Upload
susant-nath
View
221
Download
0
Embed Size (px)
Citation preview
7/28/2019 Question Bank on Accounting for Managers With Answer
1/93
Question Bank on Accounting for Manage with answer
.What is accounting?
the art of recording, classifying and summarizing in a significant manner and in
erms of money, transactions and events which are, in part at least of a financial
haracter and interpreting the results there of.
.What are financial items?
The financial items are:
Purchase
Sales
Dividend received
Gain or loss on financial investment
Interest received
Interest gain
Foreign exchange gain or loss etc.
.What is GAAP?
Generally Accepted Accounting Principle (GAAP): A set of conventions, rules, and
rocedures which defines accepted accounting practice, constitute Generally
Accepted Accounting Principles. It represents the fundamental positions that have
enerally agreed upon by accountants and encompasses permissible accounting
ractice.
7/28/2019 Question Bank on Accounting for Managers With Answer
2/93
Accounting principle means rule of action or conduct, or basis of conduct or
ractices.
.What are the statutory and non-statutory financial statements?
A statutory financial statement is a financial statement of an insurance company
repared in accordance with statutory accounting standards.
A Non-statutory Audit is an audit not required by law, the following might have one:
Clubs, certain charities, Small companies, Sole trade/partnerships
.Explain the relationship between financial items and financial statements.
he financial items are recorded in book keeping in to separate accounts and the
nancial statement is prepared as per the accounts of financial item.
.
Who sets accounting rules in India? Are they different from the rules of other
ountries?
he Institute of Charted Accountant India (ICAI) sets accounting rules in India. And it
s deferent from the rules of other countries because, each countries, has its own set of
ules and regulations for accounting and financial reporting.
.How different is partnership from Joint Stock Company?
artnership:.partnehip is an association of individuals competent to enter into contracts, who agreeo carry on the business in common with a view to earn and share profits.
. Registration is not compulsory
.there is unlimited liability.
. All partner are mutual agents
.number of partner cannot exceed 10.
7/28/2019 Question Bank on Accounting for Managers With Answer
3/93
oint stock Company:
.this Company is an artificial peon recognized by the law, with a distinctive name, a
ommon seal, a common capital and carrying limited liabilities.
. Registration is compulsory.
. There is limited liability.
. a member is not an agent of another member.
. In case of pvt the member is 50 & in case of public it is unlimited.
.What are the important features of a company form of organization?
The important features of a company form of organizations are:
1) Formation. A company is a corporate body. It enjoys a separate entity of its ownwhich is distinct from its member that constitutes it. It can be set up by following the
rocedure laid down for this purpose under the law. The formation of a company
asses through four stages (i) promotion (ii) incorporation (iii) subscription and (iv)ommencement.
2) Financing. A company limited by shares raises capital by issuing of a prospectus.n the prospectus, general public is invited to purchase the shares of the company. The
ompany, through wide publicity, is able to collect necessary capital.
3) Control. In theory and according to law, the ultimate control of the affair of the
ompany lies with the shareholder. The shareholder exercises their power of control in
he annual general meeting of the company. They review the progress and the prospects
f the company and give approval on important matte of the company.
4) Management. The shareholder, who are the owner of the company, cannot take
art in the management of its affair. They entrust the management to a Board of
Director elected by them. The Board administer the internal affair and the management
f the company. The shareholder are, thus, the risk bearer and the director are the risk
ake.
5) Duration. A company enjoys continuous existence. The existence of the companys not affected by the transfer, the death or insolvency of the member. The member may
ome and the member may go, its continuity is not affected until dissolved by a process
f law.
7/28/2019 Question Bank on Accounting for Managers With Answer
4/93
6) Double taxation. The company is subject to double taxation. Fit, the tax is levied
n the profits of the company. Secondly, the shareholder pay tax on the dividends
eceived.
7) Irredeemable share capital. Share capital is the capital collected by subscription
o the shares of the company. The capital is non-refundable except in the case ofwinding up and reduction of capital.
8) Winding up. The continuous existence of a company can come to an end only
hrough winding up which is possible through a legal process. A liquidator is appointed
or this purpose that carries the company to its end under a strict legal procedure.
.Who are the use of accounting information?
The user of accounting information isShareholder
Security analyst
Banks
Rating agency
Manage
Employees
Supplier
CustomerGovernment
Regulator
Television
channel and News paper
0.What are the contents of the annual report of a joint stock company?
The contents of the annual report of a joint stock company are:
Accountingpolicies
Balance sheet
Cash flow statement
Contents: non-audited information
http://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Cash_flow_statementhttp://en.wikipedia.org/wiki/Audithttp://en.wikipedia.org/wiki/Audithttp://en.wikipedia.org/wiki/Cash_flow_statementhttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Accounting7/28/2019 Question Bank on Accounting for Managers With Answer
5/93
Profit and loss account
Notes to the financial statements
Chair peons statement
Director' Report
Operating and financial review
Other features
Auditor report
1.What do you mean by perpetual succession of a company?
n company law, perpetual succession is the continuation of a corporation's or other
rganization's existence despite the death, bankruptcy, insanity, change in membershipr an exit from the business of any owner or member, or any transfer of stock, etc.
2.What is a foreign company?
A foreign company means a company incorporated outside Indiabut having a place of
usiness in India [Sec. 591 (1)]. Within 30 days of the establishment of the business in
ndia,
3.
roperty of a company is not the property of the shareholder. Comment
Shareholder are the proprietor of the company. The word shareholder means who
ave owned share of a particular company and gain certain rights and liabilities over
hat company. Generally the main goal of a shareholder is to gain profit because
veryone knows that man and woman in business are interested in one thing: money,
nd will do anything that has to be done to make money. But it is a traditional view,
hings are changed and company is the property of a shareholder is now an exploded
myth. The new concept according to the new socio economic thinking is that, company
s not property of shareholder; it is a social institution having duties and responsibilities
owards the community. I support that shareholder are the owner of the company, and
s an owner of the company there goal shouldnt be only profit maximization. Besideshis shareholder also should concentrate about their duties towards the society and
http://en.wikipedia.org/wiki/Profit_and_losshttp://en.wikipedia.org/wiki/Notes_to_the_financial_statementshttp://en.wikipedia.org/wiki/Chairpersonhttp://en.wikipedia.org/wiki/Chairpersonhttp://en.wikipedia.org/wiki/Notes_to_the_financial_statementshttp://en.wikipedia.org/wiki/Profit_and_loss7/28/2019 Question Bank on Accounting for Managers With Answer
6/93
ther interest groups. This essay starts with the discussion about the shareholder
wnership and their general goal.
4.
What are the interim financial reports?
A public financial report covering a period of less than one year. An interim statement
s used to convey the performance of a company before the end of the year. Unlike
nnual statements, interim statements do not have to be audited. Interim statements
ncrease communication between companies and the public, and provide investor with
p-to-date information between annual reporting periods.
5.Distinguish between a public limited company and a private limited company.
ublic companies - Ownership rights (Shares) are traded on the stock exchange.
Anyone can have part ownership of the company i.e. BT, Microsoft. Their accounts
eed to be audited and are of public information
rivate company - Ownership is usually just a few people. These are commonly
maller businesses. Their shares are not traded on the stock exchange. Their accounts
ont need to be audited, and their financial statements are private6.
Explain the concept of limited liability.
A type of liability that does not exceed the amount invested in a partnership or limited
ability company. The limited liability feature is one of the biggest advantages of
nvesting in publicly listed companies. While a shareholder can participate wholly in
he growth of a company, his or her liability is restricted to the amount of the
nvestment in the company, even if it subsequently goes bankrupt and racks up millionsr billions in liabilities.
7/28/2019 Question Bank on Accounting for Managers With Answer
7/93
7.Write a brief note on the accounting policies.
is a set of rules, concepts, conventions and Procedures which have been accepted by
ccountants over a period of time for accounting practices.8.
What are accounting standards?
he following are the mandatory Accounting Standards (AS) as on July 1, 2012 as
sted on the site of The Institute of Chartered Accountants of India (ICAI) -
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting
olicies
AS 6 Depreciation Accounting
AS 7 Construction Contracts (revised 2002)
AS 8 Accounting for Research and Development (AS-8 is no longer in force since it
was merged with AS-26)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
http://en.wikipedia.org/wiki/Institute_of_Chartered_Accountants_of_Indiahttp://en.wikipedia.org/wiki/Institute_of_Chartered_Accountants_of_India7/28/2019 Question Bank on Accounting for Managers With Answer
8/93
AS 14 Accounting for Amalgamations
AS 15 Employee Benefits (revised 2005)
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income.
AS 23 Accounting for Investments in Associates in Consolidated Financial
tatements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent` Liabilities and Contingent Assets
AS 30 Financial Instruments: Recognition and Measurement and Limited Revisions
o AS 2, AS 11 revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29
AS 31, Financial Instruments: Presentation
7/28/2019 Question Bank on Accounting for Managers With Answer
9/93
AS 32, Financial Instruments: Disclosures, and limited revision to Accounting
tandard (AS) 19, Leases
9.Distinguish between financial accounting and management accounting
FINANCIAL
ACCOUNTING
MANAGEMENT
ACCOUNTING
PRIMARY USE External( Investor,
governmentauthorities, creditor)
Internal(Manage of
business, employees)
PURPOSE OF INFORMATION Help investor,
creditor, and other
make investment,
credit, and other
decisions
Help manage plan
and control business
operations
TIMELINES Delayed or historical Current and future
oriented
RESTRICTIONS GAAP FASB AND
SEC
GAAP does not
apply, but
information should
be restricted to
strategic and
operational needs
NATURE OF INFORMATION Objective, auditable,
reliable, consistent
and precise
More subjective and
udgmental, valid,
relevant and accurateSCOPE Highly aggregated
information about the
overall organization
Disaggregated
information to
support local
decisions
BEHAVIOURAL IMPLICATIONS Concern about Concern about how
7/28/2019 Question Bank on Accounting for Managers With Answer
10/93
adequacy of
disclosure
reports will affect
employees behavior
FEATURES Must be accurate and
timely Compulsory
under company law Isan end in itself
Usually approximate
but relevant and
flexible Except forfew companies, it is
not mandatory Is a
mean to the end
SEGMENTS
OF ORGANISATION
It is primarily
concerned with
reporting for the
company as a whole.
Segment reporting is
the primary
emphasis.
0.Distinguish between public sector companies and public limited companies.
A public limited company is a corporate entity that openly sells its shares on the stock
xchange and has share holder ranging from one to infinity (1-infinity).Its headed by
fficials who are elected every end of the financial year at the Annual General
Meeting. A Public Sector Undertaking is a corporation in the public sector in India,
where management control of the company rests with the Government; it can be
Central Government or the State Governments. Below given is a partial list of Public
ector Undertakings of the Government of India.
1.Explain the important features of public limited companies.
he features of public limited companies are
There is limited liability for the shareholder.
The business has separate legal entity. There is continuity even if any of the
hareholders die.
These businesses can raise large capital sum as there is no limit to the number of
hareholder.
7/28/2019 Question Bank on Accounting for Managers With Answer
11/93
The shares of the business are freely transferable providing more liquidity to its
hareholder.
22.
Who manages a Joint Stock Company?
he company is managed on behalf of the shareholder by a Board of Director, electedt an Annual General Meeting. The shareholder also vote to accept or reject an Annual
Report and audited set of accounts. Individual shareholder can sometimes stand for
irectorships within the company, should a vacancy occur, but this is uncommon.
3.Write a brief note on the separation of management from the ownership of a
ompany.
eparation of ownership and management in cooperate governance involves placing the
management of the firm under the responsibility of professionals who are not its ownerOwner of a company may include shareholder, director, government entities, other
orporations and the initial founder. In corporate governance these owner are
ometimes different from those running the company to allow skilled manage to
onduct the complicated business of running a large company.
4.Who takes the profits of a Joint Stock Company?
hare holder take the profits of a Joint Stock Company.
5.Why companies prepare the financial statements?
he companies are preparing the financial statements because:
To find out the financial performance (profit or loss) during an accounting period.
To show financial position or health of a business.
To provide reliable information about the flow of cash during an accounting period.
To reveal the changes in fund.
To provide other information relevant to the needs of use.
6.What are the different statutory financial statements?
he different financial statements are:
Balance sheet
Profit & loss Account
Cash flow statement etc.
7/28/2019 Question Bank on Accounting for Managers With Answer
12/93
7.Examine the relationship between balance sheet, income statement, and cash flow
tatement.
ncome
tatement
ash Flow
tatement
alance
heet
00,000 75,000 125,000
The income statement shows revenue of 500,000.
The cash flow statement shows the cash received from customer is 375,000.
The balance sheet shows under assets the difference, i.e. accounts receivables is
25,000.
The income statement = cash flow statement + balance sheet. In the example above:
00,000 = 375,000 + 125,000
8.Distinguish between cash from operations and profit.
he difference between EBITDA and OCF would then reflect how the entity finances
s net working capital in the short term. OCF is not a measure of free cash flow and the
ffect of investment activities would need to be considered to arrive at the free cash
ow of the entity.9.
Distinguish between PAT and dividend.
Earnings after Tax orProfit after Tax equals sales revenue after deducting all
xpenses, including taxes (unless some distinction about the treatment of extraordinary
xpenses is made). In the US, the term Net Income is commonly used. Income before
xtraordinary expenses represents the same but before adjusting for extraordinary
ems.
Dividend is the part of the PATarnings after Tax (or Net Profit after Tax) minus
ayable dividends becomes Retained Earnings.
7/28/2019 Question Bank on Accounting for Managers With Answer
13/93
0.What is the relevance of audit report?
The auditor's report is a formal opinion, or disclaimer thereof, issued by either
n internal auditor or an independent external auditor as a result of an internal or
xternal audit or evaluation performed on a legal entity or subdivision thereof (calledn "audited"). The report is subsequently provided to a "user" (such as an individual, a
roup of peons, a company, a government, or even the general public, among other) as
n assurance service in order for the user to make decisions based on the results of the
udit.
1.Who appoints the auditor?
Member (share holder) are appoints the auditor at an annual general meeting,
2.What items are included in the notes to the financial statements?Balance sheet
Profit & loss Account
Cash flow statement etc.
3.Where do you find the description of a companys accounting policies?
inancial statement
4.
Explain the accounting equation.
shows the relationship between the economic resources of a business and the claims
gainst those resources. At any given time, the following relationship holds:
Economic resources = Claims
Economic resources are assets. The claims consist of creditor claims or liabilities,nd owner claims or equity. So the accounting equation now is: Assets= Liabilities +
Equity
5.What are the three major sources of finance?
Overdraft financing.
hareholder and director funds.
rade Credit.
actoring and invoicing discounting.
7/28/2019 Question Bank on Accounting for Managers With Answer
14/93
Hire purchase and leasing.
Bank loans.
6.What is the relationship between the accounting equation and the balance sheet?
he balance sheet shows the position of assets, liabilities and equity.he accounting equation shows
Asset= liabilities + Equity
7.Define cash from operating activities.
An accounting item indicating the cash a company brings in from ongoing, regular
usiness activities. Cash flow from operating activities does not include long-term
apital or investment costs. It can be calculated as:
Cash Flow from Operating Activities = EBIT + DepreciationTaxes
8.What are the components of cash from financing activities?
Proceeds from borrowings (both short-term and long-term)
Cash received from owner usually on issuance of stock
Repayments of borrowings
Repayments to owner
9.What are the components of cash from investment activities?Cash payments to acquire or construct long-term fixed assets such as plant and
machinery, vehicles, equipment, etc.
Cash receipts from sale of PPE and intangible assets such as buildings, copyrights,
tc.
Cash payments to purchase bonds or shares of other companies (subsidiaries,
ssociates and joint ventures).
Cash receipts from sale of bonds and shares of other companies.Cash payments in the form of loans and advances and receipt related to payback of
uch loans and receivables, etc.
7/28/2019 Question Bank on Accounting for Managers With Answer
15/93
0.Classify the following financial transactions/items into cash flows from financing,
nvestment, operating activities:Sold goods on credit. operating
Collection from customer operatingBad debt operating
Sale of shares for cash Financing
Interest received Investing
Interest paid Investing
Dividend received Investing
Dividend paid Financing
Purchased goods for cash operating
Depreciation Investing1.
Briefly explain the basic assumptions for preparing the financial statements.
According to the Framework of IAS/IF, the underlying assumptions for the preparation
f financial statements are:
Accrual basis the financial statements are prepared under the accrual basis. According
o accrual basis of accounting, the effects of transactions and other events are
ecognized when they occur and not when the cash is received or paid. In other wordshe transactions are recorded in the books of accounts when they occur and not when
he cash is received or paid. It is opposite to cash basis of accounting.
2.Examine the effect of inventory valuation on the profit and cash flows.
he different methods of inventory valuation will affect the cash flow, the actual or
ssumed association of inventory unit costs with goods sold or in stocknot goods
ow, the actual movement of goods. Therefore, gross profits will vary among theifferent methods.
7/28/2019 Question Bank on Accounting for Managers With Answer
16/93
3.Examine the importance of the accrual concept.
The effects of transactions and events are recognized when they occur (and not when
ash is received or paid), and they are recorded in the financial statements
Accrual basis the financial statements are prepared under the accrual basis. According
o accrual basis of accounting, the effects of transactions and other events are
ecognized when they occur and not when the cash is received or paid. In other words,
he transactions are recorded in the books of accounts when they occur and not when
he cash is received or paid.
4.Explain the difference between accrual concept and matching concept.
Accrual Concept: It recognizes income when it is earned not when it is collectedMatching Concept: Revenues of a period are matched with expenses to ascertain
rofit or loss.
5.Why is the matching concept central to the determination of profit?
Matching concept central to the determination of profit because the revenues of a
eriod are matched with expenses to ascertain profit or loss.
6.Explain the importance of dual aspect concept in understanding the balance sheet.n this system, every business transaction is having a twofold effect of benefits giving
nd benefits receiving aspects. The recording is made on the basis of both these
spects. Double Entry is an accounting system that records the effects of transactions
nd other events in at least two accounts with equal debits and credits.
7.Distinguish between expenses and payments.
xpenses are expenses. Money can reduce & the word can use little bit amounts. We
hould not get any assets, liability.
ayments:- it means we can get some assets, liabilities against the payments. We can
oss revenue but the same cost or more asset we should get against payments.
7/28/2019 Question Bank on Accounting for Managers With Answer
17/93
8.Distinguish between incomes and receipts.
Receipt is the money that you receive and you might have to return it on a later stage.
urther the receipt can be on sale of goods, or business receipts out of which the profit
hall be your income. If salaried, the salary is your income for the purpose of taxalculations.
All receipts need not be income. But all incomes will be receipts.
9.Name three receipts which are not incomes.
Receipt from customer against credit sale
Loan receipt
Receipt cash from share holder against issue of share capital
0.Name three payments which are not expenses.
Dividend payment
ayment of loan
ayment to
1.Name three financial items which are shown in the income statement but may not
esult in any cash outflow.
DepreciationBad debt
Outstanding expenses
2.Explain the impact of issue of shares at a discount on the accounting equation.
Asset= liabilities + Equity
When share issued +cash at asset site= +Equity
3.Examine the impact of buy-back of shares on the accounting equation.
he repurchase of outstanding shares (repurchase) by a company in order to reduce the
umber of shares on the market. Companies will buy back shares either to increase the
alue of shares still available (reducing supply), or to eliminate any threats by
hareholder who may be looking for a controlling stake.
The equity and cash at asset site will increases.
7/28/2019 Question Bank on Accounting for Managers With Answer
18/93
4.What is capital employed and owners fund?
Capital employed is usually presented as total assets less current liabilities, or fixed
ssets plus working capital also called owner fund.
5.Explain the difference between stock dividend and cash dividend.
tock dividend- A dividend payment made in the form of additional shares, rather than
cash payout. Also known as a scrip dividend."ash dividend- Money paid to stockholder, normally out of the corporation's current
arnings or accumulated profits.
6.Explain the difference between bonus shares and rights shares.
Bonus share- An offer of free additional shares to existing shareholde. A company
may decide to distribute further shares as an alternative to increasing the dividend
ayout.
Right share- Right shares are the shares which are offered by the company to the
xisting shareholder. Simply stated the existing shareholder have a right to subscribe
or the shares which are offered by the company after initial allotment until somepecial right is reserved for any other peon by special resolution in this respect.
7.Explain different methods of presenting balance sheet.
Horizontal
Vertical
8.What is an account?A record of financial transactions for an asset or individual, such as at
bank, brokerage, credit card company or retail store.
7/28/2019 Question Bank on Accounting for Managers With Answer
19/93
9.Briefly explain the debits and credit.
Debits-An accounting entry which results in either an increase in assets or
ecrease in liabilities.
Credit- An accounting entry which results in either an Decrease in assets orncrease in liabilities. or opposite of debit.
0.How is an account balanced?
he account on left side of this equation has a normal balance of debit. The accounts on
ght side of this equation have a normal balance of credit. The normal balance of all
ther accounts is derived from their relationship with these three accounts.
Normal balance of common accounts:
Asset: Debit
Liability: Credit
Owner's Equity: Credit
Revenue: Credit
Expense: Debit
Retained Earnings: Credit
Dividend: Debit1.
What is credit balance?
n a margin account, the amount of funds deposited in the customer's account following
he successful execution of a short sale order. The credit balance amount includes both
he proceeds of the short sale itself and the specified margin amount the customer is
equired to deposit under Regulation T.
2.
What is debit balance?
The debit balance is the amounts of funds the customer must put into his or her margin
ccount, following the successful execution of a security purchase order, in order to
roperly settle the transaction.
7/28/2019 Question Bank on Accounting for Managers With Answer
20/93
3.What are real accounts?
Asset, liability, reserves, and capital accounts that appear on a balance sheet
he balances of real accounts are not cancelled out at the end of an accountingeriod but are carried over to the next period. Also called permanent accounts.
4.What are the nominal accounts?
Revenue or expense account that is a subdivision of the owner' equity account, and
which is closed to a zero balance at the end of each accounting period. It starts with a
ero balance at the beginning of a new accounting period, accumulates balances during
he period, and returns to zero at the yearend by means of closing entries
Nominal accounts are income statement accounts and are also called 'temporary
ccounts' in contrast to balance sheet (asset, liability, and owner' equity) accounts
which are called 'permanent accounts' or 'real accounts.
5.What is the relevance of trial balance?
A trial balance should show the debit and credit balances in all accounts and should
dd to zero.
Maintaining a trial balance allows you to immediately check the balances of all ofour accounts and can help you to find some error in your entries.
Trial balance will be "out of balance" (i.e. not add to zero) if you make one of the
ollowing error:
f you accidently forget to book one side of an entry;
f both sides of the entry are not booked at the same amount;
f you accidently book the part of the entry as debit when it should be credit or vice
ersa.
6.Explain the process of preparing trial balance.
After posting all transactions from an accounting period, accountants prepare a trial
alance to verify that the total of all accounts with debit balances equals the total of all
ccounts with credit balances. The trial balance lists every open general ledger account
y account number and provides separate debit and credit columns for entering account
alances.
7/28/2019 Question Bank on Accounting for Managers With Answer
21/93
7.Classify the following items into real, personal, and nominal accounts:
Bad debt Nominal
Discount received Nominal
Interest paid Nominal
Dividend received Nominal
Share capital Nominal
Bonds Personal
Capital Personal
8.Classify the following items into balance sheet and income statement accounts:
Outstanding Salary Balance sheet, Income statement
Discount received Income statement
Interest received Income statement
Dividend received Income statement
Share capital Balance sheet
Bonds issued Balance sheet
Cash Balance sheet
Rent Income statement
Depreciation Income statement
9.What is positing?
he process of transferring entries from a journal of original entry to a ledger book.
0.Explain the difference between journalizing and posting.
When you journalize you are recording transactions in a journal.
A journal is a chronological record of transactions and is the fit place that transactions
re recorded. It is often referred to as a book of original entry. Each entry records the
ate, the accounts affected and their reference number, an explanation of the
ransaction, and the debit/credit effect on the accounts named. Information from the
ournal is later posted to each account.
7/28/2019 Question Bank on Accounting for Managers With Answer
22/93
eriodically, usually at the end of the day, you transfer the debits and credits from the
ournal entries by posting to the affected accounts.
1.Distinguish between ledger and journal.
The journal and the ledger are the most important books of the double entry system of
ccounting. Following are the points of difference between these two types of books:
The journal is the book of fit entry (original entry); the ledger is the book of second
ntry. It is the goal where all the entries in the journal find their ultimate destination.
The journal is the book of chronological record; the ledger is the book for the
nalytical record.
The journal, as a book of source entry, ordinarily has greater weight as legal evidencehan the ledger.
The unit of classification of data within the journal is the transaction; the unit of
lassification of data within the ledger is the account.
The process of recording in the journal is called journalizing; the process of recording
n the ledger is called posting.
2.What is income?ncome is the consumption and savings opportunity gained by an entity within a
pecified timeframe, which is generally expressed in monetary terms. However, for
ouseholds and individuals, "income is the sum of all the wages, salaries, profits,
nterests payments, rents and other forms of earnings received. in a given period of
me.
3.How is income different from profit?
ncome = Money you make (with or without taking out expenses)
rofit = Money earned after subtraction of expenses.
4.When is income recognized in the income statement?
Bottom line" is the net income that is calculated after subtracting the expenses from
evenue. Since this forms the last line of the income statement, it is informally called
7/28/2019 Question Bank on Accounting for Managers With Answer
23/93
bottom line." It is important to investor as it represents the profit for the year
ttributable to the shareholder.
5.What are expenses?
An expense is a cost that is "paid" or "remitted", usually in exchange for something of
alue. Something that seems to cost a great deal is "expensive". For a tenant, rent is an
xpense. For students or parents, tuition is an expense. Buying food, clothing, furniture
r automobile, paid salaries is often referred to as an expense.
6.What is an income statement?
A financial statement that measures a company's financial performance over a specific
ccounting period. Financial performance is assessed by giving a summary of how the
usiness incurred its revenues and expenses through both operating and non-operating
ctivities. It also shows the net profit or loss incurred over a specific accounting period,
ypically over a fiscal quarter or year.
7.Explain some of the important items of an income statement.
Net Sales (sales or revenue): These all refer to the value of a company's sales of goodsnd services to its customer. Even though a company's "bottom line" (its net income)
ets most of the attention from investor, the "top line" is where the revenue or income
rocess begins. Also, in the long run, profit margins on a companys existing productsend to eventually reach a maximum that is difficult on which to improve. Thus,
ompanies typically can grow no faster than their revenues.
Cost of Sales(cost of goods (or products) sold (COGS), and cost of services): For a
manufacturer, cost of sales is the expense incurred for raw materials, labor and
manufacturing overhead used in the production of its goods. While it may be statedeparately, depreciation expense belongs in the cost of sales. For wholesale and retaile,
he cost of sales is essentially the purchase cost of merchandise used for resale. For
ervice-related businesses, cost of sales represents the cost of services rendered or cost
f revenues.
7/28/2019 Question Bank on Accounting for Managers With Answer
24/93
Gross Profit(Gross income or gross margin): A company's gross profit does more than
imply represent the difference between net sales and the cost of sales. Gross profit
rovides the resources to cover all of the company are other expenses. Obviously, the
reater and more stable a company's gross margin, the greater potential there is for
ositive bottom line (net income) results.elling, General and Administrative Expenses: Often referred to as SG&A, this
ccount comprises a company's operational expenses. Financial analysts generally
ssume that management exercises a great deal of control over this expense category.
he trend of SG&A expenses, as a percentage of sales, is watched closely to detect
igns, both positive and negative, of managerial efficiency.
Operating Income: Deducting SG&A from a company's gross profit produces
perating income. This figure represents a company's earnings from its normal
perations before any so-called non-operating income and/or costs such as interestxpense, taxes and special items. Income at the operating level, which is viewed as
more reliable, is often used by financial analysts rather than net income as a measure of
rofitability.
Interest Expense: This item reflects the costs of a company's borrowings.
ometimes companies record a net figure here for interest expense and interest
ncome from invested funds.
Pretax Income: Another carefully watched indicator of profitability, earnings
arnered before the income tax expense is an important step in the income statement.
Numerous and drive techniques are available to companies to avoid and/or minimize
axes that affect their reported income. Because these actions are not part of a
ompany's business operations, analysts may choose to use pretax income as a more
ccurate measure of corporate profitability.
ncome Taxes: As stated, the income tax amount has not actually been paid - it is an
stimate, or an account that has been created to cover what a company expects to pay.
pecial Items or Extraordinary Expenses: A variety of events can occasion charges
gainst income. They are commonly identified as restructuring charges, unusual or
onrecurring items and discontinued operations. These write-offs are supposed to bene-time events. Investor need to take these special items into account when making
nter-annual profit comparisons because they can distort evaluations.
Net Income (net profit or net earnings): This is the bottom line, which is the most
ommonly used indicator of a company's profitability. Of course, if expenses exceed
ncome, this account caption will read as a net loss. After the payment of preferred
7/28/2019 Question Bank on Accounting for Managers With Answer
25/93
ividends, if any, net income becomes part of a company's equity position as retained
arnings. Supplemental data is also presented for net income on the basis of shares
utstanding (basic) and the potential convention of stock options, warrants etc
diluted).
Comprehensive Income: The concept of comprehensive income, which is relativelyew (1998), takes into consideration the effect of such items as foreign currency
ranslations adjustments, minimum pension liability adjustments and unrealized
ains/losses on certain investments in debt and equity. The investment community
ontinues to focus on the net income figure. The aforementioned adjustment items all
elate to volatile market and/or economic events that are out of the control of a
ompany's management. Their impact is real when they occur, but they tend to even
ut over an extended period of time.
Conclusion
When an investor understands the income and expense components of the income
tatement, he or she can appreciate what makes a company profitable., it experienced a
major increase in sales for the period reviewed and was also able to control the expense
ide of its business. That's a sign of very efficient management.
8.Distinguish between expense and asset?
An asset is something of value that is controlled by the businesses. You may haveurrent assets (items that will be available for up to 12 months) such as cash or office
upplies and you may have non-current assets (items that will be available for more
han 12months) such as a car. (PS on some non-current assets you will also have to take
nto consideration the depreciation of the asset)
An expense is outflows that are incurred when used to generate revenue, such as wages,
ent, advertising etc. these are all items that the business must pay for in order for them
o generate revenue. for example: if running a cafe, if the business operator don't pay
wages to their staff, then they will not have anyone to serve customer, which in turn
eads them to lose revenue.9.
What is depreciation?
A method of allocating the cost of a tangible asset over its useful life. Businesses
epreciate long-term assets for both tax and accounting purposes
A decrease in an asset's value caused by unfavorable market conditions.
7/28/2019 Question Bank on Accounting for Managers With Answer
26/93
0.A).Why arent purchase of equipment shown in the income statement?
Because it is capital expenditure. according to dual aspect concept the P/L
ccount is not related to purchase of equipment, the balance of equipment account
ransferred to balance sheet.B) Why is credit sales shown in the income statement?
Because when we calculate profit (Profit= total sales-total expenses)
Total sales=cash sales + credit sales
C) Why is dividend not shown in the income statement?
Dividend is a part of income; dividend is distributed after calculating the income,
hats why dividend is not shown in the income statement.D)Why is depreciation on furniture an expense?
Depreciation moves the cost of an asset to Depreciation Expense during the asset'sseful life. The accounts involved in recording depreciation are Depreciation Expense
nd Accumulated Depreciation. As you can see, cash is not involved. In other words,
epreciation reduces net income on the income statement, but it does not reduce the
Cash account on the balance sheet.
E)Why is interest due but not paid shown as an expense?
According to Accrual concept It recognizes income when it is earned not when it is
ollected. In case of expenses vice vea.
1.Explain the impact of depreciation on the financial statements.
In income statement shown as a expenses,
In balance sheet depreciation deducted from fixed asset and shown net figure of fixed
sset.
In cash flow statement depreciation adding to the net cash flow as a non cash
xpenses.
2.What are the different methods of charging depreciation?
Commonly used depreciation methods:
The straight line method
Accelerated methods:
Written -down-value method
7/28/2019 Question Bank on Accounting for Managers With Answer
27/93
Sum-of-the-yea-digit method
The production unit method
3.Examine the impact of provision for bad and doubtful debts on the incometatements.
he provision for doubtful debts is identical to the allowance for doubtful accounts.
he provision is the estimated amount of bad debt that will arise from accounts
eceivable that have not yet been collected. The provision is used under accrual basis
ccounting, so that an expense is recognized for probable bad debts as soon as invoices
re issued to customer, rather than waiting several months to find out exactly which
nvoices turned out to be bad debts. Thus, the net impact of the provision is to
ccelerate the recognition of bad debts.You typically estimate the amount of bad debt based on historical experience, andharge this amount to expense with a debit to the bad debt expense account (which
ppear in the income statement) and a credit in the provision for doubtful debts
ccount (which appear in the balance sheet). You should make this entry in the same
eriod when you bill the customer, so that revenues are matched with all applicable
xpenses (as per the matching principle).
4.Explain the process of determining EPS.The process of determining EPS is
particular Amount
Revenue xxxx
Less- Direct Expanses xxxx
Gross profit xxxx
less Indirect expenses xxxx
EBIT xxxx
less Interest xxxx
EBT xxxx
less Tax xxxx
EAT xxxx
EAT/no of equity share= EPS xxxx
7/28/2019 Question Bank on Accounting for Managers With Answer
28/93
5.What is relevance of diluted EPS?
A performance metric used to gauge the quality of a company's earnings per share
EPS) if all convertible securities were exercised. Convertible securities refer to all
utstanding convertible preferred shares, convertible debentures, stock optionsprimarily employee based) and warrants. Unless the company has no additional
otential shares outstanding (a relatively rare circumstance) the diluted EPS will
lways be lower than the simple EPS.6.
What is weighted average number of share?his element represents the weighted average total number of shares issued throughout
he period including the fit (beginning balance outstanding) and last (ending balance
utstanding) day of the period before considering any reductions (for instance, shareseld in treasury) to arrive at the weighted average number of shares outstanding.
Weighted average relates to the portion of time within a reporting period that common
hares have been issued and outstanding to the total time in that period. Such concept is
sed in determining the weighted average number of shares outstanding for purposes of
alculating earnings per share (basic).
7.What is appropriation of profit?A debit in a nominal account for ascertaining profits like the Trading and Profit and Loss accountwhich represents a transfer of credit balance from to some other nominal account (holding profitsept aside) is said to be an appropriation of profits. Such accounts to which credit balances (profits)
re transferred to are generally named reserve, provision or fund.8.
What is the composition of borrowing cost?
Borrowing cost may include:
interest expense calculated by the effective interest method under IAS 39,finance charges in respect of finance leases recognized in accordance with IAS 17
eases, and
Exchange differences arising from foreign currency borrowings to the extent that they
re regarded as an adjustment to interest costs.
7/28/2019 Question Bank on Accounting for Managers With Answer
29/93
9.Examine the impact of borrowing cost on the financial statement.
Borrowing costs that are directly attributable to the acquisition, construction or
roduction of a qualifying asset form part of the cost of that asset and, therefore, shoulde capitalized. Other borrowing costs are recognized as an expense.
0.What is the difference between revenue and profit?
Revenue is the money coming in (from sales or whatever), profit is what is left after all
xpenses have been paid.
1.Explain the relationship between income statement and accounting equation.
he income statement is the financial statement that reports a company's revenues and
xpenses and the resulting net income. While the balance sheet is concerned with one
oint in time, the income statement covers a time interval or period of time. The
ncome statement will explain part of the change in the owner's or stockholder' equity
uring the time interval between two balance sheets.
2.What are cash equivalents?
ash equivalents are one of the three main asset classes, along with stocks and bonds. These
ecurities have a low-risk, low-return profile. Cash equivalents include U.S. government Treasuryills, bank certificates of deposit, banker' acceptances, corporate commercial paper and other money
market instruments.
3.Distinguish between cash and profit.
Profit is the surplus after total costs have been deducted from total revenue, whereas
ash is money at bank or in hand, readily available for use.
Profits are calculated in the trading, profit and loss account whereas cash is shown in
he cash flow forecast or cash flow statement.
7/28/2019 Question Bank on Accounting for Managers With Answer
30/93
4.Classify the cash flows.
A list of cash flows is more meaningful to investor and creditor if they can determine
he type of transaction that gave rise to each cash flow. Toward this end, the statement
f cash flows classifies all transactions affecting cash into one of three categories:1) Operating activities,
2) Investing activities, and
3) Financing activities.
5.What is cash from operating activities (CFO)?
he inflows and outflows of cash that result from activities reported in the income
tatement are classified as cash flows from operating activitiesinflows and outflows of
ash related to transactions entering into the determination of net operation income.
. Inther words, this classification of cash flows includes the elements of net income
eported on a cash basis rather than an accrual basis.
Cash inflows include cash received from:
Customer from the sale of goods or services
hese amounts may differ from sales and investment income reported in the income
tatement. For example, sales revenue measured on the accrual basis reflects revenuearned during the period, not necessarily the cash actually collected. Revenue will not
qual cash collected from customer if receivables from customer or unearned revenue
hanged during the period.
Cash outflows include cash paid for:
Cash paid to supplier
Cash paid to employees
Income tax paid
Extraordinary items
7/28/2019 Question Bank on Accounting for Managers With Answer
31/93
Basis rather than an accrual basis. Likewise, these amounts may differ from the
orresponding accrual expenses reported in the income statement. Expenses are
eported when incurred, not necessarily when cash is actually paid for those expenses.
Also, some revenues and expenses, like depreciation expense, don't affect cash at all
nd aren't included as cash outflows from operating activities.
The difference between the inflows and outflows is called net cash flows from
perating activities. This is equivalent to net income if the income statement had beenrepared on cash.
6.What is the treatment of dividend and interest received and paid?
he dividend and interest received and paid is going under nominal account as per
ominal account principle dividend & interest paid show in income statement as
xpense and it show at cash flow statement in financing activity as cash out flow. In
ase of received it vice versa.
7.Distinguish between cash from operating activities and operating profit.
Cash from operating is cash basis accounting and operating profit is accrual basis of
ccounting
You make sales on credit, but haven't collected cash yet. Net Income goes up, but A/R
oes up instead of cash.8.
Examine the relationship between profit and cash from operating
ctivities.Net income is the profit after all expenses have been accounted for - based on GAAP
Cash from operating activities is the cash increase from just the operating activities of
he business. It does not include buying and selling assets (investing activities) or
orrowing / paying back debt or money received from issuing stock (financing
ctivities). Net income is nice but cash pays the bills. Most companies use the indirectmethod of preparing the cash flow statement where you start with net income and then
dd / subtract differences between GAAP and cash.
7/28/2019 Question Bank on Accounting for Managers With Answer
32/93
9.Why is cash generated during the year generally not equal to profit for the year?
Cash" transactions where the transaction and the transfer of cash occur at different
mes. Non -cash transactions where actual "cash" is not exchanged
Many businesses do their bookkeeping and accounting on an "accrual" basis. Someusinesses are required to use accrual methods for tax or other reasons
It is because of this accrual method that cash flows and net profits become separately
mportant.
Net profits are Total revenue minus Total expenses
ften calculated by taking Gross profits and subtracting overheads and interest
xpenses. Net profits are a measure of a business's long-term financial health.
A similar relative measure (to Net Profits) is EBITDA
Earnings before Interest, Taxes, Depreciation, and Amortization".Cash flows are cash receipts less cash payments.
Cash flows are a measure of a business's short-term financial health.
A business can go bankrupt in the short-run if "negative" cash flows go on for too
ong a period of time; likewise they will likely go bankrupt in the long-run when net
rofits are too low over a long period of time.
00.Briefly explain the provisions of the Accounting Standard (AS)-3
Accounting Standard (AS) 3,Cash Flow Statements (revised 1997), issued by the Council of the Institute of
Chartered Accountants of India, comes into effect in respect of accounting periods
ommencing on or after 1-4-1997. This Standard speeders Accounting Standard (AS)
, Changes in Financial Position, issued in June 1981.This Standard is mandatory inature2 in respect of accounting periods commencing on or after 1-4-2004 for the
nterprises which fall in any one or more of the following categories, at any time
uring the accounting period:
Objective of Accounting Standard 3 - Cash Flow Statements - AS 3
nformation about the cash flows of an enterprise is useful in providing use of financial
tatements with a basis to assess the ability of the enterprise to generate cash and cash
quivalents and the needs of the enterprise to utilize those cash flows. The economic
ecisions that are taken by use require an evaluation of the ability of an enterprise to
7/28/2019 Question Bank on Accounting for Managers With Answer
33/93
enerate cash and cash equivalents and the timing and certainty of their generation. The
tatement deals with the provision of information about the historical changes in cash
nd cash equivalents of an enterprise by means of a cash flow statement which
lassifies cash flows during the period from operating, investing and financing
ctivities.
Classification Of Cash Flows
According to Accounting standard -3 (Revised) the cash flow statement should report
ash flows during the period classified by operating, investing, and financing activities
hus cash flows are classified in to three main categories:
.Cash flow from operating activities.
.
Cash flow from investing activities..Cash flow from financing activities.
.Cash flow from operating activities:Operating activities are the principal revenue-producing activities of the enterprise
nd other activities that are not investing or financing activities.
The amount of cash flow arising from operating activities is a key indicator of the
xtent to which the operations of the enterprise have generated sufficient cash flow tomaintain the operating capability of the enterprise, pay dividends, repay loans, and
make new investments without resource to external source of financing. Information
bout the specific components of historical operating cash flows is useful, in
onjunction with other information, in forecasting future operating cash flows.
Cash flow from operating activities are primarily derived from the principal
evenue-producing activities of the enterprise. Therefore they generally result from the
ransactions and other events that enter into the determination of net profit or loss.
Examples of cash flow from operating activities are:
a. Cash receipts from the sale of goods and the rendering of service;
b.Cash receipts from royalties, fees, commissions, and other revenue
7/28/2019 Question Bank on Accounting for Managers With Answer
34/93
c.Cash payments to and on behalf of employees ;
d.
e.Cash payments to and on behalf of employees ;
f.
Cash receipts and cash payments of an insurance enterprise for premiums andclaims, annuities and other policy benefits;
g.Cash payments or refunds of income taxes unless they can be specifically
identified with financing and investing activities ;
h.Cash receipts and payments relating to future contracts, forward contracts, option
contracts, and swap contracts when the contracts are held for dealing or trading
purposes.
ome transactions, such as the sale of an item of plant, may give rise to a gain or loss
which is included in the determination of net profit or loss however the cash flow
elating to such transactions are cash flows from investing activities.
.Cash flow from investing activities.
nvesting activities are the acquisition and disposal of long-term assets and other
nvestments not included in cash equivalents. The separate disclosure of cash flows
rising from investing activities is important because the cash flows represent the
xtent to which expenditures have been made for resources intended to generate future
ncome and cash flows.Examples of cash flow arising from investing activities are:.Cash payment to acquire fixed assets (including intangibles). These payments include
hose relating to capitalized research and development cost and sale constructed fixed
ssets.
.Cash receipt from disposal of fixed assets (including intangibles).
. Cash payments to acquire shares, warrants or debt instruments of other enterprises
nd interest in joint venture (other than payments for those instruments considered to
e cash equivalent and those held for dealing or trading purpose).
.
Cash received from disposal of shares, warrants or debt instruments of othernterprises and interest in joint venture (other than received for those instruments
onsidered to be cash equivalent and those held for dealing or trading purpose).
.Cash advances nd loans made to third parties (other than advances and loans made by
financial enterprise).
7/28/2019 Question Bank on Accounting for Managers With Answer
35/93
Cash received from the payment of advances and loans made to third parties (other
han advanced and loans of financial enterprise).
.Cash payments for future contracts, forward contracts options and swap contracts
xcept when the contracts are dealing or trading purpose, or the payments are classified
s financing activities..Cash received for future contracts, forward contracts options and swap contracts
xcept when the contracts are dealing or trading purpose, or the received are classified
s financing activities.
.Cash flow from financing activities.inancing activities are activities that result in changes in the size and composition of
he owners capital (including preference share capital in the case of a company) andorrowing of the enterprise.
he separate disclosure of cash flows arising from financing activities is importantecause it is useful in predicting claims on future cash flows by provider of fund (both
apital and borrowings) to the enterprise.
Examples of cash flow arising from financing activities are:
.Cash proceeds from issuing shares or other similar instruments.
.Cash proceeds from issuing debentures, loans, bonds, and other short or long termorrowings.
.
Cash payments of amounts borrowed such as redemption of debentures, bonds,reference shares.
101.Examine the impact of the changes in the working capital on the cash
from operating activities.
Working capital is calculated as current assets minus current liabilities on the balance
sheet. Just as the name suggests, working capital is the money that the business needs
o "work." Therefore, any cash used in or provided by working capital is included inhe "cash flows from operating activities" section.
Any change in the balances of each line item of working capital from one period to
another will affect a firm's cash flows. For example, if a company's accounts
receivable increase at the end of the year, this means that the firm collected less money
7/28/2019 Question Bank on Accounting for Managers With Answer
36/93
from its customer than it recorded in sales during the same year on its income
statement. This is a negative event for cash flow and may contribute to the "Net
changes in current assets and current liabilities" on the firm's cash flow statement to be
negative. On the flip side, if accounts payable were also to increase, it means a firm is
able to pay its supplier more slowly, which is a positive for cash flow. Were all aboutshortcuts to make financial statement analysis easier, so here's a little secret that's allyou really need to remember regarding changes in working capital:
If balance of an asset increases, cash flow from operations will decrease.
If balance of an asset decreases, cash flow from operations will increase.
If balance of a liability increases, cash flow from operations will increase.
If balance of a liability decreases, cash flow from operations will decrease.
Current assets may include things like inventories and accounts receivable, whilecurrent liabilities would include short-term debt and accounts payable.
102.When will the cash from investing activities (CFI) be negative?
Negative cash flow from investing activities means that a company has spent more
money on fixed assets than it has received from the sale of fixed assets in a given
financial period. It's usually a sign of a company growing/investing in itself with a
few to growing cash flow from operating activities,103.
Explain with example the impact of depreciation on the cash from operating
activities.Depreciation is accounting's way to record wear and tear on a company's property,
plant, and equipment (P&E). Even though it's an expense on the income statement
depreciation is not a cash charge, so it's added back to net income.
7/28/2019 Question Bank on Accounting for Managers With Answer
37/93
Example
Use the following information to calculate net cash flow from operating activities
using indirect method:
Net Income 7,000Depreciation Expense 1,000
Increase in Accounts Receivable 4,400
Increase in Prepaid Rent 7,000
Decrease in Prepaid Insurance 1,300
Increase in Accounts Payable 14,000
Increase in Wages Payable 1,000
Decrease in Income Tax Payable 700
Gain on Sale of Equipment 1,800
Solution:
Cash Flows from Operating Activities:
Net Income 7,000
Depreciation Expense 1,000
Gain on Sale of Equipment 1,800Increase in Accounts Receivable 4,400
Increase in Prepaid Rent 7,000Decrease in Prepaid Insurance 1,300
Increase in Accounts Payable 14,000
Increase in Wages Payable 1,000
Decrease in Income Tax Payable 700Net Cash Flow from Operating Activities 10,400
104.Examine the implications of having positive CFF, negative CFI, and negative
CFO.
The investing activities refer to the company's investment in other companies and
goods, or to investments made in the company by other. When a company
records negativecashflow, it may be because the company is struggling, or it may
be because the company had a number of expenses that upped outflow.
7/28/2019 Question Bank on Accounting for Managers With Answer
38/93
Reviewing this statement can help owner and manage discover problems related to
the companysnegativecashflow. High operating expenses are one reason acompany may have negativecashflow.
105.Can a company have positive profit and huge negative CFO?
Yes it is possible.
Here's an example: Near the end of the year you signed a big client. To meet their
needs, you have to rapidly increase production. You buy a new production machine
with cash; you increase your raw materials inventory, paid for in cash. And just
before the end of the year, you ship out your fit large order to this new client on 30
day terms, increasing your profits...and receivables (not cash). And the result is
negative cash flow from operation and positive profit.106.
A company having profit will always have positive cash from operating
activities (CFO). Comment.
Cash flow from operating activities is a section of the cash flow statement that
provides information regarding the cash-generating abilities of a company's core
activities.
How It Works/Example:
Cash flow from operating activities is generally calculated according to the
following formula:
Cash Flow from Operating Activities = Net income + Noncash Expenses +
Changes in Working Capital
The noncash expenses are usually
The depreciation and/oramortization expenses listed on the firms income.
A statement of cash flows typically breaks out a company's cash sources and uses
for the period into three categories: cash flows from operations, cash flows
from investing activities, and cash flows from financing activities. Cash flows from
http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/cash-flow-statement-2786http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/net-income-808http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/working-capital-869http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/depreciation-1328http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/amortization-2073http://www.investinganswers.com/financial-dictionary/businesses-corporations/cash-5011http://www.investinganswers.com/financial-dictionary/investing/investing-5065http://www.investinganswers.com/financial-dictionary/investing/investing-5065http://www.investinganswers.com/financial-dictionary/businesses-corporations/cash-5011http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/amortization-2073http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/depreciation-1328http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/working-capital-869http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/net-income-808http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/cash-flow-statement-27867/28/2019 Question Bank on Accounting for Managers With Answer
39/93
operations primarily measure the cash-generating abilities of the company's core
operations rather than from its ability to raise capital or purchase assets.
Because working capital is a component ofcash flow from operations, investo
should be aware that companies can influence cash flow from operating activitiesby lengthening the time they take to pay the bills (thus preserving their cash),
shortening the time it takes to collect whats owed to them (thus accelerating thereceipt of cash), and putting off buying inventory (again thus preserving cash). It is
also important to note that companies also have some leeway about what items are
or are not considered capital expenditures, and the investor should be aware of this
when comparing the cash flow of different companies.
107.Changes in working capital will no effect on CFO. Comment.Operating cash flow doesn't mean EBITDA (earnings before interest taxes
depreciation and amortization). While EBITDA is sometimes called "cash flow", it
is really earnings before the effects of financing and capital investment decisions. It
does not capture the changes in working capital (inventories, receivables, etc.). The
real operating cash flow is the number derived in the statement of cash flows.
108.Buy back of shares will increase the cash from financing activities (CFF).Cash flow that a company acquires from a financing round instead of from
operations. That is, cash flow from financing activities is the net amount that a
company receives from issuing stock and bonds.
Generally speaking, shareholder prefer to see positive cash flow from financing
activities, but a negative amount could mean that a company is buying back its own
stock, which drives up the share price. It is calculated thus:
Cash flow from financing activities = Cash from stock and bonds - debt service on
bonds - dividends paid to stockholder - Stock buybacks - called debt.109.
Dividend paid and dividend received will affect the cash from financing
activities (CFF). Comment.
An entity may classify dividends paid as a financing cash flow because they are a
cost of obtaining financial resources. Alternatively, the entity may classify
http://www.investinganswers.com/financial-dictionary/economics/capital-5749http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/cash-flow-1175http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/inventory-2474http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/note-5082http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/note-5082http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/inventory-2474http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/cash-flow-1175http://www.investinganswers.com/financial-dictionary/economics/capital-57497/28/2019 Question Bank on Accounting for Managers With Answer
40/93
dividends paid as a component of cash flows from operating activities because they
are paid out of operating cash flows.
110.The impact of the following transaction of CFO:
Paid salaries operating outflowPurchased goods on credit
Interest received investing inflow
Interest paid investing outflowProfit on the sale of fixed assets investing inflow
Issued capital at a premium Financing inflow
Collections from old debtor. Operating inflow
Buy back of shares Financing Inflow111.
What is stock split?
A corporate action in which a company's existing shares are divided into multiple
shares. Although the number of shares outstanding increases by a specific multiple,
the total dollar value of the shares remains the same compared to pre-split amounts,
because no real value has been added as a result of the split.
112.How is stock split different from the issue of bonus issue?Simply put- A bonus is a free additional share. A stock split is the same share split
into two.
Usually companies accumulate its earnings in reserve funds instead of paying it to
share-holder in form of dividend. This accumulated reserve fund is then converted
into share-capital and allotted to share-holder as bonus shares in proportion to their
existing holding. So, Share-capital of the company increases with a
concomitant decrease in its Reserve profits. Share-holder get bonus shares in
compensation of dividend.But when a share is split, say, from 10 denominations to Re 1 denomination, there
would neither be an increase in the share capital nor a concomitant decrease in the
reserves of the company. This is because while in a bonus issue a peon having one
share of 10 face value would get another share of the same face value should the
7/28/2019 Question Bank on Accounting for Managers With Answer
41/93
company go for a 1:1 bonus what would happen in a stock split is his one 10 share
would now be converted into ten Re 1 shares.
113.Explain the impact if bonus issue on the financial statements of a company.
When the additional shares are allotted to the existing shareholder without receiving
any additional payment from them, it is known as issue of bonus shares. Bonus
shares are allotted by capitalizing the reserves and surplus. Issue of bonus shares
results in the conversion of the company's profits into share capital. Therefore it is
termed as capitalization of company's profits. Since such shares are issued to the
equity shareholder in proportion to their holdings of equity share capital of the
company, a shareholder continues to retain his / her proportionate ownership of the
company. Issue of bonus shares does not affect the total capital structure of the
company. It is simply a capitalization of that portion of shareholder' equity which is
represented by reserves and surpluses. it also does not affect the total earnings of
the shareholder. Issue of Bonus Shares is more or less a financial gimmick without
any real impact on the wealth of the shareholder. Still firms issue bonus shares andshareholder look forward to issue of bonus shares.
114.When are the shares said to be issued at a premium?
A company issues its shares at a premium when the price at which it sells the sharesis higher than their par value. This is quite common, since the par value is typically
set at a minimal value, such as 0.01 per share. The amount of the premium is the
difference between the par value and the selling price.
115.How share premium is be used?
According to Companies Act 1985 s.130 and companies ordinance 1984 (Nepal)
s.84
1) If a company issues shares at a premium, whether for cash or otherwise, a sumequal to the aggregate amount or value of the premiums on those shares shall be
transferred to an account called "the share premium account".
7/28/2019 Question Bank on Accounting for Managers With Answer
42/93
(2) The share premium account may be applied by the company in paying up
unissued shares to be allotted to member as fully paid bonus shares, or in writing
off-
(a) The company's preliminary expenses; or
(b) The expenses of, or the commission paid or discount allowed on, any issue of
shares or debentures of the company, or
(c) In providing for the premium payable on redemption of debentures of the
company.
(3) Subject to this, the provisions of this Act relating to the reduction of a
company's share capital apply as if the share premium account were part of its paid
up share capital.
116.What are the right shares?
Rights shares are issued u/s 81 of the Companies Act, 1956 when the company
decides to increase its subscribed capital. The scheme has the following
characteristics:
(a) Such share shall be offered to its equity shareholder in proportion to their hold-
ing.
(b) The offer shall be made by a notice of not less than 15 days within which the
offer is to be accepted. Otherwise it is deemed as declined.
(c) The equity shareholder to whom the offer is made shall be given a right to
renounce the offer in full or in part in favor of any other peon and the notice shall
contain a statement to this effect.
(d)After the expiry of the notice period or on receipt of intimation declining the
offer, whichever is earlier, the Board of Director may dispose of such shares in themanner most beneficial to the company.
7/28/2019 Question Bank on Accounting for Managers With Answer
43/93
117.What the bonus shares?
A bonus share is a free share of stock given to current shareholder in a company,
based upon the number of shares that the shareholder already owns. While the issueof bonus shares increases the total number of shares issued and owned, it does not
change the value of the company. Although the total number of issued
shares increases, the ratio of number of shares held by each shareholder remains
constant.
118.What is the difference between public issue and private issue of shares?
When an issue isnt made to just a select group of people however is available to
the general public as well as any other investor at large, its a public issueHowever, if the issue is enabled to a select group of people, its known as private
placement. According to Companies Act, 1956, an share issue becomes public
when it results in allotment of 50 peons or even more. Share issue becomes
privately when an allotment is made to lower than 50 peons.
119.What is capital redemption reserve?
Capital Redemption Revere is an reserve created when a company buys it owns
shares which reduces its share capital. This reserve is not distributable toshareholder and can be used to pay bonus shared issued.
120.What is buyback of shares?
The repurchase of outstanding shares (repurchase) by a company in order to reduce
the number of shares on the market. Companies will buy back shares either to
increase the value of shares still available (reducing supply), or to eliminate any
threats by shareholder who may be looking for a controlling stake.
121.Examine the impact of buy-back of shares on the financial statements.The impact of buy-back of shares
If Market Price per Share is greater than Book Value per Share, Book Value per
Share will decrease.
7/28/2019 Question Bank on Accounting for Managers With Answer
44/93
If Market Price per Share is less than Book Value per Share, Book Value per Share
will increase.
This happens because the shares are repurchased at or above the market value, so
when the market price is more than the book value, more money is spent to buy
shares having less value which erodes the book value for remaining shares.122.
What is book-building?Book building refer to the process of generating, capturing, and recording investor
demand for shares during an Initial Public Offering (IPO), or other securities during
their issuance process, in order to support efficient discovery. Usually
the issuer appoints a major investment bank to act as a major securities
underwriter or book runner. The book is the off-market collation of investor
demand by the book runner and is confidential to the book runner, issuer,and underwriter. Where shares are acquired, or transferred via a book build, the
transfer occur off-market, and the transfer is not guaranteed by an exchangesclearing house. Where an underwriter has been appointed, the underwriter bea the
risk of non-payment by an acquirer or non-delivery by the seller.
123.How is dividend declared?
Dividends are payments made by a corporation to its shareholder member. It is the
portion of corporate profits paid out to stockholder.[1]
When a corporation earnsa profit or surplus, that money can be put to two uses: it can either be re-invested in
the business (called retained earnings), or it can be distributed to shareholder. There
are two ways to distribute cash to shareholder: share repurchases or
dividends. Many corporations retain a portion of their earnings and pay the
remainder as a dividend.
A dividend is allocated as a fixed amount per share. Therefore, a shareholder
receives a dividend in proportion to their shareholding. For the joint stock company,
paying dividends is not an expense; rather, it is the division of after tax profitsamong shareholder. Retained earnings (profits that have not been distributed as
dividends) are shown in the shareholder equity section in the company's balance
sheet - the same as its issued share capital. Public companies usually pay dividends
on a fixed schedule, but may declare a dividend at any time, sometimes called
a special dividend to distinguish it from the fixed schedule dividends.
http://en.wikipedia.org/wiki/Dividend#cite_note-1http://en.wikipedia.org/wiki/Dividend#cite_note-1http://en.wikipedia.org/wiki/Dividend#cite_note-17/28/2019 Question Bank on Accounting for Managers With Answer
45/93
Cooperatives, on the other hand, allocate dividends according to membe' activity, so
their dividends are often considered to be a pre-tax expense.
Dividends are usually paid in the form of cash, store credits (common among
retail consume' cooperatives) and shares in the company (either newly created
shares or existing shares bought in the market.) Further, many public companies
offer dividend reinvestment plans, which automatically use the cash dividend to
purchase additional shares for the shareholder.
124.How is cash dividend different from stock dividend?
A cash dividend is a payment made by a company out of its earnings to investor in
the form of cash (check or electronic transfer). This transfer economic value from
the company to the shareholder instead of the company using the money for
operations. However, this does cause the company's share price to drop my roughly
the same amount as the dividend. For example, if a company issues a cash dividend
equal to 5% of the stock price, shareholder will see a resulting loss of 5% in the
price of their shares. This is a result of the economic value transfer. Another
consequence of cash dividends is that receive of cash dividends must pay tax on the
value of the distribution, lowering its final value. Cash dividends are beneficial,
however, in that they provide shareholder with regular income on their investment
along with exposure to capital appreciation.
A stock dividend, on the other hand, is an increase in the amount of shares of acompany with the new shares being given to shareholder. For example, if a
company was to issue a 5% stock dividend, it would increase the amount of shares
by 5% (1 share for every 20 owned). If there are 1 million shares in a company, this
would translate into an additional 50,000 shares. If you owned 100 shares in the
company, you'd receive five additional shares.
125.How is the preference shares redeemed?
According to Section 100 of the Companies Act, 1956 : If a company collects themoney through redeemable preference shares, this money must be returned on its
maturity whether company is liquidated or not. Section 80 of the Companies Act,
1956 lays down some provisions relating to redeemable preference shares:
The shares to be redeemed must be fully paid-up.
7/28/2019 Question Bank on Accounting for Managers With Answer
46/93
Capital reserves from forfeiture of shares and share premium account are not
available for payment of redeemable preference share holder.
Its payment will be out of the net profit of the company or amount received
on issue of new shares. Company cannot sale amount of asset for redemption
of redeemable preference shares.
126.Examine difference between preference shares and equity shares?
Equity Share Holder gets Equity Shares of the Company while Preference
Share Holder get Preference Shares.
Equity Shares are shares whose profit sharing depends on the PROFIT making
of the Company.
If the company makes huge profits, there dividend sharing will be high else itwill be low.
Whereas for Preference Share Holder, Dividend is a fixed income to them.
They get dividend at a fixed rate, irrespective of the Profit Making of the
Company.
Dividends to Equity Share holder is optional and at company's discretion.
For preference share holder, it is a right to get cumulative or non cumulative
dividends from the company.
Equity Shareholder are called Residual Owner of the company. After all theobligations of the company are over, the Equity Share Holder get their share.
Preference Share Holder get paid their dividends ahead of Equity
Shareholders.
127.What is preferential allotment of shares?
A private placement of shares or of convertible securities by a listed company is
generally known by name of preferential allotment. A listed company going for
preferential allotment has to comply with the requirements contained. According toSEBI (DIP) Guidelines, in addition to the requirements specified in the Companies
Act. In short, preferential issue means allotment of equity to some selected people
by a company which has its share already listed.
7/28/2019 Question Bank on Accounting for Managers With Answer
47/93
128.Explain the impact of the issue of bonus shares on the book value per share.The impact of the bonus shares on the book value per share.
Reserves/Retained Earnings of the company reduce.
Paid up equity share capital increases. Total Net worth remains unchanged.
No. of outstanding shares of the company increases.
Shareholder proportional ownership remains unchanged.
EPS (Earnings per share), MPS (Market price of share), BVPS (Book value
per share) decreases.
129.Examine the difference between buy-back and payment of dividend.
Simply put, the company uses existing cash for both purposes; the difference is thatdividends go directly into your pocket, which you have to pay taxes on, while the
share buyback goes to purchasing shares on the open market, which are then retired
after purchase. This action reduces the number of shares outstanding, so profits are
then divided amongst fewer shares.
130.What are convertible debentures?
Convertible debentures, which are convertible bonds or bonds that can beconverted into equity shares of the issuing company after a predetermined period of
tim