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Question 1- Inventory in a business is valued at the end of an accounting period, at either cost or
market price, whichever is lower. This is accepted convention or a practice in accounting. Give a small
introduction on accounting conventions and elucidate all the eight accounting conventions.
Answer: Accounting conventions are the rules based on which accounting takes place and these rules
are universally accepted. Conventions are those customs and traditions that guide the accountants while
preparing the financial statements. Though the concepts and the conventions are fundamentally the
same, there may be some difference in the methodology or practice from one region to another.
There are eight accounting convention. They are:
1. Convention of income recognition
According to this concept, revenue is considered as being earned on the date on which it is realized, i.e.,
the date on which goods and services are transferred to customers for cash or for promise.
2. Convention of matching cost and revenue
According to this concept, revenue earned during a period is compared with the expenditure incurred to
earn that income, irrespective of whether the expenditure is paid during that period or not. This is also
called matching cost and revenue principle. While preparing the final accounts, adjustments are made
for outstanding expenses, prepaid expenses, outstanding income, and income received in advance.
3. Convention of historical costs
This convention says that all transactions must be recorded at a value at which they were incurred. Such
a value is called Historical Cost and this principle is called the Convention of Cost
4. Convention of full disclosure
This convention requires a business to disclose the following:
All the accounting policies adopted in the preparation and presentation of financial
statements.
If there is any change in the accounting policies in the current year as compared to the
previous year/s, the effects of such changes and the reason/s thereof.
The implications (in terms of money value) on the financial statements due to such
change.
5. Convention of double aspect
This concept states that every transaction has two aspects. One is the receiving aspect and the other is
the giving aspect. In accounting language, these two aspects are called debit and credit. This concept
gives rise to the balance sheet equation, i.e., Assets = Liabilities + Capital.

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6. Convention of materiality
This convention states that the benefit derived from measuring, recording, and processing a transaction
should justify the cost of doing it.
7. Convention of consistency
This convention requires that the accounting policies must be consistently applied year after year.
Consistency is required to help comparison of financial data from one period to another. Once a method
of accounting is adopted, it should not be changed. A change in an accounting policy may be done only
when it is:
Required by law
Felt that the new policy reflects the financial performance or position better than
the old policy
8. Convention of conservatism or prudence
Accountants follow the rule anticipate no profits but provide for all anticipated losses. Whenever loss
is anticipated, sufficient provisions should be made. But if a profit is anticipated, it should not be
recorded until it is actually realized.


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Question 2- Write down a table with the accounts involved / the nature of account/its affects/ debit
or credit.
Please have the transactions given below and prepare the table as per the instructions given above for each transaction.
a. 1.1.2011 Sunitha started his business with cash Rs. 5,00,000
b. 2.1.2011 Borrowed from Malathi Rs. 5,00,000
c. 2.1.2011 Purchased furniture Rs. 1,00,000
d. 4.1.2011 Purchased furniture from Meenal on credit Rs. 1,50,000
e. 5.1.2011 Purchased goods for cash Rs. 50,000
f. 6.1.2011 Purchased goods from Ram on credit Rs. 2,50,000
g. 8.1.2011 Sold goods for cash Rs. 1,25,000
h. 8.1.2011 Sold goods to Shyam on credit Rs. 55,000
i. 9.1.2011 Received cash from Shyam Rs. 25,000
j. 10.1.2011 Paid cash to Ram Rs. 90,000

Solution
SI No. Account Involved Nature of
accounts
Affects Debit/credit
1 Cash a/c
Capital a/c
Real
Personal
Cash is coming in
Sunitha is the giver
Debit
Credit

2 Cash a/c
Loan from Malathi
Real
Personal
Cash is coming in
Malathi is the giver
Debit
Credit

3 Furniture a/c
Cash a/c
Real
Real
Furniture is coming in
Cash is going out
Debit
credit
4 Furniture a/c
Meenal a/c
Real
Personal
Furniture is coming in
Meenal is the giver
Debit
Credit

5 Purchase a/c
Cash a/c
Nominal
Real
Purchase is an expense
Cash is going out
Debit
Credit

6 Purchase a/c
Ram a/c
Nominal
Personal
Purchase is an expense
Ram is the giver
Debit
Credit
7 Cash a/c
Sales a/c
Real
Nominal
Cash is coming in
Sales is revenue
Debit
Credit

8 Shyam a/c
Sales a/c
Personal
Nominal

Shyam is the receiver
Sales is revenue
Debit
Credit

9 Cash a/c
Shyam a/c
Real
Personal

Cash is coming in
Shyam is the giver
Debit
Credit

10 Ram a/c
Cash a/c
Personal
Real

Ram is the receiver
Cash is going out
Debit
Credit


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Question 3- From the given trial balance, draft an adjusted trial balance.
Trial balance as on 31.03.2013
Debit balances Rs Credit balances Rs

Furniture 15000 Bank over draft 16000
Buildings 500000 Capital account 400000
Sales return 1000 Purchase return 4000
Bad debts 2000 Sundry creditors 35000
Sundry debtors 25000 Commission 5000
Purchases 90000 Sales 235000
Advertising 20000
Cash 10000
Taxes and insurance 5000
General expenses 7000
Salaries 20000
total 695000 total 695000

Adjustment:
1. Charge depreciation at 10% on buildings and furniture and fittings
2. Write off further bad debts 1000
3. Taxes and insurance prepaid 2000
4. Outstanding salaries 5000
5. Commission in advance 1000
Solution:
Ledger accounts
Furniture and fittings
Dr Cr
Particular Rs Particular Rs
To bal b/d 15000 By depreciation
By bal c/d
1500
13500
Total 15000 Total 15000
To bal b/d 13500

Buildings a/c
Dr Cr
Particular Rs Particular Rs
To bal b/d 500000 By depreciation
By bal c/d
50000
450000
Total 500000 Total 500000
To bal b/d 450000


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Bad debts a/c
Dr Cr
Particular Rs Particular Rs
To bal b/d
To sundry debtors
2000
1000

By bal c/d

3000
Total 3000 Total 3000
To bal b/d 3000

Sundry debtors a/c
Dr Cr
Particular Rs Particular Rs
To bal b/d 25000 By bad debts
By bal c/d
1000
24000
Total 25000 Total 25000
To bal b/d 24000

Taxes and insurance a/c
Dr Cr
Particular Rs Particular Rs
To bal b/d 5000 By prepaid taxes and
insurance
By bal c/d
2000

3000
Total 5000 Total 5000
To bal b/d 3000

Prepaid taxes and insurance a/c
Dr Cr
Particular Rs Particular Rs
To taxes and insurance 2000 By bal c/d 2000
Total 2000 Total 2000
To bal b/d 24000

Salaries a/c
Dr Cr
Particular Rs Particular Rs
To bal b/d
To outstanding salaries
20000
5000
By bal c/d 25000
Total 25000 Total 25000
To bal b/d 25000




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Outstanding salaries a/c
Dr Cr
Particular Rs Particular Rs
To bal c/d 5000 By salaries a/c

5000
Total 5000 Total 5000
To bal b/d 5000

Depreciation a/c
Dr Cr
Particular Rs Particular Rs
To furniture and fittings
To buildings
1500
50000

By bal c/d

51500
Total 51500 Total 51500
To bal b/d 51500

Commission a/c
Dr Cr
Particular Rs Particular Rs
To commission received in
advance
To bal c/d
1000

4000
By bal b/d

5000
Total 5000 Total 5000
To bal b/d 4000

Commission received in advance a/c
Dr Cr
Particular Rs Particular Rs
To bal c/d 1000 By commission a/c

1000
Total 1000 Total 1000
To bal b/d 1000







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Adjusted trial balance as on 31.3.2013
Debit balances Rs Adjustments Adjusted amount
Furniture 15000 -1500 13500
Buildings 500000 -50000 450000
Sales return 1000 1000
Bad debts 2000 +1000 3000
Sundry debtors 25000 -1000 24000
Purchases 90000 90000
Advertising 20000 20000
Cash 10000 10000
Taxes and insurance 5000 -2000 3000
General expenses 7000 7000
Salaries 20000 +5000 25000
Depreciation - 1500+50000 51500
Prepaid taxes and
insurance
- 2000 2000
total 695000 700000

Credit balances Rs Adjustments Adjusted amount
Bank over draft 16000 16000
Capital account 400000 400000
Purchase return 4000 4000
Sundry creditors 35000 35000
Commission 5000 -1000 4000
Sales 235000 235000
Outstanding salaries - 5000 5000
Commission received in
advance
- 1000 1000
Total 695000 700000








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Question 4- The reports prepared in financial accounting are also used in the management accounting.
But there are few major differences between financial accounting and management accounting.
Explain the differences between financial accounting and management accounting in various
dimensions.
Answer : The difference between financial accounting and management accounting in various dimension
are as follows:
Dimension Financial accounting Management accounting
User The primary user of financial
accounting information are
external user like shareholders,
creditors, government authorities,
employees, etc.
The primary user of management accounting are
internal user like top, middle, and lower level
managers.
Purpose Reporting financial performance
and financial position to enable the
user to take financial decision
To help the management in planning, decision
making, monitoring, and controlling.
Need It is a statutory requirement. What
to report, how to report, how much
to report, in which form to report,
etc are stipulated by law or
standards.
It is optional. What to report, how to report, how
much to report, when to report, in which form to
report, etc. are decided by the management as per
the needs of the company or management.
Expression
of
information
Accounting information is always
expressed in terms of money
Management accounting may adopt any
measurement unit like labor hours, machine
hours, or product units for the purpose of analysis.
Reporting
timing and
frequency
Financial data is presented for a
definite, say one year or a quarter.
Reports are prepared on a continuous basis,
monthly, weekly, or even daily.
Time
perspective
Financial accounting focuses on
historical data.
Management accounting is oriented towards the
future.
sources of
principles
Financial accounting is a discipline
by itself and has its own principles,
policies and conventions (GAAP)
Management accounting makes use of other
disciplines like economics, management,
information system, operation research, etc.
Reporting
entity
Overall organization Responsibility centers within the organization.
Form of
reports
Income statements(profit and loss
a/c)
Balance sheet
Cash flow
MIS reports
Performance reports
Control reports
Cost statements
Variance statements
Budgets
Estimate statements
flowcharts

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Question 5- Draw the balance sheet for the following information provided by Sandeep Ltd.
a. Current ratio : 2.5
b. Liquidity ratio : 1.5
c. Net working capital : Rs300000
d. Stock turnover ratio : 6 times
e. Ratio of gross profit to sales : 20%
f. Fixed assets turnover ratio : 2 times
g. Average debt collection period : 2 months
h. Fixed assets to net worth : 0.8
i. Reserve and surplus to capital : 0.5
Solution:
Balance sheet
Liabilities Rs Assets Rs
Capital 500000 Fixed Assets 600000
Reserve and surplus 250000 Inventories 200000
Long-term debt 150000 Debtors 250000
Current liabilities 200000 Bank 50000
Total 1100000 Total 1100000

Working notes
Current liabilities = 1
Current assets = 2.5
Working capital (2.5-1) = 1.5
Therefore current assets(2.5/1.5)x 300000
Current liabilities (1/1.5)x 300000



=300000
=500000
=200000

Liquidity ratio = 1.5
Current liabilities =200000
Therefore liquid asset (200000x1.5)
Inventories(current asset - liquid asset)


= 300000
= 200000

Stock turnover ratio =6 times

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Cost of sales (6x 200000)
Gross profit ratio =20 %
Gross profit
If sales is 100; gross profit is 20
Hence gross profit is ( 20/80)x 1200000
Sales (cost of sales + gross profit )
=1200000



=300000
=1500000

Fixed asset turnover ratio =2 times
(cost of sales/ fixed assets)
Therefore fixed assets (1200000/2)


= 600000

Debtor's collection period = 2 months
( months in a year/ debtor's turnover)
Debtor's turnover ratio(12/2) = 6 times
(sales/debtors)
Debtors(1500000/6)




=250000

Fixed assets to shareholders net worth = 0.8
Shareholders net worth(600000/0.8)

=750000

Reserve and surplus to capital = 0.50
If capital is 1: reserve and surplus is 0.5
Reserve and surplus + capital = shareholder's net
worth (0.5+ 1 = 1.5)
Reserve and surplus ( 7500000x (0.5/1.5)
Therefore share capital




= 250000
= 500000


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Question 6- Write the main difference between cash flow analysis and fund flow analysis.
Following is the balance sheet for the period ending 31st march 2011 and 2012. If the current year's is
Rs.38,000. Calculate the cash flow from operating activities.
31st march
2011 2012
Short term loan to employees 15000 18000
Creditors 30000 8000
Provision for doubtful debts 1200 -
Bills payable 18000 20000
Stock in trade 15000 13000
Bills receivable 10000 22000
Prepaid expenses 800 600
Outstanding expenses 300 500

Answer: The main difference between cash flow analysis and fund flow analysis are as follows;
Cash flow analysis Fund flow analysis
It is concerned only with the change in
cash position.
It is concerned with change in working
capital position between two balance
sheet dates.
It is merely a record of cash receipts and
distribution.
Net effect of receipts and distribution are
recorded.
Cash is part of working capital and
therefore an improvement in cash position
results in improvement in the funds
position.
An improvements in fund flow positions
need not result in improvements in cash
position.
It is cash based It is accrual based



Solution:
Statement showing cash flow from operating activities
Net loss (38,000)
Add: Decrease in current assets
Decrease in stock 2,000
Decrease in prepaid expenses 200
Increase in current liabilities

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Increase in outstanding expenses 200
Increase in bills payable 2,000 +4,400
Less: increase in current assets
Increase in short term loan to the employees 3,000
Increase in bills receivable 10,000
Decrease in creditors 22,000
Decrease in provisional for doubtful debts 1,200 (36,200)
Net cash lost in operating activities (68,800)