Accounting standards introduction P.
Q and RTP
2013 MAY 7 (e) 4 MARKS, RTP 2020 NOV Q15
Q1: What are the issues, with which Accounting Standards deal?
Answer: Accounting Standards deal with the issues of
(i) Recognition of events and transactions in the financial statements,
(ii) Measurement of these transactions and events,
(iii) Presentation of these transactions and events in the financial statements in a manner that
is meaningful and understandable to the reader, and
(iv) Disclosure requirements which should be there to enable the public at large and the
stakeholders and the potential investors in particular, to get an insight into what these
financial statements are trying to reflect and thereby facilitating them to take prudent and
informed business decisions.
2018 NOV 6 (a) 5 MARKS New Syllabus
Q2: "Accounting Standards standardize diverse accounting policies with a view to eliminate
the non-comparability of financial statements and improve the reliability of financial
statements. "Discuss and explain the benefits of Accounting Standards.
Answer: Accounting Standards standardize diverse accounting policies with a view to
eliminate the non-comparability of financial statements and improve the reliability of
financial statements. Accounting Standards provide a set of standard accounting policies,
valuation norms and disclosure requirements. Accounting standards aim at improving the
quality of financial reporting by promoting comparability, consistency and transparency, in
the interests of usersof financial statements.
The following are the benefits of Accounting Standards:
1. Standardization of alternative accounting treatments: Accounting Standards reduce to a
reasonable extent confusing variation in the accounting treatment followed for the purpose
of preparation of financial statements.
2. Requirements for additional disclosures: There are certain areas where important is not
statutorily required to be disclosed. Standards may call for disclosure beyond that required by
law.
3. Comparability of financial statements: The application of accounting standards would
facilitate comparison of financial statements of different companies situated in India and
facilitate comparison, to a limited extent, of financial statements of companies situated in
different parts of the world. However, it should be noted in this respect that differences in the
institutions, traditions and legal systems from one country to another give rise to differences
in Accounting Standards adopted in different countries.
2019 MAY 7 (e) 5 MARKS Old Syllabus
Q3: Please explain briefly two benefits and two limitations of Accounting Standards for an
accountant.
Answer: Accounting standards seek to describe the accounting principles, the lvaluation
techniques and the methods of applying the accounting principles in the preparation and
presentation of financial statements so that they may give a true and fair view. By setting
the accounting standards the accountant has the following benefits:
1. Standardisation of alternative accounting treatments: Standards reduce to a
reasonable extent or eliminate altogether confusing variations in the accounting
treatments used to prepare financial statements.
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2. Comparability of financial statements: The application of accounting standards would,
to a limited extent, facilitate comparison of financial statements of companies situated in
different parts of the world and also of different companies situated in the same country.
However, it should be noted in this respect that differences in the institutions, traditional
and legal systems from one country to another give rise to differences in accounting
standards adopted in different countries.
However, there are some limitations of setting of accounting standards:
1. Difficulties in making choice between different treatments: Alternate solutions to certain
accounting problems may each have arguments to recommend them. Therefore, the choice
between different alternative accounting treatments may become difficult.
2. Lack of flexibilities and Restricted Scope: There may be a trend towards rigidity and away
from flexibility in applying the accounting standards. Accounting standards cannot override
the statute. The standards are required to be framed within the ambit of prevailing statute
2011 NOV 7 (e) 4 MARKS, 2013 MAY 7(e) A/C 4 MARKS, 2020 NOV 6 (B) 5 MARKS New
Syllabus, RTP MAY 2021 Q15(a)
Q4: What are the qualitative characteristics that improve the usefulness of information
provided in the financial statements?
Answer: [Link]:
Information in financial statements should be presented in a manner that the users with
reasonable knowledge of business and economic activities and accounting,may readily
understand it. All relevant information should be given therein.
[Link]
The relevance of a piece of information should be judged by its materiality i.e. whether its
omission or misstatement can influence economic decisions of users or not. No relevant
information should be withheld on the grounds of complexity.
[Link]:
The information are said to be reliable when transactions and events reported are represented
faithfully and also when they are reported in terms of their substance and economic reality.
Prudence concept is also used whenever required.
[Link]:
The financial statements should permit both inter-firm and intra firm comparison. One
essential feature or requirement of comparability is disclosure of financial effect of change in
accounting policies.
2016 NOV 7 (c) 4 MARKS, RTP NOV 2021 Q15, RTP 2018 NOV Q15
Q5: Explain in brief, the alternative measurement bases, for determining the value at which
an element can be recognized in the Balance Sheet or Statement of Profit and Loss.
2019 MAY 7 (d) 5 MARKS Old Syllabus Advanced Accounting
What are the bases of measurement of Elements of Financial Statements? Explain inbrief.
2021 Dec 6 (c) 5 MARKS New Syllabus
What is meant by ‘Measurement’? What are the bases of measurement of Elements of Financial
Statements? Explain the brief.
2021 Jan 7 (c) 5 MARKS Old Syllabus Advanced accounting
Explain the following Measurement basis:
- Historical Cost
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- Current Cost
- Realizable Value
- Present Value
Answer : The Framework for Recognition and Presentation of Financial statements recognizes
four alternative measurement bases for the purpose of determining the value at which an
element can be recognized in the balance sheet or statement of profit and loss. These bases
are: (i) Historical Cost; (ii) Current cost (iii) Realizable (Settlement) Value and (iv) Present
Value.
A brief explanation of each measurement basis is as follows:
3. Historical Cost: Historical cost means acquisition price. According to this, assets are
recorded at an amount of cash or cash equivalent paid or the fair value of the asset at the time
of acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the
obligation.
4. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out
at the amount of cash or cash equivalent that would have to be paid if the same or an
equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of
cash or cash equivalents that would be required to settle the obligation currently.
5. Realizable (Settlement) Value: As per realizable value, assets are carried at the amount of
cash or cash equivalents that could currently be obtained by selling the assets in an orderly
disposal. Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash
or cash equivalents paid to satisfy the liabilities in the normal course of business.
6. Present Value: Under present value convention, assets are carried at present value of
future net cash flows generated by the concerned assets in the normal course of business.
Liabilities under this convention are carried at present value of future net cash flows that are
expected to be required to settle the liability in the normal course of business.
2017 MAY 7 (a) 4 MARKS, RTP 2018 MAY
Q6: Write short note on main elements of Financial Statements.
2018 MAY 6 (a) 5 MARKS New Syllabus
Briefly explain the elements of financial statements.
Answer: Elements of Financial Statements
The framework classifies items of financial statements can be classified in five broad groups
depending on their economic characteristics: Asset, Liability, Equity, Income/Gain and
Expense/Loss.
Resource controlled by the enterprise as a result of past events from which
Asset
future economic benefit are expected to flow to the enterprise
Present obligation of the enterprise arising from past events, the
Liability settlement of which is expected to result in an outflow of a resources
Embodying economic benefits.
Residual interest in the assets of an enterprise after deducting all its
Equity
liabilities
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Increase in economic benefits during the accounting period in the form of
inflows or enhancement of asset or decreases in liability that result in
Income/gain
increase in equity other than those relating to contributions from equity
participants
Decrease in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrence of liabilities that result in
Expense/loss
decrease in equity other than those relating to distributions to equity
participants
2018 NOV 6 (b) 5 MARKS New Syllabus
Q7: "One of the characteristics of the financial statement is neutrality. “Do you agree with this
statement? Explain in brief.
Answer: Yes, one of the characteristics of financial statements is neutrality. To be
reliable, the information contained in financial statement must be neutral, that is free
from bias.
Financial Statements are not neutral if by the selection or presentation of information, the
focus of analysis could shift from one area of business to another thereby arriving at a totally
different conclusion based on the business results. Information contained in the financial
statements must be free from bias. It should reflect a balanced view of the financial position
of the company without attempting to present them in biased manner. Financial statements
cannot be prepared with the purpose to influence certain division, i.e. they must be neutral.
2019 MAY 6 (b) 5 MARKS New Syllabus, RTP NOV 2022 Q15, RTP 2022 MAY Q15
Q8: Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below:
Liabilities Amount Amount
Proprietor's Capital 3,00,000 Fixed Assets 3,60,000
Profit & Loss Account 1,25,000 Closing Stock 1,50,000
10% Loan Account 2,10,000 Sundry Debtors 1,00,000
Sundry Creditors 50,000 Deferred Expenses 50,000
Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows:
(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The
net realisable value of fixed assets on 31.03.2018 was ` 3,25,000.
(2) Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000 respectively.
(3) The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and
` 2,50,000 respectively.
(4) Expenses for the year amounted to ` 78,000.
(5) Deferred expenses are amortized equally over 5 years .
(6) Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection of
another ` 25,000 depends on successful re-installation of certain product supplied to the
customer;
(7) Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.
(8) Cash balance as on 31.03.2018 is ` 4,22,000.
(9) There is an early repayment penalty for the loan of ` 25,000.
You are required to prepare: (Not assuming going concern)
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(1) Profit & Loss Account for the year 2017-18.
(2) Balance Sheet as on 31st March, 2018.
(ANS: Net Profit = 3,89,500, B/S=11,17,000)
2020 NOV 6 (c) 5 MARKS New Syllabus
Q9: Following is the Balance Sheet of M/s. S Traders as on 31st March, 2019:
Liabilities (`) Assets (`)
Capital 1,50,000 Fixed Assets 1,05,000
11% Bank Loan 80,000 Closing stock 76,000
Trade payables 52,000 Debtors 68,000
Profit & Loss A/c 56,000 Deferred Expenditure 24,000
Cash & Bank 65,000
3,38,000 3,38,000
Additional Information:
(i) Remaining life of Fixed Assets is 6 years with even use. The net realizable value of Fixed Assets
as on 31st March, 2020 is ` 90,000.
(ii) Firm's Sales & Purchases for the year ending 31st March, 2020 amounted to
` 7,80,000 and ` 6,25,000 respectively.
(iii) The cost & net realizable value of the stock as on 31st March, 2020 was, ` 60,000and `
66,000 respectively.
(iv) General expenses (including interest on Loan) for the year 2019-20 were ` 53,800.
(v) Deferred expenditure is normally amortises equally over 5 years starting from the Financial year
2018-19 i.e. ` 6,000 per year.
(vi) Debtors on 31st March, 2020 is ` 65,000 of which ` 5,000 is doubtful. Collection of another `
10,000 debtors depends on successful re-installation of certain products supplied to the
customer.
(vii) Closing Trade payable ` 48,000, which is likely to be settled at 5% discount.
(viii) There is a prepayment penalty of ` 4,000 for Bank loan outstanding.
(ix) Cash & Bank balances as on 31st March, 2020 is ` 1,65,200.
Prepare Profit & Loss Account for the year ended 31st March, 2020 and Balance Sheetas on 31st March, 2020
assuming the firm is not a going concern.
(Ans: net profit =35,[Link] sheet 45,600)
2021 Jan 6 (a) 5 MARKS New Syllabus
Q10: Explain how financial capital is maintained at historical cost?
Kishore started a business on 1st April, 2019 with ` 15,00,000 represented by 75,000 units of `20 each.
During the financial year ending on 31st March, 2020, he sold the entire stock for ` 30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Kishore in the year
2019-20 if Financial Capital is maintained at historical cost.
Answer : Financial capital maintenance at historical cost: Under this convention, opening and closing assets
are stated at respective historical costs to ascertain opening and closing equity. If retained profit is greater
than or equals to zero, the capital is said to be maintained at historical costs. This means the business will
have enough funds to replace its assets at historical costs. This is quite right as long as prices do not rise.
Maximum amount withdrawn by Kishore in year 2019-20 if Financial capital is maintained at historical cost
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Particulars Financial Capital Maintenance at
Historical Cost (`)
Closing equity (` 30 x 75,000 units) 22,50,000 represented by cash
Opening equity 75,000 units x ` 20 = 15,00,000
Permissible drawings to keep Capitalintact 7,50,000 (22,50,000 – 15,00,000)
Thus ` 7,50,000 is the maximum amount that can be withdrawn by Kishore in year 2019-20 if financial capital
is maintained at historical cost.
2021 July 6 (a) 5 MARKS New Syllabus
Q11: A trader commenced business on April 1, 2020 with ` 120,000, represented by 6000 units of a certain
product at ` 20 per unit. During the year 2020-21 he sold these units at ` 30/- per unit and had withdrawn `
60,000. The price of the product at the end of financial year was ` 25/- per unit. Compute retained profit of the
trader under the concept of physical capital maintenance at current cost. Also state, whether answer would be
different if the trader had not withdrawn any amount.
Answer : Physical Capital Maintenance at Current Cost
In the given case, the specific price index applicable to the product is 125 (25/20X100). Current cost of opening
stock = (` 1, 20,000 / 100) x 125 Or 6,000 units x ` 25 = ` 1, 50,000
Current cost of closing cash = ` 1, 20,000 (` 1, 80,000 – ` 60,000)Opening equity at closing
current costs = ` 1, 50,000
Closing equity at closing current costs = ` 1, 20,000 Retained Profit = ` 1, 20,000 –
` 1, 50,000 = (-) ` 30,000
The negative retained profit indicates that the trader has failed to maintain his capital. The available fund of ` 1,
20,000 is not sufficient to buy 6,000 units again at increased price of
` 25 per unit. The drawings should have been restricted to ` 30,000 (` 60,000 – ` 30,000).
If the trader had not withdrawn any amount, then the answer would have been as below:
Current cost of opening stock = ` 1, 80,000
Opening equity at closing current costs = ` 1, 50,000Retained Profit = ` 1, 80,000 –
` 1, 50,000 = ` 30,000
If the trader had not withdrawn any amount, then the retained profit would have been ` 30,000.
RTP 2021 MAY 15 (b), RTP 2019 NOV Q 15
Q12: Aman started a business on 1st April 2020 with ₹ 24,00,000 represented by 1,20,000 units
of ₹ 20 each. During the financial year ending on 31s March, 2021, he sold the entire stock for ₹
30 each. In order to maintain the capital intact, calculate the maximum amount, which can be
withdrawn by Aman in the year 2020-21 if Financial Capital is maintained at historical cost.
2021 Jan 6 (d) 5 MARKS New Syllabus
Q13: List the Criteria for classification of non-corporate entities as level I Entities for the purpose of
application of Accounting Standards as per the Institute of Chartered Accountants of India.
Answer: Criteria for classification of non-corporate entities as level 1 entities for purpose of application of
Accounting Standards decided by the Institute of Chartered Accountants of India is given below:
Non-corporate entities which fall in any one or more of the following categories, at theend of the relevant
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accounting period, are classified as Level I entities:
1. Entities whose equity or debt securities are listed or are in the process of listing on any stock exchange,
whether in India or outside India.
2. Banks (including co-operative banks), financial institutions or entities carrying on insurance business.
3. All commercial, industrial and business reporting entities, whose turnover (excluding other income) exceeds
rupees fifty crore in the immediately preceding accounting year.
4. All commercial, industrial and business reporting entities having borrowings (including public deposits) in
excess of rupees ten crore at any time during the immediately preceding accounting year.
5. Holding and subsidiary entities of any one of the above.
RTP 2022 MAY 16 (a, b)
Q14 A) A company with a turnover of ₹ 225 crores and borrowings of ₹ 51 crore during the
year ended 31s March, 2021, wants to avail the exemptions available in adoption of
Accounting Standards applicable to companies for the year ended 31.3.2021. Advise the
management on the exemptions that are available as per the Companies (Accounting
Standards) Rules, 2021.
B) An organization whose objects are charitable or religious, believes that the Accounting
Standards are not applicable to it since only a very small proportion of its activities are
business in nature. Comment.
Answer:A) The question deals with the issue of Applicability of Accounting Standards for
corporate entities. The companies can be classified under two categories viz SMCs and Non-
SMCs under the Companies (Accounting Standards) Rules, 2021. As per the Companies
(Accounting Standards) Rules, 2021, criteria for above classification as SMCs, are:
"Small and Medium Sized Company" (SMC) means, a company-
• whose equity or debt securities are not listed or are not in the process of listing on
any stock exchange, whether in India or outside India;
• which is not a bank, financial institution or an insurance company;
• whose turnover (excluding other income) does not exceed rupees two-fifty crores in
the immediately preceding accounting year;
• which does not have borrowings (including public deposits) in excess of rupees fifty
crores at any time during the immediately preceding accounting year; and
• which is not a holding or subsidiary company of a company which is not a small and
medium-sized company.
Since, XYZ Ltd.'s turnover was ₹ 225 crores which does not exceed ₹ 250 crores but borrowings
of ₹ 51 crore are more than ₹ 50 crores, it is not a small and medium sized company (SMC). The
exemptions available to SMC are not available to this company.
B) Accounting Standards apply in respect of any enterprise (whether organized in
corporate, co-operative or other forms) engaged in commercial, industrial or business
activities, whether or not profit oriented and even if established for charitable or religious
purposes. Accounting Standards however, do not apply to enterprises solely carrying on the
activities, which are not of commercial, industrial or business nature, (e.g., an activity of
collecting donations and giving them to flood affected people).
Exclusion of an enterprise from the applicability of the Accounting Standards would be
permissible only if no part of the activity of such enterprise is commercial, industrial or
business in nature. Even if a very small proportion of the activities of an enterprise were
considered to be commercial, industrial or business in nature, the Accounting Standards
would apply to all its activities including those, which are not commercial, industrial or
business in nature.
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