Accountancy : Company Accounts and Analysis of Financial Statements 2007 CBSE [ All India ] Set I

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  • Q1

    Give any two points of distinction between a share and a debenture.


    Distinction between Shares and Debentures

    a)     Ownership: A shareholder is an owner of the company whereas a debenture holder is only a creditor.

    b)     Return: The return on share is known as dividend while the return on debenture is called interest. The rate of return on shares may vary from year to year depending upon the profits of the firm but the rate of interest on debentures is pre-fixed.

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  • Q2

    What is meant by ‘Preferential Allotment of Shares’?


    A preferential allotment is one that is made at a predetermined price to the preidentified people who are interested in taking a strategic stake in the company such as promoters, venture capitalists, financial institutions, buyers of companies products or its suppliers.

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  • Q3

    Give the meaning of “Authorized capital”.


    It refers to that amount which is stated in the memorandum of association as the share capital of the company. The company is registered with this amount of capital. This is the maximum limit of capital which the company is authorized to issue and beyond which the company cannot issue shares unless the capital clause in the memorandum is altered.


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  • Q4

    List any four factors that help in the creation of goodwill of a partnership firm.



    The factors that help in creation of goodwill of a firm are:

    1. Time Factor: A company running from last 30years has more goodwill than the company which is established 1 year before.
    2. Nature of Business: It also affects the goodwill. A monopolistic business has more goodwill.
    3. Special commercial Advantage:  Long term contract for supply of raw material at a lower price
    4. Location Advantage: If the company is centrally located then the value increases.

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  • Q5

    Give the meaning of Cash Flow Statements.


    A Cash flow statement is a statement which describes the inflow(source) and outflow(uses) of cash and cash equivalents in an enterprise during a specified period of time. Such a statement describes net effects of the various business transactions on cash and its equivalents and takes into account receipts and disbursements of cash.A cash flow statements summarise the causes of changes in cash position of business enterprise between dates of two balance sheets.


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  • Q6

    A ltd. engaged in the business of retailing of two wheelers, invested Rs.50,00,000 in the shares of a manufacturing company. State with reason whether the dividend received on this investment will be cash flow from operating activities or investing activities.


    Dividends received on investments represents an inflow of cash. Such inflow does not arises out of operating activity of own business but from investment made in other business. Hence, such flow falls under Investing activity but not under operating activity.


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  • Q7

    Jain and Gupta were partners in a firm sharing profits in 3:2 ratio. Their fixed capitals were Jain Rs 1, 00,000 and Gupta Rs 1, 50,000. After the account of the year had been closed it was discovered that interest on capital at 10 % per annum as provided in the partnership agreement has not been credited to the capital accounts of the partners before distribution of profits. Pass the necessary journal entry to rectify the error.



    Interest on fixed capitals @ 10% per annum:

    Jain = 1, 00,000 x 10/100 = Rs 10,000

    Gupta = 1, 50,000 x 10/100 =Rs 15,000

    As per  partnership agreement before  distribution of profits  in 3:2 ratios, interest on capitals has to be credited @ 10% to capital A/c ,which has not be treated.

    Had it been adjusted, Gupta’s capital would have been credited Rs 5,000 more than Jain’s capital (that is 15,000-10,000 =5,000)

    Adjustment entry for this error is ---

    Jain’s Current A/c Dr. 5,000

                To Gupta current A/c           5,000

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  • Q8

    Pass necessary journal entries for the issue of 7% debentures in the following cases:
    (i)    100 debenture of Rs 100 each issued at Rs 105 each repayable at Rs 100 each.
    (ii)  100 debenture of Rs 100 each issued at Rs 100 each repayable at Rs 105 each.
    100 debenture of Rs 100 each issued at Rs 105 each repayable at Rs 108 each.


    (i) Bank A/c         Dr. (105x100)              10,500

                    To 7% debentures (Rs 100 x 100)                      10,000

                     To Debentures Premium A/c (Rs 5 x100)                  500

    (Being the issue of 100 debentures at a premium of 5 % but repayable at par)


    (ii)Bank A/c            Dr.                                 10,000

        Loss or Issue of debentures    Dr.                    500

                   To 7% debentures A/c                                             10,000

                    To Premium on redemption of debenture                          500

    (Being the issue of debentures at par but redeemable at a premium of 10%)


    (iii)Bank A/c                              Dr.        10,500                   

         Loss or Issue of debentures    Dr.              300       

                   To 7% debentures A/c                                                  10,000

                   To Premium on redemption of debenture A/c                           800

    (Being the issue of debentures at premium of 5% but repayable at a premium of 8 %)


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  • Q9

    The profit and loss Accounts of Himani & Co. for the years ended March 31,2005 and 2006 are as follows:




    Net sales

    Cost of Goods sold

    Gross profit

    Operating activities

    Net profit

    Income Tax 50% of net profit













    Compute percentage changes from 2005 to 2006.


    (i) Percentage of changes in sales


                       Percentage of change         = difference in sales / sales of 05  X 100

                                                              = 4,22,300 – 4,02,000 / 4,22,300 X 100

                                                              = 20,500 / 1,22,300 X 100 = 4.80%

    Sales has been decreased by 4.80%


    (ii) Percentage of change in cost of goods sold

    Percentage of change = difference in cost of goods sold / Cost of goods sold 05 X 100

                                                               =        3,71,000 – 3,69,000 / 3,71,00 X 100

                                                               =        2000 / 3,71,000 X 100 = 5.390%

     Sales has been decreased by 5.390%


    (i)  Percentage out Gross Profits

    Percentage of changes in gross profit  = Difference in gross profit / gross profit 05 X 100

                                                         = 51,300-33,000 / 51,300 X 100

                                                         =  18,300 / 51,300 X 100 = 35.67%


    Gross profit decreased by 35.67%

    (i)                 Percentage of changes in Net Profit

    Percentage of changes in Net Profit = Difference in net Profit / net profit 05 X 100

                                                         = 28,600 – 13,100 / 28,600 X 100

                                                         = 15,500 / 28,600 X 100 = 54.195%

    Net Profit has been decreased by 54.195%


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  • Q10

    Explain briefly any three limitations of analysis of financial statements.


    The limitation of financial statements :

    i)  It is based upon only monetary information and non-monetary factors are ignored.

    ii) It does not consider changes in price levels.

    iii)           As the financial statements are prepared on the basis of a going concern, it does not give
    exact position. This accounting concepts and conventions cause a serious limitation to financial analysis. 

    iv) It is only a study of interim reports.

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