Financial Accounting and Analysis 2078 Board Question Paper

The going concern concept is a fundamental accounting postulate assuming that an enterprise will continue its operational existence for an indefinite future and has neither the intention nor the necessity of liquidation or significantly curtailing its scale of operations. Consequently, fixed assets are recorded at amortized historical cost rather than net realizable liquidation value.

Under the accrual basis of accounting, financial transactions are recognized and recorded in the periods in which they occur—revenues when earned (irrespective of whether cash is collected) and expenses when incurred (irrespective of whether cash is paid). It upholds the revenue realization and expense matching principles, providing an accurate depiction of operational profitability.

Internal control is an integrated system of policies, procedures, and organizational checks designed and implemented by management to provide reasonable assurance regarding:

1. Safeguarding company assets against fraud, theft, and waste.
2. Ensuring accuracy and reliability of financial accounting records.
3. Promoting operational efficiency and ensuring strict compliance with laws and regulations.

Bad debts refer to trade receivables or credit sales amounts that have become completely irrecoverable due to debtor insolvency, bankruptcy, or disappearance. It is treated as an operational expense and debited to the Profit and Loss Account while crediting the debtor’s account.

The perpetual inventory system is a method of recording inventory balances continuously and immediately after every purchase and sales transaction. It maintains continuous real-time ledger records of stock quantities and values on hand, facilitating automatic computation of cost of goods sold without requiring physical stocktaking.

Journal Entries of S.S. Company:

1. On Bhadra 1 (Issue of Note):

   • Dr. Bank A/c ..................................................... Rs. 200,000
   • Cr. 15% Notes Payable A/c .................................... Rs. 200,000 (Being 3-month, 15% note issued for bank loan).

2. On Mangsir 30 / 3 Months Later (Retirement of Note):

   • Interest = $200,000 \times 15\% \times \frac{3}{12} = \text{Rs. } 7,500$. Total = Rs. 207,500.
   • Dr. 15% Notes Payable A/c ............................. Rs. 200,000
   • Dr. Interest Expense A/c ................................. Rs. 7,500
   • Cr. Bank A/c ..................................................... Rs. 207,500 (Being note principal and 3 months interest paid on maturity).

Calculation of Amount of Value Added:

1. Gross Output Value:
   $$\text{Sales} + \text{Commission Received} + (\text{Closing Stock} - \text{Opening Stock})$$
   $$= 450,000 + 15,000 + (60,000 - 30,000) = 465,000 + 30,000 = \text{Rs. } 495,000$$
2. Cost of Bought-in Materials and Services:
   $$= \text{Rs. } 270,000$$
3. Amount of Value Added:
   $$\text{Value Added} = 495,000 - 270,000 = \mathbf{\text{Rs. } 225,000}$$
   (Wages of Rs. 75,000 and income tax of Rs. 7,500 represent distribution of value added).

Accounting Equation: $\text{Assets} = \text{Liabilities} + \text{Capital}$

Return Outward Book (Purchase Returns Book)

Journal Entries:

1. Sale of Goods (Terms 2/10, n/30):

   • Dr. Accounts Receivable A/c ............................... Rs. 30,000
   • Cr. Sales A/c ........................................................... Rs. 30,000 (Being goods sold on credit).

2. Sales Return:

   • Dr. Sales Return A/c ........................................... Rs. 10,000
   • Cr. Accounts Receivable A/c ............................... Rs. 10,000 (Being defective merchandise returned by customer).

3. Settlement within Discount Period (2% discount on net balance Rs. 20,000):

   • Net Receivable = $30,000 - 10,000 = \text{Rs. } 20,000$.
   • Cash Discount = $20,000 \times 2\% = \text{Rs. } 400$. Cash Received = Rs. 19,600.
   • Dr. Cash/Bank A/c ................................................ Rs. 19,600
   • Dr. Discount Allowed A/c ................................... Rs. 400
   • Cr. Accounts Receivable A/c ............................... Rs. 20,000 (Being payment received in full settlement within discount window).

Cash Flow Statement (Direct / Indirect Reconciliation)

1. Cash Flow from Operating Activities (CFOA)

• Cash collections from sales: $900,000 + (200,000 - 160,000 \text{ AR}) = \text{Rs. } 940,000$
• Cash payments to suppliers: $600,000 + (250,000 - 200,000 \text{ Inv}) - (90,000 - 60,000 \text{ AP}) = \text{Rs. } 620,000$
• Cash paid for operating expenses: $120,000 - (20,000 - 10,000 \text{ Prepaid}) = \text{Rs. } 110,000$
• Interest paid: $\text{Rs. } 10,000$
• Taxes paid: $\text{Rs. } 10,000$ (Provision for Tax: $20,000 - 30,000 + 20,000$)
• Net Cash Flow from Operating Activities: $940,000 - 620,000 - 110,000 - 10,000 - 10,000 = \mathbf{\text{Rs. } 190,000}$

2. Cash Flow from Investing Activities (CFIA)

• Sale of Fixed Assets: Cost 35,000 + Gain 5,000 = $\text{Rs. } 40,000$
• Purchase of Fixed Assets: Ending 800,000 - Beginning 600,000 + Dep 90,000 + Sold Cost 35,000 = $\text{Rs. } (325,000)$
• Net Cash Flow from Investing Activities: $40,000 - 325,000 = \mathbf{\text{Rs. } (285,000)}$

3. Cash Flow from Financing Activities (CFFA)

• Issue of Share Capital (including Premium): $(900,000 - 800,000) + (90,000 - 80,000) = \text{Rs. } 110,000$
• Redemption of Debentures: $50,000 + 5,000 \text{ Premium} = \text{Rs. } (55,000)$
• Dividend Paid: $(10,000 + 40,000 - 20,000) = \text{Rs. } (30,000)$
• Net Cash Flow from Financing Activities: $110,000 - 55,000 - 30,000 = \mathbf{\text{Rs. } 25,000}$

Net Change in Cash:

• Opening Cash Balance: Rs. 80,000
• Less Net Decrease: (Rs. 10,000)
• Closing Cash Balance: Rs. 70,000 (Reconciled exactly with balance sheet).

Total Available for Sale:

• Baisakh 14: $1,100 \times 1.00 = \text{Rs. } 1,100$
• Ashad 18: $600 \times 1.10 = \text{Rs. } 660$
• Magh 19: $900 \times 1.20 = \text{Rs. } 1,080$
• Total Units Available: $1,100 + 600 + 900 = \mathbf{2,600 \text{ units}}$
• Total Cost of Available Goods: $1,100 + 660 + 1,080 = \mathbf{\text{Rs. } 2,840}$
• Total Units Sold: $1,000 + 500 + 700 = \mathbf{2,200 \text{ units}}$
• Ending Inventory Units: $2,600 - 2,200 = \mathbf{400 \text{ units}}$
• Sales Revenue: $2,200 \text{ units} \times \text{Rs. } 2 = \mathbf{\text{Rs. } 4,400}$

(a) Weighted Average Cost Method:

1. Weighted Average Cost per unit:
   $$\bar{C} = \frac{\text{Total Cost}}{\text{Total Units}} = \frac{2,840}{2,600} \approx \mathbf{\text{Rs. } 1.0923}$$
2. Cost of Ending Inventory: $400 \times 1.0923 = \mathbf{\text{Rs. } 437}$
3. Cost of Goods Sold (COGS): $2,200 \times 1.0923 = \mathbf{\text{Rs. } 2,403}$
4. Gross Profit: $4,400 - 2,403 = \mathbf{\text{Rs. } 1,997}$

(b) LIFO Method (Periodic):

1. Ending Inventory (400 units from oldest stock - Baisakh 14):
   $$400 \text{ units} \times \text{Rs. } 1.00 = \mathbf{\text{Rs. } 400}$$
2. Cost of Goods Sold (COGS):
   $$COGS = \text{Cost Available} - \text{Ending Inventory} = 2,840 - 400 = \mathbf{\text{Rs. } 2,440}$$
3. Gross Profit:
   $$\text{Gross Profit} = \text{Sales} - COGS = 4,400 - 2,440 = \mathbf{\text{Rs. } 1,960}$$

(a) Delivery Van Account (Diminishing Balance @ 15% p.a.)

1. Depreciation Calculations:

• Van 1 (Initial Cost = 560,000 + 40,000 = Rs. 600,000 on Jan 1, 2018):
  • 2018 Dep (Full Year): $600,000 \times 15\% = \text{Rs. } 90,000$. Book value at end of 2018 = Rs. 510,000.
  • 2019 Dep (Full Year): $510,000 \times 15\% = \text{Rs. } 76,500$. Book value at end of 2019 = Rs. 433,500.
  • 2020 Dep (6 Months to July 1, 2020): $433,500 \times 15\% \times \frac{6}{12} = \text{Rs. } 32,513$.
  • Book Value on Date of Sale (July 1, 2020): $433,500 - 32,513 = \text{Rs. } 400,987$.
  • Sale Proceeds: Rs. 400,000.
  • Loss on Sale: $400,987 - 400,000 = \mathbf{\text{Rs. } 987}$.
• Van 2 (Purchased July 1, 2019 for Rs. 600,000):
  • 2019 Dep (6 Months): $600,000 \times 15\% \times \frac{6}{12} = \text{Rs. } 45,000$. BV at end of 2019 = Rs. 555,000.
  • 2020 Dep (Full Year): $555,000 \times 15\% = \text{Rs. } 83,250$. BV at end of 2020 = Rs. 471,750.

Delivery Van Account

(b) Ethics of Accounting:

Accounting ethics are moral principles that govern financial recording and reporting. Core pillars include:

1. Integrity: Being honest, truthful, and straightforward in all professional relationships.
2. Objectivity: Avoiding bias, conflict of interest, or undue influence of others in financial judgment.
3. Professional Competence and Due Care: Keeping up to date with changing NFRS/IFRS rules and tax laws.
4. Confidentiality: Protecting proprietary client and employer data from unauthorized disclosure.

(a) Bank Reconciliation Statement of GG Company (as on 31st Chaitra 2075)

(b) Definition and Features of Treasury Stock:

Treasury stock refers to previously issued common stock that has been bought back (repurchased) by the issuing corporation from the open market and retained in its treasury for future reissuance or retirement.

Key Features:

1. Contra-Equity Account: Deducted from total shareholders’ equity on the balance sheet; it is not an asset.
2. No Voting Rights: The company cannot vote its own repurchased shares.
3. No Dividend Entitlement: Does not receive cash or stock dividends.
4. No Preemptive Rights: Does not participate in rights share offerings.

1. Meaning of Lease

A lease is a legally binding contractual agreement wherein the asset owner (lessor) conveys to another party (lessee) the right to utilize an identified physical or real property asset for an agreed duration in return for periodic lease rental payments.

2. Classification of Leases (NFRS 16 / NAS 17)

1. Operating Lease:
   • Short-term rental agreement where ownership risks and rewards remain with the lessor.
   • The lessee records periodic lease payments as an operational rental expense.
2. Finance Lease (Capital Lease):
   • Long-term agreement that transfers substantially all ownership risks and economic rewards to the lessee.
   • The lessee recognizes a Right-of-Use (ROU) Asset and a corresponding Lease Liability on its balance sheet.

3. Managerial Importance of Leasing

• Conserves Liquid Capital: Avoids massive upfront capital outlays required for purchasing heavy machinery.
• Protection Against Obsolescence: Short-term leases allow frequent upgrading to cutting-edge technology.
• Tax Deductibility: Lease rental payments are treated as tax-deductible operational expenses.

Mandatory Disclosures Under NFRS (NAS 1)

Nepal Financial Reporting Standards (NFRS) mandate comprehensive disclosures to ensure transparency, comparability, and faithful representation:

1. Statement of Compliance: Explicit, unreserved statement confirming that the financial statements comply fully with NFRS.
2. Summary of Significant Accounting Policies: Clear description of the measurement bases employed (historical cost, fair value), depreciation methods, revenue recognition timing, and inventory formulas.
3. Key Sources of Estimation Uncertainty & Critical Judgments: Disclosing management assumptions concerning future asset impairment, provision for doubtful debts, and employee retirement benefits.
4. Contingent Liabilities & Commitments (NAS 37): Disclosing unquantified lawsuits, tax disputes, and guarantees in Notes.
5. Related Party Transactions (NAS 24): Details of transactions, outstanding balances, and director remunerations with key management personnel and parent entities.
6. Events After the Reporting Period (NAS 10): Disclosing non-adjusting events (e.g., major post-year-end fires or business mergers).

i. Journal Entries

ii. Triple Column Cash Book Summary

• Cash Column Balance: Initial 300,000 - Dep to Bank 150,000 - Insurance 13,000 - Utilities 10,000 - Salary 26,000 = Rs. 101,000.
• Bank Column Balance: Initial 100,000 + Dep 150,000 + Debtor 142,500 - Creditor 45,000 - Rent 18,000 = Rs. 329,500.
• Discount Allowed Total: Rs. 7,500 | Discount Received Total: Rs. 5,000.

iii. Ledger Accounts

• Debtors A/c: Dr. To Sales Rs. 170,000; Cr. By Bank Rs. 142,500, By Discount Rs. 7,500 $\implies$ Dr. Balance = Rs. 20,000.
• Creditors A/c: Cr. By Purchases Rs. 50,000; Dr. To Bank Rs. 45,000, To Discount Rs. 5,000 $\implies$ Balance = Rs. 0 (Fully settled).

iv. Trial Balance

Balance Sheet Values for 2075:

• Current Assets ($CA$) = Inventories 100,000 + Debtors 300,000 + Cash 300,000 = Rs. 700,000
• Quick Assets ($QA$) = $CA - \text{Inventories} = 700,000 - 100,000 = \mathbf{\text{Rs. } 600,000}$
• Current Liabilities ($CL$) = Accounts Payable 150,000 + Bank Overdraft 150,000 = Rs. 300,000
• Long-Term Debt = 12% Debenture = Rs. 100,000
• Shareholders’ Equity = Share Capital 1,200,000 + Premium 120,000 + Reserve 50,000 + Retained Earnings 380,000 - Preliminary Exp 10,000 = Rs. 1,740,000
• Total Assets = $2,150,000 - 10,000 \text{ (Fictitious)} = \mathbf{\text{Rs. } 2,140,000}$
• Sales = Rs. 2,000,000 | COGS = Rs. 1,200,000 | Net Profit = Rs. 280,000 | EBIT = 280,000 + 20,000 (Interest) = Rs. 300,000

Required 10 Financial Ratios for 2075:

a. Current Ratio:

b. Quick (Acid-Test) Ratio:

c. Debt-Equity Ratio:

d. Debtors (Receivables) Turnover Ratio:

e. Fixed Assets Turnover Ratio:

f. Net Profit Ratio:

g. Return on Shareholders’ Equity (ROE):

h. Return on Total Assets (ROA):

i. Interest Coverage Ratio:

j. Stock (Inventory) Turnover Ratio:

Part (a): Users of Accounting Information (7.5 Marks)

1. Internal Users:

   • Board of Directors & Top Management: Formulating corporate strategy, capital budgeting, evaluating departmental profitability, and dividend distribution.
   • Departmental Managers & Supervisors: Monitoring day-to-day budgets, controlling production cost variances, and setting pricing policies.
   • Internal Auditors: Ensuring compliance with internal control policies and preventing fraudulent practices.

2. External Users:

   • Investors & Potential Shareholders: Analyzing return on investment (ROE), earnings per share (EPS), and capital growth potential.
   • Commercial Lenders & Banks: Assessing liquidity, solvency, debt-service coverage, and collateral safety before approving loans.
   • Suppliers and Trade Creditors: Evaluating short-term creditworthiness before extending trade credit.
   • Tax Authorities (Inland Revenue Department - IRD Nepal): Verifying corporate tax, VAT, and withholding tax compliance.
   • Employees & Trade Unions: Evaluating company profitability during wage bargaining and bonus allocations.
   • Government & Regulatory Agencies (SEBON, NRB): Monitoring market fairness and statutory disclosures.

Part (b): Value Added Statement and Its Objectives (7.5 Marks)

1. Definition of Value Added Statement (VAS):

   • A Value Added Statement (VAS) is a macro-accounting financial statement that shows the net wealth generated by the collaborative efforts of an enterprise (capital, labor, management) and how this created wealth is distributed among major stakeholders (employees, government, providers of capital, and reinvested in the business).

2. Objectives of the Value Added Statement:

   • Demonstrates Social Responsibility: Portrays the firm as a collaborative social partnership generating wealth for society rather than an exploitative profit-extractor.
   • Clarifies Distribution of Economic Wealth: Transparently displays what share of wealth went to labor (wages), government (taxes), financiers (interest), and shareholders (dividends).
   • Measures Enterprise Productivity: Value added per employee and value added per rupee of capital serve as vital productivity benchmarks.
   • Improves Industrial Relations: Provides clear economic evidence to workers that they are receiving an equitable share of the wealth they created, reducing labor disputes.