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þ c $  : Accountants follow the  $  , which states that
the requirements of any accounting principle may be ignored when there is no effect on
the users of financial information. Certainly, tracking individual paper clips or pieces of
paper is immaterial and excessively burdensome to any company's accounting
department. Although there is no definitive measure of materiality, the accountant's
judgment on such matters must be sound. Several thousand dollars may not be material
to an entity such as General Motors, but that same figure is quite material to a small,
family-owned business.
þ !  means to disclose all the details of a security problem which are known.
It is a philosophy of security management completely opposed to the idea of security
through obscurity. The concept of full disclosure is controversial, but not new; it has been
an issue for locksmiths since the 19th century. Full disclosure requires that full details of
security vulnerability are disclosed to the public, including details of the vulnerability and
how to detect and exploit it. The theory behind full disclosure is that releasing
vulnerability information results in quicker fixes and better security. Fixes are produced
faster because vendors and authors are forced to respond in order to save face. Security
is improved because the window of exposure, the amount of time the vulnerability is
open to attack, is reduced. The full disclosure principle states that any future event that
may or will occur, and that will have a material economic impact on the financial position
of the business, should be disclosed to probable and potential readers of the statements.
Such disclosures are most frequently made by footnotes. For example, a hotel should
report the building of a new wing, or the future acquisition of another property. A
restaurant facing a lawsuit from a customer who was injured by tripping over a frayed
carpet edge should disclose the contingency of the lawsuit. Similarly, if accounting
practices of the current financial statements were changed and differ from those
previously reported, the changes should be disclosed. Changes from one period to the
next that affect current and future business operations should be reported if possible.
 Changes of this nature include changes made to the method used to determine
depreciation expense or to the method of inventory valuation; such changes would
increase or decrease the value of ending inventory, cost of sales, gross margin, and net
income or loss. All changes disclosed should indicate the dollar effects such disclosures
have on financial statements.

2. Journalize the below transactions, prepare relevant ledger accounts and finally trial balance. . ( 6+6+3
= 15 Marks)
M/s Ventak Enterprise Pvt Ltd.
01.01.2009 Started business with cash Rs. 2,00,000
Goods Rs. 1,00,000 Furniture Rs. 50,000
01.01.2009 Opened Current Account with Rs. 1,00,000
02.01.2009 Placed an order with Ritik for the supply of
goods of the list price of Rs. 1, 00, 00.In this
connection, we paid 9% of the list price as
an advance by cheque.
03.01.2009 Ritik supplied goods of the list price of Rs.
1, 00,000 less 12% trade discount. Packing
and delivery charges Rs. 1,000.
04.01.2009 Purchased goods from Murali of the list
price of Rs. 1,00,000 less 12% trade
discount and paid him by cheque under a
cash discount of 5%
05.01.2009 Received an order from Shyam for supply
of goods of the list price of Rs. 1, 00,000
with an advance of 10% of list price.
06.01.2009 Supplied the above goods at 10% trade
discount. Packing and delivery charges Rs.
1000.
07.01.2009 Goods costing Rs. 80,000 sold to Mr X at a
profit of 20% on sales less 10% trade
discount and 2% cash discount
08.01.2009 Goods (cost Rs. 3,000, Sales Price Rs.
4,000) taken away by the proprietor for his
personal use.
09.01.2009 Shyam became insolvent and paid 80 paise
in a rupee in full and final settlement
10.01.2009 Paid Ritik 80% on account.
11.01.2009 Goods (Cost Rs. 3,000 , Sales Price Rs.
4,000) stolen
12.01.2009 Paid Life Insurance Premium Rs. 1,000.
13.01.2009 Cash embezzled by an employee Rs. 1,000.


3. Explain any two types of errors that are disclosed by trial balance with examples and rectification
entry.
Note - Avoid giving examples given in the self learning material. (10 marks) Nov 2010

The trial balance is prepared to check the arithmetical accuracy of accounts. If the trial balance does
not tally, it implies that there are arithmetical errors in the accounts which require location, detection
and rectification thereof. Even if the trial balance tallies, there may still exist some errors. There are
two types of errors:

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*. These errors by definition are of clerical nature. These errors may be committed at the time
of recording and/or posting. At the time of recording, the wrong amount may be recorded in
journal which will be carried throughout. Such errors will not affect the agreement of the trial
balance. These errors may also be committed at the time of posting, by way of posting wrong
amount, to the wrong side of an account or in the wrong account. The errors resulting in
posting to wrong account will not affect agreement of trial balance, whereas, other errors of
posting will resulting disagreement of trial balance.
8. ÷
  , an amount of Rs. 10,000 received from customer (Debtor) is correctly
recorded on the debit side of the cash book but while posting, the customer's account is
credited with Rs. 1,000. This is an error, which is committed at the time of posting, by posting
wrong amount to the account. This will result in disagreement of trial balance, since, the
credit total of the trail balance will be short by Rs. 9,000.
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10. The errors of omission may be committed at the time of recording the transaction in the
books of original entry or while posting to the ledger. An omission may be complete or partial.
Such errors are known as errors of omission.
11. ÷
   Machinery purchased for Rs. 50,000 by issuing a cheque is recorded first in
the credit side of cash book, in the bank column. Suppose it is not posted to the debit of
machinery account, it is an error of partial omission. The trial balance will not tally. Suppose
the transaction is not entered in the cash book and hence ignored completely, this is a case
of complete omission. It means as if the transaction has not taken place at all. It will not
affect the trial balance and hence the trial balance will tally. This is true only in case of
complete omission.
-%  ' 
13. Accounting entries are recorded as per the generally accepted accounting principles. If any
of these principles are violated or ignored, errors resulting from such violations are known as
errors of principle. As an illustration, Periodicity principle requires maintaining proper
distinction between capital and revenue items. An error of principle may occur due to
incorrect classification of expenditure or receipts between capital and revenue. This is very
 important because it will have an impact on financial statements. It may lead to under/over
stating of income or assets or liabilities, etc.
14. ÷
  amount spent on additions to the buildings should be treated as capital
expenditure and must be debited to the asset account. Instead, if this amount is debited to
maintenance and repairs account, it is treated as a revenue expense. This is an error of
principle. Since instead of asset account, i.e. buildings, the maintenance and repairs account
(expense) is debited, the trial balance will still tally but would not be correct as per generally
accepted
15. accounting principles.
16. Such errors are not disclosed by the trial balance. This will result in understating of income
due to extra charge under maintenance and repairs account and understating the value of
buildings in the balance sheet.
.+%  
18. When two or more errors are committed in such a way that the net effect of these errors on
the debits and credits of accounts is nil, such errors are called compensating errors. They do
not effect the tallying of the trial balance.
19. ÷
  In a credit sale transaction, the sales account is credited in excess by say,
Rs.5,000 and similarly the suppliers account in case of a credit purchase is understated by
Rs.5,000, this is a case of two errors compensating for each others effect. It is to be noted
that extra credit to the sales account is offset by lower credit to the creditor's account, both
being credit balance. Since, one plus is set off by the other minus, the net effect of these two
errors being of compensating nature and do not affect the agreement of trial balance.

4. Let us assume you have been recently appointed as Management Accountant of a small but upcoming
firm. Your immediate supervisor has asked you to prepare certain financial ratios from the balance sheet
of one of their clients M/s Vinod Enterprise.

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Equity Share Capital 50000 Fixed assets 87500
8% Pref Share 10000 Investments 25000
Capital
Reserve Fund 40000 Stock 30000
6% Debentures 20000 Sundry Debtors 13500
Sundry Creditors 30000 Bank Balance 7000
P & L account 21000 Preliminary 8000
Year 2000 - 1000 expenses
2001 - 20000


 

 


£he director intent to transfer a sum of Rs.5000 out of the current year͛s profit to provision for tax. £he
financial ratios needed are:
a. Return on capital employed

b. Current ratio

c. Fixed assets to networth

d. Debt - Equity ratio

e. Return on owner͛s capital. (10 Marks)

5. A friend of you has approached to help him out in setting his books of accounts in order.
Unfortunately he is struck with difference in trial balance. Help him in redrafting the trial balance. (5
Marks)

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1 Stock on 31st Dec,2008 1,92,100
2 Capital 13,450
3 Cash in hand 1,400
4 Bank Overdraft 9,320
5 Sales 2,36,400
6 Purchases 106,400
7 Returns inward 13,400
8 Returns outward 2,960
9 Carriage outward 2,360
10 Carriage inward 14,260
11 Salaries 9,600
12 Wages 3,660
13 Sundry debtors 16,300
14 Sundry creditors 37,360
15 Stock on 1st Jan 2006 94,120
16 Land and building 15,000
17 Plant and machinery 20,900
18 £rade expenses 2,090
3,95,540 3,95,540

6. Explain the accounting treatment of bad debt and provision for doubtful debts with suitable example.
(10 Marks)
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Note: Answer all the questions.

1. The Balanced Score Card is a framework for integrating measures derived from strategy.
Take an Indian company which has adopted balance score card successfully and explain how it
had derived benefits out of this framework.(10 Marks)

2. What is DuPont analysis? Explain all the ratios involved in this analysis. Your answer should
be supported with the chart. (10 Marks)

3. Prepare Funds Flow statement from the following balance sheets and additional information

Liabilities 1998 1999 Assets 1998 1999

Eq Share *,50,000 9,00,000 Good will 20,000 15,000
capital
13% 2,50,000 2,00,000 Plant & 3,50,000 4,50,000
debentures Machinery
Profit and 40,000 50,000 Land & 6,50,000 6,59,000
loss a/c building
General 40,000 50,000 Investments 40,000 1,48,000
reserve
Creditors 50,000 60,000 Debtors 50,000 30,000
Bills payable 30,000 20,000 Stock 80,000 90,000
Provision for 50,000 60,000 Bills *0,000 50,000
tax receivable
Prov for dep 1,00,000 1,40,000 Bank 40,000 30,000
on land and
building
Total Preliminary expenses 10,000 8,000

13,10,000 14,80,000 total 13,10,000 14,80,000

1. Provision for depreciation on P&M was RS40,000 o 31st March 1998 and Rs.45,000 on 31st
March 1999

2. Machinery costing Rs.36000 (acc dep Rs12,000) was sold for Rs.20,000

3. Investment costing Rs.30000 were sold at a profit of 20% on cost

4. Tax of Rs.30000 were paid (20 marks)

4. The standard cost of a certain chemical mixture is:
35% Material A at Rs.25 per kg
65% Material B at Rs.36 per kg
A standard loss of 5% is expected in production NovDuring a period there is used:
125kg of Material A at Rs.2* per kg and
2*5kg of Material B at Rs.34 per kg
The actual output was 365 kg
Calculate

a. Material cost variance

b. Material price variance

c. Material mix variance

d. Material yield variance

Hint: Use net standard output (deduct the loss) (20 Marks

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