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Financial Statements Answers

1. What is a financial statement?

The term financial statements implies that statements which are prepared or produced at the end
of financial period (for example at the end of an year) for the purpose of communicating the
financial information of a business’s activities to its stakeholders
2. What are the different financial statements out there?
- Income statement or profit and loss account
- Balance sheet or statement of financial position
- Cash flow statement or statement of cash flow
- Statement of changes in equity
- Accounting policies and explanatory notes
3. What is the main objective of financial statements?
Financial statements are the reports that show financial position, profitability and cash flows of
an entity. Therefore, their main objective is to provide information about financial position,
profitable and cash movements of an enterprise to the range of users
4. What are the uses or applications of financial statements?
- Owner of business needs to know the financial position of business whether business is in profit
or in loss
- Investors because they want to invest in the business (e.g. they purchase shares, bonds etc.)
5. List down any three users of financial statements
- Board of directors
- Management of the business
- Owner(s) of the business
6. List down any 3 external users of financial statement?
External users have an indirect relation with the organization
- Government agencies
- Investors or shareholders
- Creditors or account payable
7. List down any 3 internal users of financial statements?
Internal users are those stakeholders that have a direct relationship with the organization
- Board of directors
- Management of the business
- Owner of the business
8. Is balance sheet the part of accounting’s double entry system?
No, Balance sheet is not the part of accounting double entry system rather than it is a report or
statement that shows the detail of total assets, liabilities and capital of an entity at a particular
date.
9. When should the item of property, plant and equipment be
eliminated from the balance sheet?
The items of property, plant and equipment are fixed assets and therefore they need to be
presented in balance sheet so long as they are not disposed or future economic benefits are no
longer expected from them.
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10. In which financial statement the gain or loss on sale of fixed

assets is recorded?
The gains or losses arising from the sale or disposal of fixed assets is reported in the income
statement
11. Can an entity classify a liability or debt as a long term
liability regardless of its maturity time?
An entity can classify a liability as a long term liability in the following situations
If the business has intention to reschedule the payments so that the liability will be payable after
a year
The original maturity period of the liability was more than a year and business had falsely
assumed the liability as a current liability
12. What accounts are needed to be closed off after the
preparation of financial statement?
Nominal accounts (account of revenues and expenses) are closed off after the preparing of
income statement
13. Why there is uniformity and resemblance of format in the
financial statements of different companies?
If two or more companies follow the same set of accounting rules, procedures and conventions
(GAAPs) to prepare financial statement, then obvious there would be resemblance and
uniformity of financial statements’ format
14. What are the common size financial statements?
The financial statements that express their items in percentages of some bases rather than
presenting items in absolute figures. For example operating expenses can be shown in income
statement as 25% of total sales
15. In which financial statement dividends are reported?
- Statement of changes in equity
- cash flow statement under financing activities
Dividends are not reported in balance sheet. However, balance sheet adjust the amount of
dividends between its cash and equity sections
16. What are audited financial statements?
An audited financial statement is the one that has been verified and certified by an auditor or
chartered accountant that the financial statement is prepared in conformity with the international
accounting standards or GAAPs
17 What is a proforma financial statement?
The financial statements based on some assumed transactions or economic event which are likely
to be occurred in the future.
18. What is a Consolidated Financial Statement?
Consolidated financial statement is defined as a combine financial statement of a parent
company and its Subsidiaries (daughter companies)

 
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Accounting Equation Short Answer Questions

1. What is an accounting equation?

Assets = liabilities + capital is the accounting equation. It is considered as the foundation of
double entry system
2. What are assets?
The resources controlled by an entity that possess future economic benefits for the entity
3. What are liabilities?
The debts or obligations of a business that have been arisen by a past event or transaction
4. What is capital?
The total amount of goods or cash that is invested in a business by the owner(s)
5. What is an elaborate form of accounting equation?
Balance sheet is an elaborate form of the accounting equation. Balance sheet shows the detail of
all three elements of an accounting equation i.e. assets, liabilities and capital
6. What are the elements of an accounting equation?
There are three elements of an accounting equation assets, liabilities and equity/capital
7. What are the circumstances under which the value of capital
declines?
Since Asset=Capital + Liabilities, if liabilities remain the same and there is a decrease in assets,
the capital of a business would definitely decreases
8. How does the value of business capital increase?
A business can increase its capital by:
Injecting fresh capital in the form of cash, inventory, fixed assets etc.
Making profit
9. Can capital be negative?
Yes, capital can be negative if a business constantly making losses over time
10. What are retained earnings?
Retained earnings are the accumulated amount of net incomes that are kept aside for the future
growth and expansion of the company
11. How do expenses affect the accounting equations?
Expense decrease assets, expenses increase liabilities, expenses decrease the equity or capital of
a business
12. How do revenues or incomes affect the accounting equation?
Revenues increases assets, revenues decreases liabilities and revenues increases the equity or
capital of a business
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SHORT ANSWER QUESTIONS:

Q.1. Define direct materials.

Ans. Direct material are those whose cOnsumption may be identified with specific production
unit and which become a part of the finished product.

Q.2. Define indirect material cost.

Ans. Indirect materials are those materials which cannot be conveniently identified, with
individual cost units. These materials are generally inexpensive and do not physically become a
part of the finished products.

Q.3. What is meant by inventory control?

Ans. Material or inventory control may be defined as “systematic control and regulation of
purchase, storage and usage of materials in such a way so as to maintain an even flow of
production and at the same time avoiding excessive investment in inventories.

Q.4. Write down 5 objectives of material control. •

Ans.       I. No under-stocking.

2:No over-stocking.

1. Economy in purchases.
2. Proper quality. 5: Minimum wastage.

Q.5. What is meant by Maximum stock level?

Ans. This is that level above which stocks should not normally be allowed to rise. This level
may, however, be exceeded in certain cases e.g. when unusually favourable purchasing condition
arise. It is computed by the following formula: –

Maximum level    = order level + EOQ —.(Minimum consumption x lead time)

Q.6. What is meant by Minimum stock level?

• Ans. It is that level below which stoa should not normally- be allowed to fall-. This is
essentially a safety stock and is not normally touched. In case of stock falling below this level,
there is risk of stoppage in production and thus top-priority should be given to the acquisition of
fresh supplies.

It is computed as follows: –

Minimum level     = order leer — (normal consumption x lead time)

Q.7.         What is meant by Order stock level/order point?

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Ans. This is that level of material at which purchase requisition is initiated for fresh supplies.
This level is fixed somewhere between minimum level and maximum level. Its formula is:

Order level = maximum consumption x lead time

Q.8.         How will you treat material handling?

Ans. These expenses are generally treated as an item of factory overhead. These expenses can
also- be recovered as a percentage of the value of materials issued. For example, if the total of
material handling charges amount to Rs.2000 for a particular month and the total value of
material issued during that month comes to Rs.20000, the charge for material handling to various
jobs will be made at the rate of 10% (i.e. 2000/20,000 x 100) of the value of materials issued.

Q.9.         What is danger lever?

Ans. This is a level at which normal issues are stopped and materials are issued for important
jobs only. This level is generally fixed somewhat below the minimum level. When stock reaches
danger level, urgent action is needed for the replenishment of stock so that stoppage in
production can be avoided. Its formula is: –

Danger level = Normal consumption x time required under urgent conditions.

Q.10.      What is lead time?

Ans. Lead time is the time interval between the time an item reaches order level and actual
receipt of materials.

Q.11.      What is EOQ? Write down the formula to calculate it.

Ans. EOQ is the quantity for which order is placed when stock reaches re-order level. It is the
quantity which is most economical to order. In other words, EOQ is that size of the order, which
gives maximum economy, in purchasing any materials and ultimately contributes towards
maintaining the materials at the optimum level end at minimum cost. Its formula is:

2 x Annual Requirement x ordering

EOQ—cost Interest + carrying cost or storage
cost

 Q.12.   What is material Turn over ratio?

Ans. Material turnover ratio tells how many times in a year stock is used up and replaced; greater
the stock turnover, the more efficient is there stock policy.

Its formula is: – •

Material/stock turnover ratio — Cost of material

consumed
Average stock of
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material

LONG ANSWER QUESTIONS:

1 .         Explain the terms minimum level, maximum level and ordering level, with regard to

maintenance of stocks. What are the factors to be taken into account in fixing these levels?

1. Write a short note on Economic order Quantity.

2. Distinguish between slow moving and non-moving materials.
3. Explain material control, aspects and objectives of inventory control. What are the principles of
inventory control? Explain.

KEY TERMS:

Material control

–         Stock. levels

–         Maximum level Minimum level

–         Re-order level /order level / order point

Danger level

Average stock level

Lead time

Economic order quantity

Ordering cost

Cost of carrying stock

Stock turnover / material turnover

Financial Statements (SHORT ANSWER QUESTIONS)

Q.1. Define Income Statement. .
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Ans. It is another name of profit and loss Account that is prepared at the end of
the specific period in order to calculate the net income or net loss.
Q.2. Write two objects of preparing the Income statement?
Ans. The following are two main objectives of preparing the Income Statement.
a)             To know the gross profit on sales. This helps the owners to compare the selling
and purchasing costs for the change in selling policy.
b)             To know the operative expenses and their trend as to the volume of sales. This
helps in controlling the cost of operation.
Q.3. Write down the different forms of Income statement.
Ans. Income Statement can be prepared in any of the following forms:
1. a.    Account Form
In case of Account form like profit and loss Account all the expenses are recoded
on the debit side and incomes on the credit side.
1. b.    Report form
According to report form, Income Statement may be arranged in either a single
step or multiple step form.
Q.4. What are the different types of business? Ans. There are three types of business i.e.
a)                 Service Enterprises
b)                 Merchandising Enterprises
c)                 And Manufacturing Enterprises
Q.5. Write down the main parts of the Income statement.
Ans. Following are the parts of the income statement
i) Heading                          ii) Revenue fund      iii) Operating expense
iv) Profit/Income from operation v) other expenses Income i) Net income
Q.6. What is meant by direct expenses?
Ans. Direct expenses mean those expenses, which are directly related to
Purchases of merchandise. These expenses are incurred to bring the merchandise from
purchasing point to selling point Shop or store.
Q.7. Define operating expenses.
Ans. All kinds of expenses incurred during the operation of the business are
known as operating expenses. Generally they are sub-divided:
I. Selling Expenses   2. Administrative Expenses      3.     General Expenses
Q.8. What is balance sheet?
Ans. Balance sheet is a statement of Assets and Liabilities that is prepared in usually in the end
of the year in order to ascertain the correct fin            i I        i business.
Q.9.          What do you mean by the cost of goods sold?
Ans. Cost of Goods sold = Opening inventory + net purchases ‘during the Year
+ direct expenses.         .
Cost of merchandise available for sale                   xxxx
Less closing inventory
xxxx
Cost of Goods sold
Q.10.      Define depreciation.
Ans. Gradual Decrease in the value of asset due to its use in the business is called depreciation.
Q.11. What are the prepaid expenses?
Ans. Expenses paid in advance are called prepaid expenses e. g. prepaid salary, prepaid
insurance, prepaid advertisement expenses and prepaid Rent.
Q.12.      Define outstanding expenses.
Ans. Those expenses against which the benefits have been achieved during the
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Accounting year, but they have not been actually paid; For example; the unpaid or Accrued
Salary at the end of the year is Rs. 5500.
Q.13.      What is Accrued Income?
Ans. It is such a income which has been accrued or earned during the year but has not been
actually received.
Q.14. What is unearned Income?
Ans. It represents such portion of an but not actually earned so for.
income, which has beenreceived in advance
Q.15. What is interest on capital?
Ans. A trader sometimes charges to the business interest on his certain rate this is called interest
on capital.
capital invested at a
Q.16. What is interest on drawings?
Ans. Sometimes the trader considers it proper that if he charges interest on invested in the
business, he should also pay interest on drawings at a certain rate.
Q.17.      What is meant by Interest on Loan?
Ans. If the interest on Loan is due but not yet paid is called interest on Loan.

Managerial Accounting

Managerial accounting is used to provide information to the manager of an organization.

Managerial accounting provides information to those people that are inside the organization and
working to operate and run its functions. Managerial accounting is contrast to financial
accounting. The financial accounting provides information to the people that are outside the
organization. Those people includes stakeholders, creditors etc. The information provided by the
managerial accounting includes.

 Information related to the cost and service of the organization. For example the manager of a
firm uses the cost of the product to set a selling price. Also these costs products are used for the
valuation of inventory and to determine the income.
 Information related to the budget of the organization for a particular period.
 Information related to the performance reports. These reports contain comparison of budget
with planned results and difference between the budget and planned results.
 Other information that will help the manager to make decisions and to control operational
activities. This information is related to products and service of organization, capacity of
resources and quantity and demand of unit products.

The history of managerial accounting is not very old. Traditional accounting is designed to
determine the efficiency of internal activities of an organization. In early 1980s the firms that
widely practice the managerial accounting were highly criticized. The reason for this is that
despite of radical changes in business environment the practice of managerial accounting had
changed little over the preceding 60 years. From last few years some new managerial accounting
practice such as balance scorecard, activity based costing has been developed.

The fundamental objectives of managerial accounting are as under

 Planning and policy formulation

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According to this objective managerial accounting is used to make plans for future on the basis
of provided information. It helps to prepare the statements on the basis of past results.

 Interpretation process

Managerial accounts actually present the financial information’s to the management. The
financial information is in technical format so the need is that to make them understood easily.
This process helps to present the accounting information by using charts diagrams etc.

 Assist in decision making process

The managerial accounting makes the decision making more scientific by using different modern
techniques. Data related to cost price and other tasks is collected, analyzed and then make the
decision easy.

 Controlling

Managerial accounting also helps in managerial control. By using the tools like budgetary
control and standard costing it will control the performances. Cost control can be done by
standard costing and departmental control can be done by the budget.

 Reporting

Managerial accounting frequently keeps the management up to date about the position of the
organization through reporting. It helps the management to make proper and good decisions.

 Facilitate organization

One of the major tools of managerial accounting is “Return on Capital Employed”. Since in

order to control costing the managerial tool emphasizes most on responsibilities center. Thus it is
helpful in making effective organizational framework.

 Facilitates coordinates of operations

Managerial accounting gives various tools to control the overall operations and activities of an
organization. For this budgets are the most important means.

The organization should have three principals in order to fulfill the above objectives. These three
principals are as under.

Forward looking principal

According to this principal decision for the future are done on the basis of data collected from
the past and all other available date

Target setting principle

According to this principal a target is being fixed by the organization. This target is known as
standard, budget etc. and continuous reviewing is done to see that whether target is achieved or
not.
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The principle of exception

The managerial accounting emphasize on the deviation from the target and the reasons behind
this deviation instead of the voluminous mass of the data. The management action bases on this
analysis.

Managerial accounting is used to assemble the data of the organization and the help it in making
future decisions. Managerial accounting also helps the organization to improve its efficiency and
in achieving its operational goals. The format of a managerial accounting is as under

Provides accounting information

The service of the managerial accounting is to provide information about accounting to different
levels of managers. The duty of managerial accounting is to gives presentations in a way that
suits the management. The data collected by managerial accounting from various accounts
departments helps to make future decisions.

Cause and effect analysis

As we know that the role of financial report is only related to the profit or loss but the managerial
accounting is a step further. Managerial accounting studies the relationship between the cause
and the effect. It duty is to report the profit and also the causes for it, similarly the factors that are
directly influencing the loss are also study in managerial accounting. It compares the profit with
causes such as current assets, sales, expenses and interests payable etc.

Use of special techniques and concepts

The managerial accounting uses different techniques to make accounting data useful. The
techniques which are widely used are financial planning, standard costing, margin costing,
budgeting control etc.

Taking important decisions

The data collected by the managerial accounting help the organization to make future decisions
that are profitable for the organization.

No fixed norms

Unlike financial repot no fix techniques or methods are following in managerial accounting.
Although the tools are same but there use is different for different concerns.

There are many advantages of managerial accounting. It is helpful in improving managerial

performance in the development of new
diciplines.The main role of managerial accounting is the removal of creativity management.
Managerial accounting has systemized the activities of business in terms of efficient planning
and organization. It has also eliminated overworking in busy period and negligence in crash
periods. Managerial accounting has also improved the service of management towards its
customers by comparing the actual results with the standard. Managerial accounting also builds a
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healthy relationship between the management and the labor. This is done by avoiding
unreasoning standard of work.

But the managerial accounting has also some limitations. The managerial accounting collects its
data from financial accounting, costing accounting and other sources. It is actually the
modification of the data. The accuracy of managerial accounting depends on the accuracy of
basic data. The formation of managerial account system requires an elaborated organization. This
requires heavy investment which is only done by big organizations. Managerial accounting is
concerned only with data not with the decisions. It only helps in collecting data. It only informs
not prescribes.

What is the statement of cash flows?

The statement of cash flows is one of the main financial statements. It is to
accompany the income statement, balance sheet, and statement of
stockholders' equity. The statement of cash flows (also known as the cash
flow statement) reports

 the major sources and uses of cash during the period of the income
statement

 a reconciliation of the change in an organization's cash and cash

equivalents (which are reported on the beginning and ending balance
sheets)

 supplementary information including the amount of income taxes

paid, the amount of interest paid, and significant noncash investing
and financing activities (such as issuing common stock in exchange for
land)

The statement of cash flow is important because investors, lenders, financial

analysts, and others are interested in an organization's major cash inflows
and outflows. (This information is not available from the income statement
because the accrual basis of accounting requires that revenues be reported
when earned and expenses be reported when incurred.)

The statement of cash flows reports cash inflows as positive amounts and
the cash outflows as negative amounts. They are reported in one of the
three sections of the statement of cash flows: operating activities, investing
activities, and financing activities.