Q.1.

Explain ‘Economic Entity Assumption’ & ‘Matching Principle’ from

conceptual framework of accounting.
Ans: The economic entity assumption is an accounting principle that separates the transactions
carried out by the business from its owner. It can also refer to the separation between various
divisions in a company. Each unit maintains its own accounting records specific to the business
operations.
For example, if a company runs two business divisions – one is a hotel chain and the other is a
restaurant chain – separate accounts need to be maintained for each division. The expenses of
one line of business cannot be combined with the other. Maintaining separate records will help
the company know the true value of each business line.

The matching principle is an accounting concept that dictates that companies report expenses at
the same time as the revenues they are related to. Revenues and expenses are matched on
the income statement for a period of time (e.g., a year, quarter, or month).

Q.2. What are five steps of revenue recognition? Explain with example.
Ans: Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the
specific conditions in which revenue is recognized and determines how to account for it.
Typically, revenue is recognized when a critical event has occurred, and the dollar amount is
easily measurable to the company.
There are five steps needed to satisfy the updated revenue recognition principle:

a. Identify the contract with the customer- The new revenue guidance defines a contract as an
agreement between two or more parties that creates enforceable rights and obligations

b. Identify contractual performance obligations- A performance obligation is a promise to

transfer goods or services to a customer. This step requires an entity to identify all distinct
performance obligations in an arrangement. A good or service is distinct when (1) the customer
can benefit from the good or service on its own or with resources the customer already has access
to, and (2) the good or service can be transferred independent of other performance obligations
in the contract (even if it is transferred with other goods or services).

c. Determine the amount of consideration/price for the transaction- The transaction price is the
amount of consideration an entity expects to be entitled to for transferring promised goods or
services. The consideration amount can be fixed, variable, or a combination of both. The
transaction price is allocated to the identified performance obligations in the contract. These

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allocated amounts are recognized as revenue when or as the performance obligations are
fulfilled.

d. Allocate the determined amount of consideration/price to the contractual obligations- When

a contract includes more than one performance obligation, the seller should allocate the total
consideration to each performance obligation based on its relative standalone selling price.

e. Recognize revenue when the performing party satisfies the performance obligation- The final
step in applying the new revenue recognition standard is to recognize revenue when or as the
performance obligations in the contract are satisfied. For performance obligations that are
fulfilled at a point in time, revenue is recognized at the fulfillment of the performance obligation.
For performance obligations satisfied over time, an entity must decide how to appropriately
measure the progress and completion of the performance obligation.

Q.3. What is payroll accounting? What are the steps in determining the payroll?
Explain with example.

Ans: Payroll Accounting- Payroll accounting consists of filing and tracking employee compensation
data like money withheld from each paycheck and taxes and benefits the employee receives. Payroll
accountants use financial journal entries to summarize an organization's transactions and total cash flow.
Payroll entries fall under the scope of a general ledger that sorts all financial information. Once all payroll
information is documented on an employee, human resources can pull this data and send it to their
manager to add it to their performance evaluation.

Payroll accountants need to employ their hard skills to accurately insert relevant information into
the ledger. All expenses, liabilities and assets must be recorded for financial and compliance
purposes. Here is a full list of what you should add when documenting employee compensation:

 Gross wages, salaries, bonuses and commissions

 Withholding employer and employee taxes
 Withholding of salary, insurance premiums and savings plans
 Employer fringe benefits' expenses

5 Basic Steps to Payroll Processing:

1. Choosing a payroll schedule: There are three common payroll schedules, namely: weekly,
fortnightly, and monthly. A business’ payroll schedule determines how regularly you pay your
employees and should take into account the structure of your business and how it operates. Your
payroll schedule should suit your particular business needs and “make sense” in the grand
scheme of things to optimize your cash flow.
2. Logging employee information- This step is imperative for accurate payroll – every bit of
information related to employee wages should be recorded accurately. Payroll records include

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hours worked, timesheet records, base salary amount, any overtime amount, bank account
numbers, IR numbers, date of birth, tax code etc.
3. Calculate gross amount- An employee’s gross amount should be based on their salary or hourly
rate. However, this amount can vary during each payroll schedule due to factors such as
overtime, bonuses, leave days, sick days, commission, to name a few. Make sure everything is
accounted for in this step so your employee is receiving the correct amount of compensation for
their work.
4. Determine payroll deductions- After calculating an employee’s gross pay, you can now
determine the deductions.
5. Create a pay slip and distribute- All the information regarding an employee’s remunerations
and deductions should now be clearly presented on a pay slip and given to respective employees
confidentially. It should be consistently organized in a way that makes it easy to find the correct
information.

Q.4. Explain the different types error that are ‘not revealed’ by trial balance.
Trial balance is a listing of summary debit and credit account in which the total amount of credit
side equal to the total amount of debit side. In this case, trial balance will show immediately that
there is an error in the posting if total debit does not equal total credit. Hence, trial balance plays
an important role in checking if there are any errors in the posting into the accounts.

However, when the trial balance is in balance, it does not always mean that there is no error in
the posting into the accounts at all. This is due to there is also a type of error that do not reveal
in the trial balance.

Errors revealed by trial balance:

1. Errors of omission on both sides of double entry.

Example: The company forgot to post the $3,000 of utility expense.

Dr. [blank]

Cr. [blank]

2. Errors of posting on both sides of double entry with the same amount.
Example: Posting $3,200 transportation expense as $3,500 in the accounting entry.
Dr. Transportation exp. 3,500 Cr. Cash 3,500

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3. Errors of reverse posting in double entry.
Example: Posting $310 maintenance expense in reverse sides as below.
Dr. Cash 310

Cr. Maintenance exp. 310

4. Errors of accounting principle.
Example: Posting of $550 of maintenance expense to machinery fixed asset.
Dr. Machinery 550
Cr. Cash 550

Q.5. What are key differences between perpetual and periodic inventory system?
Explain.
The inventory system is of two types: Perpetual Inventory System, in which the movement of
the stock is recorded continuously and Periodic Inventory System, which updates the inventory
records from time to time only after the physical count of the stock.

BASIS FOR
PERPETUAL INVENTORY SYSTEM PERIODIC INVENTORY SYSTEM
COMPARISON

Meaning The inventory system which traces The Periodic Inventory System is an
every single movement of inventory, inventory record method whereby,
as and when they arise is known as the inventory records are updated
Perpetual Inventory System. at periodic intervals.

Basis Book Records Physical Verification

Updating Continuously At the end of the accounting

period.

Information Inventory and Cost of sales Inventory and Cost of goods sold
about

Balancing Figure Inventory Cost of Goods Sold

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 BASIS FOR
PERPETUAL INVENTORY SYSTEM PERIODIC INVENTORY SYSTEM
COMPARISON

Possibility of Yes No
Inventory Control

Effect on This method does not influence the Under this system, the business
business business operation. operations need to be stopped
operation during valuation.

Q.6. Explain the significance of statement of cash flow.

What is Cash Flow Statement?
The Cash Flow Statement portrays how a company has spent its cash. It is often used in tandem
with the other two key reports – the Profit and Loss and the Balance Sheet. It is the third
component of a company’s financial statements.
Why Cash Flow Statement is Important?
The cash flow report is important because it informs the reader of the business cash position. For
a business to be successful, it must have sufficient cash at all times. It needs cash to pay its
expenses, to pay bank loans, to pay taxes and to purchase new assets. A cash flow report
determines whether a business has enough cash to do exactly this.
Having cash is a key requirement for a business to stay solvent. When a business has no longer
enough cash to pay its dues, it is often declared bankrupt.
In fact, in the business world, small businesses rarely produce a cash flow report, as profit and
loss report is sufficient for their needs. On the other hand, for large entities such as Nike and
Microsoft, having a cash flow report is imperative. Such companies will often have a significant
amount of non-cash transactions, sometimes even billions of dollars in revenue that is simply
owed to them but hasn’t been received in cash yet. In these situations, a profit and loss statement
is not always sufficient, and a cash flow report is valuable to many users, such as banks and
shareholders.
Cash Flow Statement Example-

Let’s imagine you start a business with $1,000.

With your $1,000 you buy a box of ingredients and bake cakes.
You sell all the cakes to a customer for $5,000.

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The customer asks if he can purchase the cakes on credit, meaning he will pay for the cakes at
the end of the month. You agree.
Let’s determine your cash position in this scenario.
Revenue: $5,000
Under accounting rules revenue is recognized when it is earned, not when it is received.
Therefore, since you have made the sale to your customer, the sale must be recognized as
revenue received.
Profit: $4,000

You spent $1,000 on the cakes and sold them for $5,000. This leaves you with a profit of $4,000.
Cash: ZERO!
Even though you have earned $5,000 in revenue and $4,000 in profit, you have ZERO CASH! This
scenario can play out often in the business world, particularly with large corporations, which
signifies the importance of producing a cash flow report.

Q.7. What are the key components of equity? What are the cost of issuing equity?
Explain with example.
Stockholders’ Equity (also known as Shareholders Equity) is an account on a company’s balance
sheet that consists of share capital plus retained earnings. It also represents the residual value of
assets minus liabilities. By rearranging the original accounting equation, Assets = Liabilities +
Stockholders Equity, it can also be expressed as Stockholders Equity = Assets – Liabilities.
Stockholders Equity is influenced by several components:
Share Capital – amounts received by the reporting entity from transactions with its owners are
referred to as share capital.
Treasury shares- Treasury shares represent a company’s own shares repurchased and held
instead of being canceled. A company repurchases shares if it considers them to be undervalued,
when it needs shares for employee stock option schemes, wants to limit dilution, etc. Treasury
shares reduce equity balance and the number of shares outstanding. These are not entitled to
voting rights or dividends and a company may not recognize any gain or loss when reissuing them.
Retained Earnings – amounts earned through income, referred to as Retained Earnings and
Accumulated Other Comprehensive Income (for IFRS only). For more on Retained Earnings,
please click the link above.
Net Income & Dividends – Net income increases retained earnings while dividend payments
reduce retained earnings.

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 Q.8. Define fraud and internal control. Identify and explain the principles of
internal control activities.
Accounting fraud is the intentional manipulation of financial statements to create a false
appearance of corporate financial health. Furthermore, it involves an employee, accountant, or
the organization itself misleading investors and shareholders. A company can falsify its financial
statements by overstating its revenue, not recording expenses, and misstating assets and
liabilities.
Internal control, as defined in accounting and auditing, is a process for assuring achievement of
an organization’s objectives in operational effectiveness and efficiency, reliable financial
reporting, and compliance with laws, regulations and policies. A broad concept, internal control
involves everything that controls risks to an organization.
An effective internal control structure includes a company’s plan of organization and all the
procedures and actions it takes to:

•Protect its assets against theft and waste.

•Ensure compliance with company policies and federal law.
•Evaluate the performance of all personnel to promote efficient operations.
•Ensure accurate and reliable operating data and accounting reports.

Q.9. Explain the nature of accounting errors with example.

Accounting errors are those mistakes which occurs in the book keeping or accounting, relating
to a routine activity or relating to the principle of accounting. The Accounting errors happens in
entering the transactions in journal or subsidiary books or at the time of posting of entries in to
the ledger. The accounting errors may happen because of the omission, commission, principle or
as a compensating of errors.
Classification of Accounting errors- Accounting errors are classified in to four types on the basis
of nature of Errors. They are (1) Errors of Omission, (2) Errors of Commission, (3) Errors of
Principles and (4) Compensating Errors.
1. Errors of Omission-The Errors of Omission will occur when a transaction is not recorded in the
books of accounts or omitted by mistake. The Errors of Omission may happen as partial or
complete. The partial errors may happen in relation to any subsidiary books. This is the result of
when a transaction is entered in the subsidiary book but not posted to the ledger. For example,
cash paid to the suppliers has been entered in the payment side of the cash book but it will not
be entered in the debit side of the suppliers account.

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The complete omission may happen the transaction is completely omitted from the books of
accounts. For example, an accountant fails to enter a specific invoice from the sales day book.
2. Errors of Commission- When a transaction is entered in the books of accounts in wrongly, this
may be entered as partially or incorrectly. This kind of errors are known as Errors of Commission.
The Errors of Commission may happen because of ignorance or negligence of the accountant.
This may be of different types, the main reasons are Errors relating to subsidiary books and Errors
relating to ledger.
3.Errors of Principles- This kind of errors are occurs when the entries are made against the
principle of accounting. These Errors are made because of the following reasons: -
-Errors happens due to the inability to make a distinction between the revenue and capital items.
-Errors happens due to the inability to make a difference between the business expenses and
personal expenses.
-Errors happens because of the inability to make a distinction between the productive expense
and nonproductive expenses.
4.Compensating Errors- Compensating Errors are those errors which compensates themselves in
the net results of the business. This means, if there are over debit in one account which will be
compensated by the over credit in some account in the same extent of the business. Like that, if
there is a wrong debit in one account which will be neutralized by some wrong credit in the same
extent of the business.
The accounting errors will hardly affect the accuracy of trial balance of the business because the
trial balance is the final proof of the books of accounts. There are some of the methods to rectify
the accounting errors happened in the books of accounts. The important two methods for
rectifying the accounting errors are as follow.

-Striking of the wrong Entry.

-Making appropriate entries to correct the errors.
Procedure for rectifying Accounting errors: There are mainly three steps to rectify the
accounting errors in the books of accounts.
a. Ascertain the error occurred
b. Identify the correct record of transaction which has to be done.
c. Decide the rectification entry.

These all are the different kinds of accounting errors and the methods to rectify those errors.

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Q.10. Explain the purpose and basic procedures of internal and external audit.
Internal audits evaluate a company’s internal controls, including its corporate governance and
accounting processes. These audits ensure compliance with laws and regulations and help to
maintain accurate and timely financial reporting and data collection. Internal audits also provide
management with the tools necessary to attain operational efficiency by identifying problems
and correcting lapses before they are discovered in an external audit.
Why is internal audit important to an organization?
By reporting to executive management that important risks have been evaluated and highlighting
where improvements are necessary, the internal auditor helps executive management and
boards to demonstrate that they are managing the organization effectively on behalf of their
stakeholders. This is summarized in the mission statement of internal audit which says that
internal audit’s role is “to enhance and protect organizational value by providing risk based and
objective assurance, advice and insight”. Hence, internal auditors, along with executive
management, non-executive management and the external auditors are a critical part of the top
level governance of any organization.
Activities of Internal Audit: Below are the key things an internal auditor does-
Evaluating controls and advising managers at all levels- The internal auditor’s work includes
assessing the tone and risk management culture of the organization at one level through to
evaluating and reporting on the effectiveness of the implementation of management policies at
another.
Evaluating risks- It is management’s job to identify the risks facing the organization and to
understand how they will impact the delivery of objectives if they are not managed effectively.
Managers need to understand how much risk the organization is willing to live with and
implement controls and other safeguards to ensure these limits are not exceeded.
Analyzing operations and confirm information- Achieving objectives and managing valuable
organizational resources requires systems, processes and people. Internal auditors work closely
with line managers to review operations then report their findings. The internal auditor must be
well versed in the strategic objectives of their organization and the sector in which it operates in,
so that they have a clear understanding of how the operations of any given part of the
organization fit into the bigger picture.
Working with other assurance providers- Providing assurance to executive management and the
board’s audit committee that risks are being managed effectively is not the exclusive domain of
internal audit. There are likely to be other assurance providers who perform a similar role.

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An external audit is an examination that is conducted by an independent accountant. This type
of audit is most commonly intended to result in a certification of the financial statements of an
entity. This certification is required by certain investors and lenders, and for all publicly-held
businesses.
The objectives of an external audit are to determine:
-The accuracy and completeness of the client's accounting records;
-Whether the client's accounting records have been prepared in accordance with the applicable
accounting framework; and
-Whether the client's financial statements present fairly its results and financial position.
The Process of External Auditing:
Appointment of auditor. The process starts by appointing an independent auditor. This means hiring
someone who is not working for the organization or the company that requires auditing. Shareholders are
usually the ones who choose and appoint auditors at the Annual General Meeting. However, governing
legislation also has the power to choose an independent auditor. Typically, auditors will be chosen based
on their reputation, qualifications, and skills.

Acceptance of the project. The next step of the process is the terms of engagement. In this part, the
auditor confirms that he or she has accepted the appointment. He or she will be informed of the scope of
the audit plus his or her expected responsibilities throughout the contract.

Audit program. This is where the actual external auditing will take place. The auditor will collect, assess,
and interpret data to gain understanding of the organization’s activities. For each major activity listed in
the financial statements, external auditors will have to identify and assess risks that may have significant
impact on the organization’s performance or financial position.

The external auditor will also look for any irregularities. These may include the company manipulating its
own financial performance to mislead investors, delaying the disclosure of future financial performance,
etc.

Evidence gathering. External auditors will obtain evidence in order to successfully satisfy the requirements
of the audit program. This may include confirming compliance with accounting policies, examining
accounting records, and verifying assets that the organization has purchased.

Reporting. After a thorough investigation, the auditors will submit a financial report and state their
objective opinion. The scope of the audit and the outcome will be outlined in their report.

Q.11. What is conceptual framework? Why we need a conceptual framework in

financial accounting?
A conceptual framework can be defined as a system of ideas and objectives that lead to the
creation of a consistent set of rules and standards. Specifically, in accounting, the rule and
standards set the nature, function and limits of financial accounting and financial statements.

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The main reasons for developing an agreed conceptual framework are that it provides:
-a framework for setting accounting standards;
-a basis for resolving accounting disputes;

-fundamental principles which then do not have to be repeated in accounting standards.

Q.12. What is primary objective of financial reporting?

The objective of financial reporting is to track, analyze and report your business’ income. The
purpose of these reports is to examine resource usage, cash flow, business performance and the
financial health of the business. This helps you and your investors make informed decisions about
how to manage the business.
There are three main goals of financial reporting:
1.Provide information to investors: Investors will want to know how cash is being reinvested in
the business, and how efficiently capital is being used. Financial reporting helps investors decide
whether your business is a good place for their cash.
2. Track cash flow: Where is your business’ money coming from? Where is it going? Is the
business making a profit or a loss? These answers are important to know – they show how well
your business is performing, and whether it can cover its debts and continue to grow.
3. Analyze assets, liabilities and owner's equity: By monitoring these, and any changes to them,
you can work out what to expect in the future, and what you can change now to prepare. This
also shows the availability of resources for future growth.
Financial reports adhere to a group of taxation, accounting and legal requirements, called the
International Financial Reporting Standards. This is so a business’ finances can be understood all
over the world – a necessity with the increase of global companies and international
shareholders.

Q.13. What are the enhancing qualities of accounting information?

There are four (4) qualitative characteristics of accounting information that serve as the basis for decision
making purposes in accounting:

Relevance: information makes a difference in decision making

Reliability: information is verifiable, factual, and neutral

Comparability: information can be used to compare different entities

Consistency: information is consistently presented from year to year

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These qualities make accounting information understandable and useful for decision and reporting
purposes: the goal of financial reporting is to provide useful information to current and potential
investors, creditors, and other users of accounting information (e.g., government, standard-setting
bodies) to make investment, credit, and other decisions.

In addition to the aforementioned characteristics (i.e., relevance, reliability, comparability, and

consistency), the following qualities of accounting information affect its usefulness: understandability,
materiality, and conservatism.

Understandability allows the users of accounting information to comprehend (understand) accounting

information, given they spend the necessary time.

Materiality refers to a relative significance or importance of an item - dependent on individual’s judgment

- to the overall financial condition of a company. Information materiality and cost-benefit relationship
(i.e., whether information benefits outweigh its costs) impose constraints on the usefulness of accounting
information.

Conservatism (i.e., accounting practice of prudence when there is business uncertainty) can also affect
the usefulness of accounting information.

Q.14. What is petty cash account? Do we need to maintain a petty cash account
for cash control? Explain your position.
Petty cash or a petty cash fund is a small amount of money available for paying small expenses
without writing a check. Petty Cash is also the title of the general ledger current asset account
that reports the amount of the company's petty cash. The amount of petty cash will vary by
company and may be in the range of $30 to $300.
The petty cash is controlled through the use of a petty cash voucher for each payment made. The
expenses will be recorded in the company's general ledger expense accounts when the petty cash
on hand is replenished.

There are three reasons to keep petty cash:

 To make change for customers or patients

 To reimburse employees for items they have bought for your business
 To pay for small purchases which require cash, such as food for the office lunch or coffee
supplies, or for parking. Most retail businesses keep a cash drawer as do healthcare
practices.

Q.15. What is the accounting treatment for impairment of assets?

Definitions: Asset impairment occurs when the carrying amount of an asset exceeds its
recoverable amount. The impairment test is required when there are some indications or

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reasonable assumption that the recoverable amount of an asset declines rapidly. Asset
impairment accounting affects asset reduction in the balance sheet and impairment loss
recognition in the income statement.
Please note that goodwill and some tangible assets are required to make an annual impairment
test.
Carrying Amount: The carrying amount or current book value is calculated by deducting from the
initial cost of an asset any related accumulated depreciation and accumulated impairment loss.
Fair Value: Fair value is the price of an asset that can be traded between market participants at
a measurement date.
Value in Use: Value in use is the present value of all expected future cash flows to be generated
by an asset.
Recoverable Amount: The recoverable amount of an asset is the highest value in use and fair
value less all related disposal cost.
Impairment Loss: Impairment loss is the amount by which the carrying value of an assets exceeds
its recoverable amount.
Asset Impairment Procedure: An asset impairment procedure requires four stages to be
completed.
i) Identifying assets to be impaired. If there is any indication that the carrying amount
of an asset will drop below its recoverable amount, the impairment test should be
made. As was mentioned above, some assets require an annual impairment test.
ii) Impairment loss calculation. An accountant should calculate the value in use and
compare it with the fair value (if possible). If the highest of these two is less than the
carrying value of the asset, the difference should be identified as impairment loss.
iii) Impairment loss recognition. After the amount of impairment loss is calculated, it
should be recognized in the general journal.
iv) Depreciation schedule revision. Since the depreciable amount decreases due to
impairment loss recognition, the depreciation schedule should be revised.
Journal Entries
Recognition of asset impairment: If the impairment test shows an excess of carrying amount
over the recoverable amount, the impairment loss must be recognized by adjusting the entry in
the general journal.

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Recovery of asset impairment: The restoration entry to be made depends on whether or not the
gain on the revaluation of an asset exceeds its accumulated impairment losses.
If accumulated impairment losses cover asset appreciation, recovery of asset impairment should
be recorded as follows:

If asset appreciation exceeds accumulated impairment losses, a double entry should be made in
the general journal. The first one debits Accumulated Impairment Losses and credits Gain on
Revaluation for the whole amount of relevant accumulated impairment losses. The second entry
recognizes revaluation surplus by debiting the Asset account and crediting the Revaluation
Reserve for the difference between asset appreciation and accumulated impairment losses.

Q.16. Differentiate between debit memo and credit memo in preparing bank reconciliation
statement?

A bank credit memo is an item on a company's bank account statement that increases a company's
checking account balance.

Examples of Bank Credit Memo in a Bank Reconciliation:

A few examples of a bank credit memo appearing in a company's bank account include:

-The bank adding interest that was earned for having money on deposit

-The bank having collected a note for the company

-A refund of a previous bank charge

Since the amount of the bank's credit memo has already been added to the bank's balance, the bank
reconciliation will not reconcile unless the amount is also included in the company's general ledger Cash
account. To record the bank credit memo, the company will debit Cash and credit another account. For
example, if the bank statement shows a credit memo of $20 for interest earned, the company will debit
Cash for $20, and credit Interest Income for $20.

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A bank debit memo is an item on a company's bank account statement that reduces the company's
checking account balance.

Examples of Bank Debit Memo in a Bank Reconciliation:

-Bank service charge for maintaining the checking account

-A subtraction for a customer's check that did not clear the customer's bank account

-A bank fee for handling a check that was returned for insufficient funds

-A monthly loan payment

Since the amount of a bank debit memo has already been subtracted from the bank account, the amount
must also be subtracted from the company's general ledger Cash account. For example, if the bank
statement shows a debit memo of $25 for a service charge, it means that the company's general ledger
Cash account will need an entry that credits Cash for $25, and debits Bank Fee Expense or Miscellaneous
Expense for $25.

Q.17. Define cash equivalents and non-cash transactions as per IAS-7. Give some
examples of non-cash transactions. How to report non-cash activities in the
financial statements?
The Statement of Cash Flows reflects movements in cash and cash equivalents. The definitions
of these terms are therefore central to its proper preparation. IAS 7.6 provides the following
definitions:

• Cash comprises cash on hand and demand deposits.

• Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and that are subject to an insignificant risk of changes in value.
Non-cash transactions are investing and financing-related transactions that do not involve the
use of cash or a cash equivalent. When a company buys an asset or incurs an expense, but instead
of using cash, writes a promissory note or takes over an existing loan, the company is involved in
a non-cash transaction.
IAS 7.43 requires that investing and financing transactions that do not involve an inflow or
outflow of cash or cash equivalents are excluded from the Statement of Cash Flows. IAS 7.44
provides examples of noncash transactions:
• the acquisition of assets either by assuming directly related liabilities or by means of a finance
lease
• the acquisition of an entity by means of an equity issue
• the conversion of debt to equity

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Example – Non-cash transactions: Entity B is a manufacturing company. It obtains a new
machine to use within its manufacturing plant under a 5-year finance lease agreement. Entity B
recognizes the machine within property, plant and equipment at an amount of CU400,000 and
recognizes a finance lease liability for CU400,000. By the end of the reporting period, B has paid
scheduled repayments of CU35,000, of which CU2,900 was recognized as a finance cost in profit
or loss. Entity B has a policy of recognizing interest paid within financing activities.

Q.18. What is restricted cash? How to report restricted cash in the financial
statement?
Restricted cash refers to cash that is held onto by a company for specific reasons and is,
therefore, not available for immediate ordinary business use. It can be contrasted with
unrestricted cash, which refers to cash that can be used for any purpose.

Reasons for cash being restricted include-

-bank loan requirements,
-payment deposits, and
-collateral pledges
Restricted cash is commonly found on the balance sheet with a description of why the cash is
restricted in the accompanying notes to the financial statements. For example, the balance sheet
may look as follows:

The reason for any restriction is generally revealed in the accompanying notes to the financial
statements. Additionally, depending on how long the cash is restricted for, the line item may
appear under current assets or non-current assets. Cash that is restricted for one year or less is
categorized under current assets, while cash restricted for more than a year is categorized as a
non-current asset.

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Q.19. What is the importance of financial statements analysis? What are the tools
used in financial statement analysis?
The process of reviewing and analyzing a company’s financial statements to make better
economic decisions is called analysis of financial statements. In other words, the process of
determining financial strengths and weaknesses of the entity by establishing
the strategic relationship between the items of the balance sheet, profit and loss account, and
other financial statements.

Significance of Financial Analysis:

a. Finance Manager: Analysis of financial statements helps the finance manager in:
-Assessing the operational efficiency and managerial effectiveness of the company.
-Analyzing the financial strengths and weaknesses and creditworthiness of the company.
-Analyzing the current position of financial analysis,
-Assessing the types of assets owned by a business enterprise and the liabilities which are due to
the enterprise.
-Providing information about the cash position company is holding and how much debt the
company has in relation to equity.
-Studying the reasonability of stock and debtors held by the company.
-Browse more Topics under Analysis of Financial Statements
b. Top Management: Financial analysis helps the top management-
-To assess whether the resources of the firm are used in the most efficient manner

-Whether the financial condition of the firm is sound

-To determine the success of the company’s operations
-Appraising the individual’s performance
-Evaluating the system of internal control
-To investigate the future prospects of the enterprise.

c. Trade Payables: Trade payables analyze of financial statements for:

-Appraising the ability of the company to meet its short-term obligations
-Judging the probability of firm’s continued ability to meet all its financial obligations in the future.
-Firm’s ability to meet claims of creditors over a very short period of time.

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-Evaluating the financial position and ability to pay off the concerns.
d. Lenders: Suppliers of long-term debt are concerned with the firm’s long-term solvency and
survival. They analyze the firm’s financial statements-
-To ascertain the profitability of the company over a period of time,
-For determining a company’s ability to generate cash, to pay interest and repay the principal
amount

-To assess the relationship between various sources of funds (i.e. capital structure relationships)
-To assess financial statements which contain information on past performances and interpret it
as a basis for forecasting future rates of return and for assessing risk.
-For determining credit risk, deciding the terms and conditions of a loan if sanctioned, interest
rate, and maturity date etc.
e. Investors: Investors, who have invested their money in the firm’s shares, are interested in the
firm’s earnings and future profitability. Financial statement analysis helps them in predicting the
bankruptcy and failure probability of business enterprises. After being aware of the probable failure,
investors can take preventive measures to avoid/minimize losses.

f. Labor Unions: Labor unions analyze the financial statements:

-To assess whether an enterprise can increase their pay.
-To check whether an enterprise can increase productivity or raise the prices of products/ services
to absorb a wage increase.

Important tools or techniques of financial statement analysis are as follows:

-Comparative Statement or Comparative Financial and Operating Statements.
-Common Size Statements.
-Trend Ratios or Trend Analysis.
-Average Analysis.
-Statement of Changes in Working Capital.

-Fund Flow Analysis.

-Cash Flow Analysis.
-Ratio Analysis.
-Cost Volume Profit Analysis

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Q.20. Identify the limitations of ratio analysis?
Ratio analysis is a popular technique of financial analysis. It is used to visualize and extract
information from financial statements. It focuses on ratios that reflect the profitability, efficiency,
financing leverage, and other vital information about a business. The ratios can be used for both
horizontal analysis and vertical analysis. While they are a popular form of analysis, there are many
limitations of ratio analysis that financial analysts should be aware of.
Some of the most important limitations of ratio analysis include:
Historical Information: Information used in the analysis is based on real past results that are
released by the company. Therefore, ratio analysis metrics do not necessarily represent future
company performance.
Inflationary effects: Financial statements are released periodically and, therefore, there are time
differences between each release. If inflation has occurred in between periods, then real prices
are not reflected in the financial statements. Thus, the numbers across different periods are not
comparable until they are adjusted for inflation.
Changes in accounting policies: If the company has changed its accounting policies and
procedures, this may significantly affect financial reporting. In this case, the key financial metrics
utilized in ratio analysis are altered and the financial results recorded after the change are not
comparable to the results recorded prior to the change. It is up to the analyst to be up to date
with changes to accounting policies. Changes made are generally found in the notes to the
financial statements section.
Operational changes: A company may significantly change its operational structure, anything
from their supply chain strategy to the product that they are selling. When significant operational
changes occur, the comparison of financial metrics before and after the operational change may
lead to misleading conclusions about the company’s performance and future prospects.
Seasonal effects: An analyst should be aware of seasonal factors that could potentially result in
limitations of ratio analysis. The inability to adjust the ratio analysis to the seasonality effects may
lead to false interpretations of the results from the analysis.
Manipulation of financial statements: Ratio analysis is based on information that is reported by
the company in its financial statements. This information may be manipulated by the company’s
management to report a better result than its actual performance. Hence, ratio analysis may not
accurately reflect the true nature of the business, as the misrepresentation of information is not
detected by simple analysis. It is important that an analyst is aware of these possible
manipulations and always complete extensive due diligence before reaching any conclusions.

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Q.21. What are the differences between external and internal audit?
There are multiple differences between the internal audit and external audit functions, which are
as follows:
-Internal auditors are company employees, while external auditors work for an outside audit
firm.
-Internal auditors are hired by the company, while external auditors are appointed by a
shareholder vote.
-Internal auditors do not have to be CPAs, while a CPA must direct the activities of the external
auditors.
-Internal auditors are responsible to management, while external auditors are responsible to
the shareholders.
-Internal auditors can issue their findings in any type of report format, while external auditors
must use specific formats for their audit opinions and management letters.
-Internal audit reports are used by management, while external audit reports are used by
stakeholders, such as investors, creditors, and lenders.
-Internal auditors can be used to provide advice and other consulting assistance to employees,
while external auditors are constrained from supporting an audit client too closely.
-Internal auditors will examine issues related to company business practices and risks, while
external auditors examine the financial records and issue an opinion regarding the financial
statements of the company.
-Internal audits are conducted throughout the year, while external auditors conduct a single
annual audit. If a client is publicly-held, external auditors will also provide review services three
times per year.
In short, the two functions share one word in their names, but are otherwise quite different.
Larger organizations typically have both functions, thereby ensuring that their records,
processes, and financial statements are closely examined at regular intervals.

Q.22. What are the methods of fraud prevention and detention? Explain.
Fraud in most organizations, whether commercial or not-for-profit, is not totally preventable. When
entrepreneurs or senior managers recognize and acknowledge that fraud could occur in their
organization, their attention will likely shift to fraud detection.

Early detection can reduce fraud losses in many instances because organizational frauds tend to be
ongoing. Here are some ways that fraud might be detected.

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Fraud detection by tip lines: An anonymous tip line (or website or hotline) is one of the most effective
ways to detect fraud in organizations. In order for tips to be independently investigated, it is desirable
they go directly to an organization’s internal auditor, inspector general, legal department, or even to
outside legal counsel.

Fraud detection by external auditors: Financial statement auditors conduct their audits in such a way
so as to obtain reasonable assurance that financial statements are free from material misstatement,
whether caused by fraud or error. Consequently, in some cases, especially those with large losses, an
organization’s external auditors may detect fraud.

The fraud triangle is a framework designed to explain the reasoning for fraud and suggests three factors
that generally apply to fraud perpetrators:

-Pressure

-Opportunity

-Rationalization

Fraud detection by internal auditors and inspector generals: An organization’s internal auditor does
a lot of the same type of work as its external auditor, but an internal auditor is concerned with all fraud
rather than just the fraud that impacts the financial statements. As such, an internal auditor will likely
discover some frauds as a routine part of internal auditing work. Further, an internal auditor plays a key
role in developing a system of fraud indicators, so that suspicious activities are flagged and investigated.
Finally, internal auditors may be concerned with violations of the organization’s policies and procedures
even when they do not involve fraud.

Fraud detection by dedicated departments: Many organizations have departments devoted to

information security and fraud detection. Such departments may operate independently in their
functional areas or under the control of a chief information officer, the controller, or the internal auditor.

Fraud detection by accident: Passive fraud detection refers to cases in which the organization discovers
the fraud by accident, confession, or unsolicited notification by another party. Fraudsters frequently make
mistakes by failing to adequately cover their tracks. For this reason, efficient organizations will train their
employees to spot and report irregularities.

Q.23. Explain the following rates regarding VAT:

i) Standard Rate: Value-Added Tax (VAT) at the standard rate applies to most goods and
services. However, certain goods and services are liable to other reduced rates or
are exempt from VAT.
Some examples of goods and services subject to the standard rate are:
-solicitor services
-furniture

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-batteries
-motor vehicles
-consultancy services

-tires.
ii) Zero Rated: Products with a zero value are products for which value added tax (VAT) is not
imposed. Products with a zero rating may include certain food items, medical equipment, trading
pure gold, silver and platinum, trading authentic gems and pearls, trading preschool education
services and products, etc. Resellers who sell zero-rate merchandise can recover VAT on costs
incurred in any purchases that are directly related to sales of zero-rated products. When the
reseller fills the VAT returns, they can claim the input tax credits to recover the VAT they paid or
owe to the business.
iii) Exempt: Exempt products are also non-VAT goods. Since exempt products do not charge VAT,
a supplier providing exempt products cannot claim VAT on purchases related to exempt
products. Examples of exempt products include insurance, certain types of training and
education, certain services offered by doctors and dentists, postal services, physical education,
works of art, cultural services, etc. In case the reseller only provides exempt goods or services,
they cannot register for VAT or charge VAT, which means that there is no VAT to be claimed
back. If resellers sell some exempt goods and some taxable goods, they will be known as “partially
exempt”; in which case the dealer may claim VAT on the taxable goods and services sold.

Q.24. Summary of IAS 2

Objective of IAS 2: The objective of IAS 2 is to prescribe the accounting treatment for
inventories. It provides guidance for determining the cost of inventories and for subsequently
recognizing an expense, including any write-down to net realizable value. It also provides
guidance on the cost formulas that are used to assign costs to inventories.
Scope: Inventories include assets held for sale in the ordinary course of business (finished
goods), assets in the production process for sale in the ordinary course of business (work in
process), and materials and supplies that are consumed in production (raw materials).
However, IAS 2 excludes certain inventories from its scope:

-work in process arising under construction contracts

-financial instruments
-biological assets related to agricultural activity and agricultural produce at the point of harvest
Also, while the following are within the scope of the standard, IAS 2 does not apply to the
measurement of inventories held by: [IAS 2.3]

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-producers of agricultural and forest products, agricultural produce after harvest, and minerals
and mineral products, to the extent that they are measured at net realizable value (above or
below cost) in accordance with well-established practices in those industries. When such
inventories are measured at net realizable value, changes in that value are recognized in profit
or loss in the period of the change
-commodity brokers and dealers who measure their inventories at fair value less costs to sell.
When such inventories are measured at fair value less costs to sell, changes in fair value less
costs to sell are recognized in profit or loss in the period of the change.
Fundamental principle of IAS 2: Inventories are required to be stated at the lower of cost and
net realizable value (NRV).

Measurement of inventories:
-costs of purchase (including taxes, transport, and handling) net of trade discounts received
-costs of conversion (including fixed and variable manufacturing overheads) and
-other costs incurred in bringing the inventories to their present location and condition
Inventory cost should not include:

-abnormal waste
-storage costs
-administrative overheads unrelated to production
-selling costs
-foreign exchange differences arising directly on the recent acquisition of inventories invoiced
in a foreign currency

-interest cost when inventories are purchased with deferred settlement terms.

Q.25. What are the components of a complete set of financial statements as

defined in IAS-1?
Present ation of Fina ncial Stat em ents s ets o ut th e ov erall req uire men ts fo r fin ancial s tate men ts, incl uding how they shoul d be str uctu red, the mini mum re quire me nts fo r th eir c onte nt a nd o ver riding conc epts such as g oing c once rn, the accr ual b asis of acco untin g an d th e cu rre nt/n on-c ur rent distincti on. The sta nda rd r equi res a co mplet e set of fin ancial stat eme nts t o co mpris e a st ate men t of fi nanci al posi tion, a sta tem ent of p rofit or l oss an d ot her com pre hen sive inc ome , a st ate men t of c han ges in eq uity a nd a stat eme nt of cash flows.

Presentation of Financial Statements sets out the overall requirements for financial statements, including
how they should be structured, the minimum requirements for their content and overriding concepts such
as going concern, the accrual basis of accounting and the current/non-current distinction. The standard
requires a complete set of financial statements to comprise a statement of financial position, a statement
of profit or loss and other comprehensive income, a statement of changes in equity and a statement of
cash flows.

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Components of financial statements: A complete set of financial statements includes: [IAS 1.10]
-a statement of financial position (balance sheet) at the end of the period
-a statement of profit or loss and other comprehensive income for the period (presented as a
single statement, or by presenting the profit or loss section in a separate statement of profit or
loss, immediately followed by a statement presenting comprehensive income beginning with
profit or loss)
-a statement of changes in equity for the period
-a statement of cash flows for the period

-notes, comprising a summary of significant accounting policies and other explanatory notes
-comparative information prescribed by the standard.

Q25. What is overtrading? What might be the consequences of overtrading?

Over-trading means a situation where a company does more business than what its finances
allow. It is related to the cash position of the enterprise, and it occurs when the company expands
its scale of operations with insufficient cash resources.
Causes of Over-Trading:
-Inflation and Rising Prices

-High Incidence of Taxation

-Increased Lock-up of Funds in Stocks
-Over-Expansion:
Signs of Over-Trading:
i. Increase in bank borrowings and loans.

ii. Increase in stocks.

iii. Purchase of fixed assets out of short-term funds.
iv. Decline in the working capital ratio, i.e. Working Capital/Sales or Working Capital/Production
v. Decline in the rate of gross and net profits.
vi. Low current ratio and very high turnover ratio.

Consequences of Over-Trading:
i. Inability of the management to pay wages to the employees and taxes to the government.
ii. Decline in sales and costly purchases.

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iii. Difficulty in raising funds because of poor creditworthiness.
iv. Problems with debtors and creditors.
v. Inability of the management to carry out timely repairs and maintenance resulting in inefficient
working.
vi. Lack of funds will compel the company to go in for outdated and old machinery for
replacement purpose.

Remedies for Over-Trading:

i. The company should cut down its business and over-spending or it should arrange for more
funds.
ii. Preventing a situation of over-trading by taking precautionary steps.

Q.26. Discuss the ways or steps to shorten working capital cycle.

Working capital is the capital a business uses in its daily trading operations. It refers to the
difference between a company’s current assets and its current liabilities. Working capital
measures the company’s operational efficiency and its short-term health.
The Working Capital Cycle for a business is the length of time it takes to convert the total net
working capital (current assets less current liabilities) into cash. Businesses typically try to
manage this cycle by selling inventory quickly, collecting revenue from customers quickly, and
paying bills slowly to optimize cash flow.
To improve working capital, most companies aim to shorten their working capital cycle by a
faster collection of receivables, minimize inventory cycles and extend payment terms. Below are
some of the tips that can shorten the working capital cycle.
1. Faster collection of receivables: Start getting paid faster by offering discounts to clients to
reward their prompt payment. Also, centralizing accounts receivable processing helps to
maintain common practices and standards while automating processes reduces human entry
errors.
2. Minimize inventory cycles: Although inventory differs across industries, it is fundamental for
every business to manage their inventory. Lean manufacturing to streamline the process of
manufacturing and just-in-time (JIT) production are techniques to manage inventory. However,
if the company tried to aggressively reduce its inventory turn-over, a large demand shock or a
supply shock can lead to the inability to meet its current demand.
3. Extend payment terms: If there is no discount for early payments that the company can take
advantage of, the company will rather keep the cash for as long as possible to repay their debt.
Better negotiations with debtors also help to prolong the payment terms. However, if the
suppliers cannot keep up with the extended payment terms, this may sufficiently increase the

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company’s costs. This is because the suppliers will have to obtain financing at high rates and
transfer the costs onto the company.
However, in reality, many businesses cannot finance their operating cycle and are facing cash
flow constraints. Instead of investing free capital in growth opportunities and greater
shareholder payout, the company’s cash is tied up on the balance sheet.

Q.27. What is value added statement?

Value Added Statement is a financial statement that depicts wealth created by an organization
and how is that wealth distributed among various stakeholders. The various stakeholders
comprise of the employees, shareholders, government, creditors and the wealth that is retained
in the business.
Advantages of a Value Added Statement
-It is easy to calculate.
-Helps a company to apportion the value to various stakeholders. The company can use this to
analyze what proportion of value added is allocated to which stakeholder.
-Useful for doing a direct comparison with your competitors.

-Useful for internal comparison purposes and to devise employee incentive schemes.
Difference between Value Added and Profit
-Profit subtracts all the cost incurred in the process of generating revenues. The value added, on
the other hand only subtracts the cost of bought-in goods and services.
-Profits are meant for shareholders whereas value added is meant for stakeholders who include
shareholders also. Therefore, value added is a wider term.

Q.28. What is the IFRS Foundation? What relation does it have with IASB?
The International Accounting Standards Board (IASB) is an independent, private-sector body
that develops and approves International Financial Reporting Standards (IFRSs). The IASB
operates under the oversight of the IFRS Foundation. The IASB was formed in 2001 to replace the
International Accounting Standards Committee (IASC)
The IASB's role: Under the IFRS Foundation Constitution, the IASB has complete responsibility
for all technical matters of the IFRS Foundation including:
-full discretion in developing and pursuing its technical agenda, subject to certain consultation
requirements with the Trustees and the public
-the preparation and issuing of IFRSs (other than Interpretations) and exposure drafts, following
the due process stipulated in the Constitution

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-the approval and issuing of Interpretations developed by the IFRS Interpretations Committee.

Q.30. Define:
I) Operating Income: Operating income, also referred to as operating profit or Earnings Before
Interest & Taxes (EBIT), is the amount of revenue left after deducting the operational direct and
indirect costs from sales revenue. It can also be computed using gross income less depreciation,
amortization, and operating expenses not directly attributable to the production of goods.
Interest expense, interest income, and other non-operational revenue sources are not
considered in computing for operating income.
Below is an example of income from operations highlighted on Amazon.com Inc.’s 2016 income
statement.

ii) Non-Operating Income: Non-operating income refers to the part of a company’s income
that is not attributable to its core business operations. It is a category in a multi-step income

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statement. Dividend incomes, gains or losses from foreign exchange, as well as sales of assets,
write-down of assets, interest incomes, and expenses are all examples of non-operating income
items.

iii) Comprehensive Income: Comprehensive income for a corporation is the combination of the
following amounts which occurred during a specified period of time such as a year, quarter,
month, etc.:
1. Net income or net loss (the details of which are reported on the corporation's income
statement), plus
2. Other comprehensive income (if any)
Examples of other comprehensive income include:
-Unrealized gains/losses on hedging derivatives
-Foreign currency translation adjustments

-Unrealized gains/losses on postretirement benefit plans.

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Basically, comprehensive income consists of all of the revenues, gains, expenses, and losses that
caused stockholders' equity to change during the accounting period.
What is Other Comprehensive Income?
Other comprehensive income is comprised of revenues, expenses, gains, and losses that, according to the
GAAP and IFRS standards, are excluded from net income on the income statement. Revenues, expenses,
gains, and losses that are reported as other comprehensive income are only those that have not been
realized yet.

Q.31. Explain the recognition process of the elements of financial statements.

Financial statements portray the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics. These broad classes are
termed the elements of financial statements.
The elements directly related to financial position and their definition according to the
framework are:
Asset-An asset is a resource controlled by the enterprise as a result of past events and from which
future economic benefits are expected to flow to the enterprise.
Liability-A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
Equity-Equity is the residual interest in the assets of the enterprise after deducting all its
liabilities.
The elements directly related to performance and their definition according to the
framework are:
Income-Income is increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants.
Expense-Expenses are decreases in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.

Recognition of the Elements of Financial Statements

Recognition is the process of incorporating in the balance sheet or income statement an item
that meets the definition of an element and satisfies the following criteria for recognition:
-It is probable that any future economic benefit associated with the item will flow to or from the
enterprise; and

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-The item’s cost or value can be measured with reliability.
Based on these general criteria:
An asset is recognized in the balance sheet when it is probable that the future economic benefits
will flow to the enterprise and the asset has a cost or value that can be measured reliably.
A liability is recognized in the balance sheet when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present obligation and the
amount at which the settlement will take place can be measured reliably.
Income is recognized in the income statement when an increase in future economic benefits
related to an increase in an asset or a decrease of a liability has arisen that can be measured
reliably. This means, in effect, that recognition of income occurs simultaneously with the
recognition of increases in assets or decreases in liabilities
Expenses are recognized when a decrease in future economic benefits related to a decrease in
an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect,
that recognition of expenses occurs simultaneously with the recognition of an increase in
liabilities or a decrease in assets.

Q.32. What are the disclosure requirements with regard to Property, Plant and
Equipment(PPE) in the financial statements as per IAS-16?
Property, Plant and Equipment outlines the accounting treatment for most types of property,
plant and equipment. Property, plant and equipment is initially measured at its cost,
subsequently measured either using a cost or revaluation model, and depreciated so that its
depreciable amount is allocated on a systematic basis over its useful life.
Disclosure: Information about each class of property, plant and equipment.
For each class of property, plant, and equipment, disclose:
-basis for measuring carrying amount
-depreciation method(s) used

-useful lives or depreciation rates

-gross carrying amount and accumulated depreciation and impairment losses
-reconciliation of the carrying amount at the beginning and the end of the period, showing:
i. additions
ii. disposals acquisitions through business combinations

ii. revaluation increases or decreases

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iv. impairment losses
v. reversals of impairment losses
vi. depreciation

vii. net foreign exchange differences on translation

viii. other movements

Q.33. What is forensic accounting? Does it bear relation with external audit?
Forensic accounting is the investigation of fraud or financial manipulation by performing
extremely detailed research and analysis of financial information. Forensic accountants are often
hired to prepare for litigation related to insurance claims, insolvency, divorces, embezzlement,
fraud, skimming, and any type of financial theft.

Q.34. Define full disclosure and cost principle.

The Full Disclosure Principle states that all relevant and necessary information for the
understanding of a financial statement should be included on a set of financial statements
for public company filings. Financial Analysts who read financial statements need to know
what inventory valuation method has been used, if there have been any significant write-downs,
how depreciation is being calculated, and other critical information for the understanding of the
financial statements.
The cost principle is one of the basic underlying guidelines in accounting. It is also known as the
historical cost principle.
The cost principle requires that assets be recorded at the cash amount (or the equivalent) at the
time that an asset is acquired. Further, the amount recorded will not be increased for inflation or
improvements in market value.

Q.35. ‘’Bookkeeping and accounting are the same’’- Do you agree? Explain.
Bookkeeping is responsible for the recording of financial transactions whereas accounting is
responsible for interpreting, classifying, analyzing, reporting, and summarizing the financial data.
A major misconception regarding bookkeeping vs. accounting is that both are considered to be
one profession. Though they seem to be very similar, there are some striking differences between
the two. To resolve this confusion, we have listed down accounting vs bookkeeping differences
here –

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 Topic Bookkeeping Accounting
Definition Bookkeeping is mainly related to Accounting is the process of
identifying, measuring, and summarizing, interpreting, and
recording, financial transactions communicating financial
transactions which were classified
in the ledger account
Decision Management can't take a decision Depending on the data provided by
Making based on the data provided by the accountants, the management
bookkeeping can take critical business decisions
Objective The objective of bookkeeping is to The objective of accounting is to
keep the records of all financial gauge the financial situation and
transactions proper and systematic further communicate the
information to the relevant
authorities
Preparation Financial statements are not prepared Financial statements are prepared
of Financial as a part of this process during the accounting process
Statements
Skills Bookkeeping doesn't require any Accounting requires special skills
Required special skill sets due to its analytical and complex
nature
Analysis The process of bookkeeping does not Accounting uses bookkeeping
require any analysis information to analyze and interpret
the data and then compiles it into
reports

Q.36. What is the purpose of financial statements as per IAS-1?

The objective of general purpose financial statements is to provide information about the
financial position, financial performance, and cash flows of an entity that is useful to a wide range
of users in making economic decisions. To meet that objective, financial statements provide
information about an entity's: [IAS 1.9]
-assets

-liabilities

-equity

-income and expenses, including gains and losses

-contributions by and distributions to owners (in their capacity as owners)

-cash flows.
That information, along with other information in the notes, assists users of financial statements
in predicting the entity's future cash flows and, in particular, their timing and certainty.

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Q.37. Distinguish between tangible and intangible assets.
Tangible assets are typically physical assets or property owned by a company, such as computer
equipment. Tangible assets are the main type of assets that companies use to produce their
product and service.
Intangible assets don't physically exist; yet are they have a monetary value since they represent
potential revenue. A type of an intangible asset could be a copyright to a song.

Basis Tangible Assets Intangible Assets

Meaning Tangible assets are the assets owned by Intangible assets implies
the firm which are having monetary value incorporeal assets which have
and is materially present. a certain economic life and an
economic value.
Form Physical Abstract
Reduction in Depreciation Amortization
value
Liquidation Easy Difficult
Residual value Yes NO
Acceptance as Creditors accept such assets as collateral. Creditors do not accept such
collateral assets as security.

Q.38. Explain the purpose of choosing a method for inventory valuation.

Choosing the right inventory valuation method is important as it has a direct impact on the
business’s profit margin. Your choice can lead to drastic differences in the cost of goods sold, net
income and ending inventory.
There are advantages and disadvantages of each method. For example, the LIFO method will give
you the lowest profit because the last inventory items bought are usually the most expensive
while the FIFO will give you the highest profit as the first items in stock are usually the cheapest.
To assess the method which is best for you, you need to pay attention to changes in the inventory
costs.
-If the inventory costs are escalating or are likely to increase, LIFO costing may be better. As
higher cost items are considered sold, it results in higher costs and lower profits.

-In case your inventory costs are falling, FIFO might be the best option for you.
-For a more accurate cost, use the FIFO method of inventory valuation as it assumes the older
items that are less costly are the ones sold first.
As a business owner, you need to analyze each method and apply the method that reflects the
periodic income accurately and suits your specific business situation. The Financial Accounting

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Standards Board (FASB), in its Generally Accepted Accounting Procedures, allows both FIFO and
LIFO accounting.

Q.40. Why LIFO is not permissible under IFRS?

After the revision of IAS 2 Inventories in 2003, LIFO was explicitly prohibited to be used by the
entities following International Accounting Standards to prepare and present financial
statements. Before this revision LIFO was available as allowed alternative i.e. an option if
company wishes to use the inventory valuation method other than the preferred method.
One of the reason that can easily be understood is that LIFO cause reduction in tax
burden under inflationary economies i.e. in the times of rising prices. This happens because LIFO
assumes that inventory which is bought latest will be sent to production hall to be consumed in
the production process and thus higher value inventory will be included in cost of sales figure
which will result in larger cost and ultimately lesser profits and thus lesser tax. So, many argue
that LIFO is one of the tools to save tax “expenses”.
However, the major reason is not the impact on tax. The main reason for excluding the LIFO is
because IFRSs shifted its focus on balance sheet instead of income statement which is also
known as balance sheet approach. The impact of this turn in focus from income statement to
statement of financial position (SoFP) requires that the figures in the SoFP should be according
to present market conditions i.e. it should provide the most relevant information with respect
to time and if the statement of financial position items are measured according to up to date
information only then financial position can be ascertained reliably.

Md. Nuruddin Mahmud is trying to stop procrastination . Advise him at [email protected]