Question 1. What Is Financial Accounting?
Financial accounting gathers and summarizes financial data to prepare financial reports such as balance sheet and income statement for the organization’s management, investors, lenders, suppliers, tax authorities, and other stakeholders.
Question 2. What Is The Role Of Financial Accounting In Business?
- Every business is required by law, in which the business is registered and operated, to maintain a record of its business transaction and communicate those in the form of financial reports. These reports are commonly referred to as financial statements.
- The users of these financial statements are what we call stakeholders. These are individual, group of individuals or organization which are directly and indirectly interested in the course of a business which includes the owner, managers, employees, creditors, the government or general public.
- Financial accounting is the accounting process that culminates in the preparation of financial reports of a business which is used by stakeholders in forming their economic decisions.
- The main objective of financial accounting is to provide information regarding the financial condition and performance of a business entity. This information are reported and communicated in the form of financial statements.
- Additionally, financial accounting shows the results of stewardship of a business management. By looking at the financial reports, users can interpret how well or bad the business management has operated and used its resources.
Question 3. Who Governs The Financial Reporting Standard?
Since financial accounting is the process that provides financial reports to the general public, professionals in the accounting, trade and commerce, have developed and formed an accounting standard which will serve as the foundation of all accounting process and procedures performed. Such accounting standard is referred to as the Generally Accepted Accounting Principles (GAAP).
GAAP represents the rules, procedures, practice and standards followed in the preparation and presentation of the financial statements. Its purpose is to ensure consistency and comparability of reported financial information of business entities, in order to protect the users or general public, since they use financial reports in their economic decisions.
Question 4. Difference Between Financial Accounting And Bookkeeping?
Financial accounting is different from bookkeeping. Bookkeeping is a branch of financial accounting which pertains to the procedural process of recording and maintaining the business transactions. The only function of bookkeeping is to keep the financial record of the business accurate and complete. On the other hand, financial accounting includes a broader role compared to bookkeeping. It is not merely procedural in nature but also conceptual. Financial accounting is also concern with the why, reason or justification of any action adopted. It is responsible not only in the complete and accurate recording of business transactions but also it ensures that the reported financial statement abides by the accounting standards, and all other reporting standards, such as the government.
Question 5. What Is The Primary Objective Of Financial Accounting?
The primary objective of the Financial Accounting is to communicate and provide information to the investors and creditors on the economic activities of the enterprise that will help them in their investment decisions.
Question 6. What Are Financial Statements? Name The Major Financial Statements?
The Financial statements are the reports that result from the process of accounting which allow the interested parties to evaluate the profitability and the solvency of the business. The major financial statements are:
- Profit and Loss Account
- Balance sheet
- Cash Flow statement.
Question 7. What Is The Difference Between Balance Sheet And Profit & Loss Account?
The balance sheet is one of the most important financial statements of a company. It is reported to investors at least once per year. It may also be presented quarterly, semiannually or monthly. The balance sheet provides information on what the company owns (its assets), what it owes (its liabilities), and the value of the business to its stockholders (the shareholders’ equity). The name, balance sheet, is derived from the fact that these accounts must always be in balance. Assets must always equal the sum of liabilities and shareholders’ equity.
A company’s income statement/profit and loss account statement is a record of its earnings or losses for a given period. It shows all of the money a company earned (revenues) and all of the money a company spent (expenses) during this period. It also accounts for the effects of some basic accounting principles such as depreciation. The income statement is important for investors because it’s the basic measuring stick of profitability. A company with little or no income has little or no money to pass on to its investors in the form of dividends. If a company continues to record losses for a sustained period, it could go bankrupt. In such a case, both bond and stock investors could lose some or all of their investment. On the other hand, a company that realizes large profits will have more money to pass on to its investors.
Question 8. What Are The Principal Qualitative Characteristics Of Financial Statements?
The principle characteristics of financial statements are the attributes that make the information provided in the financial statements useful to the users. The principle qualitative characteristics are
- Understandability: They should be readily understandable to the users. For this purpose users are deemed to have reasonable knowledge of business and economic activities.
- Relevance: To be useful information must be relevant to the decision-making needs of the users.
- Reliability: Information is said to be reliable when it is free from errors, bias and can be depended upon by the users to represent faithfully, which it purports to represent.
- Comparability: Users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance.
Question 9. What Is Meant By The Quality Of Financial Reporting? What Is Conservatism, And How Does It Affect The Quality Of Earnings?
The quality of financial reporting refers to how close the financial statements are to economic reality. The closer the financial statements are to economic reality, the higher is the quality of financial reporting. The less that management uses discretionary means to manipulate earnings, the higher the quality of financial reporting. Conservatism means that management should take great care not to overstate assets and revenues and not to understate liabilities and expenses. The more conservative management is in making accounting judgments, the higher will be the quality of financial reporting.
Question 10. What Are The Major Constraints On Relevant And Reliable Financial Statements?
The major constraints on relevant and reliable financial statements are:
- Timeliness: If there is undue delay information becomes irrelevant.
- Balance between cost and benefit: The benefits derived from information should exceed the cost of providing it.
- Balance between the various qualitative characteristics: In practice it has become necessary to achieve an appropriate balance between the qualitative characteristics.
- True and fair view presentation: There is no clarity in the term true and fair view as required by the Companies Act. The conceptual framework does not discuss this.
Question 11. What Are The Golden Rules Of Accounting?
The golden Rules of Accounting are:
- Debits always equal Credits
- Increases do not necessarily equal Decreases
- Assets – Liabilities = Owner’s Equity (The accounting equation).
Question 12. What Is Fundamental Accounting Equation?
Accounting equation is a mathematical expression used to describe the relationship between the assets, liabilities and owner’s equity of the business model. The basic accounting equation states that assets equal liabilities and owner’s equity, but can be modified by operations applied to both sides of the equation, e.g., assets minus liabilities equal owner’s equity.
Question 13. What Are Accounting Standards? List Few Advantages?
Accounting Standards are rules and criteria of accounting measurement evolved by several accounting standard setting bodies established in developing and developed countries.
- International Accounting Standard Board (IASB) – International Accounting Standards.
- Financial Accounting Standards Board (FASB) US Generally Acceptable Accounting Practices (specifically Statements on Financial Accounting Standards).
- In India Institute of Chartered accountants of India Accounting Standards.
The advantages are:
- Reduces to a reasonable extent eliminates confusing variations in the accounting treatment.
- Lays down disclosure requirements beyond that required by law.
- To a limited extent facilitates comparison of financial statements globally.
Question 14. Discuss The Gaap Measures Used In India?
The financial statements are prepared under the historical cost convention, in accordance with Indian Generally Accepted Accounting Principles ( GAAP ) comprising of the accounting standards issued by the Institute of Chartered Accountants of India and the provisions of the Companies Act, 1956, as adopted consistently by the company.
All income and expenditure having a material bearing on the financial statements are recognized on the accrual basis. The preparation of the financial statements in conformity with GAAP requires, that the management of the company ( Management ) make estimates and assumptions, that affect the reported amounts of revenue and expenses of the period, reported balances of assets and liabilities and disclosures relating to contingent assets and liabilities as of the date of the financial statements. Examples of such estimates include, expected contract costs to be incurred to complete software development, provision for doubtful debts, future obligations under employee retirement benefit plans and the useful lives of fixed assets. Actual results could differ from those estimates.
Question 15. Tell Us What You Know About Accounts Receivables And Payables?
Accounts Receivable, normally abbreviated as A/R, is the money that is currently owed to a company by its customers. The reason why the customers owe money is that the product has been delivered but has not been paid for yet. Companies routinely buy goods and services from other companies using credit. Although typically A/R is almost always turned into cash within a short amount of time, there are instances where a company will be forced to take a write-off for bad accounts receivable if it has given credit to someone who cannot or will not pay. This is why you will see something called allowance for bad debt in parentheses beside the accounts receivable number.
Accounts Payable is the money that the company currently owes to its suppliers, its partners and its employees. Basically, these are the basic costs of doing business that a company, for whatever reason, has not paid off yet. One company’s accounts payable is another company’s accounts receivable, which is why both terms are similarly structured. A company has the power to push out some of its accounts payable, which often produces a short-term increase in earnings and current assets.
Question 16. Tell Me Something About Accounting For Goodwill Finance?
Goodwill is considered to be one of the largest intangible assets, the value of which companies want to reflect correctly in their financial statements. Accounting for this asset, poses many challenges for accountants, as it is an unidentifiable intangible asset.
Question 17. Can You Provide Us A Suitable Definition Of Goodwill?
Goodwill as an intangible asset can be defined from two approaches:
Under this method, goodwill is taken to be the difference between the purchase price and the fair market value of an acquired companys assets.
Excess profits approach
Under this method, the present value of the projected future excess earnings over normal earnings for similar businesses is recorded as goodwill. Due to uncertainty of future earnings, valuing goodwill using this method is difficult.
Question 18. What Is Debenture Redemption Reserve?
The companies (Amendment) Act 2000 require every company to create debenture redemption reserve for redemption of debentures out of appropriation of profits every year until redemption. This reserve cannot be utilized by the company except for the purpose of redemption.
Question 19. What Is Deferred Revenue Expenditure?
Deferred revenue expenditures represent types of assets whose usefulness do not expire in the year of their occurrence but generally expires in the near future. These types of expenditures are carried forward and are written off in future accounting periods.
Sometimes, we make some revenues expenditure but it eventually becomes a capital asset (generally of an intangible nature). Example, if we undertake substantial repairs to the existing building, the deterioration of the premises may be avoided. If we charge the whole expenditure during the current, the current year expenses are affect. However, since the benefit of this expenditure is enjoyed over a number of years. So, to overcome this only a part of the expenditure is charged current year and the balance carried forward and written off gradually during the future periods.
Question 20. What Are Contingent Liabilities?
These are liabilities, which materialize on the happening or non-happening of an event.
Contingent liabilities are not real liabilities and as such do not appear in the liability side of balance sheet. But are disclosed by way of a note in the balance sheet.
Question 21. What Is Depreciation? List Few Methods Of Providing Depreciation?
It is common knowledge that when an asset is used over a period of time, it looses its value. This loss in value is called depreciation. Pickles defines it as “the permanent and continuing diminution in the quality, quantity or value of an asset” Depreciation is the continuous shrinkage of book value of an asset.
Few method of depreciation are
Straight line Method: An equal amount is written off every year during the working life of an asset so as to reduce the cost of the asset to nil or its residual value at the end of its useful life.
Reducing Balance Method: A fixed percentage of the diminishing value of the asset is written off each year so as to reduce to its break up value at the end of its life.
Machine hour method: If it is practicable to keep a record of the actual running hours of each machine, depreciation may be calculated on the basis of the hours for which the concerned machine worked.
Question 22. What Do You Understand By Contract Account ?
Account in which posting data for contracts or contract items are processed for which the same collection/payment agreements apply. Contract accounts are managed on an open item basis within contract accounts receivable/payable.
Question 23. Please Tell How You Can Analyze A Balance Sheet Vis-à-vis The Performance Of The Company In The Capital Market? Give Examples With Reference To Some Specific Parameters?
The analysis of a balance sheet can identify potential liquidity problems. These may signify the company’s inability to meet financial obligations. An investor could also spot the degree to which a company is leveraged, or indebted. An overly leveraged company may have difficulties raising future capital. Even more severe, they may be headed towards bankruptcy. These are just a few of the danger signs that can be detected with careful analysis of a balance sheet.
Beyond liquidity and leverage, there are certain very important benchmarks and aspects, which are helpful in the analysis of balance sheet.
- Revenues/Sales growth
- Bottom line growth
- ROI – Return on Investment
- Market Capitalization
- Company management
- PSR (Price-to-Sales Ratio)
- Return on Equity
- Debt-to-Equity Ratio
- Earnings Per Share (EPS).
Question 24. Define Fifo And Lifo. Explain What Effects That Fifo And Lifo Have On The Balance Sheet During A Period Of Rising Prices And During A Period Of Falling Prices?
FIFO is the inventory cost flow assumption that treats the first goods in as the first goods sold. LIFO is the inventory cost flow assumption that treats the last goods in as the first goods sold. In a period of rising prices, FIFO values inventory at current costs. However, LIFO would value inventory at costs that the company could have incurred years ago. The analyst should take the LIFO cost flow assumption into account and consider adjusting the inventory of a company using LIFO upward to account for inflation.
Question 25. What Are Marketable Securities?
Marketable securities are cash substitutes. Marketable securities are investments with short-term maturities with little risk due to interest rate fluctuations. Examples of marketable securities include Treasury Bills, Negotiable Certificates of Deposit, and Commercial Paper.
Question 26. What Is The Entry For Deferred Tax Liability According To As22?
Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. Deferred tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and current liabilities.
The break-up of deferred tax assets and deferred tax liabilities into major components of the respective balances should be disclosed in the notes to accounts.
Question 27. What Is Sec 72a Of Income Tax Act?
Incentive for amalgamation extended to hotels and certain banks – Sec. 72A. The benefit of carry forward and set off of accumulated losses and unabsorbed depreciation would be extended in the case of amalgamation of a company owning a hotel with another company or an amalgamation of a banking company with the State Bank of India or its subsidiary or other specified banks. Two additional conditions for amalgamating a company will have to be fulfilled, viz. that it should have been engaged in the business for at least 3 years during which the accumulated loss has occurred or the unabsorbed depreciation has accumulated and it has held continuously as on the date of amalgamation at least 3/4ths of the book value of fixed assets held by it two years prior to the date of amalgamation.
Question 28. What Is The Accrual Basis Of Accounting?
Under the accrual basis of accounting, revenues are reported on the income statement when they are earned. (Under the cash basis of accounting, revenues are reported on the income statement when the cash is received.) Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.
Question 29. What Is The Difference Between Financial Accounting And Management Accounting?
Financial accounting: has its focus on the financial statements which are distributed to stockholders, lenders, financial analysts, and others outside of the company. Courses in financial accounting cover the generally accepted accounting principles which must be followed when reporting the results of a corporation’s past transactions on its balance sheet, income statement, statement of cash flows, and statement of changes in stockholders’ equity.
Managerial accounting: has its focus on providing information within the company so that its management can operate the company more effectively. Managerial accounting and cost accounting also provide instructions on computing the cost of products at a manufacturing enterprise. These costs will then be used in the external financial statements. In addition to cost systems for manufacturers, courses in managerial accounting will include topics such as cost behavior, break-even point, profit planning, operational budgeting, capital budgeting, relevant costs for decision making, activity based costing, and standard costing.
Question 30. What Is The Difference Between Accounts Payable And Accrued Expenses Payable?
I would use the liability account Accounts Payable for suppliers’ invoices that have been received and must be paid. As a result, the balance in Accounts Payable is likely to be a precise amount that agrees with supporting documents such as invoices, agreements, etc.
I would use the liability account Accrued Expenses Payable for the accrual type adjusting entries made at the end of the accounting period for items such as utilities, interest, wages, and so on. The balance in the Accrued Expenses Payable should be the total of the expenses that were incurred as of the date of the balance sheet, but were not entered into the accounts because an invoice has not been received or the payroll for the hourly wages has not yet been processed, etc. The amounts recorded in Accrued Expenses Payable will often be estimated amounts supported by logical calculations.
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