Financial Accounting 2022 Board Question Paper

Meaning and Objective of Accounting

Accounting is the art and science of systematically identifying, measuring, recording, classifying, summarizing, analyzing, and communicating financial transactions and economic events in monetary terms to enable informed decision-making by stakeholders.

• One Primary Objective: To ascertain the true operational profit or loss of the business for a specific accounting period and present a fair view of its financial position (assets, liabilities, and equity).

The Accounting Period Concept

The accounting period concept (periodicity postulate) states that although a business entity has an indefinite operational lifespan (going concern), its continuous economic life must be divided into artificial, regular, and uniform time intervals (typically 12 months or one fiscal year).

• Purpose: Enables management, tax authorities, and investors to measure operational performance, compute tax liabilities, and assess financial health periodically rather than waiting until entity liquidation.

Meaning of Debit Note

A debit note is a formal commercial document sent by a buyer to a seller informing them that the seller’s account has been debited in the buyer’s books of accounts.

• Typical Grounds for Issuance:
  1. Return of damaged, defective, or incorrect merchandise (purchases returns).
  2. Overcharge errors discovered on the original commercial sales invoice.
  3. Claiming unrecorded allowances or trade discounts.

Journal Entry: Payment to Creditors with Discount

Opening Journal Entry

Computation of Opening Capital:

$$\text{Total Assets} = \text{Furniture } (80,000) + \text{Machinery } (120,000) + \text{Debtors } (90,000) + \text{Cash } (40,000) = \mathbf{Rs\ 330,000}$$

$$\text{Total Liabilities} = \text{Creditors } (60,000) + \text{Bank Loan } (70,000) = \mathbf{Rs\ 130,000}$$

$$\text{Capital (Balancing Figure)} = \text{Assets} - \text{Liabilities} = 330,000 - 130,000 = \mathbf{Rs\ 200,000}$$

Opening Journal Entry:

Calculation of Net Profit

1. Gross Profit:

   $$\text{Gross Profit} = \text{Sales} - \text{Cost of Goods Sold (COGS)}$$
   $$\text{Gross Profit} = 800,000 - 480,000 = \mathbf{Rs\ 320,000}$$

2. Net Profit:

   $$\text{Net Profit} = \text{Gross Profit} - \text{Administrative and Selling Expenses}$$
   $$\text{Net Profit} = 320,000 - 80,000 = \mathbf{Rs\ 240,000}$$

• Conclusion: The Net Profit for the year is Rs 240,000.

Users of Accounting Information

1. Internal Users:
   • Management & Executives: Utilize financial data for planning, budgeting, cost control, and strategic decision-making.
   • Employees & Trade Unions: Evaluate job security, profitability for annual bonus bargaining, and wage negotiations.
2. External Users:
   • Investors & Shareholders: Assess dividend yields, capital growth potential, and risk.
   • Creditors & Financial Institutions: Evaluate debt-servicing capacity and creditworthiness before issuing loans.
   • Tax Authorities (IRD): Determine statutory corporate income tax, VAT, and excise liabilities.

Accounting Equation and Rules of Debit and Credit

The accounting equation expresses the fundamental financial balance of double-entry bookkeeping:

$$\text{Assets} = \text{Liabilities} + \text{Owner's Equity (Capital)}$$

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Debit and Credit Rules Based on Accounting Equation:

1. Assets: Increase is Debited ($Dr.$); Decrease is Credited ($Cr.$).
2. Liabilities: Increase is Credited ($Cr.$); Decrease is Debited ($Dr.$).
3. Owner’s Equity / Capital: Increase is Credited ($Cr.$); Decrease (drawings/losses) is Debited ($Dr.$).
4. Revenues / Incomes: Increase equity $\implies$ Credited ($Cr.$).
5. Expenses / Losses: Decrease equity $\implies$ Debited ($Dr.$).

Accounting Equation Table

$$\text{Assets} = \text{Liabilities} + \text{Capital}$$

Verification: Assets (302,000) = Liabilities (40,000) + Capital (262,000). Balanced!

Sales Day Book

Solution: Provision for Doubtful Debts Account

Working Notes:

1. Total Bad Debts for the Year:
   $$\text{Total Bad Debts} = \text{Old Bad Debts (Trial Balance)} + \text{New Bad Debts (Adjustment)} = 8,000 + 4,000 = \mathbf{Rs\ 12,000}$$
2. Closing Provision for Doubtful Debts:
   $$\text{Net Remaining Debtors} = \text{Trade Debtors} (64,000) - \text{New Bad Debts} (4,000) = \mathbf{Rs\ 60,000}$$
   $$\text{Required Provision} = 5\% \text{ of } 60,000 = \mathbf{Rs\ 3,000}$$

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Provision for Doubtful Debts Account

• Interpretation: An amount of Rs 5,000 is charged to the Profit and Loss Account as provision expense for the year.

Rectifying Journal Entries (Before Trial Balance)

Accounting Errors Disclosed and Not Disclosed by Trial Balance

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1. Two Errors Disclosed (Detected) by Trial Balance

These errors cause the debit and credit totals of the trial balance to disagree:

1. Posting Wrong Amount to One Side: Recording Rs 5,000 in the Cash Book but accidentally posting Rs 50,000 to the Sales Account.
2. Omission of Posting to One Account: Posting a transaction to the debit of a debtor’s account but completely omitting the credit posting to the sales ledger.

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2. Two Errors Not Disclosed (Undetected) by Trial Balance

These errors do not affect the arithmetical equality of debits and credits:

1. Error of Principle: Violating fundamental GAAP accounting rules (e.g., treating capital expenditure as revenue expenditure, such as debiting repairs when purchasing machinery). Both debit and credit amounts remain equal.
2. Compensating Errors: When an error on the debit side is accidentally offset by an equal error of the same magnitude on the credit side in unrelated accounts.

Cash Flow Statement: Operating, Investing, and Financing Activities (NAS 7 / NFRS)

A Cash Flow Statement explains the net changes in cash and cash equivalents over an accounting period classified across three distinct operational pillars.

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1. Cash Flow from Operating Activities (CFO)

• Concept: Pertains to the primary revenue-generating activities of the enterprise and working capital shifts.
• Inflows: Cash collections from customer sales and fee receipts.
• Outflows: Cash payments to suppliers for raw materials, employee wages, rent, and corporate income taxes.
• Example: Collecting Rs 500,000 from accounts receivable and paying Rs 200,000 to trade vendors.

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2. Cash Flow from Investing Activities (CFI)

• Concept: Involves the acquisition and disposal of long-term property, plant, equipment (PPE), and non-operating financial investments.
• Inflows: Sale proceeds from old vehicles, factory equipment, or redemption of government bonds.
• Outflows: Purchase of commercial land, new software licenses, or plant machinery.
• Example: Purchasing a delivery van for Rs 1,500,000 and receiving Rs 50,000 from the sale of old office furniture.

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3. Cash Flow from Financing Activities (CFF)

• Concept: Relates to transactions that alter the equity capital structure and long-term borrowings of the enterprise.
• Inflows: Issuing new ordinary shares, debentures, or securing long-term bank loans.
• Outflows: Repayment of bank principal, redemption of preference shares, and dividend payments to shareholders.
• Example: Raising Rs 2,000,000 through fresh share issues and distributing Rs 300,000 in cash dividends.

Triple Column Cash Book for the Month of Falgun 2078

Note: On Falgun 25, XYZ Ltd. owed Rs 30,000 (50,000 - 20,000). Settled via cheque of Rs 28,000 $\implies$ Discount allowed = Rs 2,000.

Solution: Machinery Account (2076 to 2078)

Working Notes:

1. Depreciation on Machine 1 (Cost = 250,000, 12% p.a.):
   • Annual depreciation = $250,000 \times 0.12 = \text{Rs } 30,000$.
   • 2076/77 (Full year): $\text{Rs } 30,000$.
   • 2077/78 (Full year): $\text{Rs } 30,000$.
   • 2078 (Baisakh 1 to Ashwin 30 = 6 months): $30,000 \times \frac{6}{12} = \text{Rs } 15,000$.
   • Total Accumulated Depreciation = $30,000 + 30,000 + 15,000 = \text{Rs } 75,000$.
   • Book Value on date of sale (30th Ashwin 2078) = $250,000 - 75,000 = \text{Rs } 175,000$.
   • Sale proceeds = $\text{Rs } 165,000$.
   • Loss on Sale of Machine 1: $175,000 - 165,000 = \mathbf{Rs\ 10,000}$.
2. Depreciation on Machine 2 (Cost = 150,000, 12% p.a.):
   • 2077/78 (Kartik 1 to Chaitra 30 = 6 months): $150,000 \times 0.12 \times 6/12 = \text{Rs } 9,000$.
   • 2078/79 (Full year): $150,000 \times 0.12 = \text{Rs } 18,000$.
3. Depreciation on Machine 3 (Cost = 200,000, purchased 30th Ashwin 2078):
   • 2078/79 (Kartik 1 to Chaitra 30 = 6 months): $200,000 \times 0.12 \times 6/12 = \text{Rs } 12,000$.

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Machinery Account

| Dr. | | | Cr. | | | :--- | :--- | :---: | :--- | :--- | :---: | | Date | Particulars | Amount (Rs.) | Particulars | Amount (Rs.) | | 2076/01/01| To Bank A/c (Machine 1) | 250,000 | By Depreciation A/c | 30,000 | | | | | By Balance c/d | 220,000 | | | Total | 250,000 | Total | 250,000 | | 2077/01/01| To Balance b/d | 220,000 | By Depreciation A/c: | | | 2077/07/01| To Bank A/c (Machine 2) | 150,000 | - On M1: 30,000 | | | | | | - On M2 (6 mo): 9,000 | 39,000 | | | | | By Balance c/d | 331,000 | | | Total | 370,000 | Total | 370,000 | | 2078/01/01| To Balance b/d | 331,000 | By Depreciation (M1, 6 mo) | 15,000 | | 2078/06/30| To Bank A/c (Machine 3) | 200,000 | By Bank A/c (Sale of M1) | 165,000 | | | | | By Profit & Loss A/c (Loss on sale) | 10,000 | | | | | By Depreciation A/c: | | | | | | - On M2 (full): 18,000 | | | | | | - On M3 (6 mo): 12,000 | 30,000 | | | | | By Balance c/d (M2: 123,000 + M3: 188,000) | 311,000 | | | Total | 531,000 | Total | 531,000 |

Solution: Preparation of Financial Statements and Ratio Analysis

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a. Income Statement for the Year Ended 30th Chaitra 2078

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b. Balance Sheet As On 30th Chaitra 2078

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c. Ratio Analysis

1. Current Ratio:

   $$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} = \frac{172,000}{93,000} = \mathbf{1.85 : 1}$$

2. Debt-Equity Ratio:

   $$\text{Debt-Equity Ratio} = \frac{\text{Long-Term Debt}}{\text{Shareholders' Equity}} = \frac{120,000}{249,000} = \mathbf{0.48 : 1} \quad (\text{or } 48.19\%)$$

3. Inventory Turnover Ratio:

   $$\text{Average Inventory} = \frac{\text{Opening Stock} + \text{Closing Stock}}{2} = \frac{40,000 + 60,000}{2} = \text{Rs } 50,000$$
   $$\text{Inventory Turnover Ratio} = \frac{\text{COGS}}{\text{Average Inventory}} = \frac{104,000}{50,000} = \mathbf{2.08\text{ times}}$$