Accounting for Manager

Assignment A
Question 1a): What do you understand by the concept of conservatism? Why it is also
called the concept of prudence? Why it is not applied as strongly today as it used to be
in the Past?
Answer: Concept of Conservatism implies using conservatism while preparing financial
statements i.e. income should not be accounted for unless it has actually been earned but
expenses, even if just anticipated should be provided for. According to this concept, revenues
should be recognied only when they are realied, while expenses should be recognied as
soon as they are reasonably possible. !or instance, suppose a firm sells "##units of a product
on credit for $s."#, ###. %ntil the payment is received, it will not be recorded in the accounting
boo&s. 'owever, if the firm receives information that the customer has lost his assets and is
li&ely to default the payment, the possible loss is immediately provided for in the firm(s boo&s.
)he rule is to recognie revenue when it is reasonably certain and recognie expenses as soon
as they are reasonably possible. )he reasons for accounting in this manner are so that financial
statements do not overstate the company(s financial position.
*t is also called the concept of prudence as it essentially involves exercising prudence in
recording income and expenses+losses in the financial statements so that anticipated income
are not recorded whereas li&ely losses are provided for.
'owever, this concept is not applied as strongly today as it used to be in the past for the reason
that the modern world saw a considerable increase in corporate frauds e.g. ,nron case in %-A
and -atyam in *ndia. Also, there is a decline in assuming corporate social responsibilities due to
superfluous issues of gaining publicity and brand building. )hese two major issues call for
increased transparency in financial statements and hence, the decline in use of age old concept
of conservatism.
Question 1 b): What is a Balance Sheet? Ho does a !unds !lo Statement differ from a
Balance Sheet? "numerate the items hich are usually shon in a Balance Sheet and a
!unds !lo Statement#
Answer: A .alance -heet is a type of financial statement of an entity, indicating the financial
position at a given point of time. *t is the statement of Assets and /iabilities as on a particular
date. )he various items of a .alance -heet can be grouped under two heads, vi: assets and
liabilities.
!unds !low statement determines the sources of cash flowing into the firm and the application
of that cash by the firm. )he various items of a !unds !low -tatement can be grouped under
two heads, vi: inflow of funds 0sources1 or outflow of funds 0applications1.
2hile the .alance -heet shows only the monetary value of each source and application of
funds at the end of the year, funds flow statement depicts the extent of changes in each source
and application of funds during the year. *f we ta&e the .alance -heet for two consecutive years
and wor& out the change for each item, we are able to arrive at the !unds !low -tatement
items.
)he various items usually shown in a .alance -heet are:
$ssets side:
0"1 !ixed assets
0a1 3ross bloc&
0b1 /ess depreciation
0c1 4et bloc&
0d1 Capital wor&5in5progress
061 *nvestments
071 Current assets, loans, and advances:
0a1 *nventories
0b1 -undry debtors
0c1 Cash and ban& balances
0d1 8ther current assets
0e1 /oans and advances
091 :eferred $evenue ,xpenditure:
0a1 Miscellaneous expenditure to the extent not written off or adjusted
0b1 ;rofit and /oss account
%iabilities side:
0"1 -hareholder<s funds
0a1 Capital
0b1 $eserves and -urplus
061 /oan funds
0a1 -ecured loans
0b1 %nsecured loans
Current liabilities and provisions:
0a1 /iabilities
= -undry Creditors
= 8utstanding expenses
= ;rovision for tax
-imilarly, items in a !unds !low -tatement are:
*nflow of funds:
= A decrease in assets
= An increase in liabilities
= An increase in shareholder(s funds
8utflow of funds:
= An increase in assets
= A decrease in liabilities
= A decrease in shareholder(s funds