average receivables

Correct answer is A, B and D Only

Key Points

• Cost volume or profit analysis = Cost volume or profit analysis also known as CVP analysis shows the changes in the cost and the profit due to changes in the volume of production. It is a main part of the marginal costing techniques. Here total cost of production and profits of a concern depends upon many factors such as selling price per unit, variable cost per unit, sales volume, product mix and fixed cost per unit. It help the business to understand the relationship between these factors and then make an informed decision about pricing, production and overall business strategy.
• Advantages of CVP analysis
  • Informed decision making = CVP provides a framework of decision making by taking into account the relationship between various factors which are cost, volume and profit. This also simplifies the work of the managers to take an more informed decisions to increase the efficiency and achieve the objectives of the business.
  • Cost control = CVP analysis facilitate better cost control by categorizing the cost into fixed and variable cost. Managers can identify the areas where the cost can be controlled or reduced and then frame the policies accordingly so that there is reduction in the cost and increase in profits.
  • Profit planning = CVP analysis helps the managers to plan the profit by studying the relationship between the cost and the volume. By understanding the break even point (no profit, no loss situation) and the effect of production levels on the profits companies can plan and frame their strategies so that maximum profit can be earned.
  • Break even analysis = Break even analysis is a situation of no profit or no loss or the situation where the level of production or sales at which the total revenue equals to the cost. This analysis is helpful to find out the minimum level of sales which are required to recover the cost.
• Limitations of CVP analysis 
  • Linearity = CVP analysis assume a liner relationship between the cost, volume and profit but in reality this situation does not exist because there are many factors that can affect the cost such as environmental factors, social factors, technological factors etc.  and due to that the cost fluctuates. And when the cost keeps on changing the firms efficiency and the productivity also changes and will not remain constant.
  • Constant selling price = The next assumption of CVP analysis is constant selling price which is also one of the limitations. As the environment and the business too are dynamic the prices and the cost will keep on fluctuating. The factors that can affect the selling price are cost of production, resource availability, demand of the product etc.
  • Sales are constant = CVP assumes that sales and inventory are constant which is not true because sales are affected by various factors such as marketing strategies, intermediaries, demand of the product and market conditions.