ACCOUNTING CONCEPTS

1. Mr. Smith started his own restaurant as a sole proprietorship firm. The business usually deals in cash and
as the business is performing exceedingly well, there is a good amount of cash collection at the end of
each day. Mr. Smith, himself being a graduate in Hotel Management, decided to learn accounting to
keep record of the financial transactions. At the end of the month, he received telephone bill for his
restaurant and residence for Rs.3,000 and Rs.1,000 respectively. He took out Rs.4,000 from the cash box
and gave it to his staff to pay both the bills. Has he done the right thing? Can he treat Rs.4,000 as
expenses of the business?
2. Mr. Ravi started a travel agency which provides outstation cab services to its clients. At the initiation,
Mr. Ravi purchased four Rangemax cars to constitute the taxi fleet. Each vehicle cost Rs.7,00,000
including all the taxes, insurance and accessories fittings. Useful life of each car is expected to be 7 years
after which they will be scrapped at a negligible value. Within 15 days of Mr. Ravi buying the taxis, the
automobile company launched a new advanced version of Rangemax car at an attractive price. The
previous model (which Ravi bought) is now available at Rs.6,40,000 apiece. What is the amount Mr.
Ravi should record as value of the cars in the books - Rs.28,00,000 or Rs.25,60,000?
3. Continuing with case # 2 above, suppose at the end of first year, Mr. Ravi decides to dispose of one of
the cars to buy a new luxury sedan car. He sells the car for Rs.5,80,000 and buys a new car to expand the
business in a new lucrative segment. Should he revalue all the other remaining cars at Rs.5,80,000?
Should your answer differ if you come to know that Mr. Ravi has sold the car because of a severe
financial distress as his business has not performed well and there exists a significant probability that the
business might close down due to this financial distress in near future?
4. Jonathan started a business as a construction contractor. He invested his own capital to purchase and
furnish an office. He has been awarded few contracts by local civic body which may take 2 – 3 years to
complete. He has heard about going concern assumption that accounting is done with an assumption that
business will have an infinite economic life. Following this assumption, he decides to do the accounting
from the year as and when the first few contracts are complete. Is he right in doing so?
5. Electromax ltd. is in the business of selling commercial generator sets usually installed in large
establishments. The generator sets are usually sold on credit and payment is received after one month.
The company is responsible for installing the generator at the customer’s premises and usually gets
payment one month after that. The generator also carries 3-year manufacturer warranty which includes
replacement guarantee in case of irreparable problems. Experience of past few years indicate that 0.5%
of generators required replacements and almost 5% of generators developed some major technical fault
which were required to be repaired at company’s cost. The average cost per generator incurred by
company in rectifying these problems were approximately 20% of the original costs of the generators.
No problems are reported in other generators. Following are the details of one of the transactions for
generators sold to a long standing corporate client:

15.02.2015 : Order Received

15.03.2015 : Assembling Started
30.03.2015 : Installation Done
28.04.2015 : Payment Received

The company ends its financial year on 31.03 every year. Should the above transaction be treated as sale
of year 2014-15 or 2015-16?
6. Austrade is an upmarket retail store which deals in FMCG products and groceries. It usually purchases
goods on credit from suppliers and sells the goods in cash to its customers. There is a 14 day return
policy available to the customers and suppliers advance a credit for 1 month. On 12 th of March 2015 the
 store purchased bulk of small bathing bars for Rs.25,000 from a local wholesaler. Due to wedding
season, a customer purchased the whole lot for Rs.28,000 at the normal selling price. The supplier of
bathing bars was paid on 11th April 2015. The financial year of company ends on 31.03.2015. What will
be the sales and expense figures for year 2014-15?
7. Wantmart has taken telephone and internet services from Netfast Ltd. The service provider charges the
company on monthly basis and usage of billing month is to be paid for in the next month. In the month
ending on 31st March, the company has been billed for Rs.1.20 crore which is to be paid by 15 th of April.
Similarly, the company has also taken a store insurance for a period of one year beginning from 1 st of
January. The annual insurance premium paid is Rs.30,00,000 and insurance will be effective till 31 st of
December. How much expenses shall Wantmart book in year ending 31.03.2015?
8. Suave Technologies is into development of enterprise solutions for banking companies. It has separate
workforce for development and to provide technical support for the software platforms. It paid salaries
of Rs.792 crores to development team and Rs.584 crores to support team in the financial year ending
31.03.2014. It deducted all the salary from the revenues for the year 2013-14. In financial year 2014-15
the figures for both the salaries were Rs.812 crores and Rs.686 crores respectively. However, instead of
assuming both the salary as expenses, the company added salary paid to development team (Rs.812
crores) to the cost of software being developed which has increased the profits significantly as the
expenses are lesser. Has company done the right thing?
9. Zenstar Ltd. is into manufacturing of cables and wires. Copper and Aluminum are the primary
conductors used in wires and cables. It keeps stock of Copper and Aluminum sufficient to support
production for a period of one month. At present it has stock worth Rs.30 crores of Copper and Rs.12
crores of Aluminum. Suddenly there is a spike in Copper prices due to some global factors. The stock, if
valued at current prices will be worth Rs.38 crores. The prices of Aluminum, on the other hand, has
fallen down. The stock of Aluminum at current prices is worth Rs.10 crores. The company decides to
book the anticipated profit of Rs.8 crores and anticipated loss of Rs.2 crores on Copper and Aluminum
respectively. Will you support the decision?
10. Altius ltd. specializes in production of customized audio systems. It gets the production done at a high-
tech plant facility near its corporate office. The broad expense heads for the company in year 2014-15
are as follows:
 Material and Components : Rs.46 Crores
 Labour Charges : Rs.10 Crores
 Other Factory Charges : Rs.16 Crores
 Corporate Office Expenses : Rs.1.00 Crores
 Legal Charges : Rs.0.25 Crores
 Office Salaries : Rs.1.20 Crores
 Audit Fees : Rs.0.20 Crores
 Sales and Support Charges : Rs.6.00 Crores

Can the company choose to ignore disclosure of relatively minor expenses?

11. Xpress Cabs runs a fleet of taxis which specifically caters to the need of intra-city commuters. The
drivers of the cabs are employees of the company and are responsible for refueling and maintenance of
the cabs. The drivers are required to intimate the information regarding refueling bill, repair costs,
parking costs and kilometers run at the end of each day to the accounts office through SMS. The
accountant enters the amount spent on refueling and repairs on the basis of the SMS received. Comment
about the effectiveness of the process adopted by the company?