Unit 2 Accounting and Auditing PYQ’s 7th Jan 2025

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

Key Points

• Direct material cost variance (A) matches with Standard cost for actual output – actual cost (IV).
  • Explanation: This variance measures the difference between the standard cost of the direct materials required for actual production and the actual cost incurred. It helps in identifying how well the cost control is being managed.
  • Key Point: It indicates the overall cost efficiency concerning direct materials.
• Direct material price variance (B) matches with Actual Quantity x (standard price – actual price) (III).
  • Explanation: This variance focuses on the difference between the standard price and the actual price paid for the materials, multiplied by the actual quantity of materials purchased. It helps in assessing the impact of price changes on material costs.
  • Key Point: It highlights price-related efficiencies or inefficiencies.
• Direct material usage variance (C) matches with Standard price x (Standard Quantity for actual output quantity – Actual Quantity) (II).
  • Explanation: This variance measures the difference between the standard quantity expected to be used for actual production and the actual quantity used, multiplied by the standard price. It helps in evaluating the efficiency of material usage.
  • Key Point: It identifies wastage or savings in material usage.
• Direct material mix variance (D) matches with Standard price x (Revised standard quantity – Actual Quantity) (I).
  • Explanation: This variance assesses the impact of changing the mix of materials used from what was planned, by comparing the standard cost for the revised mix to the actual quantity used. It helps in understanding the cost implications of using different material combinations.
  • Key Point: It analyzes the cost effects of changing material proportions.

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

Key Points

• Conservatism (A) matches with Anticipate no profit, but provide for all possible losses (IV).
  • Explanation: The conservatism principle in accounting advises that potential expenses and liabilities should be recognized as soon as possible, but revenues should only be recognized when they are assured. This approach ensures that financial statements are not overly optimistic.
  • It helps in providing a buffer against future uncertainties and potential losses.
• Dual aspect (B) matches with Every transaction has a two-fold effect (III).
  • Explanation: The dual aspect concept is fundamental to accounting, stating that every financial transaction affects at least two accounts in the accounting records. This is the basis for the double-entry bookkeeping system, ensuring that the accounting equation (Assets = Liabilities + Equity) always remains balanced.
  • For example, purchasing inventory for cash increases inventory (asset) and decreases cash (asset).
• Separate Business entity (C) matches with Enterprise is treated as separate from owner and other persons associated with it (II).
  • Explanation: The separate business entity concept dictates that the business is a distinct entity from its owners and other entities. This means that the financial transactions of the business should be recorded separately from those of the owners or other businesses.
  • This principle is crucial for accurate financial reporting and accountability.
• Consistency (D) matches with Use of same accounting policies by a firm from period to period (I).
  • Explanation: The consistency concept in accounting requires that companies use the same accounting methods and principles from period to period. This ensures comparability of financial statements over different periods, helping stakeholders make informed decisions.
  • Any changes in accounting policies should be disclosed and justified to maintain transparency.

 The correct answer is – Vouching

Key Points

• Vouching
  • Vouching is the process of checking the entries in the books of account with the relevant documentary evidence to ensure their accuracy and authenticity.
  • It involves verifying the validity of transactions recorded in the books by examining supporting documents such as invoices, receipts, vouchers, and other relevant records.
  • This process helps in detecting errors, frauds, and ensuring that the transactions are recorded in the correct accounting period.
  • Vouching is fundamental to auditing and helps in maintaining the integrity of financial records.

Additional Information

• Internal Check
  • Internal check refers to the system of arranging the duties of staff members in such a way that the work performed by one person is automatically checked by another.
  • This system helps in preventing and detecting errors and frauds in the course of business operations.
  • It is an integral part of internal control but is more focused on the day-to-day operations and division of work.
• Internal Control
  • Internal control is a broader concept that includes all the policies and procedures adopted by the management to ensure the orderly and efficient conduct of business.
  • It aims to safeguard assets, prevent fraud, ensure the accuracy and completeness of accounting records, and ensure compliance with applicable laws and regulations.
  • Internal controls include internal checks, internal audits, and other control mechanisms.
• Verification
  • Verification is the process of confirming the existence, ownership, valuation, and presentation of assets and liabilities in the financial statements.
  • It involves physical inspection of assets, reviewing documentation, and confirming balances with third parties.
  • Verification ensures that the financial statements provide a true and fair view of the financial position of the entity.

The correct answer is B, D, and E Only.

Key Points

Let’s analyze each statement:

• Statement A
  • Section 25 of the Indian Partnership Act, 1932, deals with the liability of a partner for the acts of the firm. However, the admission of a new partner is governed by Section 31 of the Indian Partnership Act, 1932.
  • Reason for exclusion: The statement incorrectly cites the section of the act that deals with the admission of a new partner, making it false.
• Statement B
  • The new profit-sharing ratio indeed refers to the ratio in which all partners, including new partners, share future profits and losses of the firm.
  • Reason for inclusion: This is a correct and true statement.
• Statement C
  • New profit share is calculated by adding the profit share sacrificed by existing partners to the new partner’s share, not by subtracting it from the old profit share.
  • Reason for exclusion: The formula given is incorrect, making the statement false.
• Statement D
  • Sacrificing ratio is indeed calculated by subtracting the new profit share from the old profit share.
  • Reason for inclusion: This is a correct and true statement.
• Statement E
  • The profit or loss arising from the revaluation account is transferred to the partner’s capital account.
  • Reason for inclusion: This is a correct and true statement.

Therefore, the statements that are correct regarding the admission of a new partner are B, D, and E. This makes option 1: “B, D, and E Only” the correct choice.

The correct answer is – Personal Account

Key Points

• Prepaid Insurance
  • Prepaid Insurance is classified as a Personal Account in accounting.
  • Personal Accounts represent accounts that relate to individuals, companies, firms, or associations.
  • Prepaid Insurance is considered a Personal Account because it represents an amount paid in advance to a person or entity (the insurance company) for services to be received in the future.
  • In accounting terms, Personal Accounts adhere to the Golden Rule: “Debit the receiver, credit the giver.”

Additional Information

• Real Account
  • Real Accounts relate to tangible and intangible assets owned by the company, such as land, buildings, machinery, patents, etc.
  • The Golden Rule for Real Accounts is: “Debit what comes in, credit what goes out.”
• Nominal Account
  • Nominal Accounts pertain to income, expenses, losses, and gains within a specific accounting period.
  • These accounts are closed at the end of each accounting period by transferring their balances to the Profit and Loss Account.
  • The Golden Rule for Nominal Accounts is: “Debit all expenses and losses, credit all incomes and gains.”
• Real and Nominal Both
  • Accounts cannot be classified as both Real and Nominal as they serve different purposes in accounting.
  • Real Accounts deal with assets, while Nominal Accounts deal with income and expenses.

 The correct answer is 30%

Key Points

• Determining the P/V ratio:
  • Contribution Margin (C) is calculated as: Sales – Variable Costs. However, in the absence of variable costs, we can use the Margin of Safety (MOS) and Fixed Costs (F) to determine Contribution Margin.
  • We know that Margin of Safety (MOS) = Actual Sales – Break-even Sales. Therefore, Break-even Sales = Actual Sales – Margin of Safety = Rs 48,000 – Rs 8,000 = Rs 40,000.
  • The Contribution Margin (C) at Break-even Point (BEP) is equal to the Fixed Costs, which is Rs 12,000.
  • The P/V ratio (Profit/Volume ratio) is given by the formula: P/V ratio = Contribution Margin / Sales. At BEP, this is: P/V ratio = Fixed Costs / Break-even Sales = Rs 12,000 / Rs 40,000 = 0.3 = 30%

Additional Information

• Importance of P/V ratio in Financial Analysis:
  • The P/V ratio is a key indicator of the relationship between profit and sales volume. A higher P/V ratio indicates a higher profitability for each unit of sales.
  • This ratio helps in determining the break-even point, making decisions about product pricing, and understanding the impact of changes in sales volume on profitability.
  • Businesses use the P/V ratio to analyze the impact of variable costs and to ensure that they cover fixed costs and generate profit.

 The correct answer is ‘E, D, C, B, A’

Key Points

• Determine and analyze the number of physical units in the form of inputs (transferred from previous process) and output (E):
  • This initial step involves identifying and analyzing the physical units that are transferred from the previous process and those that are output at the end of the current process.
  • This helps in understanding the flow of units and is essential for calculating the work-in-progress and the total units accounted for.
• Prepare statement of equivalent production (D):
  • The next step is to prepare a statement of equivalent production, which accounts for the work-in-progress by converting partially completed units into their equivalent full units.
  • This ensures that the work-in-progress is accurately reflected in the process costing.
• Prepare statement of cost per equivalent unit (C):
  • After determining the equivalent units, the next step is to prepare a statement of cost per equivalent unit.
  • This involves calculating the cost associated with each equivalent unit, which includes both direct and indirect costs.
• Prepare statement of Evaluation (B):
  • This step involves preparing a detailed statement of evaluation, where the costs are assigned to the units completed and transferred out as well as to the ending work-in-progress.
  • This ensures that the costs are accurately distributed among the completed units and the units still in process.
• Prepare process account (A):
  • The final step is to prepare the process account, which summarizes all the cost allocations and unit movements.
  • This account provides a clear and comprehensive view of the entire process, including the costs incurred and the output produced.

 The correct answer is 2.5 : 1

Key Points

• The Current Ratio:
  • The Current Ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year.
  • It is calculated using the formula: Current Ratio = Current Assets / Current Liabilities.
  • Given that Current Assets are Rs 4,00,000 and Working Capital is Rs 2,40,000, we first calculate Current Liabilities as:
    Current Liabilities = Current Assets – Working Capital = 4,00,000 – 2,40,000 = Rs 1,60,000.
  • Now, the Current Ratio is:
    4,00,000 / 1,60,000 = 2.5 : 1
  • A Current Ratio of 2.5 : 1 indicates that the company has Rs 2.5 in current assets for every Rs 1 of current liabilities, showing strong liquidity and financial health.

Additional Information

• Importance of Current Ratio:
  • A higher Current Ratio typically indicates that the company can easily meet its short-term obligations.
  • However, an excessively high Current Ratio might suggest inefficiency in managing current assets.
  • The ideal Current Ratio is usually between 1.5 and 2, depending on the industry.
• Exclusion of Inventories:
  • While inventories are part of current assets, they might not always be easily converted into cash, which is why other ratios like Quick Ratio exclude inventories.

 The correct answer is 1) A and E Only.

Key Points

Let’s analyze each statement:

• A. Call-in-advance is the amount paid by the shareholders in excess of amount due from them.
  • This statement is correct. A call-in-advance refers to the amount paid by shareholders before it is actually called by the company. It is an excess amount paid over and above the due amount.
• B. When the number of shares applied is more than the number of shares offered to the public for subscription, the issue is termed as under subscription.
  • This statement is incorrect. When the number of shares applied for is more than the number of shares offered, the issue is termed as over subscription, not under subscription.
• C. Section 49 of the Companies Act prohibits the issue of shares other than sweat equity shares at discount.
  • This statement is incorrect. Section 53 of the Companies Act, 2013 prohibits the issue of shares at a discount, except for sweat equity shares.
• D. Unless or until the forfeited shares are re-issued, the balance on the shares forfeited account will be deducted from the paid-up capital.
  • This statement is incorrect. The balance on the forfeited shares account is not deducted from the paid-up capital. It is shown as a separate reserve in the balance sheet until the shares are re-issued.
• E. The securities premium is an amount in excess of nominal value of face value of the securities.
  • This statement is correct. Securities premium refers to the amount received by a company over and above the face value of its shares.

Therefore, the statements that are correct are A: Call-in-advance is the amount paid by the shareholders in excess of amount due from them and E: The securities premium is an amount in excess of nominal value of face value of the securities. This makes option 1: “A and E Only” the correct choice.