CMA Inter

Departmental Accounting – CMA Inter Financial Accounting Study Material

Departmental Accounting – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Departmental Accounting – CMA Inter Financial Accounting Study Material

Distinguish Between

Question 1.
Distinguish between Branch and Departmental Accounting. (June 2013, 2 marks)
Answer:
The differences between Branch and Departmental are listed below:-

Departmental Branch
1. Departmental always in Inland 1. It is either Inland or Foreign.
2. All departments of a Business remain generally under one roof. 2. Branch of a concern is established at different place in the same town or at different town.
3. Departments are made to increase the efficiency of the Business. 3. Branch is opened to increase the Sale.

Practical Questions

Question 2.
Surya Co. Ltd. has three departments. It made purchases during the financial year 2012-13 as below
Departmental Accounting - CMA Inter Financial Accounting Study Material 1
Stock as on 01.04.2012
Dept. A = 240 units
Dept. B = 160 units
Dept. C = 304 units

Sales made were
Dept. A  2040 units at ₹ 20 each
Dept. B 3840 units at ₹ 22.50 each
Dept. C 4992 units at ₹ 25 each
The rate of gross profit is uniform for all the departments. Assume the unit price of opening stock and purchase unit cost are uniform. Prepare Departmental Trading Account. (June 2013, 7 marks)
Answer:
Departmental Accounting - CMA Inter Financial Accounting Study Material 2
Working Notes:
1. Cost of each unit of the different departments. Since the rate of G.P. is uniform for all products. Assuming if all goods purchased was sold then the gross profit would be:
Departmental Accounting - CMA Inter Financial Accounting Study Material 3
Cost Price Per Unit
A= 20 – 20 × 20% = 16
B = 22.50 – 22.50 × 20% = 18
C = 25 – 25 × 20% 20

Purchase Price Per Unit
A = 2,000 × 16 = 32,000
B = 4,000 × 18 = 72,000
C = 4,800 × 20 = 96,000

2. Opening Stock
A = 240 × 16 = 3,840
B = 160 × 18 = 2,880
C = 304 × 20 = 6,080
Departmental Accounting - CMA Inter Financial Accounting Study Material 4

4. Sales:
A:2,040 × ₹ 20 = 40,800
8: 3,840 × ₹22.5O = 86,400
C: 4,992 × ₹ 25 = 1,24,800

Departmental Accounting - CMA Inter Financial Accounting Study Material

Question 3.
The following details are available in respect of a business for a year.

Department Opening Stock Purchase Sales
X 120 units 1,000 units 1,020 units at ₹ 20.00 each
Y 80 units 2,000 units 1,920 units at ₹ 22.50 each
Z 152 units 2,400 units 2,496 units at ₹ 25.00 each

The total value of purchases is ₹ 1,00,000. It is observed that the rate of Gross Profit is the same in each department. Prepare Departmental Trading Account for the above year. (Dec 2017, 8 marks)
Answer:
1. Computation of Closing Stock Quantity (In units)

Particulars X Y Z
Opening Stock 120 80 152
Add: Purchase 1,000 2000 2,400
Less: Units Sold (1,020) (1,920) (2,496)
Closing Stock 100 160 56

2. Computation of Gross Profit Ratio:
We are informed that the GP Ratio is the same for all departments. Selling Price is given for each department’s products but the Sale Quantity is different from that of Purchase Quantity. To find the Uniform
GP Hate, the sale value of Purchase Quantity should be compared with the Total Cost of Purchase, as under.
Departmental Accounting - CMA Inter Financial Accounting Study Material 5
Opening and Closing Stocks are valued at Cost as indicated in WN 3 above. Sale Amount in the Trading Account is computed for the Sale Quantity only. Gross Profit is calculated at 20% of Sale Value.

Question 4.
The following information provided by the Shobha Departmental Store for the year ended 31 March, 2018:

Department Purchase (units) Sales Closing Stock (units)
X 2500 2550 units @ ₹ 160 per unit 250
Y 5000 4800 units @ ₹ 180 per unit 400
Z 6000 6240 units @ ₹ 200 per unit 140

The total value of purchases is ₹ 15 Lakh. it is observed that the rate or gross profit is the same in each department.
You are required to prepare the Departmental Trading Account for the year ended 31st March, 2018. (Dec 2018, 9 marks)
Answer:
(i) Computation of Opening Stock Quantity (units):

Particulars Dept. X Dept. Y Dept. Z
Sales- units
Add: Closing Stock- units
2550
250
4800
400
6240
140
Less: Purchases-units 2800
2500
5200
5000
6380
6000
Opening Stock- units 300 200 380

(ii) Computation of Gross Profit Ratio:

Sales value of Total purchase Quantity:
Department – X = ₹ 160 x 2,500 4,00,000
Department – Y = ₹ 180 x 5,000 9,00,000
Department – Z = ₹ 200 x 6,000 12,00,000
Sale value of total purchase Quantity 25,00,000
Less: total purchase price 15,00,000
Gross profit 10,00,000
Rate of gross profit = (₹10 lakh/25 lakh) x 100 = 40%

(iii) Computation of Cost per unit for each Department

Particulars Dept. X (₹) Dept. Y (₹) Dept. Z (₹)
Selling Price per unit 160 180 200
Less: G. P. @ 40% 64 72 80
Cost per unit 96 108 120

Departmental Accounting - CMA Inter Financial Accounting Study Material 6

Question 5.
A firm has two departments-Sawmill and Furniture. Furniture is made with wood supplied by the Sawmill department at its usual selling price. From the following figures prepare Departmental Trading and Profit and Loss Account for the year 2018:

Sawmill (₹) Furniture (₹)
Opening Stock on 1 January, 2018 150,000 25,000
Sales 12,00,000 2,00,000
Purchases 10,00,000 7,500
Supply to Furniture Department 1,50,000
Selling expenses 10,000 3,000
Wages 30,000 10,000
Closing Stock on 31st December, 2018 1,00,000 30,000

The value of stocks in the Furniture Department consist of 75% wood and 25% other expenses. The Sawmill Department earned Gross Profit at 15% on sales in 2017. General expenses of the business as a whole came to ₹ 55,000. The firm adopts FIFO method for assigning costs to inventories. (Dec 2019, 8 marks)
Answer:
Departmental Accounting - CMA Inter Financial Accounting Study Material 7
Working Notes:
1. Calculation of Stock Reserve (opening)
25,000 × 75% wood × 15% = ₹ 2,813

2. Calculation of closing stock reserve
Gross profit Rate of Sawmill of 2018
2,70,000/ (12,00,000 + 1,50,000) × 100 =20%
30,000 × 75% × 20% = ₹ 4,500

Question 6.
X Ltd. has three rt,A, B and C from the particulars given below compute:
(i) The values of stock as on 31st December 2020, and
(ii) The departmental result showing the actual amount of gross profit.

A
B
C
Stock (on 1.1.2020) 24,000 30,000 12,000
Purchases 1,46,000 1,24,000 48,000
Actual Sales 1,72,500 1,59,400 74,600
Gross Profit on normal selling price 20% 25% 33\(\frac{1}{3}\) %

During the year ended 31st December 2020, certain items were sold at discount, and these discounts were reflected in the value of sales shown above. The items sold at discount were:

A
B
C
Sales at normal price 10,000 3,000 1,000
Sales at actual price 7,500 2,400 600

(Dec 2021, 6 marks)
Answer:

Calculation of Departmental Result Deptt. A B C
Gross Profit ₹ 32,500 39,400 24,600
Value of Stock (31/12/2020) ₹ 2,500 600 400

Departmental Accounting CMA Inter Financial Accounting Notes

Departmental Accounts
Departmental Accounts helps in identifying the performance of each department. Each department is considered to be an Activity Centre. It is. a tool which helps management in decision-making.

Departmental Accounting - CMA Inter Financial Accounting Study Material

Advantage
Departmentation offers the following advantages:

  • Proper Allocation
  • Control
  • Proper absorption

Inter-Departmental Transfer

  • Transfer made by one department to another may be recorded either:
  • At Cost Price; and
  • At Invoice Price i.e., Market Based Price.

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Branch Accounting – CMA Inter Financial Accounting Study Material

Branch Accounting – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Branch Accounting – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note on:
Classification of Branches for Branch accounting purpose. (Dec 2012, 5 marks)
Answer: .
Branches are classified as two-way,
(i) Inland Branch,
(ii) Foreign Branch

(i) Inland Branches:
(a) Dependent Branches: Branches in respect of which the whole of the accounting records are kept at head office.
(b) Independent Branches: As the name indicates such branches maintain independent accounting records.

(ii) Foreign Branches: Branches which are located in a foreign country other then ¡n which the company is incorporated they maintain independent and complete record of business.

Methods of accounting are:

  • Final Accounts method
  • At wholesale price
  • At Cost Price/At Invoice Price
  • Debtors method;
  • Stock and Debtors method; and
  • Cash Basis System.

Descriptive Questions

Question 2.
Define branch as per section 2(14) of the Companies Act, 2013. (Dec 2021, 1 mark)
Answer:
Any establishment described as a branch by the company.

Practical Questions

Question 3.
Priya Sales Corporation of Jaipur has a Branch at Kota to which goods are sent @ 33% above cost. The Branch makes sales both for cash and on credit. Branch expenses are paid directly from Head Office and the Branch has to remit all cash received into the Head Office Bank Account at Kota.
Following further details are given for the year ended 31st March, 2012:

(₹)
Goods sent to Branch at invoice price 18,00,000
Goods returned by Branch at invoice price 20,000
Stock at Branch on 1.4.2011 (at invoice price) 2,40,000
Branch Debtors on 1.4.2011 2,15,000
Sales during the year: Cash 5,80,000
Credit 11,40,000
Cash received from Branch debtors 10,45,000
Discount allowed to by Branch to debtors 14,800
Bad debts 9,200
Sales return at Kota Branch 25,000
Salaries and wages at Branch 1,80,000
Rent, Rates and Taxes at Branch 42,000
Sundry expenses at Branch 15,000

Stock at Branch on 31 .3.2012 at invoice price 3,60,000
You are required to show Branch Stock Account, Branch Adjustment Account, Branch Expenses Account, Branch Debtors Account, Branch Goods sent to Branch Account and Branch Profit & Loss Account in the books of the Head Office. (Dec 2012, 8 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 1

Branch Accounting - CMA Inter Financial Accounting Study Material

Question 4.
A Company with its Head Office at Kolkata has a Branch at Chennai. The Branch receives all goods from Head Office who remits cash for all expenses. Total Sales by Branch for year ended 31.03.2012 amounted to 6,50,000 out of which 75% on Credit. Other details for Chennai Branch were as under:

01.04.2011 31.03.2012
Stock 4,000 30,000
Debtor 45,000 30,000
Petty Cash 250

Petty Cash sent by Head Office ₹ 3,000 but ₹ 2,500 is spent for Petty Expenses. The Expenses of 45,000 are actually spent by Branch. All sales are made by the Branch at Cost plus 25%. You are required to prepare the Chennai Branch A/c in the Books of Head Office for the year ended 31.03.2012. (June 2013, 5 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 3

Working Notes:
1. Petty Cash Account

To Balance b/d 250 By Petty Expenses 2,500
To Bank – Cash sent by H.O. 3,000 By Balance c/d 750
3,250 3,250

2. Memorandum Debtors Account

To Balance b/d 45,000 By Bank A/c (Collection) 5,02,500
To Credit Sales (6,50,000) x 75% 4,87,500 By Balance c/d 30,000
5,32,500 5,32,500

3. Calculation of Cost of Goods Sent:
(a) Cost of Goods Sold 6,50,000 x 100/1 25 = 5,20,000
(b) Cost of Goods Sold = Opening Stock + Cost of Goods Sent – Closing Stock
5,20,000 = 4,000 + Cost of Goods sent – 30,000
Hence, Cost of Goods sent = 5,46,000

Question 5.
Prepare a Branch Account in the books of Head Office from the following particulars for the year ended 31 March 2013, assuming that H.O. sold goods at cost plus 25%.

Particulars Particulars
Stock on 01.04.2012 2,72,500 Bad debts 2,000
Debtors on 01.04.2012 15,000 Allowances to customers 1,000
Petty cash on 01.04.2012 1,000 Return inward 1,000
Goods sent to Branch 3,60,000 Rates & Taxes 5,000
Goods returned to H.O. 25,000 Salaries 18,000
Cash sales 54,000 Misc. Expenses 4,000
Cash received from debtors 2,30,000 Stock on 31.03.2013* 3,15,000
Debtors on 31.03.2013 74,000
Petty cash (31.03.2013) 5,000

Both opening and closing stock at invoice price. (Dec 2013, 6 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 4

Question 6.
Prepare Branch account in the books of the Head Office and also debtors account from the following information given below: for the year 2013 The Unique Shoe Stores has an old branch at Kanpur. Goods are invoiced at the branch at 25% profit on cost price. The branch has been instructed to send all cash daily to the Head Office. All expenses are paid by the Head Office except petty expenses which are met by the Branch Manager.

Stock on 01.01.2013 (invoice price) 15,000
Sundry debtors on 01.01.2013 9,000
Cash in hand on 01.01.2013 400
Office furniture on 01.01.2013 1,200
Goods supplied by the Head Office (invoice price) for year 80,000
Goods returned to Head Office for year 1,000
Goods returned by debtors at the end of year 480
Debtors at the end of year 8,220
Cash sales for year 50,000
Credit sales for year 30,000
Discount allowed for year 300

Branch Accounting - CMA Inter Financial Accounting Study Material 5
Petty expenses paid by Branch Manager during year 280
Stock on 31.12.2013 14,000
Provide depreciation on furniture at 10% per year (June 2014, 4+2=6 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 6

Question 7.
Answer the question:
TUSHAR Ltd. with its Head Office ¡n Delhi invoices goods to its Branches at Mumbai and Kolkata at 20% less than the catalogue price which is cost plus 50% with instructions that cash sales are to be made at invoice price and credit sales at catalogue price less discount at 15% on prompt payments. Provision is to be made for discount to be allowed to debtors, at year-end on the basis of year’s trend of prompt payments.

All branch expenses are paid by the Head Office and all branch collections are remitted daily to Head Office.
1. Opening Stock at Branch at its cost ₹ 12,000.
2. Opening Branch Debtors ₹ 10,000.
3. Goods Sent to branch (at cost to H.O.) ₹ 1,10,000.
4. Goods received by Branch till close of the year ₹ 1,27,000.
5. Transfer from Kolkata branch to Mumbai branch at catalogue price ₹ 75,000.
6. Transfer to Kolkata branch from Mumbai branch at catalogue price ₹ 30,000.
7. Goods purchased by Mumbai branch from local suppliers (cost) ₹ 30,000
Closing stock in hand at branch out of ‘local purchases (cost) ₹ 6,000.
8. Cash Sales ₹ 74,800.
9. Credit Sales ₹ 1,45,000.
10. Goods returned by Credit Customers to branch ₹ 30,000.
11. Goods returned by Credit Customers directly to RO. ₹ 15,000.
12. Goods returned by Branch to H.O. ₹ 24,000.
13. Cash remitted by Credit Customers directly to Branch ₹ 45,635.
14. Cash remitted by Credit Customers directly to H.O. ₹ 40,000.
15. Discount Allowed to Debtors ₹ 13,365.
16. Loss of Goods by fire (at invoice price) 3,000 against which 80% of cost was recovered from the insurance Company.
17. Loss of goods at Branch through normas pilferage (at catalogue price) ₹ 3,000.
18. Branch Expenses: Paid ₹ 9,000, Outstanding ₹ 741.
19. Branch Manager is entitled to a commission @ 6% of net profits after charging such commission.

Required:
Prepare Mumbai Branch Stock Account, Mumbai Branch adjustment A/c Mumbai Branch Expenses AIc and Mumbai Branch Profit & Loss A/c and Mumbai Branch Debtors Nc under Stock & Debtors Method. (Dec 2014, 12 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 9
Calculation of provision for discount
Prompt paying debtors during year = \(\frac{13,365}{15 \%}\) =‘ 89,100
Total debtors who made payment during the year = 45,635 + 40,000 + 13,365 = 99,000
Proportion of prompt payers = \(\frac{89,100}{99,000}\) x 100 = 90%
Likely prompt paying debtors ¡n dosing debtors = 11000 x 90% = 9,900
Provision for discount = 9,900 x 15% = 1,485

Branch Accounting - CMA Inter Financial Accounting Study Material

Question 8.
Answer the question:
From the information of AMBA LTD. received from its branch – AB, calculate the invoice price of goods sent to branch and Profit included thereon.
Goods received from H.O. (AMBA LTD.) – ₹ 1,00,000
Goods in transit from HO. – ₹ 50,000
Goods are invoiced to branch at cost plus 25%. (June 2015, 2 marks)
Answer:
Branch Accounts
Goods “received” from H.O.  1,00,000
+ Goods in transit 50,000
Invoice Price of Goods Sent to Branch 1,50,000
Profit=Cost+25%
∴ 1/5 on Invoice Price
Profit = \(\frac{1,50,000}{5}\) = 30,000

Question 9.
Answer the following question (Give workings):
TULSIAN LTD. with its Head Office in Delhi invoices goods to its Branch at Mumbai at 20% less than the catalogue price which is cost plus 50% with instructions that cash sales are to be made at invoice price and credit sales at catalogue price.

Opening Stock at Branch at its cost ₹ 12,000
Goods sent to Branch (at cost to H.O.) ₹ 1,40,000
Goods received by Branch till close of the year ₹ 1,38,000
Cash Sales ₹ 46,000
Credit Sales ₹ 1,00,000
Stock lost by fire (at cost) ₹ 2,500

Required:
Calculate the amount of Closing Stock at Branch-Mumbai. (Dec 2015, 2 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 10

Question 10.
LINKEN LTD., with a Head Office in Kolkata, sends goods to its /Madras branch at cost plus 25 per cent. The following particulars are available in respect of the Branch for the year ended 31st March, 2016.

Opening Stock at Branch at cost to Branch 4,00,000
Goods sent to Branch at invoice price 60,00,000
Loss-in-transit at invoice price 75,000
Pilferage at invoice price 30,000
Sales 60,95,000
Expenses 3,00,000
Closing Stock at Branch at cost to Branch 2,00,000
Recovered from Insurance company against lost-in-transit 50,000

You are required to prepare:
(i) Branch Stock Account
(ii) Branch Adjustment Account a
Branch Profit & Loss Account in the book of Linken Ltd. (June 2016, 5 + 2 + 2 = 9 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 11

Question 11.
M/S YAVATI LTD. having its principal place of business at BENGALURU has a branch at New Delhi. The company sends goods to its branch at cost plus which is the selling price. The following information is given in respect of the branch for the year ended 31st March, 2016.

Goods sent to Branch (invoice value) 24,00,000
Stock at Branch (01.04.2015)at selling price 1,20,000
Cash Sales 9,00,000
Returns from Customers 30,000
Branch Expenses paid for cash 2,67,500
Branch Debtors’ Balance (01.04.2015) 1,50,000
Discounts allowed 5,000
Bad Debts 7,500
Stock at Branch (31.03.2016) at selling price 2,40,000
Branch Debtor’s Balance (31.03.2016) 1,82,500
Collections from Debtors 13,50,000
Branch Debtors’ Cheques returned dishonoured 25,000

You are required to prepare:
(i) Branch Stock Account
(ii) Branch Debtors Account and
(iii) Branch Adjustment Account to reveal the profit of the Branch for the year ended March 31, 2016. (Dec 2016, 3+2+4 = 9 marks)
Answer:

Question 12.
Prepare a Branch account in the books of Head Office from the following particulars for the year ended 31st March, 2017 assuming that H.O. supplied goods at cost plus 25%.

Particulars Amount (₹) Particulars Amount (₹)
Stock on 1.4.2016 (I.P.) 12,500 Bad Debts 2,000
Debtors 5,000 Allowances to customers 1,000
Petty Cash 1,000 Returns Inwards 1,000
Goods sent to branch (l.P.)
Goods return to H.O. (I. P.)
40,000

5,000

Cheques sent to Branch for expenses:
Cash Sales 12,000 Rates & Taxes 3,000
Cash received from debtors 30,000 Salaries 8,000
Misc. Exps. 1,000
Stock on 31.03.2017 (I.P.) 15,000
Debtors 4,000
Petty Cash 1,000

(June 2017, 9 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 15
Note: Here loading is \(\frac{25}{125}=\frac{1}{5}\) of invoice price. Hence, loading on opening stock will be 15,000 × \(\frac{1}{5}\) = ₹ 2,500 and so on.

Branch Accounting - CMA Inter Financial Accounting Study Material

Question 13.
X Ltd. has its H.O. in Delhi and a branch in Mumbai. H.O. supplied goods to its branch at cost plus 33%. From the particulars given below prepare a Branch Trading Account for the year ended 31st March 2018
in the books of RO.:

Particulars Amount (₹) Particulars Amount (₹)
Opening Stock (l.P) 40,000 Sales:
Goods sent to Branch (I.P.) 2,50,000 Cash 1,00,000
Return to H.O.(l.P.) 10,000 Credit 3,00,000
Discounts allowed to customers 10,000
Closing Stock (l.P.) 60,000

It is estimated that 2% of the goods received are lost through natural wastage. (June 2018, 6 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 16
Note:
1. Discount allowed to customer will appear in Branch Profit & Loss Account.
2. Loss through natural wastage is a normal loss and as such, the same should be charged against branch’s gross profit. So, no adjustment is required.

Question 14.
Rukmani Stores, Delhi invoiced goods to its Jaipur Branch @ 20% less than the Catalogue price which is cost plus 50% with instructions that cash sales were to be made at invoice price and credit sales at catalogue price and allow discount on prompt payment. The following details related to branch are provided by Rukmani Stores for the year ended 31st March 2019:
Branch Accounting - CMA Inter Financial Accounting Study Material 17
It was decided to make provision for discount of ₹ 42,500 on closing debtors for prompt payment. Depreciate the furniture @ 10% per annum. You are required to prepare Jaipur Branch Account and Goods Sent to Branch Account in the books of Rukmani Stores. (June 2019, 8 marks)
Answer:
Branch Accounting - CMA Inter Financial Accounting Study Material 18
Notes on Jaipur Branch A/c:
1. Since in Question, Invoice Price is given therefore, Jaipur Branch Stock A/c should be prepared at Invoice Price.
2. In this case Debtor method of Branch Accounting is used therefore, petty expenses of ₹ 11,000 incurred by Branch itself would not be shown at the debit of Jaipur Branch A/c. These petty expenses are already adjusted in closing balance of Branch cash of ₹ 14,000.
3. On similar logic we have correctly not shown Bad Debts and Discount relating to Jaipur Branch A/c to the debit of Jaipur Branch A/c since these Bad Debts and Discount are already adjusted in closing balance of Branch Debtors.
Branch Accounting - CMA Inter Financial Accounting Study Material 19
Note on Good Sent to Branch AIc: Since in Question, Invoice Price is given therefore, Good Sent to Branch A/c should be prepared at Invoice Price.

Notes:

  •  Furniture at on 31.03.2019 = ₹ 1,20,000 x 90% = ₹ 1,08,000.
  • Cash Balance at Branch on 31.03.2019 = ₹ 13,60,000 (Cash Sales) + 18,65,000 (Collection from Debtors) – ₹ 32,00,000 (Remittances from Branch) – ₹ 11,000 (Petty Exp. Paid by Branch) = ₹ 14,000.
  • Closing Branch Debtors:

Branch Accounting - CMA Inter Financial Accounting Study Material 20

Question 15.
From the following particulars relating to Pune Branch for the year ending December 31, 2018, prepare Branch Account in the books of Head Office:

Stock at Branch on January 1, 2018 10,000
Branch Debtors on January 1, 2018 4,000
Branch Debtors on December 31, 2018 4,900
Petty cash at branch on January 1, 2018 500
Furniture at branch on January 1, 2018 2,000
Prepaid fire insurance premium on January 1, 2018 150
Salaries outstanding at branch on January 1, 2018 100
Goods sent to Branch during the year 80,000
Cash Sales during the year 1,30,000
Credit Sales during the year 40,000
Cash received from debtors 35,000
Cash paid by the Branch debtors directly to the Head Office 2,000
Discounts allowed to debtors 100
Cash sent to Branch for Expenses:
Rent 2,000
Salaries 2,400
Petty Cash 1,000
Annual Insurance up to March 31, 2019 600 6,000
Goods returned by the Branch 1,000
Goods returned by the debtors 2,000
Stock on December 31, 2018 5,000
Petty Cash spent by Branch 850
Provide depreciation on furniture 10% p.a.

Goods costing ₹ 1,200 were destroyed due to fire and a sum of ₹ 1,000 was received from the Insurance Company. (Dec 2022, 15 marks)

Branch Accounting CMA Inter Financial Accounting Notes

Branch
A Branch is a subordinate division of an office.
Section 2(14) of the Companies Act, 2013 defines a Branch Office as- Any establishment described as a Branch by the Company.

Dependent Branches
Dependent branches are branches in respect of which the whore of the accounting records are kept at Head Office only.

Independent Branches
Independent branches are branches which maintain independent accounting records.

Foreign Branches
Foreign branches are located in a foreign country (i.e. in a country other than in which the company ¡s incorporated and registered).

Branch Accounting - CMA Inter Financial Accounting Study Material

Debtors Method
This method is usually adopted when the branch is of small size. Under this method, the head office maintains separate Branch Account for each branch. Its purpose is to ascertain profit or loss made by each branch.

Stock and Debtors Method
When there are large number of transactions, this method is particularly adopted by the H.O. to make efficient control over the branches.

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Lease Accounting – CMA Inter Financial Accounting Study Material

Lease Accounting – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Lease Accounting – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.

Write short note:
Operating Lease and Finance Lease (Dec 2017, 4 marks)
Answer:
Operating Lease and Finance Lease
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or sones of payments the right to use an asset for an agreed period of time.

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.

An operating lease is a lease other than a finance lease. As per AS 19, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

Question 2.
Write short note:
Finance Lease (June 2019, 4 marks)
Answer:
Finance Lease:
It is a lease, which transfers substantially all the risks and rewards incidental to ownership of an asset to the Lessee by the Lessor but not the legal ownership. In following situations, the lease transactions are called Finance Lease.

  • The lessee will get the ownership of leased asset at the end of the lease term.
  • The lessee has an option to buy the leased asset at the end of term at price, which is lower than its expected fair value at the date on which option will be exercised.
  • The lease term covers the major part of the life of asset.
  • At the beginning of lease term, present value of minimum lease rental covers substantially the initial fair value of the leased asset.
  • The asset given on lease to lessee is of specialized nature and can only be used by the lessee without major modification.

Descriptive Questions

Question 3.
Answer the following:
State the types of lease to which AS-19 are not applicable. (June 2014, 2 marks)
Answer:
The Accounting Standard AS-19 is not applicable to the following types of Lease:

  • Lease agreement to explore natural resources such as oil, gas, timber, metal and other material rights;
  • Licensing agreements for motion picture film, video recording, Plays, manuscripts, patents and other rights;
  • Lease agreement to use land.

Lease Accounting - CMA Inter Financial Accounting Study Material

Practical Questions

Question 4.
Kovid Limited has taken a Machinery on Lease from Krishna Limited.
The following information are provided by Kovid Limited:
Lease Term 5 years
Fair value at inception of Lease ₹ 20 Lakhs
Lease Rent ₹ 5 Lakhs per annum payable at the end of the year
Expected Residual value ₹ 3 Lakhs
Guaranteed Residual value ₹ 2 Lakhs
Implicit Interest rate 15.5% per annum
You are required to prepare Lease Rent Account and Lease Liability Account in the Books of Kovid Limited. (The present value of Re. 1 at Discount rate of 15.5% are 0.8658, 0.7496, 0.6490, 0.5619 and 0.4865 for year it year 5 respectively.) (Dec 2013, 8 marks)
Answer:
Lease Accounting - CMA Inter Financial Accounting Study Material 1
Present value of minimum lease payment (₹ 17,53,700) is less than fair value at the inception of lease ( ₹ 20,00,000) so the leased asset and liability should be recognized at ₹ 17,53,700.
Lease Accounting - CMA Inter Financial Accounting Study Material 2

Question 5.
Answer the question:
(a) Makkhu Limited leased a machine to Gunu Limited on the following terms:
(i) Fair value of the machine ₹ 72 lakhs
(ii) Lease term 5 years
(iii) Lease rental per annum ₹ 12 lakhs
(iv) Guaranteed residual value ₹ 2.40 lakhs
(v) Expected residual value ₹ 4.50 lakhs
(vi) Internairateot return 15%
Discounted rates at 15% for? 1, 1st year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718 and 0.4972 respectively. Ascertain Unearned Finance Income. (June 2015, 8 marks)
Answer:
As per AS-19 on leases, unearned finance income is the difference between
(a) the gross investment in the lease and
(b) the present value of minimum lease payment under the finance lease from the standpoint of the lessor,
and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease.

where:
(a) Gross investments in the lease Is the aggregate of:
(i) minimum lease payments from the standpoint of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Gross investment = Minimum Lease Payments + Unguaranteed Residual Value
= Total lease rent + Guaranteed Residual Value (GRV) + Unguaranteed Residual Value (URV)
= (12,00000 × 5) + 2,40,000 + 2,10,000
= 64,50,000 (a)

(b) Table showing present value of (1) Minimum Lease Payments (MLPs) and Unguaranteed Residual Value (URV):
Lease Accounting - CMA Inter Financial Accounting Study Material 4
Unearned finance income = (a) – (b)
= 64,50,000 – 42,46,380
= 22,03,620

Question 6.
Answer the question:
Classify the following into either Operating or Financial Lease (briefly give you reasoning):
1. Lessee has option to purchase the asset at lower than fair value, at the end of lease term. It is certain that the lessee will exercise the option
2. Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired at the end of lease term.
3. Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature and has been procured only for use of the lessee.
4. Present value of minimum lease payment = X. Fair value of the asset = Y. (Dec 2015, 8 marks)
Answer:

  1. Finance lease if it becomes certain at the inception of lease itself that the option will be exercised by the lease that also at a price which is lower than its expected fair value.
  2. Finance lease, since a substantial portion of the life of the asset is covered by lease term.
  3. Finance lease since the asset is procured only for the use of lessee.
  4. Finance lease since at the beginning of the lease term, present value of minimum lease rental covers substantially the initial fair value of the leased asset. Where X is minimum tease rental and Y is initial fair value.

Question 7.
X Ltd. has leased equipment over its useful life that costs ₹7,46,55,100 for a three year lease period. After the lease term the asset would revert to the Lessor. You are informed that:
(i) The estimated unguaranteed residual value would be? 1 lakh only.
(ii) The annual lease payments have been structured in such a way that the sum of their present values together with that of the residual value of the asset will equal the cost thereof.
(iii) Implicit interest rate is 10%.
You are required to ascertain the annual lease payment and the unearned finance income P.V. factor @ 10% for years 1 to 3 are 0.909, 0.826, and 0.751 respectively. (June 2016, 6 marks)
Answer: .
Calculation of lease rental:
Cost of Assets
= Present value of lease rental + Present value of residual valued
7,46,55,100 = 2.486x + .751 × 1,00,000
7,46,55,100 -75,100 = 2.486x
\(\frac{7,45,80,000}{2.486}\) = x
x = 3,00,00,000

Calculation of Unearned Financial Income:
Gross investment – Net investment
[(3,00,00,000 x 3) + 1,00,000] – 7,46,55,1 00
9,01,00,030 – 7,46,55,100
1,54,44,900

Lease Accounting - CMA Inter Financial Accounting Study Material

Question 8.
M Ltd. sold machinery having WDV of ₹ 200 Lakhs to N Ltd. for ₹ 250 Lakhs and the same machinery was leased back by N Ltd. to M Ltd. The leaseback is an operating lease. Comment on the accounting treatment as per AS 19 in the following circumstances:
(i) Fair value is ₹ 230 Lakhs and sale price is ₹ 250 Lakhs
(ii) Fair value is ₹ 175 Lakhs and sale price is ₹ 195 Lakhs (June 2017, 4 marks)
Answer:
(i) Profit of ₹ 30 Lakhs (230 Lakhs – 200 Lakhs) to be immediately recognised in its books and balance profit of ₹ 20 Lakhs (250 Lakhs – 230 Lakhs) is to be amortized/deferred over lease period.

(ii) Loss of ₹ 25 Lakhs (200 Lakhs – 175 Lakhs) to be immediately recognised by M Ltd. in its books and profit of ₹ 20 Lakhs (195 Lakhs – 175 Lakhs) should be amortised/deferred over lease period.

Question 9.
A Ltd. has taken the assets on lease from X Ltd. The following information is given below:
Lease Term = 3 years
Fair value at inception of lease = ₹ 14,00,000
Lease Rent = ₹ 6,00,000 p.a. at the end of each year
Guaranteed Residual Value = ₹ 44,000
Implicit Interest Rate 15% p.a.
Calculate the value of the asset to be considered by A Ltd. and the interest (finance charges) in each year. Present value of ₹ 1.00 at 15% is given below.

Year 1 2 3
PVIF (15%) 0.869 0.756 0.657

(June 2019, 5 marks)
Answer:
Calculation of Present value of Minimum Lease Payments:

Year (end) MLP (₹) PVIF at 15% Present Value (₹)
1 6,00,000 0.869 5,21,400
2 6,00,000 0.756 4,53,600
3 6,44,000(6,00.000+44,000) 0.657 4,23,108
13,98,108

Value of the asset will be the lower of fair value at the inception of lease and present value of MLP plus residual value. Therefore, the value of the asset will be ₹ 13,98,108.
Lease Accounting - CMA Inter Financial Accounting Study Material 5
(Alternative Calculation)

Year Liability (₹) MLP (₹) Finance Charge (₹) Principle Amt. of reduction (₹)
1 13,98,108
2 10,07,824 6,00,000 2,09,716 3,90,284
3 5,58,998 6,00,000 1,51,174 4,48,826
4 6,44,000 83,850 5,60,150

Note: The difference between this figure and the guaranteed residual value (as per the problem) is due to approximation.

Question 10.
L Ltd. leased a machine to T Ltd. on the following terms:

Particulars (₹ In Lakhs)
(i) Fair Value of the machine 72
(ii) Lease Term 5 Years
(iii) Lease rental per annum 12
(iv) Guaranteed residual value 2.4
(v) Expected residual value 4.5
(vi) Internal Rate of return 15%

Discounted rates @ 15% for 1 year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718 and 0.4972 respectively.
From the above calculate
(i) Gross investment in the lease
(ii) Unearned Finance Income. (Dec 2021, 6 marks)
Answer:

As per AS-19 on leases, unearned finance income is the difference between
(a) the gross investment in the lease and
(b) the present value of minimum lease payment under the finance lease from the standpoint of the lessor,
and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease.

where:
(a) Gross investments in the lease Is the aggregate of:
(i) minimum lease payments from the standpoint of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Gross investment = Minimum Lease Payments + Unguaranteed Residual Value
= Total lease rent + Guaranteed Residual Value (GRV) + Unguaranteed Residual Value (URV)
= (12,00000 × 5) + 2,40,000 + 2,10,000
= 64,50,000 (a)

(b) Table showing present value of (1) Minimum Lease Payments (MLPs) and Unguaranteed Residual Value (URV):
Lease Accounting - CMA Inter Financial Accounting Study Material 4
Unearned finance income = (a) – (b)
= 64,50,000 – 42,46,380
= 22,03,620

Lease Accounting CMA Inter Financial Accounting Notes

Lease
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

Finance Lease
A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset.

Operating Lease
An operating lease is a lease other than a finance lease.

Fair Value
Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

Economic Life
Economic life is either: (a) the period over which an asset is expected to be economically usable by one or more users; or (b) the number of production or similar units expected to be obtained from the asset by one or more users.

Useful Life
Useful life of a leased asset is either: (a) the period over which the leased asset is expected to be used by the lessee; or (b) the number of production or similar units expected to be obtained from the use of the asset by the lessee.

Lease Accounting - CMA Inter Financial Accounting Study Material

Residual value
Residual value of a leased asset is the estimated fair value of the asset at the end of the lease term.

Gross Investment In the Lease
Gross investment in the lease is the aggregate of the minimum lease payments under a finance lease from the standpoint of the lessor and any unguaranteed residual value accruing to the lessor.

Net Investment
Net investment in the lease is the gross investment in the lease less unearned finance income.

Contingent Rent
Contingent rent is that portion of the lease payments that is not fixed in amount but is based on a factor other than just the passage of time (e.g., percentage of sales, amount of usage, price indices, market rates of
interest).

Leases are classified into two types:
Finance Lease
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Title may or may not eventually be transferred.

Operating Lease
A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership.

Sale and Leaseback Transactions
A sale and leaseback transaction involves the sale of an asset by the vendor and the leasing of the same asset back to the vendor. The lease payments and the sale price are usually interdependent as they are negotiated as a package.

Lease Accounting – CMA Inter Financial Accounting Study Material Read More »

Partnership Accounting – CMA Inter Financial Accounting Study Material

Partnership Accounting – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Partnership Accounting – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note:
Guaranteed Partnership. (June 2013, 5 marks)
Answer:
In a partnership, there may be special agreement by virtue of which partner may get the guarantee of earning a minimum amount of profit. The guarantee may be given by one partner in particular or by the firm. It is given generally to encourage a junior partner or any sincere clerk of the business inducted to the benefits of partnership.

Guarantee given by the partner:

  • The appropriation of profit should be made in the general course by applying the existing profit-sharing ratio.
  • The minimum amount guaranteed is to be decided.
  • In case the guaranteed amount (ii) is more, the excess should be deducted from the share of profit of the partner giving guarantee and calculated under (i) above. The same amount should be added with the original share of profit of the partner to whom the guarantee has been given.

Question 2.
Write short flotes on Designated Partner in a Limited Liability Partnership and what are their liabilities.
(Nov 2016, 4 marks)
Answer:
Designated Partners:
As per Sec. 7 of the LLP Act, every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India.

Provided that in case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.

Explanation:
Subject to the purpose of this Section the term a resident in India means a person who has stayed in India for a period of not less 182 days during the immediately preceding one year. Subject to the provisions of sub-section (1).

1. If the incorporation document:

  • Specifies who are to be designated partners, such persons shall be designated partners on incorporation; or
  • States that each of the partners from time to time of limited liability partnership is to be designated partner, every such partner shall be a designated partner.

2. Any partner may become a designated partner by and in accordance with the limited liability partnership agreement and a partner may cease to be a designated partner in accordance with limited liability partnership agreement.

3. An individual shall not become a designated partner in any limited liability partnership unless he has given his prior consent to act as such to the limited liability partnership in such form and manner as may be prescribed.

4. Every limited liability participant shall file with the registrar the particulars of every individual who has given his consent to act as designated partner in such form and manner as may be prescribed within thirty days of his appointment.

5. An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed.

Liabilities of Designated Partners:
As per Sec. 8 of LLP Act, unless expressly provided otherwise in this Act, a designated partner shall be:

  • responsible for the doing of all acts, matters, and things as are required to be done by the LLP in respect of compliance of the provisions of this Act including filing of any document, return, statement and the like report pursuant to the provision of this act and as may be specified in the limited liability partnership agreement; and
  • liable to all parties imposed on the limited liability partnership for any contravention of those provisions.

Partnership Accounting - CMA Inter Financial Accounting Study Material

Question 3.
Write short notes on the following:
Criticism of the decision of Gamer vs. Murray. (Dec 2017, 5 Marks)
Answer:
Criticism of the decision of Garner vs. Murray
The following criticism may be advocated against the decisions laid down in Garner vs. Murray principle:

  • If any solvent partner has a debit balance in capital account, he must not bear the deficiency of the insolvent partner;
  • This principle does not apply it there are only two partners;
  • In spite of having a credit balance in capital account the solvent partner must bring cash equal to the amount of loss on realization which is immaterial and useless; and
  • If any solvent partner who possess more private asset but contributes less capital, he will naturally, as per Gamer vs. Murray’s decision, bear less amount of deficiency of the insolvent partner than the other solvent partner who possesses less private assets but contributes more capital to the firm. This is not justified.

Question 4.
Write short notes on extent of liability of LLP and its Partners. (May 2018, 5 marks)
Answer:
Under Sec. 27(3) of the LLP Act, 2008 an obligation of an LLP arising out of a contract or otherwise, shall be solely the obligation of the LLP. The limitations of liability Obtian LLP and Its partners are as follows:
The liabilities of an LLP shall be met out of the properties of an LLP:

  • A partner is not personally liable, directly or indirectly (for an obligation of an LLP arising out of a contract or otherwise), solely by reason of being a partner in the LLP;
  • An LLP is not bound by anything done by a partner in dealing with a person, if:
  • The partner does not have the authority to act on behalf of the LLP in doing a particular acts, and
  • The other person knows that the partner has no authority or does not know or believe him to be a partner in the LLP.
  • The liability of the LLP and the partners perpetrating fraudulent dealings shall be unlimited for all or any of the debts or other liabilities of the LLP.

Question 5.
Write short note on the following:
(i) Applicability and Non-Applicability of Gamer vs. Murray Rule (Dec 2018, 5 marks)
Answer:
In the case of dissolution of a partnership firm due to insolvency, Gamer vs Murray rule is applicable at the time of any partner becoming insolvent. It requires –
1. That the solvent partners should bear the loss arising due to insolvency of a partner in their capital ratio after making adjustments for past accumulated reserves, profits or losses, drawings, interest on drawings/capitals, remuneration to partners, etc., to the date of dissolution but before making adjustment for profit or loss on realization in case of fluctuating capital. In case of fixed capital no such adjustments are required.

2. That the solvent partners should bring in cash equal to their respective shares of the loss on realization.

Non-Applicability:
This rule is not applicable when:

  1. The solvent partner has a debit balance in the capital account.
  2. Only one partner is solvent.
  3. All partners are insolvent.
  4. The partnership deed provides for a specific method to be followed in case of insolvency of a partner, then the conditions given in the deed would prevail.

Question 6.
Write a short note on the following:
Maximum Possible Loss Method (June 2019, 5 marks)
Answer:
Maximum Possible Loss Method:
Steps:

  1. Prepare a statement showing the distribution of cash
  2. Pay off the external Liabilities
  3. After all the payment is made for the external liabilities, the partners will be paid off. a

Partnership Accounting - CMA Inter Financial Accounting Study Material 1

4. The maximum loss shall be shared amongst the partners in their profit-sharing ratio, as it, there will be no further realization.
5. If any of the partner capitals, after step (4) is negative, that partner shall be treated like an insolvent partner.
6. The deficiency of the in3olvent partner as per step (5) shall be shared by the other solvent partners (i.e. those partners who has positive capital balances) in their capital contribution ratio as per Gamer vs. Murray Rule.
7. Repeat the steps (3) to (6) till final realisation.

Question 7.
Write short flotes on the following:
Applicability of Section 37 of the Indian Partnership Act, 1932 (Dec 2019, 5 marks)
Answer:
Applicability of Section 37 of the Indian Partnership Act 1932:
In case of retirement, the retiring partner or in case of death, the executor of the deceased partner, if the duos are not settled, then such retired partner or the executor is entitled to the following:
Maximum of: Interest @ 6% p.a. on the amount due to them (i.e. if the amount is unsettled, like, rate of interest on loan to be allowed to the retired partner or the executor is not mentioned)
Or
The share of profit earned for the amount due to the partner Conditions:

  • The surviving partners/continuing partners continue to carry on the business of the firm.
  • The business is carried on without any final settlement of accounts between the continuing partners and the outgoing partners or his estate.
  • There is no contract to the contrary of the options contained in Section 37 i.e. share in the profits or interest @ 6% p.a. on the unsettled capital.

Distinguish Between

Question 8.
Answer the following:
What are the distinction between an Ordinary Partnership Firm and a Limited Liability Partnership (LLP)? (May 2016, 4 marks)
Answer:
Distinction between an Ordinary Partnership Firm and a Limited Liability Partnership (LLP):

Basis of Difference Partnership LIP
1. Applicable Law Indian Partnership Act, 1932. Limited Liability Partnerships Act, 2008.
2. Formation Formed by an Agreement. Formed by Law.
3. Registration Optional. Compulsory with ROC.
4. Body Corporate Not a body corporate. A Body Corporate After registration with ROC, it becomes a body corporate.
5. Separate Legal Identity It has no separate legal identity. All body corporate are said to have a separate legal Identity
6. Perpetual Succession No perpetual succession. It has perpetual succession.
7. Number of Partners Minimum 2 and Maximum 100. Minimum 2, but no maximum limit.
8. Liability of Partners/ Members Liability of the partners is unlimited. Partners are severally and jointly liable for actions of other partners and the firm and their liability extends to personal assets. Liability of the partners is limited to the extent of their contribution towards LLP except in case of intentional fraud or wrongful act of omission or commission by a partner.
9. Principal-Agent Relationship Partners are the agents of the firm and of each other i.e. Mutual agency. Partners are agents of the firm only and not of other partners. No Mutual agency.

Descriptive Questions

Question 9.
Answer the following:
Under what circumstances, an LLP can be wound up by the Tribunal. (May 2015, 4 Marks each)
Answer:
Circumstances when an LLP can be wound up by the tribunal:

  • The partnership shall be dissolved if mere is unlawful object of the firm.
  • The partnership firm shall be dissolved when all the partners become insolvent.
  • The partnership firm is dissolved by order of court.
  • If there is any criminal law or case on the firm, the firm shall be dissolved.
  • If partnership is under ‘oss on continuous basis then firm shall be dissolved by the tribunal.
  • If partnership violates any rule of partnership Act then court may give order for dissolution.

Partnership Accounting - CMA Inter Financial Accounting Study Material

Question 10.
Explain the nature of Limited Liability Partnership. Who can be a designated partner in a Limited Liability Partnership? (Nov 2017, 4 marks)
Answer:
1. Nature of LLP:

Point LLP
Governing law The Limited Liability Partnership Act, 2008
Registration Registration with registrar of LLP mandatory.
Name Name should contain limited liability partnership suffix.
Creation Created by law
Separate entity Separate legal entity under LLP Act, 2008.
Perpetual succession LLP has perpetual succession, and partners may come and go.
Legal proceedings A LLP is a legal entity can sue and be sued.
Annual filing of forms Annual Statement of Accounts and Solvency &
Annual return to be filed with registrar every year.
Digital signature for partners As e-forms are filled electronically at least one designated partner should have digital signature.
Agency Relationship Partners act as agents of LLP and not of the other partners.
Liability of Partners Limited, to the extent their contribution towards LLP, except in case of intentional fraud or wrongful act of omission or commission by partner.

2. Designated partners:
Sec. 7 of LLP Act deals with designed partners, and Sec. 8 deals with liabilities of Designated partners, given below:

  • Every LLP shall at least 2 designated partners (DPs).
  • OPs shall be individuals only.

(Note: !t all partners of LLP are bodies corporate, or one or more partners are individuals or bodies corporate, at least 2 individuals who are partners of such LLP or Nominees of such bodies corporate, shall act as designated partners).

  • At least I DP should be resident in India. (Note: Resident means a person who has stayed in India ≥ 182 days during. The immediately preceding 1 year).
  • An individual can become a DP in any LLP, only it he has given his consent to act as such, to the LLP.

Question 11.
Why is goodwill considered to be an intangible asset and not a fictitious asset? (Dec 2017, 1 mark)
Answer:
Goodwill is not a fictitious asset because it has a realisable value. It is an intangible asset because it cannot be seen and touched.

Question 12.
Answer the following:
Under what circumstances an LLP can be wound up by the tribunal? (Nov 2020, 5 marks)
Answer:
An LLP may be wound up by the Tribunal in the following circumstances:

  • If the LLP decides that it should be wound up by the Tribunal;
  • If for a period of more than six months, the number of partners of the LLP is reduced below two;
  • If the LLP is unable to pay its debts;
  • If the LLP has acted against the interests of the integrity and sovereignty of India, the security of the state or public order;
  • If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar for five consecutive financial years;
  • If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

Question 13.
Explain the nature of a Limited Liability Partnership. Who can be a designated partner in a Limited Liability Partnership and what are their liabilities? (May 2022, 5 marks)
Answer:
Nature of Limited Liability Partnership:
A limited liability partnership is a body corporate formed and incorporated under the LLP Act, 2008, and is a legal entity separate from that of its partners. A limited liability partnership shall have perpetual succession and any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership.

Designated Partners:
Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be resident in India. In case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.

Liabilities of designated partners:
As per section 8 of the LLP Act, unless expressly provided otherwise in this Act, a designated partner should be:

  • Responsible for the doing of all acts, matters, and things as are required to be done by the Iimged liability partnership in respect of the provisions of this Act including tiling of any document, return, statement.
  • Lable to all penalties imposed on the limited liability partnership for any contravention of those provisions.

Practical Questions

Question 14.
Ashok & Bala who where in partnership sharing 7/12 and 5/12 respectively admitted Chand as a partner giving him 1/5th share from 01.042011. The new profit-sharing ratio is 7: 5:3. Chand brought ₹ 96,000 towards goodwill to be shared by Ashok & Bala In their sacrificing ratio. The amount so brought was however credited to Chand’s capital account by mistake:
The Trial Balance of the firm as on 31 March, 2012 is given below:
Partnership Accounting - CMA Inter Financial Accounting Study Material 2
Interest on drawings is to be ignored but interest on capital is to be charged at 5% per annum which was not made so far. Prepare new Balance Sheet as at 31.03.2012 gMng effect to above adjustments/omissions. (Dec 2012, 8 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 3

Question 15.
Sachin & Ganguly are partners of a firm SG & Co. From the following information calculate the value of goodwill by super profit method and capitalization method:
(i) Average capital employed in the business ₹ 5,00,000.
(ii) Net trading profit of the firm for the last three years ₹ 1,50,000; ₹ 1,70,000 and ₹ 1,90,000.
(iii) Rate of return expected from capital having regard to risk involved @ 15 % per annum.
(iv) Goodwill to be valued at 2 years’ purchase. (Dec 2012, 5 marks)
Answer:
Calculation of Goodwill
(i) Super Profit Method
Goodwill = Super Profit x No. of years of purchase
= 95,000/- × 2 = 1.90,000/-
= Average Profit – Normal Profit
= 1,70,000 -(5,00,000 × 15%) = 95,000

Average Profit = \(\frac{1,50,000+1,70,000+1,90,000}{3}\) = 1,70,000

(ii) Capitalization Method
Goodwill = Value of Business – Avg. Capital Employed
= \(\left(\frac{1,70,000}{15 \%}\right)\) – 5,00,000
= 11,33,333 – 5,00,000 = 6,33,333/-

Question 16.
Ram, Rahim, and Robert are partners in a firm sharing profits and losses in the proportion of 3 : 3 : 2. Their Balance Sheet as on 31.03.2013 was as follows:
Partnership Accounting - CMA Inter Financial Accounting Study Material 4
They decided to dissolve the firm on 01.04.2013. They report the result of realization as follows: .
Land and Buildings 90,000 – realized in cash
Debtors 60,000 – realized in cash
Investments 5,500 – taken over by Ram
Stock 75,500 – taken over by Rahim
Goodwill 18,000 – taken over by Robert
The realization expenses amounted to ₹ 2,000. Close the Accounts of the firm. (June 2013, 5 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 5

Partnership Accounting - CMA Inter Financial Accounting Study Material

Question 17.
A, B, and C started a partnership firm on 1.1.2012. A introduced ₹ 10,000 on 1.1.2012 and further introduced ₹ 4,000 on 1.7.2012. B introduced ₹ 25,000 at first on 1.1 .2012 but withdrew ₹ 5,000 from the business on 31.9.2012. C introduced ₹ 15,000 at the beginning on 1.1.2012, increased it by ₹ 5,000 on 1.4.2012, and reduced it to ₹ 10,000 on 1.11.2012.

During the year 2012 they made a net profit of ₹ 75,500. The partners decided to provide interest on their capitals at 10% p.a. and to divide the balance of profit in their effective capital contribution ratio. Prepare the Profit and Loss Appropriation Account for the year ended 31.12.2012. (June 2013, 5 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 6

Question 18.
Answer the following question (give workings wherever required):
P, Q, and R are three partners sharing profit and loss equally. Their respective capitals as on 01.04.2012 were P- ₹ 80,000, Q – ₹ 60,000, and R- ₹ 50,000. They mutually agreed on the following points as per the partnership deed:
Interest on capital to be allowed @ 5%.
P to receive a salary of ₹ 500 per month.
Q to receive a commission @ 4% on net profit after charging such commission.
After charging all other items, 10% of the net profit to be transferred to General Reserve.
The firm made profit of ₹ 66,720 during the financial year 2012-13. What will be the Net Divisible Profit available to each partner? (Dec 2013, 2 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 8
Net Divisible profit available to each of the partner will amount to = ₹ 44,325/3 = ₹ 14,775.

Question 19.
Kapil, Manoj and Chetan are partners sharing profits and losses in the ratio of 2 : 2: 1. On 1st January 2010, they took out a loint life policy of ₹ 2,00,000. Annual premium of ₹ 10,000 was payable on 1st January each year. Last premium was paid on 1st January, 2013. Manoj died on 1st March, 2013, and policy money was received on 31st March, 2013. The surrender value of policy as on 31st March each year were as follows:
2010:Nil .
2011: ₹ 2,000
2012: ₹ 5,000
Show Joint Life Policy accounts as on 31 March each year assuming that:
(i) The premium is charged to profit and loss account every year.
(ii) The premium is debited to joint life policy account and the balance of the joint life policy account is adjusted every year to its surrender value. (Dec 2013, 6 marks)
Answer:
1. In this case, premium paid is charged to Profit & Loss account every year. So nothing will appear in the joint life policy account of 2010, 2011, and 2012. However, in 2013, the joint life po1icy account will appear as follows.
Partnership Accounting - CMA Inter Financial Accounting Study Material 9

Question 20.
Answer the following question (give workings):
(A) Babbu and Dabbu are partners, sharing profit or loss in the ratio 3:2. They admit Kachari for \(\frac{1}{6}\) th share of profits in the firms of which she takes \(\frac{2}{3}\) rd from Babbu and \(\frac{1}{3}\) rd from Dabbu. Find the new profit-sharing ratio. (June 2014, 2 marks)
Answer:
Share surrendered by Babbu = \(\frac{1}{6} \times \frac{2}{3}=\frac{2}{18}\)
Share surrendered by Dabbu = \(\frac{1}{6} \times \frac{1}{3}=\frac{1}{18} \)

New Ratio:
Babbu = \(\frac{3}{5}-\frac{2}{18}=\frac{44}{90} \)
Dabbu = \(\frac{2}{5}-\frac{1}{18}=\frac{31}{90} \)
Kachari = \(\frac{1}{6} \times \frac{15}{15}=\frac{15}{90} \)
NPSR = 44:31:15

Question 21.
The Balance Sheet of A, B, and C who are sharing profits in proportion to their capital stood as follows on March 31st, 2012:
Partnership Accounting - CMA Inter Financial Accounting Study Material 10
B retired on the above date and the following was agreed upon:
(i) The stock be depreciated by 6%.
(ii) That the provision for doubtful debts be brought up to 5% on Debtors.
(iii) That the Land and Buildings be appreciated by 20%.
(iv) That a provision for ₹ 1,540 be made in respect of outstanding legal charges.
(v) That the Goodwill of the entire firm be fixed at ₹ 21,600 and B’s share of it be adjusted into the accounts of A and C who are going to share future profits in the ratio of 5 : 3.
(vi) That the assets and liabilities (except Cash at Bank) were to appear in the Balance Sheet at their old figures.
(vii) That the entire capital of the firm as newly constituted by fixed at ₹ 56,000 between A and C in the proportion of 5 : 3 (actual cash to be brought in as paid off, as the case may be). Show the Balance Sheet after B’s retirement. (June 2014, 10 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 11
Note: Since assets and liabilities will appear in the Balance Sheet at their old figure Memorandum Revaluation Account should be opened.

Working Note:
Gaining Ratio
A = \( \frac{5}{8}-\frac{4}{9}=\frac{45-32}{72}=\frac{13}{72}\)
C = \(\frac{3}{8}-\frac{2}{9}-\frac{27-16}{72}=\frac{11}{72} \)
Hence, gaining ratio = 13:11

Partnership Accounting - CMA Inter Financial Accounting Study Material 12
∴ B’s share of goodwill = ₹ 21,600 × 3/9 = ₹ 7,200
Partnership Accounting - CMA Inter Financial Accounting Study Material 13

Question 22.
Answer the following question (Give workings):
Gunnu and Chinu are partners. They are entitled for 9% interest on their capital contributions. The firm allowed ₹ 54,000 towards interest on capital to partners. Calculate the capital contribution of each partner if interest on Gunnu’s capital is ₹ 13,500 more than the interest on Chinu’s capital. (Dec 2014, 2 marks)
Answer:
Let Chinu’s capital be x.
∴ Interest on Chinu’s capital = 0.09x
And interest on Gunnu’s capital = 0.09x + 13,500
0.09x + 0.09x + 13,500 = 54,000
0.18 x = 40,500
x = 2,25,000
Interest on Gunnu’s capital = (0.09 × 2,25,000) + 13,500 = 33,750
∴ Gunnu’s capital = 3,75,000
And Chinu’s captal (x) = 2,25,000

Partnership Accounting - CMA Inter Financial Accounting Study Material

Question 23.
Answer the question:
Doll and Dolly are in partnership sharing profits and losses equally. They keep their books by Single Entry System. No ready figures are available for the total sales but they maintain a steady gross profit rate of 25% on sales. An abstract of their cash transactions for the year ended 30th June 2011 is given below:
Partnership Accounting - CMA Inter Financial Accounting Study Material 14
Other Information:
(i) Discount allowed, ₹ 2,800.
(ii) Discoun4 earned, ₹ 2400.
(iii) Outstanding Printing, ₹ 500.
(iv) Capital of Doll as on 30th June, 2010 was ₹ 4,000 more than Capital of Dolly.
(v) Provide depreciation of Furniture @ 10% p.a.

From the above, you are required to prepare in the books of Doll and Dolly:
(i) The Trading and Profit and Loss Account for the year ended 3oth June, 2011 and
(ii) The Balance Sheet as on the date. (Dec 2014, 12 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 15
G.P. on sales = 25%
∴ G.P.on cost = 33.33%
Cost = Opening stock + Purchase – Closing stock = 2,10,600
G.P. = 70,200

Question 24.
Answer the question:
X, Y, and Z are partners in the ratio of 3 : 2: 1. W is admitted with 1/6th share in future profits. Z would retains his original shares. Find out the new profit-sharing ratios of the partners. (June 2015, 2 marks)
Answer:
X’s New share = 3/6 – (1/6 x 3/5) = 12130
Y’s New share = 2/6 – (1/6 x 2/5) 1= 8/30
Z’sshare = 1/6
W’sshare = 1/6
Therefore, NPSR = X:Y:Z: W=12:8:5:5

Question 25.
A, B, and C were equal partners in a firm. Their Balance Sheet as on 31st March, 2015 was as follows:

Liabilities Amount ₹ Assets Amount ₹
A’s Capital’ 1,60,000 Building 4,00,000
C’s Capital 1,00,000 Machinery 4,00,000
A’s Loan 2,00,000 Furniture and Fixtures 1,60,000
Creditors 10,00,000 Stock 1,60,000
Book Debts 2,00,000
Cash at Bank 10,000
B’s Capital (Overdrawn) 1,30,000
14,60,000 14,60,000

The firm was dissolved as all the partners were declared insolvent. The assets were realized as under:
Book debts: 45% less; Building: ₹ 1,60,000: Stock: ₹ 1,00,000; Machinery: ₹ 2,00,000; and Furnitures and fixtures; 40,000. Realization expenses were ₹ 10,000.

Partner Private Assets ₹ Private Liabilities ₹
A 2,50,000 2,50,000
B 2,00,000 1,80,000
C 2,30,000 2,50,000

You are required to prepare:
(i) Realisation Account,
(ii) Bank Account,
(iii) Creditors Account,
(iv) Partner’s Capital Account, and
(v) Deficiency Account. (June 2015, 4 + 2 + 1 + 3 + 2 = 12 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 17

Partnership Accounting - CMA Inter Financial Accounting Study Material

Question 26.
A, B, and C have been in business partnership for some years, Sharing Profit in the proportions of 4:3:3. The balances in the books of the firm as on 31st March, 2015 subject to final Adjustment, were as under:
Partnership Accounting - CMA Inter Financial Accounting Study Material 18
C died on 30.09.2014. The Partnership deed provided that:
(1) Interest was to be credited on Capital accounts of partners at 10% P.A. on the balance at the beginning of the year.
(2) On the death of a Partner
(i) Goodwill was to be valued at three years’ purchase of average Annual Profits of three years up to the date of death, after deducting interest on Capital Employed at 8% P.A. and a fair remuneration for each of the partners;
(ii) Fixed Assets were to be vali’d by an independent valuer and all other assets and liabilities to be taken at Book Value.
(3) Wherever necessary, profit or loss should be apportioned on a time basis.
(4) The amount due to the deceased partner’s Sole Heir was to receive interest @ 12% RA. from the date of death until paid.

It was ascertained that:
(a) Profits for three years, before charging partners’ interest were: 2011-1 2 – ₹ 3,36,000, 2012-13 – ₹3,78,000 and 2013-14 – ₹ 3,60,000 respectively.
(b) The independent valuation at the date of death revealed: Land and Buildings – ₹ 3,00,000 and Furniture and Fixtures – ₹30,000.
(c) A fair remuneration for each of the Partners would be ₹ 75,000 P.A. and that the Capital employed in business to be taken as ₹ 7,80,000 throughout.

It was agreed among the Partners that:
(i) Goodwill was not to be shown as an asset of the firm as on 31.03.2015. Therefore, adjustment for goodwill was to be made in Capital Accounts.
(ii) A and B would share equally from the date of death of C.
(iii) Depreciation on revised value of assets would be Ignored.
You are required to prepare:
(i) Revaluation Account
(ii) Partners’ Capftal Accounts
(iii) Partners’ Current Accounts
(iv) C’s Heir Account
(v) Balance Sheet as on 31 .03.2015 (Dec 2015, 1+2+1+1+4+3 = 12 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 21

Question 27.
Answer the following question.
(i) S and N are partners sharing Profit /(Loss) in the ratio of 5:3. They admit J into partnership for \(\frac{3}{10}\) th in the Profit /(Loss) in which J acquired \(\frac{1}{5}\)th share from S and \(\frac{1}{10} \) th share from N respectively. Calculate the new Profit/Loss sharing ratios of the partners. (June 2016, 2 marks)
Answer:
Ss new share = \(\left(\frac{5}{8}-\frac{1}{5}\right)=\frac{25-8}{40}=\frac{17}{40}\)
N’s new share = \(\left(\frac{3}{8}-\frac{1}{10}\right)=\frac{15-4}{40}=\frac{11}{40} \)
J’s share = \(\frac{3}{10}=\frac{12}{40} \)
Hence New profit/loss sharing ratios of the partners = 17:11:12

Question 28.
A, B, and C are in partnership sharing Profits and Losses in the ratio 3:2:1 respectively. The Balance Sheet of the Partnership firm as on 31st March, 2016 is as under:
Partnership Accounting - CMA Inter Financial Accounting Study Material 22
C decides to retire from the business as on the above date and D is admitted as a partner on that date. The following matters agreed:
(i) Assets revalued as: Premises – ₹ 2,40,000, Plant- ₹ 70,000 Stock – ₹1,08,358.
(ii) A provision of ₹ 6,000 is created against debtors.
(iii) Goodwill is to be recorded in the books on the day C retires at 84,000.

The partners in the new firm do not wish to maintain a Goodwill Account so that amount is to be written off against the New Partners Capital Accounts.
(iv) A and B are to share profit in the same ratio as before, and D is to have the same share of profits as B.
(v) C is to take a car at its book value of ₹ 7,800 in part payment, and the balance of all he is owed by the firm in cash except ₹ 40,000 which he is willing to leave as a Loan Account.
(vi) The partners in the new firm are to start on an equal footing so far as Capital and Current Accounts are concerned. D is to contribute cash to bring his Capital and Current Accounts to the same amount as the original partner from the old firm who has the lower investment in the business. The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.

(vii) Revaluation profit or loss is to be adjusted in the Partners’ Current Account.
You are required to prepare:
(a) Revaluation Account
(b) Partners’ Capital Accounts
(C) Partners’ Current Accounts
(d) C’s Loan Account.
(e) Bank Account.
(f) Balance Sheet of the New Firm as at 01.04.2016. (June 2016, 3+2+2+1+2+5 = 15 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 23

Question 29.
Answer the following question (Give workings):
P and R are currently partners in a firm sharing Profit/Loss in the ratio of 4:3. A new partner D ¡s admitted and after his admission new Profit/Loss sharing ratio between P, R, and D becomes 5:3:2. What will be the sacrifice ratio of P and R after admission of D? (Dec 2016, 2 marks)
Answer: .
Calculation of sacrificing ratio of P&R after D’s admission:
Partners P R D
Old Ratio 4: 3: –
‘New Ratio 5: 3: 2
P = \(\frac{4}{7}-\frac{5}{10}=\frac{(40-35)}{70}=\frac{5}{70} \)
R = \(\frac{4}{7}-\frac{5}{10}=\frac{(40-35)}{70}=\frac{5}{70}\)
Sacrificing ratio or P&R = 5:9.

Question 30.
P, Q, R, and T have been carrying on business in partnership sharing profits and losses in the ratio of 4: 1: 2 : 3. The following is their Balance Sheet as on 31st March, 2016:

It has been agreed to dissolve the partnership on 1st April, 2016, on basis of following points agreed upon:
(i) P is to take over Trade Debtors at 80% of Book Value (₹ 3,50,000);
(ii) T is to take over the stock in Trade at 95% of the value; and
(iii) R is to discharge Trade Creditors.
(iv) The realisation is: Premises ₹ 2,75,000 and Furnitures ₹ 25,000.
(y) The expenses of realisation come to ₹ 30,000.
(vi) Q is found insolvent and ₹ 21,900 is realised from his estate.
Note: The loss arising out of capital deficiency may be distributed following decision in Garner vs. Murray.
You are required to Prepare:
(a) Realisation Account
(b) Bank/Cash Account
(c) Capital Accounts of the Partners. (Dec 2016, 5+4+5+1 = 15 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 28

Question 31.
P, Q and R sharing profits and losses equally, had been trading for many years. R decided to retire on 31.3.2017 on which date Balance Sheet of the firm is as follows.

Capital accounts: Cash 36,000
P 1,20,000 Debtors 74,000
Q 85,000 Stock 60,000
R 75,000 Plant and Machinery 1,20,000
Creditors 85,000 Land and Building 75,000
3,65,000 3,65,000

Value of goodwill was agreed as ₹ 93,000. Land and building increased in value, it being agreed at ₹ 1,05,600, plant and machinery was revalued at ₹ 1,00,500 and it was agreed to provide 6% in respect of debtors. Prepare revaluation account, capital accounts and balance sheet. (June 2017, 5 +5+5 = 15 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 29

Partnership Accounting - CMA Inter Financial Accounting Study Material

Question 32.
(ii) The Balance Sheet of a Partnership Firm had an Investment Fluctuation Reserve of ₹ 10,000. A new partner ¡s admitted. Value of Investment is ₹ 60,000 against its book value of ₹ 70,000. What amount of, the investment Fluctuation Reserve will be distributed among partners?
(iii) When does the Capital Account of a partner not show a debit balance in spite of regular losses incurred by the firm?
(iv) At the time of dissolution of Partnership Firm realisation expenses amounted to ₹ 3,000 paid by Nisha, a partner who was to bear these expenses. What entry is required in the Books of the firm? (Dec 2017, 1 mark each)
Answer:
(ii) Nil. There is no excess amount in the Investment Fluctuation Reserve Account as the fall in the value of the investment is equal to the reserve.
(iii) When partners maintain Fixed Capital Account, all adjustments including share of profit or loss is shown in their Current Account. Hence, the Capital Account of the partners will not be disturbed and this will not show a debit balance in spite of regular losses.
(iv) No entry is required as the expenses are to be borne by the partners.

Question 33.
Snehal, Suchita and Sindhu were partners sharing profits and losses in the ratio of 3:2:1. The firm was dissolved on 31.03.2015. After transfer of assets and liabilities to Realisation A/c, the following transactions
took place.
Give journal entries in the books on dissolution of the firm.
(i) Suchita’s Loan to the firm ₹ 30,000 was settled at ₹ 28,500.
(ii) A creditor for ₹ 50,000, took over Machinery of Book value ₹ 40,000 at ₹ 35,000.
The balance was settled in Cash.
(iii) Workmen Compensation Reserve – ₹ 40,000. A liability equal to 60% of the Reserve was settled
(iv) Sindhu was to receive 5% of the value of assets realised as remuneration for completing the dissolution work and was to bear realization expenses. Realization expenses were ₹ 5,500 that was paid by Sindhu. Assets realised ₹ 60,000.
(v) The Balance Sheet disclosed a footnote, contingent liability for ₹ 5,000 in respect of a bill discounted. The bill was received from Megha. On the date of dissolution, Megha was declared insolvent and was not able to pay the amount due. The bill had to be met by the firm.
(vi) Loss on realization amounted to ₹ 24,000. (Dec 2017, 7 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 30

Question 34.
A and O were partners of a firm sharing profits and losses in the rabo 2: 1. The Balance Sheet of the firm as at 31st March, 2017 was as under:

Liabilities Amount ₹ Assets Amount ₹
Capital Accounts: Plant and Machinery 5,00,000
A 8,00,000 Building 9,00,000
B 4,00,000 Sundry Debtors 2,50,000
Reserves 5,25,000 Stock 3,00,000
Sundry Creditors 2,75,000 Cash 1,50,000
Bills Payable 1,00,000
21,00,000 21,00,000

They agreed to admit P and Q into the partnership on the following terms:
(i) The firm’s goodwill to be valued at 2 years’ purchase of the weighted average of the pr1 its’ of tho last 3 years. The relevant figures are:
Year ended 31.03.2014 – Profit ₹ 37,000
Year ended 31.032015- Profit ₹ 40,000
Year ended 31.03.2016 – Profit ₹ 45.000
(ii) The value of the stock and Plant and machinery were to be reduced by 10%.
(iii) The building was to be valued at ₹ 10,11,000.
(iv) There was an unrecorded liability of ₹ 10,000.
(v) A, B. P & Q agreed to share profits and losses in the ratio 3 : 2: 1: 1.
(vi) The value of reserve, the values of liabilities, and the values of assets other than cash were not to be altered.
(vii) P and Q were to bring capitals equal to their shares of Profit considering B’s capita’ as base after all adjustments.

You are required to prepare:
(1) Memorandum Revaluation Account,
(2 Partner’s Capital Accounts and
(3) The Balance Sheet of the newly constructed firm. (June 2018, 15 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 31
1. Calculation of Goodwill
Weighted Average Profit:
Weighted Average Profit = ₹ 2,52,000/6 = 42,000
Goodwill is valued at 2 year’s purchase
Value of Goodwill: ₹ 42000 x 2 = ₹ 84,000
Partnership Accounting - CMA Inter Financial Accounting Study Material 33

3. Calculation of closing capitals of P and O B’s capital is taken as base. Closing capital of B after all adjustments is ₹ 4,30,000. Total capital of firm will be = 4,30,000 x 7/2 = ₹ 15,05,000
Hence, P’s and O’s closing capital should be ₹ 2,15,000 (15,05,000 x 1/7) each i.e. at par with B (as per new profit and loss sharing ratio)

Question 35.
A, B, and C are partners in a firm sharing profits and losses as 3 : 2: 1. Their Balance Sheet as on 31st March, 2018 was as follows:
Partnership Accounting - CMA Inter Financial Accounting Study Material 35
B died on 1st August, 2018. His account is to be settled under the following terms:
(i) Goodwill will be valued at 3 years purchase of last four accounting years average profit. Profits were :2014-15 ₹ 135 Lakh, 2015-16 ₹ 145 Lakh, 2016-17 ₹ 131 Lakh and 2017-18 ₹ 165 Lakh.
(ii) Land and Building will be valued at ₹ 250 Lakh and Plant and Machinery will be valued at ₹ 240 Lakh.
(iii) For the purpose of calculating B’s share in the profits of 01.04.2018 to 31.07.2018, the profits for the year 2017-18 will be taken as base.
(iv) Interest on Partners’ Loan will be calculated @ 6% per annum.
(v) A sum of ₹ 50 Lakh to be paid immediately to B’s Executor and the balance to be paid on 1st December 2018 together with interest @ 10% per annum.
You are required to pass necessary journal entries to record the above transactions and amount payable to B’s Executor’s Account. (Dec 2018, 15 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 36
Working Notes:
(1) Calculation of Share of B in GoodwilL
Average of past tour years profits = (₹ 135 Lakh + ₹ 145 Lakh + ₹ 131 Lakh + ₹ 165 Lakh)/4 = ₹ 44 Lakh

Value of Firm’s Goodwill = ₹ 144 Lakh x 3 = ₹ 432 Lakh
B’s Share in Goodwill = ₹ 432 Lakh x 216 = ₹ 144 Lakh,
which will be credited to B’s Capita A/c and Debited to A’s Capital A/c & C’s Capital A/c in the ratio of 3:1
(2) B’s Share in profit f’om 01.04.18 to 1.8.18 = ( ₹165 x 4/12) x 216 = ₹ 18.333 Lakh
(3) Interest on B’s Loan from 01.04.18 to 1.8.18 = ₹ 20 Lakh x 6% x 4/1 = ₹ 40,000
(4) Interest to B’s Executor from 1.08.18 to 1.12.18 = ₹ 356.066 Lakh – ₹ 50 Lakh = ₹ 306.066 x 10% x 4/12 = ₹ 10.2022 Lakh

Question 36.
A, B, and C were partners in a firm sharing profits & losses in the ratio of 3:1: 1 agreed upon dissolution of there partnership. They each decide to take over certain assets and liabilities and continue business separately.
Partnership Accounting - CMA Inter Financial Accounting Study Material 38
It is agreed as follows:
(i) Goodwill is to be ignored.
(ii) A is to take over all the Fixtures at ₹ 800; Debtors amounting to ₹ 20,000 at ₹ 17,200. The creditors of ₹ 6,000 to be assumed by A at that figure.
(iii) B is to take over all the stocks at ₹ 7,000 and certain of the sundry assets at ₹ 7,200 (being book value less 10%).
(iv) C takes over the remaining sundry assets at 90% of book values less ₹ 100 allowances and assumes responsibility for the discharge ot the loan, together with accruing interest of ₹ 30 which has not been recorded in the books of the firm.
(v) The expenses of dissolution were ₹ 270. The remaining debtors were sold to a debt-collecting agency for 50% of book values. Prepare Realisation Account, partners’ Capital Accounts, and Bank Account. (June 2019, 15 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 39

Partnership Accounting - CMA Inter Financial Accounting Study Material

Question 37.
The Balance Sheet of X and Y who shares profits and losses in the ratio of 3: 2, at 31 March, 2019 was as follows:
Partnership Accounting - CMA Inter Financial Accounting Study Material 42
They decided to admit Z on that date for 1/4th share on the followng terms:
(a) New Profit sharing ratio will be 6 : 9: 5. Z is to bring in capita equal to 1/4th of the total capital of the new firm.
(b) Goodwill of the firm is to be valued at 4 years, purchase of the average super profits of the last three years. Average profits of the last three years are ₹ 70,000 while the normal profits that can be earned with the
capital employed are 30000. No Goodwill is to appear in the books. Z brings in ₹ 24,000 cash out of his share of Goodwill.
(c) Patents to be written down to ₹ 3,000 and Stock is undervalued by ₹ 2,000. 20% of General Reserve to be transferred to Provision for Doubtful Debts. ₹ 9,000 included ¡n Sundry Creditors be written back as
no longer payable.

(d) Out of the amount of insurance which was debited entirely to P & L A/c, ₹10,000 be carried forward as an Unexpired Insurance. Unaccounted Accrued Income of ₹ 2,000 to be provided for. A debtor whose dues of
₹ 10,000 were written off as Bad Debts paid 80% ¡n full settlement. A claim of ₹ 6,000 on account of workmen’s compensation to be provided for.

(e) The market value of investments was ₹ 90,000. Half of the investments were to be taken over by old partners in their old profit-sharing ratio. Prepare Revaluation Account, Capital Accounts of the Partners and the
Balance Sheet of new firm. (Dec 2019, 15 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 43

Working Notes
1. X’s sacrifice = 3/5 – 6/20 = 6/20, Y’s gain = 2/5 – 9/20 = (1/20)
2. Firm’s Goodwill = Super Profits × 4 = (₹ 70,000 – ₹ 30,000) × 4 = ₹ 1,60,000
3. Z’s Share of Goodwill = ₹ 1,60,000 x 1/4 = ₹ 40,000
4. Ys Share of Goodwill = ₹ 1 ,60,000 x 1/20 = ₹ 8,000
5. Z’s New Capital (₹ 1,73,400+ ₹ 7600)x 1/3 = ₹ 83,000
Partnership Accounting - CMA Inter Financial Accounting Study Material 44

Question 38.
X and Y were Partners sharing profit/losses as 3:2. They admit Z as a new partner, giving him 1/5th share of future profits. What should be the new profit-sharing ratio? (Dec 2021, 1 mark)
Answer:
12:8:5

Question 39.
The partners of a firm distributed the profits for the year ended 31/3/2021 ₹ 90,000 in the ratio of 3:2:1 without providing for the following adjustments.
(i) A and B were entitled to a salary of ₹ 1,500 each per annum.
(ii) B was entitled to a Commission of ₹ 4,500.
(iii) B&C had guaranteed a minimum profit of ₹ 35,000 P.a to A.
(iv) Profits were to be shared in the ratio of 3:3:2
Pass the necessary journal entries for the above adjustments in the Books of the Firm. (Dec 2021, 6 marks)
Answer:
Partnership Accounting - CMA Inter Financial Accounting Study Material 45

Question 40.
X & Y are partners. They decided to dissolve their firm. Pass necessary entries assuming that various assets and external liabilities have been transferred to the Realisation account.
(i) X’s loan(partner) was appearing on the liability side of the balance sheet at ₹ 30,000. He accepted an unrecorded asset of ₹ 50,000 in full settlement of his account.
(ii) Runa, a creditor, to whom ‘ ₹ 30,000 were due to be paid, accepted an unrecorded computer of ₹ 20,000 at a discount of 10%, and the balance was paid to him in cash.
(iii) Suman, an unrecorded creditor of ₹ 45,000, accepted an unrecorded motor car of ₹ 30,000 at 35,000, and the balance was paid to him in cash.
(iv) There was a contingent liability in respect of bills discounted but not matured ₹ 30,000.
(v) Furniture of ₹ 15,000 and goodwill of ₹ 20,000 were appearing in the balance sheet but no other information was provided regarding these two items. (Dec 2021, 5 marks)
Answer:
(i) Debit X’s loan account and credit realisation account by ₹ 30,000
(ii) Debit realisation account and credit bank account by ₹ 12,000
(iii) Debit realisation account and credit bank account by ₹ 10,000
(iv) No entry.
(v) No entry.

Question 41.
P, Q, R, and S are sharing profits and losses in the ratio 3 : 3 : 2: 1. Frauds committed by R during the year were found out and it was decided to dissolve the partnership on 31st March, 2019 when their Balance Sheet was asunder:
Partnership Accounting - CMA Inter Financial Accounting Study Material 46
Following information is given to you:
(i) A cheque for ₹ 7,000 received from debtor was not recorded in the books and was misappropriated by R.
(ii) Investments costing ₹ 8,000 were sold by R at ₹ 11,000 and the funds transferred to his personal account. This sale was omitted from the firm’s books.
(iii) A creditor agreed to take over investments of the book value of ₹ 9,000 at ₹ 13,000. The rest of the creditors were paid off at a discount of 5%.
(iv) The other assets realized as follows:
Building:110% of book value
Stock: ₹ 1,20,000
Investments: The rest of investments were sold at a profit of ₹ 7,000
Debtors: The rest of the debtors were realized at a discount of 10%.
(v) The bills payable were settled at a discount of ₹ 500.
(vi) The expenses of dissolution amounted to ₹ 8,000.
(vii) It was found out that realization from Rs private assets would only be ₹ 7,000.
Prepare Realization Account, Cash Account and Partner’s Capital Accounts. All workings should part of your answer. (Dec 2022, 15 marks)

Partnership Accounting CMA Inter Financial Accounting Notes

Admission of Partner
Partners of a continuing business may, by common consent, decide to admit a new partner for additional capital, technical skill or managerial efficiency.

Valuation of Inherent or Non-Purchased Goodwill

  1. Average Profits Methods
  2. Super Profits Method
  3. Capitalization of Profits Methods
  4. Annuity Method

Retirement of Partner
A Partner may leave the firm by taking retirement., Normally the retirement takes place by consent of all the partners and! or by other mode of communication by the intended Partner to all other partners.

Death of Partner
If a partner dies, the partnership is usually dissolved. But if the surviving partners desire so, they may purchase the share of the deceased partner and carry on the business. In that case, they have to decide (1) the total amount payable to the legal representative or executor of the deceased partner and (2) the mode of such payment.

Dissolution of a Partnership Firm
Whenever a reconstitution takes place within a Partnership in the form of admission, retirement or death of a Partner, the existing partnership is dissolved. The Partnership firm, may, however, continue, if the remaining partners desire so. But if the partnership firm is discontinued for any reason, that is called Dissolution of the firm.

Partnership Accounting - CMA Inter Financial Accounting Study Material

Insolvency of a Partner
If a partner becomes insolvent and fails to pay his debit balance of Capital A/c either wholly or in part, the unrecoverable portion is a loss to be borne by the solvent partners.

The decision in Garner vs. Murray Case
Unless otherwise agreed, the decision in Gamer vs. Murray requires:

  • That the solvent partners should bring in cash equal to their respective shares of the loss on realization;
  • That the solvent partners should bear the loss arising due to the insolvency of a partner in the ratio of their Last Agreed Capitals.

Partnership Accounting – CMA Inter Financial Accounting Study Material Read More »

Preparation of Financial Statements from Incomplete Records – CMA Inter Financial Accounting Study Material

Preparation of Financial Statements from Incomplete Records – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Preparation of Financial Statements from Incomplete Records – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note on the following:
Weaknesses of Single Entry System (June 2017, 5 marks)
Answer:
Weaknesses of single entry system:

  • As principle of double entry is not followed, the trial balance cannot be prepared. As such, arithmetical accuracy cannot be guaranteed.
  • Profit or loss can be found out only by estimates as Nominal Accounts are not maintained.
  • It is not possible to make a balance sheet in absence of Real Accounts.
  • It is very difficult to detect frauds or errors.
  • The valuation of assets and liabilities is not proper.
  • The external agencies like banks cannot use financial information. A bank cannot decide whether to lend money or not.
  • It is quite likely that the business and personal transactions of the proprietor get mixed.

Question 2.
Write short note on the following:
Features of Single Entry System. (June 2018, 5 marks)
Answer:
Single Entry System has the following features:
(a) Maintenance of books by a sole trader or partnership firm: The books which are maintained according to this system can be kept only by a sole trader or by a partnership firm.

(b) Maintenance of cash book: In this system, it is very often to keep one cash book which mixes up business as well as private transactions.

(c) Only personal accounts are kept: In this system, it is very common to keep only personal accounts and to avoid real and nominal accounts. Therefore, sometimes, this is precisely defined as a system where only personal accounts are kept.

(d) Collection of information from original documents: For information one has to depend on original vouchers, example, in the case of credit sales, the proprietor may keep the invoice without recording it anywhere, and at the end of the year the total of the invoices gives an idea of total credit sales of the business.

(e) Lack of ‘uniformity: It lacks uniformity as it’s a mere adjustment of double entry system according to the convenience of the person.

(f) Difficulty in preparation of final accounts: It ¡s much difficult to prepare trading, profit and loss accounts, and balance sheets due to the absence of nominal and real accounts in the ledger.

Descriptive Questions

Question 3.
In the single-entry system, which two methods are used to ascertain profit or loss? (Dec 2021, 1 mark)
Answer:

  • Statement of affairs method.
  • Conversion method.

Practical Questions

Question 4.
Mr. Dipankar a retail trader needs financial statements for the year ended 31.03.2013 for availing a bank loan. He gives you the following information regarding receipts and payments.
(i) Cash deposited into the bank account ₹ 1,05,000.
(ii) Dividend from companies deposited in bank account ₹ 5,000.
(iii) Tuition fees of doctor oaid by cheque ₹ 15,000.
(iv) Rent for the year paid by cash ₹ 24,000.
(v) Cash collections from debtors ₹ 5,50,000.
(vi) Amounts paid to creditor ₹ 4,00,000 in cash and ₹ 1,00,000 by cheque.
(vii) Salary and wages paid in cash ₹ 36,000.
(viii) Office electricity paid by cheque ₹ 12,000.
(ix) General expenses incurred in cash ₹ 18,000.
(x) Drawings every montt’ ₹ 6,000 by cash.
(xi)

Particulars 31 03.2012 31 .03.2013
Stock 3,20,000 4,40,000
Bank 55,000 38,000
Cash 10,000 12,000
Debtors 75,000 86,000
Creditors 48,000 70,000

Prepare his Trading & Profit and Loss Account for the year ended 31st March, 2013 and Balance Sheet as at
31.03.2013. (Dec 2013, 10 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 1
₹ 4,12,000 + ₹ 1,81,000 – ₹ 72,000 ₹ 15,000
[Opening Capital + Net Profit – Drawings – Doctor Fees]

Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material

Question 5.
Answer the following question (give working):
Calculate the average collection period from the following details by adopting 360 days an year.

Average Inventory – ₹ 10,80,000 Gross Profit Ratio – 10%
Debtors – ₹ 6,90,000 Credit sales to total sales – 20%
Inventory Turnover – 6 Times 1 year – 360
ratio – days

(June 2014, 2 marks)
Answer:
Inventory turnover ratio = \(\frac{\text { Cost of goods sold }}{\text { Average Inventory }} \)
6 = \(\frac{\text { COGS }}{10,80,000} \)
COGS = 64,80,000 .
GP ratio =10%
Hence, Sales = COGS × \(\frac{100}{90}\)
= 64,80,000 × \(\frac{100}{90}\) = 72,00,000
Credit sales = 72,00,000 × 20% = 14,40,000
Average collection Period = \(\frac{\text { Average Debtors }}{\text { Credit Sales }} \times 360 \)
= \(\frac{6,90,000}{14,40,000} \) × 360 = 172.5 days

Question 6.
Answer the question:
Prepare Total Creditors Account for the year ended on 31.03.2013 from the data given below:

Creditors Balance on 01.04.2012 38,000
Credit Purchases during the year 2,67,000
Bills payable accepted 62,000
Cash paid to Creditors 1,37,000
B/R endorsed to creditors 16,000
Endorsed B/R dishonoured. 3,000
B/P dishonoured 2,000
Purchase returns 11,000
Discount received 6,000
Transfer from Debtors’ ledger 7,000

(Dec 2014, 4 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 3

Question 7.
ANSHU keeps his books under a single-entry system. On 31st March, 2014 his Balance Sheet was as follows:

Liabilities Assets
Capital 4,50,000 Fixed Assets 2,25,000
Creditors 8,70,000 Stock 9,15,000
Bills Payable 1,87,500 Debtors 2,22,000
Expenses Outstanding 67,500 Bills Receivable 90,000
Prepaid Insurance 3,000 Cash/Bank Balance 1,20,000
15,75,000 15,75,000

(i) Following is the summary of cash and bank transaction for the year ended 31st March, 2015:
Cash Sales ₹ 1,10,70,000;
Collection from Debtors ₹ 22,65,000;
Payments to Creditors ₹ 1,12,60,500;
Paid for Bills Payable ₹ 12,22,500;
Sundry Expenses Paid ₹ 9,31,050;
Drawings for Domestic expenses by Mr. Anshu ₹ 3,60,000;
Cash and Bank Balance as on 31 -03-2015 ₹ 1,90,950.

(ii) Following further details are furnished:
Gross Profit on Sales @ 10%;
Bills Receivable from Debtors during the year ₹ 6,52,500;
Discount Allowed to Debtors ₹ 54,000
Discount Received from Creditors ₹ 42,000;
Bills Receivable Endorsed to Creditors ₹ 22,500;
Annual Fire Insurance Premium paid (This is paid on 1st August every year) ₹ 9,000;
Depreciation on Fixed Assets @ 10%.

(iii) Balance as on 31-03-2015 are given below:
Stock in hand ₹ 9,75,000;
Debtors ₹2,28,000;
Bills Receivable ₹ 2,10,000;
Outstanding Expenses ₹ 7,500;
Bills payable ₹ 2,10,000.

You are required to prepare:
(1) Trading and Profit and Loss Account for the year ended March 31, 2015; and
(2) Balance Sheet as on 31.03.201 5. (June 2015, 4 + 3 + 5 = 12 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 4
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 6

Question 8.
The following is the Balance Sheet of MR. SILGARDO as on March 31, 2015.

Liabilities Assets
Capital Account 4,80,000 Buildings 3,25,000
Loan 1,50,000 Furniture 50000
Trade Creditors 3,10,000 Motor car 90,000
Stock 2,00,000
Trade Debtors 1,70,000
Cash in hand 20,000
Cash at bank 85,000
9,40,000 9,40,000

A fire occurred on the night of 31st March, 2016, in which all books and records were lost. The cashier had absconded with the available cash. MR. SILGARDO gives you the following information:
(a) His sales for the year ended March 31, 2016 were 20% higher than the previous years. He always sells his goods at cost plus 25%. 20% of the total sales for the year ended March 31, 2016 was for cash. There were no cash purchases.

(b) On April 1, 2015 the stock level was raised to ₹ 3,00,000 and the stock was maintained at this level throughout the year.

(c) Collection from Debtors amounted to ₹ 14 lakh of which ₹ 3.50 lakh was recewed in cash. Business expenses amounted to ₹ 2,00,000 of which ₹ 50,000 was outstanding on March 31, 2016 and ₹ 60,000 was paid by cheques.

(d) Analysis of the passbooks revealed on the following:
Payment to creditors ₹ 13.75 lakh, Personal drawings ₹ 75,000.
Cash deposited in bank ₹ 7.15 lakh.
Cash withdrawn from bank ₹ 1,20,000.

(e) Gross profit as per last year’s audited accounts was ₹ 3,00,000.
(f) Provide depreciation on buildings and furniture at 5% and on motor cars at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
Required:
(i) Prepare Trading and Profit and Loss Account for the year ended March 31,2016.
(ii) Prepare Balance Sheet as on 31.03.2016. (June 2016, 5 + 5 + (2 + 1 + 1 + 1) = 15 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 7
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 9

5. Calculation of Purchase:
(Sales + Closing Stock) – (Opening Stock + Gross Profit)
= (18,00,000 + 3,00,000) – (2,00,000 + 20% of 18,00,000)
= (21,00,000 – 5,60,000) = ₹ 15,40,000.

Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material

Question 9.
M/S SHOANI a trader who maintained books under Single Entry System, approaches you with the following details:

01.04.2015 31.03.2016
Assets and Liabilities:
Trade Creditors 1,57,700 1,24,000
Sundry Expenses Outstanding 6,000 3,300
Sundry Assets (Net) 1,16,100 96,000
Stock-in -Trade 80,400 1,11,200
Cash at Bank 40,000 69,200
Cash in hand 29,600 12,000
Trade Debtors 1,65,300 1,78,700

(1) Details relating to transactions during the year ended March 31, 2016.
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 10
(2) Depreciation was provided 20% of WDV on Sundry Assets for the year.
You are requested to prepare:
(i) Trading and Profit & Loss Account for the year ended March 31, 2016 and
(ii) Balance Sheet as on that date. (Dec 2016, 5+3+1+1+1+1 = 12 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 11
Working Notes.
1. Purchase = Credit 5,80,000+ Cash 10,300= ₹ 5,90,300.
2. Sundry expenses = paid in cash ₹ 95,700 pius outstanding on 31.03.2016, ₹ 3,300 outstanding on 01.04.2015 ₹ 6,000 = ₹ 93,000.
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 12

Question 10.
The statement of Affairs of Mr. M on Saturday, the 31st December 2015 was as follows:

Capital 50,000 Fixed Assets 30,000
Sundry Creditors 10,000 Stock 10,000
Liability for Expenses 1,000 Debtors 15,000
Bank 5,000
Cash 1,000
61,000 61,000

Mr. M did not maintain has books on the Double Entry System. But he carefully follows the following system:
(a) Every week he draws 200.
(b) After meeting his weekly sundry expenses ( 100 on average) and his drawings, the balance of weekly collection is banked at the commencement of the next week.
(c) No cash purchase is made and creditors are paid by cheques.
(d) Sales are at fixed price which includes 20% profit on sales.
(e) Credit sales are few and are noted in a diary. Payments are received in cheques only from such parties.
(f) Expenses other than sundries and other special drawings are made in cheques
(g) All unpaid bills are kept in a tile carefully.
The following are his bank transactions for 13 weeks:

Balance on Jan. 1 5,000 Creditors paid 40,000
Cheques deposited 2,000 Rent paid 600
Cash deposited 42,000 Expenses (other than Sundry Expenses) 3,000
Balance on April 1 5,400
49,000 49,000

After 13 weeks on 1st April Monday, the entire cash was missing when it was to be deposited in the bank. The following further tacts are ascertained:
(a) Stock on that day was valued at ₹ 4,000;
(b) Sundry Debtors amounted to ₹ 20,000 as per diary;
(c) Sundry Creditors were ₹ 8,000 as per unpaid bills file. Find out the amount of cash missing. (June 2017, 15 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 14

Question 11.
The following is the Balance Sheet of Chirag as on 31st March, 2015:

Liabilities Assets
Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor Car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at Bank 8,500
94,000 94,000

A riot occurred on the night of 31st March, 2016 in which all books and records were lost. The cashier had absconded with the available cash. He gives you the following information:
(a) His sales for the year ended 31 March, 2016 were 20% higher than the previous year’s. He always sells his goods at cost plus 25%; 20% of the total sales for the year ended 31st March, 2016 were for cash. There were no cash purchases.

(b) On 1st April, 2015 the stock level was raised to ₹ 30,000 and stock was maintained at this new level all throughout the year.

(c) Collection from debtors amounted to ₹ 1,40,000 of which ₹ 35,000 was received in cash, Business expenses amounted to ₹ 20,000 of which ₹ 5,000 was outstanding on 31st March, 2016 and ₹ 6,000 was paid by cheques.

(d) Analysis of the Pass Book revealed the Payment to Creditors ₹ 1,37,500, Personal Drawing ₹ 7,500, Cash deposited in Bank ₹ 71,500, and Cash withdrawn from Bank ₹ 12,000.

(e) Gross Profit as per last year’s audited accounts was ₹ 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Cr at 20%.
(g) The amount dedicated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended 31st March, 2016 and Balance Sheet as on that date. (Dec 2017, 15 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 15
(iv) Last year’s Total Sales = Gross Profit x 100/20 = ₹ 30,000 x 100/20 = ₹ 1,50,000 ‘
(v) Current years Total Sales = ₹ 1,50,000 + 20% of ₹ 1,50,000 = ₹ 1,80,000
(vi) Current years Credit Sales = 1,80,000 80% = 1,44,000
(vii) Cost of Goods Sold = Sales – G.P. = ₹ 1,80,000 – ₹ 36,000 = ₹ 1,44,000
(viii) Purchases = Cost of Goods Sold + Closing Stock – Opening Stock
= ₹ 1,44,000 + ₹ 30,000 – ₹ 20,000
= ₹ 1,54,000.

Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material

Question 12.
The following information relates to the business of ABC Enterprises, which requests you to prepare a Trading and Profit & Loss A/c for the year ended 31st’ March, 2017 and a Balance Sheet as on that date:
(a) Assets and Liabilities as on:

01.04.2016 ₹ 31.03.2017 ₹
Furniture 60,000 63,500
Stock 80,000 70,000
Sundry Debtors 1,60,000 ?
Sundry Creditors 1,10,000 1,50,000
Prepaid Expenses 6,000 7,000
Outstanding Expenses 20,000 18,000
Cash in Hand & Bank Balance 12,000 26,250

(b) Cash transactions during the year:
(i) Collection from Debtors, after allowing discount of ₹ 15,000 amounted to ₹ 5,85,000.
(ii) Collection on discounting of Bills of Exchange, after reduction of discount of ₹ 1,250 by bank, totaled to ₹ 61,250.
(iii) Creditors of ₹ 4,00,000 were paid ₹ 3,92,000 in full settlement of their dues.
(iv) Payment of Freight inward of ₹ 30,000.
(v) Mount withdrawn for personal use ₹ 70,000.
(vi) Payment for office furniture ₹ 10,000.
(vii) Investments carrying annual interest of 6% were purchased at ₹ 95 (200 shares, face value ₹ 100 each) on 1st’ October, 2016, and payment made there of.
(viii) Expenses including salaries paid ₹ 95,000.
(ix) Miscellaneous receipts of ₹ 5,000.

(c) Bills of exchange drawn on and accepted by customers during the year amounted to ₹ 1,00,000. of these, bills of exchange of ₹ 20000 were endorsed in favour of creditors. An endorsed bill of exchange of ₹ 4,000 was dishonored.
(d) Goods costing ₹ 9,000 were used as advertising material.
(e) Goods are invariably sold to show a gross profit of 20% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction of capital by proprietor of ABC enterprises.
(g) Provide at 2% for doubtful debts on closing debtor. (June 2018, 15 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 19

Question 13.
Ram Prakash keeps his books on Single Entry System. From the following information provided by him, prepare Trading and Profit & Loss Account for the year ended 31st March, 2018 and Balance Sheet as at that date:

Particulars 31st March, 2017 (₹) 31st March, 2018 (₹)
Furniture 1,00,000 1,20,000
Stock of Goods-in-Trade 60,000 20,000
Sundry Debtors 1,20,000 1,40,000
Prepaid Expenses 4,000
Sundry Creditors 40,000 ?
Unpaid Expenses 12,000 20,000
Cash 22,000 6,000

Receipts and Payments during the year were as follows:

Particulars
Receipts from Debtors 4,20,000
Paid to Creditors 2,00,000
Transportation 40,000
Drawings 1,20,000
Sundry Expenses 1,40,000
Furniture Purchased 20,000

Other Information: There were a considerable amount of Cash Sales. Credit Purchases during the year amounted ₹ 2,30,000. Provide a provision for Doubtful Debts to the extent of 10% on Debtors. (Dec 2018, 8 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 21

Question 14.
Mr. Kanan is running a business of readymade garments. He does not maintain his books of accounts under double-entry system. While assessing the income of Mr. Kanan for the financial year 2018-19, Income Tax Officer feels that he has not disclosed the full income earned by him from his business. He provides you the following information:

On 31st March, 2018
Sundry Assets ₹ 16,65,000
Liabilities ₹ 4,13,000
On 31st March, 2019
Sundry Assets ₹ 28,40,000
Liabilities ₹ 5,80,000
Mr. Kanan’s drawings for the year 2018-19 ₹ 32,000 per month
Income declared to the Income Tax Officer ₹ 9,12,000

During the year 2018-19, one life insurance policy of Mr. Kanan was matured and amount received ₹ 50,000 was retained in the business. State whether the Income Tax Officer’s contention is correct. Explain by giving your working. (June 2019, 7 marks)
Answer:
Determination of Capital balance of Mr. Kanan on 31.3.2018 and on 31.3.2019

31.3.2018 ₹ 31.3.2019 ₹
Assets 16,65,000 28,40,000
Less: Liabilities 4,13,000 5,80,000
Capital 12,52,000 22,60,000

Determination of Profit by applying the method of the capital comparison.

Capital Balance as on 31.3.2019 22,60,000
Less: Fresh capital introduces(matured life insurance policy amount) (50,000) 22,10,000
Add: Drawings (₹ 32,000 x 12) 3,64,000
25,94,000
Less: Capital Balance as on 1.4.2018 (12,52,000)
Profit 13,42,000
Income declared 9,12,000
Suppressed Income 4,30,000

The Income Tax Officers’ contention that Mr. Kanan has not declared his true income is correct. Mr. Kanan’s true income is in excess of the disclosed income by ₹ 4,30,000.
Note:
Closing capital is increased due to fresh capital introduction, so it is deducted.
Closing capital was reduced due to withdrawal by proprietor; so it is added back.

Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material

Question 15.
A retail trader had not kept proper books of account. From the details given below, you are required to prepare the Profit and Loss Account for the year ended 31st March 2018.

1st April, 2017 (₹) 31st March, 2018 (₹)
Stock-in-Trade 16,700 18,100
Sundry Creditors 15,400 19,200
Sundry Debtors 11,200 10,600
Cash in Hand 250 1,400
Bank Overdraft 19,200 Nil
Bills Receivable 16,000 5,000
Fixtures and Fittings 1,500 1,500
Motor Van 1,900 Nil
Bank Balance Nil 2,900

Drawings during the year amounted to ₹ 2,400. Depreciate Fixtures and Fittings by 10%. ₹ 600 is irrecoverable from Debtors. Provide 5% for Doubtful Debts and ₹ 200 in respect of Bills Receivable. (Dec 2019, 8 marks)
Answer:
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 22

Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 23

Question 16.
Calculate:
(i) Gross profit.
(ii) Cost of goods sold and
(iii) Closing stock from the
following particulars.
Opening stock ₹ 20,000
Cash sales ₹ 60,000
Credit sales ₹40,000
Purchase ₹ 70,000
Rate of gross profit on cost 33\(\frac{1}{3} \) % (Dec 2021, 4 marks)
Answer:
Gross Profit = ₹ 25,000
Cost of Goods Sold = ₹ 75,000
Closing Stock = ₹ 15,000
Total Sales = 60,000 + 40,000 = 1,00,000
Sales – COGS =GP
Also COGS x 33.33% = GP
Sales – COGS = COGS x 33.33%
Sales = COGS + 0.33 COGS
Sales = 1.33 COGS.
COGS = \(\frac{\text { Sales }}{1.33}=\frac{1,00,000}{1.333}\) = 75000
GP = 1,00,000 – 75,000 = 25,000
Op. St + Purchase – Closing Stock = COGS
20,000 + 70,000 – CI Stock = 75,000
CI Stock = 15,000

Question 17.
Alpana enterprises maintain their books of accounts under a single entry system. The balance sheet on 31st March, 2018 was a follows:

Liabilities Amount (₹) Assets Amount (₹)
Capital A/C 6,75,000 Furnitures and fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding expenses 67,500 Trade debtor 3,12,000
Prepaid insurance 3,000
Cash in hand and at the Bank 1,20,000
= 15,00,000 = 15,00,000

The following was a summary of cash and bank book for the year ended 31st March, 2019
Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material 24
Additional information:
(a) Discounts allowed to trade debtors and received from trade creditors amounted to ₹ 54,000 and ₹ 42,500 respectively (For the years ended 31st March, 2019)
(b) Annual fire insurance premium ₹ 9,000 was paid every year on 1st August for the renewal of the policy.
(c) Furniture and fixture were subject to depredation @ 15% P.a. on diminishing balance method.
(d) The following are the balances as on 31st March, 2019.
Stock: ₹ 9,75,000
Trade Debtors ₹ 3,43,000
Outstanding expenses. ₹55,200

(e) Gross profit ratio of 10% on sales is maintained throughout the year. From the above particulars. Find out.
(i) Amount of credit sales. (Dec 2021, 1 mark)
(ii) Amount of credit purchase. (Dec 2021, 2 marks)
(iii) Amount of closing balance of creditors as on 31 -03-19(Dec 2021, 2 marks)
(iv) Amount of gross profit for the year ended 31-03-19 (Dec 2021, 1 mark)
(v) Amount of Sundry expenses to be charged to the profit and loss account for the year ended 31-03-19 (Dec 2021, 4 marks)
(vi) Amount of net profit for the year ended 31-03-19 (Dec 2021, 1 mark)
(vii) Amount of dosing capital as on 31-03-19. (Dec 2021, 1 mark)
Answer:
(i) Credit Sale – ₹ 28,60,000
(ii) Credit Purchase – ₹ 1,25,97,000
(iii) Closing balance of Creditors – ₹ 8,29,000
(iv) Gross Profit – ₹13,93,000
(v) Sundry Expenses – ₹ 9,18,750
(vi) Net Profit – ₹ 4,40,250
(vii) Closing Capital (31-03-19) – ₹ 7,55,250

Question 18.
Following is the incomplete information of Jyotishikha Traders:
The following balances are available as on 31.03.2018 and 31.03.2019.

Balances 31.03.2018 31.03.2019
Land and Building 5,00,000 5,00,000
Plant and Machinery 2,20,000 3,30,000
Office equipment 1,05,000 85,000
Debtors (before charging for Bad debts) ? 95,000
Creditors for purchases 2,25,000 ?
Creditors for office expenses 20,000 15,000
Stock ? 65,000
Long term loan from SBI @ 12% 1,60,000 1,00,000
Bank 25,000 ?
Other Information In ₹
Collection from debtors 9,25,000
Payment to creditors for purchases 5,25,000
Payment of office expenses (excluding interest on loan) 42,000
Salary paid 32,000
Selling expenses 15,000
Cash sates 2,50,000
Credit sales (80% of total sales)
Credit purchases 5,40,000
Cash purchases (40% of total purchases)
GP Margin at cost plus 25%
Discount Allowed 5,500
Discount Received 4,500
Bad debts (2% of closing debtors)
Depreciation to be provided as follows:
Land and Building 5%
Plant and Machinery 10%
Office Equipment 15%

Other adjustments:
(i) On 01.10.18 they sold machine having Book Value 40,000 (as on 31.03.2018) at a loss of ? 15,000. New machine was purchased on 01.01.2019.
(ii) Office equipment was sold at its Book Value on 01.04.2018.
(iii) Loan was partly repaid on 31.03.19 together with Interest for the year.
You are required to prepare Trading, Profit & Loss Account, and Balance Sheet as on 31.03.2019. (Dec 2022, 15 marks)

Preparation of Financial Statements from Incomplete Records - CMA Inter Financial Accounting Study Material

Preparation of Financial Statements from Incomplete Records CMA Inter Financial Accounting Notes

Preparation of Financial Statements From Incomplete Records
Many times small business organizations do not maintain a comprehensive accounting system which is based on the double entry principle. The businessman is usually happy with the minimum information like the balances of cash and bank accounts and whether he has made a profit or loss. These people maintain rough or sketchy records that serve a limited purpose. Because the principle of double entry is not followed, it is often referred to as a ‘single entry system.

Features of Single Entry System:

  • Maintenance of books by a sole trader or partnership firm
  • Maintenance of cash book
  • Only personal accounts are kept.
  • Collection of information from original documents
  • Lack of uniformity
  • Difficulty in preparation of final accounts

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Preparation of Financial Statements of Not-for-Profit Organisations – CMA Inter Financial Accounting Study Material

Preparation of Financial Statements of Not-for-Profit Organisations – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Preparation of Financial Statements of Not-for-Profit Organisations – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note on the following:
Features of Income and Expenditure Account (June 2019, 5 marks)
Answer:
Features of Income and Expenditure Account:

  1. It follows Nominal Account.
  2. All expenses of revenue nature for the particular period are debited to this Account on accrual basis.
  3. Similarly, all revenue incomes related to the particular prepaid are credited to this account on accrual basis.
  4. All Capital Incomes and Expenditures are excluded.
  5. Only current year’s incomes and expenses are recorded. Amounts related to other periods are deducted. Amounts outstanding for the current year are added.
  6. Profit on Sale of Assets is credited. Loss on Sale of Asset is debited. Annual Depreciation on Assets is also debited.
  7. If income is more than expenditure, it is called a Surplus and is added with Capital or General Fund etc. in the Balance Sheet.
  8. If expenditure is more than income, it is a deficit, and ¡s deducted from Capital or General Fund, etc. in the Balance Sheet.

Distinguish Between

Question 2.
Difference between Receipts & Payments Account and Income & Expenditure Account. (Dec 2016, 3 marks)
Answer:
Income and Expenditure Account and Receipts and Payments Account:

Income and Expenditure Account Receipts and Payments Account
1. It is a Nominal Account. It is a Real Account.
2. It is a summary of the working of the organization. It is a summary of cash and bank transactions of the organization.
3. It is based on accrual system. It is based on cash system.
4. It records expenses and losses on debit side and incomes and gains on credit side. It records inflow of cash on debit side and outflow of cash on credit side.
5. It is a temporary account and has no opening and closing balance It is a real account and starts with opening balance of cash and bank.
6. It is closed at the end of the year and balance figure of the account is transferred to capital fund. It is balanced at the end of the year and the balance carried forward shows the cash and bank balance at the end of the period.
7. It records items of revenue nature only irrespective of their effect on flow of cash. It records items both of capital and revenue nature provided they affect flow of cash.
8. It records transactions of current year only. It records transactions of previous years, current year and subsequent years provided flow of cash is affected.

Practical Questions

Question 3.
Income and Expenditure Account and the Balance Sheet of Nav Bharat Club are as under:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 1
The following adjustments have been made in the above accounts:
(i) Upkeep of ground ₹ 1,500 and printing and stationery ₹ 510 relating to 2010-2011 were paid in 2011-12.
(ii) One-half of entrance fee has been capitalised.
(iii) Subscription outstanding in 2010-11 was ₹ 3,100 and for 2011-12 ₹ 2,600.
(iv) Subscription received in advance in 2010-11 was ₹ 1,100 and in 2011-12 for 201 2-13 ₹ 700.
(v) Outstanding salary on 31.3.2011 was ₹ 3,600.
Prepare Receipts and Payments Account for the year ended on 31st March, 2012. (Dec 2012, 8 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 2

Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material

Question 4.
Jodhpur Club furnishes you the Receipts and Payments Account for the year ended 31.03.2013:

Receipts Payments
Cash in hand (1.4.2012) 40,000 Salary 20,000
Cash at Bank (1.4.2012) 1,00,000 Repair expenses 5,000
Donations 50,000 Furnitures 60,000
Subscriptions 1,20,000 Investments 60,000
Entrance fee 10,000 Misc. expenses 5,000
Interest on investments 1,000 Insurance premium 2,000
Interest from banks 4,000 Billiards table and other sports items 80,000
Sale of old newspaper 1,500 Stationery expenses 1,500
Sale of drama tickets 10,500 Drama expenses 5,000
Cash in hand (31.03.2013) 26,500
Cash at Bank (31.03.2013) 72,000
3,37,000 3,37,000

Additional information:
(i) Subscriptions in arrears for 2012 – 13 ₹ 9,000 and subscription in advance for the year 2013-14 ₹ 3,500.
(ii) 400 was the insurance premium outstanding as on 31.03.2013.
(iii) Miscellaneous expenses prepaid ₹ 900.
(iv) 50% of donation is to be capitalized.
(v) Entrance fees to be treated as revenue income.
(vi) 8% interest has accrued on investments to five months.
(vii) Billiards table and other sports equipments costing ₹ 3,00,000 were purchased in the financial year 2011.12 and of which ₹ 80,000 was not paid 31.03.2012. There is no charge for Depreciation to be
considered. You are required to prepare Income and Expenditure Account for the year ended 31.03.2013 and Balance sheet of the Club as at 31.03.2013. (June 2013, 10 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 3

Question 5.
The Income and Expenditure Account of Shooters Club for the year ended 31st March, 2013 is given below:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 4
Adjustments are made in respect of the following:
(i) Subscription for 2012 unpaid at 31.03.2012 ₹ 2,000 of which ₹ 1,800 was received in December 2012.
(ii) Subscription received in advance as on 01.04.2012 was ₹ 500.
(iii) Subscription received in advance as on 31.03.2013 is ₹ 400.
(iv) Subscription for 2012-13 unpaid as on 31.03.2013 is ₹ 700.
(v) Sundry asset as on 01.04.2012 ₹ 26,000. Sundry asset as on 31.03.2013 after depreciation ₹ 27,000.
(vi) Cash balance as on 01.04.2012 ₹ 1,600.
(vii) Capital fund as on 01.04.2012 ₹ 29,100.
Prepare:
(i) Receipts and Payments A/c for the year 2012-13.
(ii) Balance sheet as at 31.03.2013. (Dec 2013, 10 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 5

Question 6.
Answer the following questions (give workings):
(iii) The following informations are obtained from the books of a club:
(a) Subscription received during the year ending 31 March, 2014 ₹ 2,56,000. out of which ₹ 8,000 was for the year 2014-15 and ₹ 11,000 for the year 2012-13.
(b) Subscription was outstanding on 01.04.2013 ₹ 18,000 and on 31.03.2014 for 2013-14 ₹ 21,000. Calculate the amount of subscription to be credited to Income and Expenditure Account for the year ending 31.03.2014. (June 2014, 2 marks)
Answer:
Computation of the amount creditable to Income & Expenditure Account:

Subscription received during the year 2,56,000
Less Subscription received in advance for 2014-15 8,000
Less: Subscription for 2012-13 11,000
Add: O/s Subscription for 2013-14 21,000
Subscription to be credited to Income & exp. A/c 2,58,000

Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material

Question 7.
A Town Club provides you information relating to assets and liabilities as on 01.01.14.
Calculate
(i) Receipts and Payment Account,
(ii) income and Expenditure Account for the year ended 31 .12.2013 and
(iii) a Balance Sheet as on date.
Cash in hand ₹ 4,000, subscription receivable ₹ 400, furniture ₹ 2,000, sports material ₹ 1200, investments ₹ 5,000, buildings ₹ 10,000, and outstanding creditors for supplies ₹ 600. During the year 2013, the dub did the following business,
(i) Subscription received including the arrears ₹ 6,000,
(ii) subscription due ₹ 600,
(iii) paid the outstanding creditors for supplies ₹ 600,
(iv) subscriptions to newspapers ₹ 1,000,
(v) sports materials purchased ₹ 2,000,
(vi) sale of old newspapers ₹ 100,
(vii) meeting expenses ₹ 900,
(viii) lighting charges ₹ 800,
(ix) Establishment salaries ₹ 2,000,
(x) stock of sport materials at the end ₹ 1,000,
(xi) Interest received on investments ₹ 150 (outstanding ₹ 50),
(xii) borrowings ₹ 4,000,
(xiii) purchased furniture (31-12-2013) ₹ 800,
(xiv) expenditure on annual function ₹ 750 and
(xv) donations received ₹ 3,600 (half to be capitalised).
Provide depreciation at 5% on furniture and buildings. (June 2014, 4+4+2= 10 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 6
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 7

Question 8.
Answer the question:
Compute the income from subscription for the year 2014 from the following particulars relating to TARUN CLUB:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 8
(June 2015, 2 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 9

Question 9.
Answer the question.
The following is the Income and Expenditure Account of GREEN CITY CLUB for the year ended March 31, 2015. (Amount in ₹)
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 10
The Income and Expenditure Account has been prepared after the following adjustments:

Subscription Outstanding on 31.03.2014. 1,20,000
Subscription received in Advance on 31.03.2014. 90,000
Subscription Outstanding on 31.03.2015. 80,000
Subscription received in Advance on 31.03.2015. 1,40,000

Salaries Outstanding at the beginning of the year and at the end of the year were ₹ 40,000 and ₹ 30,000 respectively.
Audit fees for the year (2014-15) has not been paid. Previous year’s audit fee ₹ 15,000 was paid during the year.
The club’s Assets on 31 March 2014 were as follows:

Freehold Land 10,00,000
Sport Equipments 2,60,000

At the end of the year, after depreciation, the equipments amounted to ₹ 2,70,000. Bank Loan of ₹ 1,00,000 as on 31st March, 2014 was still due at the end of the current year. On 31st March, 2015, Cash at Bank amounted to ₹ 6,97,000.

You are required to prepare:
(i) The Receipts and Payments Account tor the year ended 31st March, 2015 and
(ii) Balance Sheet as on 31.03.2015 (Dec 2015, 5+4+1+2 = 12 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 11

Question 10.
The following is the income and Expenditure Account of Gama Club for the year ended 31 March. 2017:
Income and Expenditure Account for the year ended 31st March, 2017

Expenditure Income
To Salaries 19,500 By Subscription 68,000
To Rent 4,500 By Donation 5,000
To Printing 750
To insurance 500
To Audit Fees 750
To Games & Sports 3,500
To Subscriptions written off 350
To Miscellaneous Expenses 14500
To Loss on sale of Furniture 2,500
To Depreciation: Sports Equipment 6,000
Furniture 3,100
To Excess of income over expenditure 17,050
73,000 73,000

Additional information:

31-03-2016 31-03-2017
Subscription in arrears 2,600 3,700
Advance Subscriptions 1,000 1,500
Outstanding expenses:
Rent
500 800
Salaries 1,200 350
Audit Fee 500 750
Sports Equipment less depreciation 25,000 24,000
Furniture less depreciation 30,000 27,900
Prepaid Insurance 150

Book value of furniture sold is ₹ 7,000. Entrance fees capitalized ₹ 4,000. On 1st April, 201v there was no cash in hand but Bank Overdraft was for ₹ 15,000. On 31st March, 2017 cash in hand amounted to ₹ 850 and the rest was Bank balance. Prepare the Receipts and Payments Account of the Club for the year ended 31st March, 2017. (Dec 2017, 15 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 12

Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material

Question 11.
Following is the summary of Receipts and Payments of
Radix Clinic for the year ended 31 March, 2017:

Opening Cash Balance 56,000
Donations received (including 50,000 for Building Fund.) 1,55,000
Payment to creditors for Medicines Supply 2,10,000
Salaries 70,000
Purchase of Medical Equipments 1,05,000
Medical Camp Collections 87,500
Subscription Received 3,50,000
Interest on Investments @ 9’p.a. 63,000
Honorarium to Doctors 1,90,000
Telephone Expenses 6,000
Medical Camp Expenses 10,500
Miscellaneous Expenses 7,000

Additional Information:

01.04.2016 ₹ 31.03.2017 ₹
1. Subscription Due 10,500 15,400
2. Subscription Received In Advance 8,400 4,900
3. Stock of Medicine 70,000 1,05,000
4. Medical Equipments 1,47,000 2,14,200
5. Building 3,50,000 3,15,000
6. Creditor for Medicine Supply 63,000 91,000
7. Investments. 7,00,000 7,00,000

You are required to prepare Receipts and Payments Account and Incomes and Expenditure Account for the year ended 31st March, 2017 and the Balance Sheet as on 31st March, 2017. (June 2018, 15 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 14

Question 12.
The following information provided by the Nay Yuvak Mandai, Delhi for the first year ended 31 March, 2018:
(i) Donations received for building ₹ 25 Lakh.
(ii) Other incomes and receipts were: (₹ in ‘000)

Particulars Capital Income (₹) Revenue Income (₹) Actual Receipt (₹)
Entrance fees 251 251
Life Membership fees 105 105
Subscription 1,160 1,151
Play Ground rent 120 110
Refreshment account 115 115
Sundry incomes 62 49

(iii) Expenditures and actual payments were: (₹ in ‘000)

Particulars Capital Expenditure (₹) Revenue Expenditure (₹) Actual Payment (₹)
Land 800 800
Books 236 202
Furniture 345 315
Honorarium and salaries 165 131
Maintenance of playground 52 50
Refreshment account 79 79
Insurance Premium 12 15
Sundry expenses 70 65

Others:
Donation were utilized to the extent of ₹ 13 Lakh in construction of building, balance were unutilized. In order to keep in safe, 8% Government Securities were purchased on 31st December, 2017 for ₹ 10.50 Lakh. Remaining amount was put ¡n bank as term deposit on 31st March, 2018. During the year 2017-18, Subscription received in advance ₹ 52,000 for the year 2018-19. Depreciation to be charged on Building and Furniture @ 10% and on Books @ 15%. You are required to prepare the Receipts & Payments Account, Income & Expenditure Account and Balance Sheet as on 31st March, 2018. (Dec 2018, 15 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 17
Working Notes:

  1. Donation received for building has been treated as capital item.
  2. Amount of Term Deposit = Donations Received-(Cost of Building + 8% Govt. Securities)
    ₹ 25 Lakh – (13 Lakh + 10.50 Lakh) = ₹ 1,50,000
  3. Profit on Refreshment = ₹ 1,15,000 – 79,000 = ₹ 36,000
  4. Outstanding Subscription = ₹ 11,60,000- (11,51,000-52,000) = ₹ 61,000
  5. Accrued Interest on Govt. Securities: ₹ 10,50,000 × 8% × 3112 = ₹ 21,000

Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material

Question 13.
Calculate the amount of sports material to be transferred to income and Expenditure Account of Kanan Bala Sports Club, Ludhiana, for the year ended 31st March, 2018:

Particulars (₹)
(i) Sports Material sold during the year (Book value ₹ 50,000) 56,000
(ii) Amount paid to creditors for sports material 91,000
(iii) Cash purchase of sports material 40,000
(iv) Stock of sports material as on 31.03.2017 50,000
(v) Stock of sports material as on 31.03.2018 55,000
(vi) Creditors for sports material’ as on 31.03.2017 37,000
(vii) Creditors for sports material as on 31.03.2018 45,000

(Dec 2019, 7 marks)
Answer:
Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material 19

Question 14.
The following is the Income and Expenditure Account of Gama Club for the year ended 31st March, 2021:
Income and Expenditure Account for the year ended 31st March, 2021

To Salaries 19,500 By Subscription 68,000
To Rent 4,500 By Donation 5,000
To Printing 750
To Insurance 500
To Audit Fees 750
To Games & Sports 3,500
To Subscriptions written off 350
To Miscellaneous Expenses 14,500
To Loss on sale of furniture 2,500
To Depreciation:
Sports Equipment
6,000
Furniture 3,100
To Excess of income over expenditure 17,050
73000 73,000

Additional information: ‘

31-3-2020 31-3-2021
Subscriptions in arrears 2,600 3,700
Advance Subscriptions 1,000 1,500
Outstanding Expenses:
Rent 500 800
Salaries 1,200 350
Audit Fee 500 750
Sport Equipment less depreciation 25,000 24,000
Furniture less depreciation 30,000 27,900
Prepaid Insurance 150

Book value of furniture sold is ₹ 7,000. Entrance fees capitalized ₹ 4,000. On 1st April, 2020, there was no cash in hand but Bank Overdraft was for ₹ 15,000. On 31St March, 2021, Cash in hand amounted to ₹ 850 and the rest was Bank balance. Prepare the Receipts and Payments Account of the Club for the year ended 31st March, 2021. (Dec 2022, 15 marks)

Preparation of Financial Statements of Not-for-Profit Organisations CMA Inter Financial Accounting Notes

Receipt and Payment Account
This is similar to cash book. Entries are made on cash basis and items pertaining to previous year or current year or subsequent years are also recorded. Receipts are shown on debit side and payments are shown on
credit side. Capital as well as revenue items are entered in the R & P A/c.

Income and Expenditure Account
This is similar to the Profit and loss AJc and is prepared exactly based on same principles. As the name suggests only revenue items are recorded here in. Incomes are recorded on the credit side while the expenses on the debit side. Both incomes and expenses must be taken on the basis of accrual concept.

Balance Sheet
It is prepared as on the last day of the accounting period. It also has assets and liabilities and prepared based on accounting equation. But, there’s no capital account. Instead, there is a capital fund. The surplus or deficit from Income & Expenditure A/c is adjusted against this capital fund at the end of the year.

Capital Fund
It is also called ‘General Fund” or accumulated Fund.” It is actually the Capital of a non-profit concern. it may be found out as the excess of assets over liabilities. Usually “Surplus” or Deficit” during a period is added with o deducted from it.

Preparation of Financial Statements of Not-for-Profit Organisations - CMA Inter Financial Accounting Study Material

Special Fund
It may be created out of special donation or subscription or out of a portion of the ‘Surplus’.

Legacy received
It is to be directly added with Capital Fund after deduction of tax,(if any). It is a kind of donation received according to the will made by a deceased person.

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Preparation of Financial Statements of Commercial Organisations – CMA Inter Financial Accounting Study Material

Preparation of Financial Statements of Commercial Organisations – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Preparation of Financial Statements of Commercial Organisations – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note on the following:
Provision for Discount on Debtors (June 2019, 5 marks)
Answer:
Provision for Discount on Debtors:
We know that cash discount is allowed by the suppliers to customers for prompt settlement of cash. Naturally a provision is created for this purpose. Thus, the provision which is created on Sundry Debtors for allowing discount on receipt of cash in that accounting period is called Provision for Discount on Debtors. It is needless to say that if the customer pays their debts before the due dates, they may claim discounts and that ¡s why discount is allowed to debtors for prompt settlement Is an usual practice.

Where goods are sold on credit, debtors accounts are debited but the amount may not be realized in this same accounting periods. Naturally, a possible aim is to allow discount whether cash is received. The same will happen in the next accounting period. Due to this reason a provision for discount on debtors is made on the basis of past experience at an estimate rate on Sundry Debtors. Care should be taken while calculating discounts. Discount should be calculated at a specified rate on of debtors (i.e. after discounting bad debts and provision for bad debts).

Descriptive Questions

Question 2.
Form presentation of financial statements is known as Horizontal” form or “Vertical” form. (Dec 2021, 1 mark)
Answer:
Horizontal form.

Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material

Practical Questions

Question 3.
On 1st April, 2013 the balance of provision for bad and doubtful debts was ₹ 13,000. The bad debts during the year 2013-14 were ₹ 9,500. The sundry debtors as on 31st March, 2014 stood at ₹ 3,25,000 out of these debtors of ₹ 2,500 are bad and cannot be realized. The provision for bad and doubtful debts is to be raised to 5% on sundry debtors.
(i) Pass necessary adjustment entries for bad debts and its provision on 31st March, 2014.
(ii) Prepare the necessary ledger accounts.
(iii) Show the relevant items in the profit and loss account and Balance Sheet. (June 2014, 3+3+2 = 8 marks)
Answer:
Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material 1

Question 4.
Answer the following question.
The following details are abstracted from the record of VENELA LTD. for the year ended March 31st, 2016.

Net Working Capital ₹ 35,00,000
profit before Tax ₹ 25,00,000
The Current Ratio 2.4:1

You are required to calculate the amount of Current Assets of Venela Ltd. for Ihe year ended March 31,2016. (June 2016, 2 marks)
Answer:
Net Working Capital
= Current Assets (C.A) – Current Liabilities (C.L) = 35,00,000
Or, C.A – C.L = ₹ 35,00,000 Equation (i)

Again Current Ratio = \(\frac{C.A}{C.L}=\frac{2.4}{1} \) = 2.4 C.L
Or, CA. – 2.4 C.L = 0 ……………………. Equation (ii)
After multiplying (i) with 2.4 we get
2.4 C.A -2.4 C.A = ₹ 84,00,000 ……………………… Equation (iii)
∴ [ (iii) – (ii) ] –
Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material 3
Hence, Current Assets of Venela Ltd. = ₹ 60,00,000

Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material

Question 5.
M/S ADHUNA & CO. had a provision for Bad Debts of ₹ 13,000 against their book debts on 15th April, 2015. During the year ended 31st March 2016, ₹ 8,500 proved irrecoverable and it was desired to maintain the provision for bad debts @5% on Debtors which stood at ₹ 3,90,000 before writing off Bad Debts. Prepare the provision for Bad Debt Account for the year ended March 31, 2016. (Dec 2016, 3 marks)
Answer:
Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material 4

Question 6.
A company maintains its reserve for bad debts @ 5% and a reserve for discount on debtors @ 2%. You are given the following details:

Particulars 2016 2017
Bad debts 800 1,500
Discount allowed 1,200 500
Sundry debtors (before providing all bad debts and discounts) 60,000 42,000

On 01/01/2016, Reserve for bad debts and Reserve of discount on debtors had balances of ₹ 4,550 and ₹ 800 respectively. Show Reserve for Bad Debts and Reserve for Discount on Debtors Account for the years 2016 and 2017. (June 2018, 7 marks)
Answer:
Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material 5

Question 7.
Following is the Trial Balance as on 31 March, 2019 of Bajrang Traders:

Particulars Debit (₹) Credit (₹)
Stock on 01 .04.2018 1,35,000
Purchases and Sales 28,50,000 46,25,000
Returns 35,000 22,500
Carriage Inwards 24,000
Carriage Outwards 33,000
Wages 1,25,000
Salaries 3,52,000
Printing and Stationery 6,500
Insurance Premium 15,000
Repairs 11,000
Discounts Allowed 30,500
Discounts Received 15,500
Bad Debts 28,000
Provision for Bad Debts 35,000
Advertisement 38,000
Interest on Investment 42,000
Drawings 2,10,000
Investment 8,00,000
Furniture and Fixtures 3,50,000
Office Equipments 2,45,000
Land and Building 15,00,000
Sundry Debtors and Creditors 6,90,000 4,55,000
Establishment Expenses 35,000
Capital 31,05,000
Cash at Bank 7,24,000
Cash in Hand 63,000
Total 83,00,000 83,00,000

Additional Information:
(i) Closing Stock of goods amounted to ₹ 1,85,000 and of stationery amounted to ₹ 1,500.
(ii) Depreciation to be charged on Land and Building @ 10%; On Office Equipments @ 15%; and On Furniture and Fixtures @ 10%.
(iii) Insurance Premium paid on 1st July 2018 for one year.
(iv) Write off further as bad debts ₹ 5,000 and maintain a provision for bad debts of 5% on debtors.
(v) Provision made for discount on debtors @ 2%.
(vi) Goods costing ₹ 12,500 used for given free samples to customers.
(vii) Goods costing ₹ 25,000 were sent on approval basis to a customer for ₹ 40,000 on 26th March, 2019. This was recorded as actual sales but approval did not received till 31st March, 2019.
(viii) Outstanding salaries were for one month.
(ix) Investment made at 7.50% per annum on 1st May, 2018.
You are required to prepare Trading Account and Profit & Loss Account for the year ended 31st March, 2019 and a Balance Sheet as on that date. (June 2019, 15 marks)
Answer:
Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material 6

Working Notes:
(i) Prepaid Insurance Premium from 1.4.19 to 30.6.19= ₹ 15,000 × 3/12 = ₹ 3,750.
(ii) Outstanding Interest on Investment:
Total Interest (1.5.18 to 31.3.19) = ₹ 8,00,000 × 7.50% x 11/12 = ₹ 55,000
Outstanding = ₹ 55,000 – ₹ 42,000 = ₹ 13,000.

Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material

Question 8.
From the following Trial Balance of Bharat Tushar as on 31st March, 2019, you are required to prepare a Trading and Profit & Loss Account for the year ended 31st March, 2019 and Balance Sheet as on that date, after making the necessary adjustment as mentioned here under:

Particulars Debit Balance (₹) Credit Balance (₹)
Capital and Drawings 24,000 1,60,000
Furniture and Fixtures 8,000
Plant and Machinery 60,000
Patents (ten years from 01.04.2018) 40,000
Opening Stock 40,000
Purchases and Sales 1,70,000 2,64,000
Salaries 14,800
Wages 30,000
Sundry Debtors and Creditors 20,400 24,000
Land 28,350
Loan from Shyam (at 6% from 01.10.2018) 20,000
Postage and Fax 3,000
Rent, Rates and Taxes 7,200
Bad Debts 800
Discount 1,200
Carriage Inward 400
Interest on loan 300
Insurance 1,600
Traveling expenses 1,000
Sundry expenses 600
Cash and Bank 33,750
Bank Overdraft 15,000
Total 4,84,200 4,84,200

Adjustments:
(a) Closing Stock is valued at 30,000.
(b) A new machine was installed on 1st April, 2018 for ₹ 3000. No entry in this respect was passed in the books. Wages’of ₹ 1,000 paid for installing the machine were debited to Wages Account.
(c) Of the Sundry Debtors,₹ 200 are bad and are to be written off. You are required to maintain a Provision for Doubtful Debts @ 5% on Debtors and Provision for Discount on Debtors @ 2%.
(d) Goods costing ₹ 2,000 were given away as free samples for publicity.
(e) Depreciate Plant and Machinery at 20% per annum and Furniture and Fixture at 10% per annum.
(f) On 01.04.2018 Machinery of the value of ₹ 10,000 was destroyed by fire and the insurance claim settled at ₹ 8,000 was credited to Machinery Account.
(g) Goods for ₹ 1,200 were sent to a customer at a profit of 20% on cost on 30th March, 2018 on sale or return basis. This was recorded as actual sales. (Dec 2019, 15 marks)
Answer:
Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material 8

Preparation of Financial Statements of Commercial Organisations CMA Inter Financial Accounting Notes

Profitability Statement
This statement is related to a complete accounting period. It shows the outcome of business activities during that period in a summarized form.

Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material

Balance Sheet
The Balance Sheet shows the list of resources and the funding of the resources e. assets and Iiabihties (towards owners and outsiders).

Trading Account.
It is an account which is prepared by a merchandising concern which purchases goods and sells the same during a particular period. The purpose of it to find out the gross profit or gross loss which is an important indicator of business efficiency.

Direct expenses
It means all those expenses which are incurred from the time of purchases to making the goods in suitable condition.

Capital
This indicates the initial amount the owner or owners of the business contributed.

Reserves and Surplus
The business is a going concern and will keep making profit or loss year by year. The accumulation of these profit or loss figures (called as surpluses) will keep on increasing or decreasing owners’ equity.

Long-Term or Non-Current Liabilities
These are obligations which are to be settled over a longer period of time say 5-10 years.

Short-Term or Current Liabilities
A liability shall be classified as Current when it satisfies any of the following:

  • It is expected to be settled in the organization’s normal Operating Cycle,
  • It is held primarily for the purpose of being traded,
  • It is due to be settled within 12 months after the Reporting Date.

Fixed Assets
These represent the facilities or resources owned by the business for a longer period of time. The basic purpose of these resources is not to buy and sell them but to use for future earnings. The benefit from use of these assets is spread over a very long period.

Investments
These are funds invested outside the business on a temporary basis.

Current Assets
An asset shall be classified as Current when it satisfies any of the following:

  • It is expected to be realized in, or is intended for sale or consumption in the organization’s nórmal Operating Cycle,
  • It is held primarily for the purpose of being traded,
  • It is due to be realised within 12 months after the Reporting Date, or
  • It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle a Liability for at least 12 months after the Reporting Date.

Stocks
This includes stork ot raw material, semi-finished goods or WIP, and finished goods.

Debtors
They represent customer balances which are not paid. The bad debts or a provision for bad debt is reduced from debtors and net figure is shown in balance sheet.

Bills receivables
Credit to customers may be given based on a bill to be signed by them payable to the business at an agreed date in future.

Cash in Hand
This represents cash actually held by the business on the balance sheet date.

Cash at Bank
Dealing through banks is quite common. Funds held as balances with bank are also treated as current asset, as it is to be applied for paying to suppliers.

Prepaid Expenses
They represent payments made against which services are expected to be received in a very short period.

Advances to suppliers
When amounts are paid to suppliers In advance and goods or services are not received till the balance sheet date, they are to be shown as current assets.

Preparation of Financial Statements of Commercial Organisations - CMA Inter Financial Accounting Study Material

Bad Debts
Bad debts are uncollectible or irrecoverable debt or debts which are impossible to collect is called Bad Debts.

Doubtful Debts
The debts which will be receivable or cannot be ascertainable at the date of preparing the final accounts (i.e., the debts which are doubtful to realize) is known as doubtful debts.

Good Debts
The debts which are not bad Le., there is neither any possibility of bad debts nor any doubts about its realization, is called good debts. As such, no provision is necessary for it.

Preparation of Financial Statements of Commercial Organisations – CMA Inter Financial Accounting Study Material Read More »

Bills of Exchange, Consignment, Joint Venture – CMA Inter Financial Accounting Study Material

Bills of Exchange, Consignment, Joint Venture – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Bills of Exchange, Consignment, Joint Venture – CMA Inter Financial Accounting Study Material

Bills of Exchange CMA Inter Financial Accounting Study Material

Short Notes
Question 1.
Write short flotes on the following:
(a) Accommodation Bill (June 2016, 5 marks)
(c) Rebate on Bills Discounted (June 2016, 5 marks)
Answer:
(a) Accommodation Bill: An Accommodation Bill is a bill of exchange signed by-a party as drawer, drawee, endorser to accommodate another party whose credit is not strong enough to enable him to borrow on his single name. It is drawn for the purpose, of arranging temporary finance.

Therefore, an Accommodation Bill is a Bill of exchange which has been drawn, on and accepted by a reputable party for the purpose of giving value to the bill so that it can be discounted. What actually happens In the case of an accommodation bill is that one party draws the bill and the other party accepts it.

Then, the drawing party gets it discounted from the bank and receives eady cash of which he is in need. The money received is either wholly utilized by the drawer, or by both, the drawee and the acceptor. Before the due date approaches, the required sum of money is sent to the acceptor in order to make him able to honour the bill and the bill is honoured on the due date. Thus, although there is no legal liability, there exists a strong moral understanding between the parties concerned.

(c) Rebate on Bills Discounted: When a bank discounts a bill of exchange, the full amount of the discount earned is credited to the Discount Account but some of the Bills discounted may not mature for payment by the close for the year; as a result, the amount of discount in respect of such bill would not have been earned during the year.

On this consideration, the unexpired portion of such discount is carried forward by Debiting the Discount Account and crediting Rebate on Bills Discounted Account. The latter account is shown on the liabilities side of the Balance Sheet as income received which had hot accrued before the close of the year. At the commencement of the period next following the account is close oft by transfer to the Discount Account.

Question 2.
Write short note:
(d) Features of a Bill of Exchange. (Dec 2022, 5 marks)

Practical Questions

Question 3.
(a) On 20th July, 2012, Sohan drew a bill for ₹ 50,000 on Mohan for the period of four months and Mohan accepted it. It was for mutual accommodation of both to the extent of 2/3rd and 1/3rd. On 23rd July, 2012, Sohan discounted the bill with the Bank @ 12% per annum and remitted one-third of proceeds to Mohan. On 18 November, 2012 Mohan drew another bill for ₹ 71,000 on Sohan to provide funds to meet the first bill, for the period of three months, which was accepted by Sohan. On 21st November 2012, Mohan discounted it with Bank @ 12% per annum. With this amount, the first bill was met out and ₹ 12,580 was remitted to Sohan.

On 1st February, 20131 Sohan became insolvent and Mohan received a dividend of 60 paise in a rupee in full settlement on 15th February 2013. Give journal entries to record the above transactions in the books of Sohan and prepare Sohan’s account in the ledger of Mohan. (Dec 2013, 10 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 1
Calculation of distribution of discount
In case of accommodation bills, the proceeds of discounting are shared by parties as agreed. The discounting charges are also shared in agreed proportion. Here, the ratio between Sohan and Mohan is given as two-thirds and one-third.
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 2

Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material

Question 4.
Big owes Fast ₹ 12,000 for which the former accepts a three months’ bill drawn by the latter. Fast immediately discounts the bill with his banker, Strong Bank, at 12% p.a. On the due date, the bill is dishonoured and Strong Bank pays ₹ 40 as noting charges. Big pays ₹ 2,360 including interest of ₹ 400 and gives another bill at three months’ for the balance.

Fast endorses the bill to his creditor Thin in full settlement of his debt for ₹ 10,200. Thin discounts the bil with banker Strong Bank who charges ₹ 80 as discount. Before maturity Big becomes bankrupt and first and final dividend of 20 paise in a ₹ is realized from his estate. Show the journal entries in the books of Thin and Strong Bank and the ledger account of Big in the books of Fast. (June 2014, 6 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 3

Question 5.
Answer the question:
(a) BABAI sold goods to KACHARI for ₹ 90,000 on 1st April 2014 for which the later accepted three bills of ₹ 30,000 each due respectively in 1, 2 and 3 months. The first bill is retained by Babai and is duly met. The second bill was discounted (discount being ₹ 600) and is met in due course. The third bill is also discounted (discount being ₹ 900) and is dishonoured, the Noting charges being ₹ 150.

New arrangements were duly made whereby Kachan pays Cash ₹ 10,150 and accepts a new bill due in 2 months for the balance of the amount with interest at 15% p.a. The bill is retained. On due date the same is dishonoured, noting charges being ₹ 180. Kachari declared insolvent on 15th Sept 2014 and 35 paise in a rupee were received from his estate.
Required:
Pass Journal entries in the Books of BABAI. (June 2015, 8 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 4

Question 6.
Answer the question:
(a) On 1st April, 2014 NANU BANK LTD. had a balance of ₹ 45 Lakhs in ‘Rebate on Bills Discounted Account.’ During the year ended 31st March, 2015, Nanu Bank Ltd. discounted bills of exchange of ₹ 51,000 Lakh charging interest at 15% per annum, the average period of discount being for 73 days. Out of these, Bill of Exchange of ₹ 3,067 Lakh were due for realization from the acceptor/customers after 31st March, 2015, the average period outstanding after 31st March, 2015 being 53 days.
You are required to pass the necessary Journal Entries and show the Ledger Accounts in the Books of NANU BANK LTD. pertain to
(i) Rebate on Bills Discounted Account
(ii) Interest and Discount Account (June 2015, 4 + (2 + 2) = 8 marks)
Answer:
In the books of NANU BANK Ltd.
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 5

Question 7.
Answer the following question (Give workings):
(g) On 1st April, 2015 ALOKE accepted a bill for ₹ 5,000 for 3 months drawn by KUNTAL. Kuntal endorses the bill in favour of Chinu. At maturity, the bill was dishonoured. Pass the Journal Entries in the Book of KUNTAL. (Dec 2015, 2 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 6

Question 8.
GOURU and GYANI were friends and in need of funds. On 1st April, 2015 Gouru drew a BOL for ₹ 2,00,000 for three months on Gyani. On 4.4.15 Gouru got the bill discounted at 15% per annum and remitted half of the proceeds to Gyani. On the due date, Gyani could not meet the bill, instead, Gouru accepted Gyani’s bill for ₹ 1,20,000 on 4th July, 2015 for two months. This was discounted by Gyani at 15% per annum and out this ₹ 19,500 was paid to Gouru after deducting ₹ 500 discounting charges. Due to financial crisis, Gouru became insolvent and the bill drawn on him was dishonoured and his estate paid 40%. Days of grace for discount purposes may be ignored.
Required:
(i) Give Journal Entries and
(ii) Prepare Gyani’s Account in the books of Gouru. (Dec 2015, 6 + 2 = 8 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 7

Question 9.
VISHAN for mutual accommodation of TITHAN and himself drew upon the latter a three-months bill for ₹ 24,000 on is’ 1st July 2015, which was duly accepted. Vishan discounted the bill at 6% p.a. on 4th July 2015 and remitted 1 of the proceeds to Tithan. On 1st August 2015, Tithan drew and Vishan accepted a bill at 3 months for ₹ 9,600. On 4th August 2015, Tithan discounted the bill at 6% p.a. and remitted half the proceeds to Vishan.

At maturity, Vishan met his acceptance, but Tithan failed to meet his and Vishan had to take up. Vishan drew and Tithan accepted a new bill at two months on 4th November, 2015, for the amount due to Vshan plus ₹ 200 as interest. On 1st’ January, 2016, Tithan became insolvent and a first and final dividend of 40 paise in the rupee was received from his estate on 31st March, 2016. Note: Days of grace for discounting purposes may be ignored.
Required:
Pass the necessary Journal Entr,es in the Books of VISHAN. (Dec 2016, 4 + 3 =7 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 8
Note: Value of the new bill will be 12,000 for 1 bill + 4,800 for 2 bills + 200 for interest = 17,000.

Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material

Question 10.
Sunil owed Anil ₹ 80,000. Anil draws a bill on Sunil for that amount for 3 months on 1st April. Sunil accepts it and returns it to Anil. On 1st April Anil discounts it with Citi Bank at a discount of 12% p.a. On the due date the bill was dishonoured, the bank paid noting charges ₹ 100. Anil settled the bank’s claim along with noting charges in cash. Sunil accepted another bill for 3 months for the amount due plus interest of ₹ 3,000 on 1st July. Before the new bill becomes due, SunD retires the bill with a rebate of ₹ 500. Show journal entries in books of Anil. (June 2017, 9 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 9

Question 11.
(A) X sells goods toY for ₹ 2,00,000. Instead of one bill of ₹ 2,00,000, X draws three bills of exchange on Y for ₹ 40000; ₹ 60,000 and ₹ 1,00,000. What is the value involved in drawing three bills instead of one?
(B) Sunny draws a bill on Vivek for three months. On the due date, Vivek finds himself in financial difficulties and requests Sunny to renew the bill for a further period of one month. Sunny agrees to his request. What is the virtue involved in renewing the bill?
(C) What is the value involved in accepting an accommodation bill?
(D) What is the reason that a drawer cannot file a suit against drawee in case of dishonour of an accommodation bill? (June 2018, 1 x 4 = 4 marks)
Answer:
(A) Any of three bills may be put to different uses i.e., any of the bill may either be discounted, endorsed or kept till the date of maturity. For example, if X is in need of 30,000 he may get only the first bill discounted from the bank.
(B) Virtue involved is the expression of morality and humanism towards a fellow businessman by helping him in case of need.
(C) Value involved in accepting an accommodation bill is helping a friend who is temporarily in need of money.
(D) Because accommodation bills are drawn without consideration.

Question 12.
X draws a bill on Y. Y accepts the same. Can Y endorse the bill to Z? (Dec 2021, 1 mark)
Answer:
No, Y cannot endorse the bill to Z because Y is drawee only. X, the drawer can do so.

Question 13.
What journal entry will be passed in the books of a drawer and drawee at the time of dishonour of Bill of Exchange in the following cases?
(i) If Bill of ₹ 10,000 was discounted from the bank and the noting charges paid by the bank was ₹ 100.
(ii) If B/R of ₹ 10,000 was endorsed in favour of C. Noting charges paid by ₹ 1o0.
(iii) If B/R is retained with a drawer and noting charges was ₹100 (Dec 2021, 4 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 10

Consignment Accounting CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note on the following:
Treatment of Abnormal Loss in case of Consignment Account. (June 2017, 5 marks)
Answer:
Abnormal Losses arises as a result of negligence) accident etc., e.g., theft, fire etc. Before ascertaining the result of the consignment, value of abnormal loss should be adjusted. The method of calculation is similar to the method of calculating unsold stock. Sometimes insurance company admits the claim in part or in full. The same should also be adjusted against such abnormal loss.

While valuing the abnormal loss the proportionate expenses are taken only up to the stage of the loss. For example, if goods are lost in the transit on way to the consignee’s place, the value of abnormal loss will include the basic cost of the goods plus proportionate expenses of the consignor only and not the proportionate expenses of consignee because consignee has spent nothing on account of these goods.

Treatment of Abnormal Loss
(i) For Abnormal Loss –
Abnormal Loss A/c Dr,
To Consignment A/c

(ii) For the insurance claim due I received by the consignor –
Insurance Co./Bank A/c Dr.
To Abnormal Loss A/c

(iii) It goods are not insured –
Profit & Loss A/c Dr.
To Abnormal Loss A/c

(iv) For transferring the net loss –
Profit & Loss A/c Dr.
To Abnormal Loss A/c

Question 2.
Write short note on the following:
Operating cycle of Consignment Arrangement. (June 2018, 5 marks)
Answer:

  • Operating Cycle of Consignment Arrangement:
  • Goods are sent by consignor to the consignee
  • Consignee may pay some advance or accept a bill of exchange
  • Consignee will incur expenses for selling the goods
  • Consignee maintains records of all cash and credit sale
  • Consignee prepares a summary of results called as Account sales
  • Consignor pays commission to the consignee.

Question 3.
Write short notes on Overriding Commission. (Dec 2021, 3 marks)
Answer:
Overriding Commission: It is an extra commission allowed over and above, the normal Commission is generally offered for the following reasons:

  • When the agent is required to put in hard work in introducing a new product in the market.
  • Where he is entrusted with the work of šupervising the performance of other agents in a particular area.
  • For effecting sales at prices higher than the price fixed by the consignor.

Distinguish Between

Question 4.
Differences between sale arid consignment. (Dec 2017, 5 marks)
Answer:
Difference between Sale and Consignment:
1. In sale the property in goods is transferred to the buyer immediately where as in consignment the property transferred to the buyer only when goods are sold by the consignee. The ownership of goods remains with the consignor when goods are transferred to the consignee by the consignor.

2. In sale, the risk attaching to the goods passes with ownership to the buyer, in case of a consignment, the risk attaching to the goods does not pass to the consignee who acts as a mere agent. it there is any damage or loss to the goods it is borne by the consignor provided the consignee has taken reasonable care of the goods and the damage or loss is not due to his negligence.

3. The relationship of consignor and consignee is that of a principal and an agent as in a contract of agency whereas the relationship of buyer and seller is governed by the Sale of Goods Act.

4. Unsold goods on consignment are the property of the consignor and may be returned if not saleable in the market whereas goods sold on sale basis are normally not returnable unless there is some defect in them.

Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material

Question 5.
Difference between Sale and Consignment (Dec 2019, 5 marks)
Answer:
Difference between Sale and Consignment:
1. In sale the property in goods is transferred to the buyer immediately where as in consignment the property transferred to the buyer only when goods are sold by the consignee. The ownership of goods remains with the consignor when goods are transferred to the consignee by the consignor.

2. In sale, the risk attaching to the goods passes with ownership to the buyer, in case of a consignment, the risk attaching to the goods does not pass to the consignee who acts as a mere agent. it there is any damage or loss to the goods it is borne by the consignor provided the consignee has taken reasonable care of the goods and the damage or loss is not due to his negligence.

3. The relationship of consignor and consignee is that of a principal and an agent as in a contract of agency whereas the relationship of buyer and seller is governed by the Sale of Goods Act.

4. Unsold goods on consignment are the property of the consignor and may be returned if not saleable in the market whereas goods sold on sale basis are normally not returnable unless there is some defect in them.

Descriptive Questions

Question 6.
What is Del Credere commission? (Dec 2013, 3 marks)
Answer:
Sometimes the consignor allows an extra commission to the consignee in order to cover the risk of collection from customers, on account of credit sales which is known as Del Credere Commission. Naturally, if debt is found to be irrecoverable the same must be borne by the consignee. There will be no effect in the books of consignor. In short, the credit sales will be treated as cash sales to consignor. If no Del Creciere Commission is given by the consignor to the consignee, the amount of Bad Debts must be borne by the consignor.

Practical Questions

Question 7.
Answer the following question (give workings wherever required):
From the following particulars, calculate the value of unsold goods on consignment:

Goods sent on consignment (1500 kgs.) 3,30,000
Consignor’s expenses 13,000
Consignee’s non-recurring expenses 7,000
Consignee’s recurring expenses 3,500
Goods sold by consignee (1000 kgs.) 3,50,000
Wastage treated as normal (100 kgs.)

(Dec 2013, 2 marks)
Answer:
Value of unsold Goods:
Unsold quantity = 1,500 -1,000 – 100 = 400 Kgs.
Cost of goods sent (3,30,000) + Consignor’s Exp. (13,000) + Consignee’s
non-recurring exp. (7,000) = 3,50,000.
Value of unsold goods = [3,50,000 / (1,500 – 100)] × 400 = ₹ 1,00,000.

Question 8.
On 1st July, 2013 B. Dufta of Kolkata consigned 250 Computers costing ₹ 28,000 each to T. Ramasami, Chennal. Expenses of ₹ 17,000 were met by the consignor. T. Ramasami spent ₹ 14,500 for clearance on 31st July 2013 and selling expenses were ₹ 1,500 per computer as and when the sale made by consignee. T. Ramasami sold on 4th September 2013, 150 computers at ₹ 40,000 per computer and again on 21st September, 75 computers at ₹ 42,500.

Mr. Ramasami was entitled to a commission of ₹ 1,500 per computer sold plus one-fourth of the amount by which the gross sale proceeds less total commission thereon exceeded a sum calculated at the rate of ₹ 35,000 per computer sold. T. Ramasami sent the account sale and the amount due to B. Dutta on 30th September 2013 by bank demand draft. You are required to show the consignment account and T. Ramasami’s account in the books of B. Dutta. (June 2014, 8 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 1
Working Notes:
(i) Calculation of Commission
Let ‘x’ be total commission
x = (225 × 1,500) + \(\frac{1}{4} \) [60,00,000 + 31,87,500 – x – 1 (35,000 × 225)]
x = 3,37,500 +\(\frac{1}{4} \) (91,87,500 – x – 78,75,000)
x = 3,37,500 + 3,28,125 – \(\frac{x}{4} \)
\(\frac{5}{4} \)x=6,65,625
x = 5,32,500
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 2

Question 9.
Answer the following questions (Give workings):
Ajay of Jaipur sent goods of ₹ 2,50,000 to Vijay of Mumbai on consignment. Ajay paid ₹ 8,500 as railway freight and ₹ 4,240 as insurance. 2% goods are damaged In the Vijay’s godown due to normal circumstances. Vijay incurred cartage ₹ 5,140 and selling expenses ₹ 14,700. Calculate the value of stock of unsold 15% of goods sent to Vijay. ₹ 3,25,000 is total cost of 6500 units, consignor’s expenses are ₹ 65,000, units lost in transit was 700 units and consignee’s non-recurring expenses amounted to ₹ 4,300, what will be the value of stock? (Dec 2014, 2 marks each)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 3
(h) Cost of 6500 units = Total cost + Consigner expenses = 3,25,000 + 65,000 = ₹ 3,90,000
Cost of 700 units = ( 3,90,000 ÷ 6.500) × 700 = ₹ 42,000
Value of closing stock = 6500 unit cost price Cost of units lost in transit = ₹ 3,90,000 – ₹ 42,000 = ₹ 3,48,000
Add: Non-recurring expenses = ₹ 4,300
Total cost price of 5800 units = ₹ 3,52,300

Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material

Question 10.
Answer the question:
MR NAITIK sends goods to the value of ₹ 9,37,500 at cost to MR JATIN on a consignment basis to be sold at 5% commission on sales on 01.01.2015. Jatln accepted a bill of ₹ 2,50,000 drawn by Naitik for 4 months on the same date. Naitik discounted the bill with his banker @ 15% p.a. on 04.02.2015. Naltik Incurred ₹ 75,000 by way of freight and other expenses, whereas expenses of Jatin were ₹ 50,000 out of which 60% were non-recurring. Jatin sent the final balance of ₹ 7,68,750 to Naitik on 31.03.15 along with account sales. The Gross Profit margin is 25% on Sales and 10% of Goods Remaining unsold with Jatin.
You are required to prepare:
(i) Consignment Account and
(ii) Jatin Account-in the books of Mr. Naitik. (June 2015, 8 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 4
Working Notes:
1. Calculation of amount of goods sold on consignment:
\(\frac{9,37,500}{1-0.25} \times 0.90\) = ₹ 11,25,000

Question 11.
IRANI & Co., of Chennal, had consigned 6000 shirts to Vikram of Jaipur at cost of ₹ 425 each. Irani & Co., paid freight ₹ 50,000 and insurance ₹ 7,500. During the transit 550 shirts were totally damaged by fire. Vikram took delivery of the remaining shirts and paid ₹ 82,000 on customs duty. Vikram had sent a bank draft to Iraní & Co., for ₹ 3,50,000 as advance payment. 5000 shirts were sold by him at 550 each. Expenses incurred by Vikram on godown rent and advertisement, etc., amounted to ₹ 12,000. He is entitled to a commission of 5%. One of the customer to whom the goods were sold on credit could not pay the value of 40 shirts which is not recoverable. Vikram settled his account immediately. Nothing was recovered from the insurer for the damaged goods.
You are required to prepare:
(i) Consignment to Vlkram Account.
(ii) Vikram Account – in the book of IRANI & Co. (June 2016, (4+1)+2 = 7 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 5

Question 12.
From the following particulars unsold stock on Consignment.

Goods sent (1000 kgs.) ₹ 20,000
Consignor’s expenses ₹ 4,000
Consignees non-recurring expenses ₹ 3,000
Sold (800 kgs.) ₹ 40,000
Loss due to natural wastage (100 kgs.)

(June 2019, 3 marks)
Answer:
Value of Unsold Stocks

Total cost of goods sent 20,000
Add: Consignor expenses 4,000
Add: Non-recurring expenses 3,000
Cost of (1,000 Kgs – 100 Kgs) = 900 Kgs 27,000

∴ Value of unsold stock (1,000- 800- 100) = 100 Kgs. will be = 27,000 × (100 Kgs. / 900 Kgs.) = ₹ 3000.

Repeatedly Asked Questions
Question Frequency
1. Difference between Sale and Consignment 17- Dec, 19- Dec 2 Times

Joint Venture CMA Inter Financial Accounting Study Material

Practical Questions

Question 1.
Answe the question:
X and Y entered into a joint venture for purchase and sale of some household items. They agreed to share profits and losses in the ratio of their respective contributions. X contributed ₹ 10,000 in cash and Y ₹ 13,000. The whole amount was placed in a Joint Bank Account. Goods were purchased by X for ₹ 10,000 and expenses paid by Y amounted to ₹ 2,000. They also purchased goods for ₹ 15,000 through the Joint Bank Account. The expenses on purchase and sale of the articles amounted to ₹ 6,000 (including those met by Y). Goods costing ₹ 20,000 were sold for ₹ 45,000 and the balance were lost by fire. Prepare Joint Venture Account, Jo1nt Bank Account and the Ventures’ Accounts closing the venture. (Dec 2014, 8 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 6

Question 2.
JIBAN and MITRIK decided to work in joint venture with the following scheme, agreeing to share profits in the ratio of 2/3 and 1/3. They guaranteed the subscription aL par of 50 lakhs shares of ₹ 10 each in RAINBOW LTD. and to pay all expenses up to allotment in consideration of RAINBOW LTD. issuing to them 3,00,000 other shares of ₹ 10 each fully paid together with a commission @ 5°’ in cash which will be taken by J IBAN and MITRIK in 3:2.
Co-ventures introduced cash as follows:
JIBAN: Stamp charges, etc. ₹ 1,65,000
Advertising charges ₹ 1,35,000
Car expenses ₹ 1,54,000
Printing charges ₹ 1,88,000
MITRIK: Rent ₹ 1,30,000
Solicitor’s charges ₹ 80,000
Application tell short of the 50 lakhs shares by 1,20,000 shares and MITRIK. introduced ₹ 12,00,000 for the purchase of those shares.

The guarantee having been fulfilled, Rainbow Ltd. handed over to the venturers 3,00,000 shares and also paid the Commission in cash. All their holdings were subsequently sold by the venturer MITRIK receiving ₹ 12,50,000 and JIBAN ₹ 25,00,000.
You are required to prepare the:
(i) Memorandum Joint Venture Account and
(ii) Joint Venture Account with MITRIK – in the Books of JIBAN. (Dec 2015, 6 + 2 = 8 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 7

Question 3.
THITAN of Tatanagar and NITAN of Nagpur entered into a Joint Venture to trade together in the buying and receiving of cheap machinery. Profit or loss to be shared in the ratio of 2:3. Thitan undertook to make the purchases and Nitan to effect sales.

NITAN remitted ₹ 1,50,000 to Thtan towarus the Joint Venture. Thitan Purchased machinery worth ₹ 1,20,000 and paid ₹ 57,000, for repairs of these, 2.5% as buying commission and ₹ 5,400 for other Sundry expenses. He then sent all the machines purchased and repairtd to Nitan of Nagpur. While taking delivery of the machinery at Nagpur, Nitan incurred ₹ 9,000 towards Railway Freight and ₹ 4,200 towards Octroi. He sold part of the machinery for ₹ 2,10,000 and kept the remaining for himself at an agreed value of ₹ 45,000. Other exprises of Nitan were:
(i) Godown rent ₹ 2,700
(ii) Insurance ₹ 3,360
(iii) Brokerage ₹ 4,980; and
(iv) Miscellaneous ₹ 3,840
Both the parties decided to close the venture at this stage.
You are required to prepare the
(i) Memorandum Joint Venture Account showing profit of me Business.
(ii) Joint Venture with Nitan Account in the Books of Thitan. (Dec 2016, 5+2 = 7 marks)
Answer:
Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material 8

Bills of Exchange CMA Inter Financial Accounting Notes

Bill of Exchange
An instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain some of money only to the order of the certain person or to the bearer of the instrument”.

Discounting a Bill
If the holder of a bill wants to get the money of the bill before its due date, he can do so by selling the bill to a bank or a Discounting House who in consideration of a charge called discount, provides him with ready cash. This is known as discounting the bill.

Dishonour of Bill
Dishonour of a Bill means that the acceptor refuses to honour his commitment on due date and for this, payment of the bill on presentation does not take place.

Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material

Renewal of Bills
Sometimes the drawee of a bill is not able to meet the budget on due date. He may request the drawer to draw a new Bill for the amount due. Sometimes he pays a certain amount out and accepts a first bill for the balance for which he has to pay a certain amount of interest which is either paid in cash or is included with the fresh bill. This bill is known as Renewal of Bills.

Retirement of Bill
Sometimes the drawee pays the bu! before the date of maturity. Under the circumstances, the drawer allows certain amount of rebase or discount which is calculated on certain percentage p.a. basis. The rebate is calculated from the date of payment to the date of maturity.

Types of Bills of Exchange

  • Trade bill: This bill is drawn to settle a trade transaction.
  • Accommodation bill: This bill is used without a trade transaction and is for mutual benefit.

Insolvency of Drawee (Acceptor)
Insolvency of acceptor means that he cannot pay the amount owed by him. Therefore, on insolvency of the acceptor, bill will be treated as dishonoured and entries for dishonour of bill will be passed in the books of respective parties.

Consignment Accounting CMA Inter Financial Accounting Notes

Consignment Accounting
In case of direct selling, the company usually has depots all over. The stocks are transferred to these depots and from there finally sold to ultimate customers, This involves huge expenses and arid problems of maintaining the same on a permanent basis. Hence, the firm could appoint agents to whom stocks will be given. These agents distribute the products to ultimate customers and receive commission from the manufacturer. One such way of indirect selling is selling through consignment agents.

Consignor
He is the person who sends goods to agents e.g. a manufacturer or wholesaler.

Consignee
He is the agent to whom goods are sent for selling.

Proforma Invoice
When the consignor sends the goods to the consignee, he prepares only a proforma invoice and not an invoice. A proforma invoice looks like an invoice but is really not one.

Account Sales
This is a periodical statement prepared by consignee to be sent to the consignor giving details of all sales (cash and credit), expenses incurred and commission due for sales, destroyed-in-transit or in godown and deducting the amount of advance remitted by him.

Normal Loss
Normal Losses arise as a result of natural causes, e.g. evaporation, leakage, breakage etc., and they are inherent in nature. Since normal loss is a charge against gross profit no additional adjustment is required for this purpose.

Bills of Exchange, Consignment, Joint Venture - CMA Inter Financial Accounting Study Material

Abnormal Losses –
Abnormal Losses arises as a result of negligence/accident etc., e.g., theft, fire etc. Before ascertaining the result of the consignment, value of abnormal loss should be adjusted.

Joint Venture CMA Inter Financial Accounting Notes

Joint Venture Accounts
A Joint Venture is a temporary form of business organization. Two or more people having requisite skill sets come together to form a temporary. partnership. This is called a Joint Venture.

Basic Features
The basic features of a Joint Venture business are:

  • It is done for a specific purpose and hence has a limited duration.
  • The partners are called co-venturers.
  • The profit or loss on a joint venture is shared between the co-venturers in the agreed ratio.
  • The co-venturers may or may not contribute initial capital.
  • The JV is dissolved once the purpose of the business is over.
  • The accounts of the co-venturers are settled immediately on dissolution.
  • A joint venture has no name.

Bills of Exchange, Consignment, Joint Venture – CMA Inter Financial Accounting Study Material Read More »

Accounting Fundamentals – CMA Inter Financial Accounting Study Material

Accounting Fundamentals – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Accounting Fundamentals – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note:
(c) Accounting convention of consistency; (Dec 2012, 5 marks)
Answer:
In order to enable the management to draw important conclusions regarding the working of a company over a number of years it is essential that accounting practices and methods remain unchanged from one accounting period to another. According to AS-1 consistency is a fundamental assumption and it is assumed that accounting policies are consistent from one period to another. Where this assumption is not followed, the fact should be disclosed with proper reasons.

Kohler has talked about three types of consistencies:

  • Vertical consistency: Consistency maintained within the interrelated financial statements of the same date.
  • Horizontal consistency: This enables the comparison of performance of the organization in one year with its performance of previous/next year.
  • Third-dimensional consistency: Performance of one organization can be compared with that of another organization in the same industry.

Question 2.
Write short note on the following:
The Accrual Concept (June 2017, 5 marks)
Answer:
The Accrual Concept:
The accrual concept is based on recognition of both cash and credit transactions. In case of a cash transaction, owner’s equity is instantly affected as cash either is received or paid. In a credit transaction, however, a mere obligation towards or by the business is created. When credit transactions exist (which is generally the case), revenues are nt the same as cash receipts and expenses are not same as cash paid during the period.

When goods are sold on credit as per normally accepted trade practices, the business gets the legal right to claim the money from the customer. Acquiring such right to claim the consideration for sale of goods or services is called accrual of revenue. The actual collection of money from customers could be at a later date.

Similarly, when the business procures goods or services with the agreement that the payment will be made at a future date, it does not mean that the expense effect should not be recognized. Because an obligation to pay for goods or services is created upon the procurement thereof, the expense effect also must be recognized. Today’s accounting systems based on accrual concept are called as Accrual System or Mercantile System of Accounting.

Accounting Fundamentals - CMA Inter Financial Accounting Study Material

Question 3.
Write short notes on the following:
(a) Objectives of Accounting
(b) Methods! Criteria for the selection and application of Accounting policies (Dec 2017, 5 marks each)
Answer:
(a) Objectives of Accounting:
The main objective of Accounting is to provide financial information to stakeholders. This financial information is normally given via financial statements, which are prepared on the basis of Generally Accepted Accounting Principles (GAAP). There are various accounting standards developed by professional accounting bodies all over the world.

In India, these are governed by The Institute of Chartered Accountants of India, (ICAI). In the US, the American Institute of Certified Public Accountants (AICPA) is responsible to lay down the standards. The Financial Accounting Standards Board (FASB) is the body that sets up the International Accounting Standards. These standards basically deal with accounting treatment of business transactions and disclosing the same in financial statements:

The following are the main objectives of accounting:

  • To ascertain the amount of profit or loss made by the business i.e. to compare the income earned versus the expenses incurred and the net result thereof.
  • To know the financial position of the business i.e. to assess what the business owns and what it owes.
  • To provide a record for compliance with statutes and laws applicable.
  • To enable in readers to assess progress made by the business over a period ot time.
  • To disclose information needed by different stakeholders.

(b) The major considerations governing the selection and application of accounting policies are:
1. Prudence: Generally maker of financial statements has to face uncertainties a the time of preparation of financial statement, these uncertainties may be regarding collectability of recoverable, number of warranty claims that may occur. Prudence means making of estimates that are required under conditions of uncertainty.

2. Substance over form: It means that transactions should be accounted for in accordance with actual happening and economic reality of the transactions not by its legal form.

3. Materiality: financial statement should disclose all the items and facts which are sufficient enough to influence the decisions of reader or/user of financial statement.

Question 4.
Write short note on the following:
The Accrual concept (June 2019, 5 marks)
Answer:

The Accrual Concept:
The accrual concept is based on recognition of both cash and credit transactions. In case of a cash transaction, owner’s equity is instantly affected as cash either is received or paid. In a credit transaction, however, a mere obligation towards or by the business is created. When credit transactions exist (which is generally the case), revenues are nt the same as cash receipts and expenses are not same as cash paid during the period.

When goods are sold on credit as per normally accepted trade practices, the business gets the legal right to claim the money from the customer. Acquiring such right to claim the consideration for sale of goods or services is called accrual of revenue. The actual collection of money from customers could be at a later date.

Similarly, when the business procures goods or services with the agreement that the payment will be made at a future date, it does not mean that the expense effect should not be recognized. Because an obligation to pay for goods or services is created upon the procurement thereof, the expense effect also must be recognized. Today’s accounting systems based on accrual concept are called as Accrual System or Mercantile System of Accounting.

Question 5.
Write short notes on the following:
Users of Accounting Information (Dec 2019, 5 marks)
Answer:
Users of Accounting Information
Accounting provides information both to internal users as well as external users. The internal users are all the organizational participants, at all levels of management (i.e. top, middle, and lower). Generally top: level management requires information for planning. middle level management which requires information for controlling the operations. For internal use, the information is usually provided in the form of reports, for instance, Cash Budget Reports, Production Reports, Idle Time Reports, Feedback Reports, whether to retain or replace an equipment decision reports, project appraisal reports, and the like.

The external users (e.g. Banks, Creditors) do not have direct access to all the records of an enterprise, they have to rely on financial statements as the source of information. External users are basically, interested in the solvency and profitability of an enterprise.

Question 6.
Write short flotes on Source documents: (Dec 2021, 3 marks)
Answer:
Source documents:
Vouchers are the documentary evidence of the transactions so happened. Source documents at the basis on which transactions are recorded in subsidiary books, i.e source documents are the evidence and proof of transactions.

Question 7.
Write short notes on Errors of principle. (Dec 2021, 3 marks)
Answer:
An error of principle: Entering revenue expenses as capital expense or vice versa or entering revenue receipt as capital receipt or vice versa.

Accounting Fundamentals - CMA Inter Financial Accounting Study Material

Question 8.
Write short notes:
(a) Advantages of Double Entry System.
(b) The main objective of the Depreciation Policy. (Dec 2022, 5 marks each)

Distinguish Between

Question 9.
The distinction between Fundamental ‘accounting assumptions and Accounting policies. (Dec 2018, 5 marks)
Answer:

Basis of Discountion Fundamental Accounting Assumptions Accounting Policies
1. Number There are only three fundamental accounting assumptions viz. Going Concerned, Consistency, and Accrual. There is no single list of accounting policies which are applied in all circumstances. As a result, there may be different accounting policies adopted by different enterprises.
2. Disclosure if followed No disclosure is required if all the fundamental assumptions have been followed. Disclosure is required if a particular accounting policy has been followed
3. Disclosure not ‘followed In case the fundamental assumptions are not followed; the fact has to be disclosed in the financial statements together with the reasons. In case, the policy is changed in subsequent year, the reasons for such change and the resulting financial consequences have to be disclosed.
4. Choice There is no choice. The firm has a choice to select a particular policy.

Descriptive Questions

Question 10.
Answer the following question (give workings wherever required):
State briefly the three fundamental accounting assumptions. (Dec 2013, 2 marks)
Answer:
The three fundamental assumptions are (a) going concern; (b) consistency; and (c) accrual. Going Concerned: It is assumed that the concern would be continuing in operation for the foreseeable future. It is also assumed the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of operations.

Consistency: The accounting policies followed are consistent from one accounting period to another.
Accrual: The revenues and expenses are accrued, that is recognized as they are earned or incurred, and recorded in the financial statements of the periods to which they relate.

Question 11.
What are the steps or phases of ‘Accounting Cycle’? (Dec 2013, 4 marks)
Answer:
Steps Phases of Accounting Cycle:

  • Recording of Transaction: As soon as a transaction happens it is at first recorded in subsidiary book.
  • Journal: The transactions are recorded in Journal chronologically.
  • Ledger: All journals are posted into ledger chronologically and in a classified manner.
  • Trial Balance: After taking all the ledger account’s closing balances, a Trial Balance is prepared at the end of the period for the preparations of financial statements.
  • Adjustment Entries: All the adjustments entries are to be recorded properly and adjusted accordingly before preparing financial statements.
  • Adjusted Trial Balance: An adjusted Trial Balance may also be prepared.
  • Closing Entries: All the nominal accounts are to be closed by the transferring to Trading Account and Profit and Loss Account.
  • Financial Statements: Financial statements can now be easily prepared which will exhibit the true financial position and operating results.

Question 12.
What is a depreciable cost? (Dec 2021, 1 mark)
Answer:
Depreciable cost = Cost of asset- Scrap value.

Question 13.
Name the side on Which increase in capital is recorded. (Dec 2021, 1 mark)
Answer:
Credit side.

Question 14.
Under which accounting concept provision ¡s made for doubtful debts. (Dec 2021, 1 mark)
Answer:
Prudent concept.

Question 15.
Why is the capital of the owner shown on the liability side of the balance sheet? (Dec 2021, 1 mark)
Answer:
Due to separate entity concept.

Question 16.
What type of account is a revaluation account? (Dec 2021, 1 mark)
Answer:
Nominal account.

Accounting Fundamentals - CMA Inter Financial Accounting Study Material

Question 17.
What is the traditional function of accounting? (Dec 2021, 1 mark)
Answer:
Recording of financial transactions.

Question 18.
Should a transaction be first recorded in a journal or Ledger. Why? (Dec 2021, 1 mark)
Answer:
Transactions are first recorded in a journal because it is a book of original entries.

Question 19.
On which basis of accounting outstanding expenses are not recorded? (Dec 2021, 1 mark)
Answer:
Cash basis of accounting.

Question 20.
Name the error committed by violating the wies of accounting. (Dec 2021, 1 mark)
Answer:
Error of principle.

Question 21.
Define merchandise. (Dec 2021, 1 mark)
Answer:
Merchandise means goods for resale.

Question 22.
Which transactions will:
(i) Decrease the assets and decrease the capital.
(ii) Increase the assets and increase the liabilities.
(iii) Increase the assets and decrease other assets.
(iv) Decrease the assets and decrease the liabilities. (Dec 2021, 4 marks)
Answer:
(i) Drawing or expenses.
(ii) Purchase of an asset on credit.
(iii) Purchase or sale of an asset in cash.
(iv) Payment of liability.

Question 23.
When you proceed to reconcile the bank account starting with ‘credit’ cash book Balance, how is the following dealt with and why?
(i) Cheque issued but not presented for payment
(ii) Cheque deposited but not yet credited.
(iii) Bank charges charged by the bank not recorded in the cash book.
(iv) Interest allowed by the hank is not recorded in the cash book. (Dec 2021, 4 marks)
Answer:
(i) Cheques issued but not yet presented for payment are deducted because the bank shows lower overdrawn balance.
(ii) Cheques deposited but not deared are added because the bank shows a higher overdrawn balance.
(iii) Bank charges are added because the bank shows a higher overdrawn balance.
(iv) Interest allowed is deducted because the bank shows lower overdrawn balance.

Question 24.
Why is goodwill considered an “Intangible asset” but not a “fictitious assets? (Dec 2021, 2 marks)
Answer
Goodwill cannot be seen or touched. It can only be felt. Hence, it is treated an intangible asset. But it is not a fictitious asset because fictitious do not have a value. Whereas Goodwill has value and it can be purchased or sold with any other asset.

Practical Questions

Question 25.
Mr. X is owner of a Cinema Hall. He spent a heavy amount for complete renovation of the hail, for installation of air-conditioning machines and for sitting arrangement with cushion seats. As a result the revenue has been doubled. He also spent for few more doors for emergency exit. State your opinion about the treatment of the entire expenditure. (Dec 2012, 2 marks)
Answer:
If due to any expenditure, the future benefits from the assets increases beyond its previously assessed standard of performance. then it should be capitalized. The size of the expenditure is not Important for capitalizing the expenditure. In the present case, renovation expenses should be capitalized because it has enhanced the revenue-generating capacity of the hail but expenditure for making more emergency exit does not enhance the revenue-generating capacity of the hall, so it should be charged to revenue.

Accounting Fundamentals - CMA Inter Financial Accounting Study Material

Question 26.
The total of debit side of the Trial Balance of Lotus Stores as at 31.03.2012 is ₹ 3,65,000 and that of the credit side is ₹ 2,26,000. After checking, the following mistakes were discovered:

Items of account Correct figures (as it should be) (₹) Figures as it appears in the Trial Balance (₹)
Opening stock 15,000 10,000
Rent and rates 36,000 63,000
Sundry creditors 81,000 18,000
Sundry debtors 1,04,000 1,58,000

Ascertain the correct total of the Trial Balance. (Dec 2012, 5 Marks)
Answer:
In the books of Lotus Stores calculation of correct Total of Trial Balance

Particulars Dr. Cr.
Total of Trial Balance as per on 31.03.12 3,65,000 2,26,000
Add understatement of op. stock 5,000
Less: overstatement of Rent & Rates 27,000
Add: understatement of sundry creditors 63,000
Less: overstatement of sundry debtors 54,000
Correct Total 2,89,000 2,89,000

Question 27.
State whether the following items are ¡n the nature of capital, Revenue and/or Deferred Revenue Expenditure:
(i) Expenditure on special advertising campaign ₹ 66,000; suppose the advantage will be received for six years.
(ii) An amount of ₹ 8000 spent as legal charges for abuse of trademark.
(iii) Legal charges of ₹ 15,000 incurred for raising loan.
(iv) Share issue expenses ₹ 5,000.
(v) Freight charges on a new machine ₹ 1,500 and erection charges ₹ 1,800 for that machine. (June 2013, 1 x 5 = 5 marks)
Answer:
(i) As per Para 56 of AS 26, the expenditure incurred on intangible items would have to expense off when they are incurred. So, the Advertisement Expenses is not carried forward to the next year, and the full amount is shown in the Profit & Loss A/c. So, ₹ 66,000
consider for revenue expenditure.
(ii) Revenue expenditure ₹ 8,000
(iii) Capital expenditure ₹ 15,000
(iv) Capital expenditure ₹ 5,000
(v) Capital expenditure = 1,500+ 1,800 = ₹ 3,300.

Question 28.
Answer the following questions (give workings wherever required):
(i) A trader acquired furniture & fittings for ₹ 10,000 but included the same in purçhase account. He paid ₹ 5,000 to a supplier which was omitted to be recorded in the books. State the types of errors and pass journal entries t rectify the errors.

(iii) The company maintains 10% of debtors as provision towards bad debts. It has routed all bad debts through the provision account. The opening balance of provision as on 01.04.2012 was ₹ 68,000. The closing provision i.e. on 31st March, 2013 was ₹ 92,000. Bad debts written off debited to provision account was ₹ 28,000. How much should be debited to Profit & Loss Account towards provision for doubtful debts for the year ended 31st March, 2013? (Dec 2013, 2 marks each)
Answer:
(i) The first error is error of principle. The capital expenditure has been claimed as revenue expenditure. The second one is error of omission.
The Journal Entries are:
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 1

Question 29.
State with reason whether the followings are capital or revenue expenditure:
(i) Freight charges of ₹ 12,000 incurred foie machinery purchased for ₹ 2,00,000.
(ii) ₹ 90,000 being expenditure incurred for a well-equipped labour welfare centre.
(iii) Compensation of ₹ 1,50,000 each paid to three employees who were retrenched.
(iv) Purchase of TV set for ₹ 30,000 to be installed in the reception hall. (Dec 2013, 1 x 4 = 4 marks)
Answer:
(i) Expenditure incurred towards freight charges for bringing the machinery to the location and till regular production is capital expenditure. Hence, the freight charge is to be capitalized.
(ii) Labour welfare centre is a permanent addition and therefore a capital expenditure.
(iii) Compensation to retrenched employees will not bring any permanent benefit and hence is revenue expenditure.
(iv) Television set purchased is a capital expenditure unless the person acquiring the same is a dealer of television sets.

Question 30.
Answer the question:
(b) Pass necessary journal entries to rectify the following errors assuming’ that the errors were detected after the preparation of final accounts:
(i) Return inward book was undercast by ₹ 18,000.
(ii) Goods purchased for proprietor’s use for ₹ 10,000 debited to purchase account.
(iii) ₹ 5,200 paid for freight on machinery was debited to freight account.
(iv) No adjustment entry was passed for an amount of ₹ 15,000 relating to outstanding rent. ‘
(v) Furniture of ₹ 13,000 purchased from Chandra Furniture House was entered in purchase book.
(vi) ₹ 10,000 received from Mohan has been credited to Sohan. (Dec 2014, 4 marks)
Answer:
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 2

Question 31.
Answer the question:
(a) Journalise the following transactions in the books of SHIVA.
01.05.2015 – Started business with ₹ 5,00.000 of which 50% amount was borrowed from SB! and 20% amount was borrowed from his sister Patta.
05.05.2015 – Purchased goods from China Mart worth ₹ 1,60,000 at 25% trade discount and 40% amount paid in cash.
08.05.2015 – Sold goods to Satish ₹ 60,000 at 20% trade discount and received ¼ amount in cash.
15.05.2015 – Paid to Chinu Mart ₹ 69,500 in full settlement of A/c. (June 2015, 4 marks)
Answer:
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 3

Question 32.
Answer the question.
(a) Trial Balance of ANKIT LTD. failed to agree and the difference was put into Suspense Account pending investigation which discovered the following:
(i) Discount received ₹ 1,320 had been debited to Discount allowed as ₹ 132.
(ii) Goods of the value of ₹ 200 returned by Kishan were entered in the Sales Day Book and posted therefrom to the credit of Krishan as ₹ 20.
(iii) A credit purchase of ₹ 500 from N. Kumar was recorded as sale to M. Kumar for ₹ 50.
(iv) A credit sale of machine of P. Dass for ₹ 600 recorded through Sales Day Book as sale to C. Dass for ₹ 60.
Required:
Pass the Rectifying Entries in the Book of Ankit Ltd. (Dec 2015, 4 marks)
Answer:
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 4

Accounting Fundamentals - CMA Inter Financial Accounting Study Material

Question 33.
Answer the question.
MILTON LTD. sold goods worth ₹ 1,00,000 to NARMADALTD. Narmada Ltd. asked for discount of ₹ 16,000 which was agreed by Mton Ltd. The sale was effected and Goods despatched. After receiving, Goods Worth ₹ 14,000 was found defective, which they returned immediately. They made the payment of ₹ 70,000 to Milton Ltd. The accountant of Milton Ltd. booked the Sales for ₹ 70,000. Discuss whether the accounting entry passed by the accountant of the company is correct? (Dec 2015, 4 marks)
Answer:
The accounting entry passed by the accountant of the company is incorrect as it does not depict the original transaction. Sates should be shown at the gross amount and thereafter, entry of sales return should be passed. The goods returned cost 14,000 on which discount was availed which needs to be reversed.
Discount = \(\frac{14,000 \times 16,000}{1,00,000}\)
= 2,240

Question 34.
(a) The trial balance of M/s SEWADA & CO., on 31st March 2016 did not agree. In order lo close the books, the accountant placed the difference of ₹ 12,385 (Dr.) to Supens Account for necessary adjustments In the next period. On 30th April, 2016 the following errors, arising in 2015-16 were detected:
(i) ₹ 1,000 allowed as cash discount to a trade debtor was not debited to the discount account.
(ii) Credit sale of ₹ 4,850 was posted to the credit of the customer’s account as ₹ 4,535.
(iii) Machinery purchased for ₹ 50,000 in cash was posted to the Purchases Account in the ledger.
(iv) Sales Book was overcast by ₹ 2,000 in February 2016.

Required:
(a) Pass the necessary Journal Entries to rectify these errors.
(b) Prepare suspense account in the book of SEWADA & CO. (June 2016, 5 +2 =7 marks)
Answer:
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 5

Question 35.
The Trial Balance of a concern has agreed but the following mistakes were discovered after the preparation of Final Accounts.
(i) No adjustment entry was passed for an amount of ₹ 2,000 relating to outstanding rent.
(ii) Purchase book was overcast by ₹ 1,000.
(iii) ₹ 4,000 depreciation of Machinery has been omitted to be recorded in the book.
(iv) ₹ 600 paid for purchase of stationary has been debited to Purchase A/c.
(v) Sales books was overcast by ₹ 1,000.
(vi) ₹ 5,000 received, in respect of Book Debt had been credited to Sales A/c.
Show the effect of the above errors in Profit and Loss Account and balance Sheet. (June 2017, 6 marks)
Answer: .
Effects of the errors in Profit and Loss A/c and Balance Sheet

Profit and Loss A/c Balance Sheet
(a) Profit was overstated by ₹ 2,000 (a) Capital was also overstated by ₹ 2,000 and outstanding Liability was understated by ₹ 2,000.
(b) Gross profit was understated by ₹ 1,000 and also the Net Profit. (b) Capital was understated by ₹ 1,000.
(c) Net Profit was overstated by ₹ 4,000. (c) Machinery was overstated by 4,000 and so the Capital A/c was also overstated by ₹ 4,000.
(d) No effect on Net Profit. (d) No effect in Balance Sheet.
(e) Gross Profit & Net Profit were overstated by ₹ 1,000. (e) Capital was overstated by ₹ 1,000.
(f) Gross Profit & Net Profit were overstated by ₹ 5,000. (f) Capital & Sundry Debtors were overstated by ₹ 5,000.

Question 36.
(a) Khetan Ltd. has received two lakh subscriptions during the current year under its new scheme whereby customers are required to pay a sum of ₹ 4,500 for which they will be entitled to receive a magazine for a period of 3 years. Khetan wants to treat the entire amount as revenue for current year. Comment. (June 2017, 3 marks)

(b) Alex. Ltd. intends to set up a solar plant. Alex Ltd. has acquired a dilapidated factory, having an area of 7500 acres at a cost of ₹ 70,000 per acre. Alex Ltd. has incurred ₹ 50,00,000 on demolishing the old factory building thereon. A sum of ₹ 43,57,500 (including 5% Sales Tax) was realized from sale of material salvaged from the site. Alex Ltd. also incurred Stamp Duty and Registration Charges of 5% of Land Value, paid Legal and Consultancy Charges ₹ 5,00,000 for land acquisition, and incurred ₹ 2,00,000 on Title Guarantee Insurance. Compute the value of land acquired. (June 2017, 6 marks)
Answer: .
(a) As illustrated in AS 9 ‘Revenue Recognition’, revenue received or billed should be deferred and recognized either on a straight line basis over time or, where the items delivered vary ¡n value from period to period, revenue should be based on the sales value of the item delivered in relation to the total sales value of all items covered by the subscription.

Accordingly, in the given case the accounting treatment adopted by Khetan Ltd. to treat the entire amount as revenue for the current year is not in accordance with AS 9. The revenue should be recognized on a straight-line basis over the period of 3 years.
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 6

Question 37.
The Trial Balance of a concern Fas agreed but the following mistakes were discovered after the preparation of final Accounts.
(i) No adjustment entry was passed for an amount of ₹ 2000 relating to outstanding rent.
(ii) Purchase book was overcast by ₹ 1,000.
(iii) ₹ 4,000 depreciation of Machinery has been omitted to be recorded in the book.
(iv) ₹ 600 paid for purchase of stationary has been debited to Purchase A/c.
(v) Sales books was overcast by ₹ 1,000.
(vi) ₹ 5000 received in respect of Book Debt had been credited to Sales A/c.
Show the effect of the above errors in Profit and Loss Account and balance Sheet. (Dec 2017, 6 marks)
Answer:

Profit and Loss A/c Balance Sheet
(a) Profit was overstated by ₹ 2,000 (a) Capital was also overstated by ₹ 2,000 and outstanding Liability was understated by ₹ 2,000.
(b) Gross profit was understated by ₹ 1,000 and also the Net Profit. (b) Capital was understated by ₹ 1,000.
(c) Net Profit was overstated by ₹ 4,000. (c) Machinery was overstated by 4,000 and so the Capital A/c was also overstated by ₹ 4,000.
(d) No effect on Net Profit. (d) No effect in Balance Sheet.
(e) Gross Profit & Net Profit were overstated by ₹ 1,000. (e) Capital was overstated by ₹ 1,000.
(f) Gross Profit & Net Profit were overstated by ₹ 5,000. (f) Capital & Sundry Debtors were overstated by ₹ 5,000.

Question 38.
(a) The Trial Balance oIS Ltd. as on 31/03/2018 showed the credit in excess by ₹ 415 which was been carried to Suspense Account. On a closed scrutiny of the books, the following errors were revealed:
(i) A cheque of ₹ 3456 received from AB Ltd. after allowing it a discount of ₹ 46 was endorsed to CD Ltd. in full settlement for ₹ 3,500. The cheque was finally dishonoured but no entries are passed in the books of account.
(ii) Goods of the value of ₹ 230 returned by PQ Ltd. were entered in Purchase Day book and posted therefrom to MN Ltd. as ₹ 320.
(iii) Bad debts aggregating ₹ 505 written off during the year in Sales Ledger but were not recorded In Genéral Ledger.
(iv) Bill for ₹ 750 received from Z Ltd. for repairs to Machinery was entered in the Inward Invoice Book as ₹ 650.
(v) Goods worth ₹ 1,234 purchased from Y Ltd. on 28/03/2018 had not been entered in Day book and credited to Y Ltd. but Goods were not delivered till 5th April, 2018. The title of Goods was however passed on 28/03/2018 and was taken into stock on 31 -03-2018.
(vi) ₹ 79 paid for Freight on Machinery was debited to Freight account as ₹ 97. Pass the necessary Journal Entries to rectify the above-mentioned errors. (June 2018, 8 marks)
Answer:
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 7

Accounting Fundamentals - CMA Inter Financial Accounting Study Material

Question 39.
(a) A bookkeeper extracted the following Thai Balance as on 31st March 2018:
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 8
You are required to:
(i) State the errors giving reasons,
(ii) Redraft the Trial Balance correctly. (Dec 2018, 7 marks)
Answer:
(i) (I) Stock on 31st March 2018, will not appear in the Trial balance because it represents a part of the goods purchased but not yet sold. As the total purchases have been included in the Trial balance, there is no need of including the Closing Stock again.
(II) Machinery is an asset and thus will appear in the debit column.
(III) Wife’s loan to the business is a liability. It will appear in the credit column.
(IV) Discount allowed, being an expense, will appear in the debit column.
(V) Drawings made by the proprietor is a decrease of capital (i.e., decrease of proprietor’s claim from the business). It will appear In the debit column.
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 9

Question 40.
(a) Rectify the following errors:
(i) A Credit Sale of goods to X ₹ 3,000 posted as ₹ 30,000.
(ii) A Cash Sale of goods to Y ₹ 3,000 posted as ₹ 30,000.
(iii) A Credit Sale of furniture to ₹ 3,000 posted as ₹30,000.
(iv) A Credit Sale of goods of ₹ 3,000 to Krishan entered in the purchases book as ₹ 30,000 and posted therefrom to the credit of Kishan as ₹ 3,000.
(v) A Cash Sale of goods of ₹ 3,000 to Krishan posted to the credited of Kishan as ₹ 30,000.
(vi) A Credit Purchase of old machinery from Sohan for ₹ 17,000 was entered in the Purchases Book as purchase from Mohan for ₹ 71,000. ₹ 3,000 paid as Repair Charges of this Machinery debited to General Expenses Account.
(vii) A Bill drawn on Meenu for ₹ 30,000 was passed through bills payable book with ₹ 3,000 and posted therefrom to the credit of Meena as ₹ 300.
(viiii) Sales included a sale of furniture having a book of value of ₹ 900 for ₹ 850 on 31st March 2018. , (June 2019, 8 marks)
Answer:
Accounting Fundamentals - CMA Inter Financial Accounting Study Material 10

Question 41.
From the following particulars calculate operating profit.
Net profit. ₹ 1,00,000
Rent received. ₹ 10,000
Gain on the sale of machines. ₹ 15,000
Interest on loan paid. ₹ 18,000
Donation paid. ₹ 4,000 (Dec 2021, 2 marks)
Answer:
Operating Profit = 1,00,000 – 10,000 – 15,000 + 18,000 + 4,000 = 97,000
∵ Operating Profit = 97,000

Question 42.
Ruma Ltd. purchased a plant on 1st April 2015 for ₹ 2,40,000 it bought another plant on 1st July, 2016 for ₹ 1,60,000. On 1st January 2018 Plant bought on 1st April 2015 was sold for ₹ 1,60,000 and a fresh plant was purchased on the same date. Payment of this plant will be made as under.
1st January 2018 ₹ 40,000.
1st January 2019 ₹ 48,000.
1st January 2020 ₹ 44,000.
Payments made in 2019 and 2020 include interest of ₹ 8,000 and ₹ 4,000, respectively. Depreciation is charged at 10% P.a. on the diminishing balance method.
From the above particulars, Find out.
(i) Cost of plant bought on January 1st’, 2018.
(ii) Loss on sale of plants.
(iii) Closing balance of plant 2 and plant 3 as on 31-3-2018 (Dec 2021, 6 marks)
Answer:
(i) Cost of Plant:
40,000 + 48,000 – 8,000 + 44,000 – 4,000 = 1,20,000

(ii) Loss on sale of Plant:
WDV on 1.1.2018 2,40,000-24,000 – 21,600 – 14,580 = 179,820
Loss = 1,79,820 – 1,60,000 = 19,820

(iii) Closing balance of Plant:
Plant 2
1,60,000 – \(\left(1,60,000 \times \frac{10}{100} \times \frac{9}{12}\right) \) -14,800 = 1,33,200

Plant 3
1,20,000 – 1,20,000 × \(\frac{10}{100} \times \frac{3}{12}\)
= 1,17,000

Accounting Fundamentals - CMA Inter Financial Accounting Study Material

Question 43.
ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine amounting to ₹ 4,00,000. As on 31st March, 2021 before delivery of the machine, ABC Ltd. had to change its method of production. The new method will not require the machine ordered and so it shall be scrapped after delivery. The expected scrap value is NIL. Show the treatment of machine in the books of ABC Ltd. (Dec 2022, 5 marks)

Repeatedly Asked Questions
Question Frequency
1. Write short note on the following:
The Accrual Concept 17-June, 19 June
2 Times

Accounting Fundamentals – CMA Inter Financial Accounting Notes

Accounting Concepts
Accounting Concepts refer to the assumptions and conditions that define the parameters and constraints within which the accounting operates. They lay down the foundation for accounting principles, and ensure recording of financal facts on sound bases and logical considerations.

Accounting Conventions
Accounting Conventions are customs and methods. procedures or guidelines associated with the practical application of accounting principles.

Capital Expenditure
Capital Expenditure refers to that expenditure, benefit from which can be enjoyed by an entity over a number of accounting periods. This type of expenditure happens to be non-recurring in nature. A capital expenditure takes place when an asset or service is acquired or improvement of a fixed asset is affected.

Revenue Expenditure
Revenue Expenditure refers to that expenditure, benefit from which can be enjoyed by an entity ¡n the current accounting period. This type of expenditure happens to be recurring in nature. Revenue expenditures are incurred to carry on the regular course of operations by an organisation.

Capital Receipts
Capital Receipts refer to the receipts which are obtained by an entity from operations other than the regular operations f the entity. Capital receipts do not have any effect on the operating result during the course of a year.

Revenue Receipts
Revenue Receipts refer to the receipts which are obtained by an entity from its regular course of operations. Receipts of money in the revenue nature increase the profits or decrease the losses of a business and must be set against the revenue expenses in order to ascertain the profit for the period.

Capital Profit
Capital Profit refers to a profit which anses out of the non-operating activities of an entity. It is non-recumng in nature. Generally, capital profits arise out of the sale of assets other than inventory, or in connection with the raising of capital or at the time of purchasing an existing business.

Revenue Profit
Revenue Profit refers to a profit which arises out of the regular operating activities of an entity. It is recurring in nature.

Accounting Fundamentals - CMA Inter Financial Accounting Study Material

Capital Loss
Capital Loss refers to a loss which does not arise to an entity in the regular course of its operations.

Revenue Loss
Revenue Loss arises to an entity from the normal course of business.

Charts of Accounts
A Chart of Accounts (COA) is a listing of all accounts in the general ledger, each account accompanied by a reference number.

Double Entry System
Double Entry System of Bookkeeping is an accounting system which recognizes the fact that every transaction has two aspects and both aspects of the transaction are recorded in the books of accounts.

Journal
Journals the book of original entry in which financial transactions are firstly recorded after their occurrence in chronological order. It is in this book of accounts where the transactions are recorded in the first place.

Ledger
The book of account in which transactions are recorded in respective account after they have been entered in the journal is called the Ledger. It is the book of account in which the transactions are recorded in a classified and permanent manner. It is the final destination of all the accounts, and hence, it is also called the Book of Final Entry. The process of recording the entry in the ledger is technically known as posting.

Cash Book
The book of account that records all cash receipts and cash payments of an organization is referred to as cash book. The receipts ar entered on the debit side, while the payments are recorded in the credit side of the cash book.

Bank Book
Deviating from the traditional method of keeping an additional column for bank transactions in a double and triple-column cash book, today organizations keep a separate subsidiary book similar to cash book to record all receipts and payments made through the bank. This is known as Bank Book or Bank Journal.

Bank Reconciliation Statement
At any point of time, the balances as per cash book (bank column) and pass book should be equal in amount. But, in reality, it rarely happens due to certain specific reasons. To reconcile the balances as reflected by these two related books a statement is prepared, which ¡s referred to as the Bank Reconciliation Statement.

Trial Balance
The Trial Balance is a statement drawn up using the ledger balances to test of the arithmetical accuracy of the ledger account. The primary purpose of drafting a Trial Balance is to ensure that there are no arithmetical errors.

Depreciation
The gradual decline in the value of a tangible asset is termed as Depreciation. Thus, in ears be stated that depreciation is a part of cost of tangible fixed asset which has expired because of its usage, lapse of time, etc.

Accounting Fundamentals - CMA Inter Financial Accounting Study Material

Amortization
Amortization is a gradual and systematic writing of of intangible asset over its estimated useful life. For example, patents, purchased goodwill, and copyrights are amortized over their useful life being intangible assets.

Depletion
Depletion is the value of wasting assets extracted from quarry, mine, etc. Extraction reduces the available quantity of material.

Accounting Fundamentals – CMA Inter Financial Accounting Study Material Read More »

CMA Inter Business Laws and Ethics MCQs

CMA Inter Business Laws and Ethics MCQs – CMA Inter Business Laws and Ethics Study Material is designed strictly as per the latest syllabus and exam pattern.

CMA Inter Business Laws and Ethics MCQs

Question 1.
Fill in the Blanks based on Factories Act 1948
(i) No child shall be employed or permitted to work in any factory for more than ……………….. hours in a day.
Answer:
4½hours

(ii) No female Child shall be required or allowed to work in any factory except between ……………………. AM and PM.
Answer:
8 AM – 7 PM.

(iii) No Child shall be employed during the Night and Night means a period of at least twelve consecutive hours which shall include the interval between ………………… PM and ……………….. AM.
Answer:
10 P.M – 6 A.M.

(iv) No woman shall be required or allowed to work in any factory except between the hours of ……………………. AM and PM. (Dec 2012, 1 x 4 = 4 marks)
Answer:
6 A.M. – 7 P.M. (Sec. 66)

Question 2.
(i) A part-time employee engaged on regular basis is eligible for Bonus under Payment of Bonus Act 1965. Write only True or False.
Answer:
This statement is true.

(ii) Whether Gratuity under Payment of Gratuity Act, 1972 is payable for the period of layoff under the industrial Disputes Act 1947. Write only True or False.
Answer:
This statement is true.

(iii) Fill in the blanks:
No adult worker shall be required to allow to work in a factory

(1) for more than ……………………… hours in any week.
Answer:
48 hrs.

(2) for more than ………………… hours in any day.
Answer:
9 hrs.

(3) the period of work of adult workers in a factory shall be so fixed. that no period shall exceed ……………………. hours. (June 2013, 1 mark each)
Answer:
5 hrs.

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 3.
Choose the correct answer from the given tour alternatives:
(i) Cash is withdrawn by a customer of a bank from the automatic teller machine is an example of
(a) Express Contract
(b) Void Contract
(c) Tacit Contract
(d) Illegal Contract
Answer:
(c) Tacit Contract

(ii) Which of the following is not implied condition under The Sale of Goods Act, 1930?
(a) Sale by description
(b) Sale by discount price
(c) Sale by sample
(d) Quality or fitness
Answer:
(b) Sale by discount price

(iii) The Occupier of every factóry shall provide and maintain suitable room or rooms for the use of the children under the age of six years of women workers where the number of such women workers exceed
(a) 20
(b) 50
(c) 30
(d) 150
Answer:
(c) 30

(iv) Examine as to which of the following payments form part of “salary” under the provisions of the Payment of Bonus Act, 1965.
(a) Traveling allowance
(b) Commission on sales
(c) Dearness allowance
(d) Overtime allowance
Answer:
(c) Dearness allowance

(v) The Employees Provident Funds Act, 1952 is applicable to every establishment mentioned in Schedule I and employed
(a) 10 persons or more
(b) 100 or more persons
(c) 20 or more persons
(d) 50 or more persons
Answer:
(c) 20 or more persons

(vi) A factory employs 250 workers. All the workers including workers above 60 years of age and below 15 years of age went on strike. The employer
(a) can deduct fine from all the workers
(b) can not deduct fines from workers who are under the age of 15
(c) no fine can be imposed from workers who are 60 years and above
(d) can not deduct any fine from any worker
Answer:
(b) Cannot deduct fine from workers who are under the age of 15

(vii) The employer’s and employee’s share of contribution of ESI fund is
(a) 1.75% and 4.75% of wages respectively
(b) 3.25% and 0.75% of wages respectively
(c) 10% and 3.75% of wages respectively
(d) 11 % and 3.75% of wages respectively
Answer:
(b) 3.25% and 0.75% of wages respectively

(viii) A Formal notarial certificate attesting the dishonour of a bill or note is called
(a) Noting
(b) Protest
(c) Attestation of Dishonour
(d) Endorsement
Answer:
(b) Protest

(ix) Public notice is not required when there is
(a) admission of new partner
(b) retirement of any partner,
(c) expulsion of any partner
(d) dissolution of the firm
Answer:
(a) Admission on new partner

(x) A LLP shall fiíe an annual return duly authenticated with the Registrar within……………….. of closure of a financial year under the Limited Liability Partnership Act, 2008.
(a) 30 days s
(b) 45 days
(c) 60 days
(d) 90 days
Answer:
(c) 60 days

(xi) The board of directors may appoint additional directors from time to time if so authorized by
(a) Artides of Associabon
(b) Memorandum of Association
(c) A resolution passed at general meeting
(d) A resolution passed at board meeting
Answer:
(a) Articles of Association

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(xii) Business ethics are gaining importance because of
(a) smooth functioning
(b) good image
(c) the growth of consumer movement
(d) increasing profit
Answer:
(c) The growth of consumer movement.

(xiii) Which of the following statements is correct about business ethics?
(a) Social responsibility and business ethics are considered different concepts
(b) Making higher profits should be the main objective of a business
(c) A business may be sustained only if it cares for society
(d) Companies making ethical investments may not be able to compete
Answer:
(c) A business may sustain only If it cares for society

(xiv) Holders of public office should take decisions solely in terms of the public interest. This principle of public life is called
(a) Integrity
(b) Accountability
(c) Honesty
(d) Selflessness (Dec 2013, 1 x 14 = 14 marks)
Answer:
(d) Selflessness

Question 3.
Choose the correct answer from the given four alternatives:
(i) A party who does not suffer any loss in case of breach of contract is entitled to
(a) Statutory damages
(b) Liquidated damages
(c) Exemplary damages
(d) Nominal damages
Answer:
(d) Nominal damages

(ii) If part of the contract is illegal, then the whole contract will be
(a) Voidable
(b) Void
(c) Legal
(d) Illegal
Answer:
(b) Void

(iii) In which of the following cases, the claim of Quantum Meruit arise
(a) when there is no breach of contract
(b) when a contract is discovered to be valid
(c) where something has been done non gratuitously
(d) where the contract is divisible
Answer:
(d) Where the contract is divisible

(iv) Amit tells Bharat in the presence of Chetan that Amit is agent of Chetan. Chetan maintains silence instead of denying it. Later, if Amit sells Chetai goods to Bharat, Chetan cai1,ot dispute Bharat’s title to the goods. This is example of
(a) sale by the official receiver
(b) sale by a tinder of goods
(c) sale by estoppel
(d) execution of Sale
Answer:
(c) Sale by estoppel.

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(v) An act to dissuade the intending buyer from bidding or from raising the price by pointing out defects in the goods or by doing some other acts which prevent persons from forming a fair estimate of the price of the goods is known as
(a) Knock out an agreement
(b) Damping
(c) Puffers
(d) None of the above
Answer:
(b) Damping

(vi) If a minor draws, endorses, delivers or negotiates an instrument, such instrument binds
(a) all parties to the instrument Including the minor
(b) only the minor and no other parties to the instrument
(c) all parties to the instrument except the minor
(d) None of the above
Answer:
(c) all parties to the instrument except the minor

(vii) If a partnership firm, the decision can be made by rule of majority when decisions relate to
(a) policy matters
(b) ordinary routine matters
(c) financial matters
(d) buying and selling of property
Answer:
(b) Ordinary routine matters

(viii) Power to exempt any LLP or class of LLP for audits of accounts is with
(a) Inspector
(b) Central Government
(c) Any other regulatory authority
(d) None of the above
Answer:
(b) Central Government

(x) No fine can be imposed on any employed person who is under the age of
(a) 10
(b) 12
(c) 15
(d) 18
Answer:
(c) 15

(xi) In case of employee covered under the ESI, the accídent report shall be sent in ………………. to local office of the ESI to which trie company is attached.
(a) Fcmi No. 18
(b) Form No. 18A
(c) Form No. 25
(d) Form No. 16
Answer:
(d) Form No. 16

(xiv) Application for Director Identification Number (DIN) is to be made to Central Govt. in Form
(a) Dir – 1
(b) Dir- 2
(c) Dir – 3
(d) None of the above
Answer:
(b) DIR-2

(xvii) Business ethics is based on well-accepted
(a) Moral and Social Values
(b) Social Values only
(c) Moral Values only
(d) None of the above
Answer:
(a) Moral and Social Values

(xviii) Out of seven principles of public life, the principle of objectivity means
(a) holders of public office should take decisions solely in terms of the public interest.
(b) in carrying out public business including making public appointments, holders of public office should make choices on merit.
(c) holders of public office are accountable for their decisions and actions to the public.
(d) holders of public office should be as open as possible about all the decisions and actions that they take.
Answer:
(b) In carrying out public business including making public appointments, holders of public office should make choices on merit.

(xix) Who is responsible for ethical behaviour?
(a) Lecturers and Supervisors
(b) The Psychologist
(c) The Participants
(d) The Psychological Community
Answer:
(b) The Psychologist

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(xx) The three C’s of business ethics are
(a) Commitment, Contribution and Consequences
(b) Compliance, ContributIon and Con€equences
(c) Compliance, Customs and Contribution
(d) Codes, Compliance, and Contributions (June 2014, 1 x 15= 15 marks)
Answer:
(b) Compliance, Contribution, and Consequences.

Question 4.
Answer all questions: (Choose the correct answer from the given four alternatives.).
(i) In social agreements usual presumption is
(a) that parties do not intend to create social relations.
(b) that parties intend to perform them.
(c) that parties do not intend to make legal and social relations.
(d) that the parties do not intend to create legal relations between them.
Answer:
(d) that the parties do not intend to create legal relations between them.

(ii) In a sale of goods, the doctrine of caveat emptor will not apply when there is
(a) usage of trade
(b) consent by fraud
(c) buyer’s error of judgment
(d) Merchantable Quality
Answer:
(d) Merchantable Quality

(iii) A bill of exchange, that is drawn accepted or endorsed without consideration is called
(a) Accommodation bill.
(b) Promissory note
(c) Trade bill
(d) Bearer instrument
Answer:
(a) Accommodation bill

(iv) Employee’s State Insurance Act, 1948 is applicable to all
(a) factories including factories belonging to Government and seasonal factories.
(b) factories excluding seasonal factories.
(c) factories including factories ‘belonging to Government and seasonal but excluding Silk factory.
(d) factories including factories belonging to Government but excluding seasonal factories.
Answer:
(d) factories including factories belonging to Government but excluding seasonal factories.

(v) A partner must give a public notice of his retirement from the firm in order absolve himself from them: liability for the acts of the other partners done after his retirement is known as
(a) Dormant partner
(b) Ostensible partner
(c) Nominal partner
(d) partner by estoppel
Answer:
(b) Ostensible partner

(vi) A prospectus which does not have complete particulars on the price of securities offered and the quantum of securities offered by the company is known as
(a) Private Placement
(b) Red-herring prospectus
(c) Deemed prospectus
(d) Shelf prospectus
Answer:
(b) Red-herring prospectus

(vii) The crucial step in understanding business ethics is
(a) Establishing codes of ethics
(b) Learning to recognize ethical issues
(c) Having efficient operations
(d) Implementing a strategic plan (Dec 2014, 2 x 7 = 14 marks)
answer:
(b) Learning to recognize ethical issues

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 5.
Answer all questions (Choose the correct answer from the given tour alternatives.)
(i) An agreement which is enforceable at the option of one or more parties thereto but not at the option of other or others is called
(a) Void contract
(b) Voidable contract
(c) Void agreement
(d) Unenforceable contract
Answer:
(b) Voidable Contract

(ii) Which of the following agency is irrevocable under The Indian Contract Act, 1872?
(a) Agency for fixed period
(b) Agency for single transaction
(c) Agency coupled with interest
(d) Continuing agency
Answer:
(c) Agency coupled with interest

(iii) A Sqrt of tacit understanding/agreement among the intending bidders to stifle competition by not bidding against each other in an auction sale is called as
(a) Damping
(b) Knock-out agreement
(c) Puffers
(d) By-bidders
Answer:
(b) Knock-out agreement

(iv) When ani instrument is drawn conditionally or for a special purpose as a collateral security and not for the purpose of transferring property therein, it is called
(a) Ambiguous.
(b) Inchoate
(c) Escrow
(d) Inland
Answer:
(c) Escrow

(v) Which Committee ¡s constituted by the occupier to promote cooperation between. the workers and management in maintaining proper safety and health at workplace?
(a) Safety Committee
(b) Health Committee
(c) Management Workers Consultative Committee
(d) Maintenance Committee
Answer:
(a) Safety Committee

(vii) Businessmen or industrialists take initiative to form new companies. Their main function is to manage the company after its promotion, they are known as
(a) Particular Promoters
(b) Occasional Promoters
(c) Professional Promoters
(d) General Promoters
Answer:
(d) General Promoters

(viii) The study of ethics can be divided into four operational areas namely meta-ethics, normative ethics, descriptive ethics and
(a) positive ethics
(b) physical ethics
(c) applied ethics
(d) natural ethics (June 2015, 2 x7= 14 marks)
Answer:
(c) applied ethics

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 6.
Answer all questions (Choose the correct answer from the given four alternatives):
(i) Anchal purchased a motor car from Kamal who had no title to it. Anchal used the motor car for several months. True owner spotted the motor car and demanded it from Anchal. Ir, such case:
(a) Anchal is bound to hand over the motor car to true owner.
(b) Anchal is not bound to return the motor car to true owner as he has paid in full settlement to Kamal.
(c) Anchal shalt advise true owner to approach Kamal.
(d) True owner has no ñght to claim either from Anchal or from Kamal. (Dec 2015, 1 mark)
Answer:
(a) Anchal is bound to hand over the motor car to true owner.

(ii) Which of the following agreements is wagering agreement under the Indian Contract Act, 1872?
(a) Crossword competition involving application of skill and knowledge.
(b) Contract of Insurance.
(c) A promise to pay B ₹ 1,000 if it rains on Monday.
(d) A agrees to pay B ₹ 1,000 if two straight lines should enclose a space. (Dec 2015, 1 mark)
Answer:
(c) A promise to pay B ₹ 1,000 if It rains on Monday.

(iii) Under Sale of Goods Act, which of the delivery of goods is called as delivery by attornment?
(a) Actual
(b) Symbolic
(c) Constructive
(d) Physical (Dec 2015, 1 mark)
Answer:
(c) Constructive

(iv) Where the price of the goods under a contract of sale is to be fixed by the valuation of a third party who fails to fix the valuation, but goods are supplied to the buyer, under section 10 of the Sale of Goods Act, 1930, the buyer is:
(a) Liable to pay the reasonable price of the goods.
(b) Liable to pay the minimum price of the goods.
(c) Not liable to pay any price until fixed by the valuer.
(d) Liable to pay the maximum retail price. (Dec 2015, 1 mark)
Answer:
(a) Liable to pay the reasonable price of the goods.

(v) Under Factories Act, 1948, where work of the same kind is carried out by two or more sets of workers during different periods of the day, each of such periods is called a:
(a) Relay
(b) Shift
(c) Recess
(d) Overtime (Dec 2015, 1 mark)
Answer:
(b) Shift

(vi) Under Employee’s State Insurance Act, in order to qualify for sickness benefits, the insured worker is required to contribute for:
(a) 70 days in a contribution period of 6 months.
(b) 78 days in a contribution period of 3 months.
(c) 91 days in a contribution period of 3 months.
(d) 78 days in a contribution period of 6 months. (Dec 2015, 1 mark)
Answer:
(d) 78 days in a contribution period of 6 months.

(vii) Ankh purchased goods worth ₹ 20,000 from Anuj. In lieu of cash payment, Ankit accepts a bill of exchange of ₹ 20,000 to be payable after three months. This is an example of:
(a) Accommodation Bill
(b) Fictitious Bill
(c) Genuine Bill
(d) Documentary Bill (Dec 2015, 1 mark)
Answer:
(c) Genuine Bill

(viii) Under the NegoUable Instruments Act, 1881,whether acceptance of a bill of exchange in the following situation shall be treated as ‘qualified’ acceptance where the acceptor:
(a) Undertakes to pay only 10,000 for a bill drawn for ₹ 15,000.
(b) Declares the payment to be independent of any other event.
(c) Writes, ‘Accepted, payable at ABC Bank’.
(d) Writes, ‘Accepted, payable at Delhi’. (Dec 2015, 1 mark)
Answer:
(a) Undertakes to pay only 10,000 tar a bill drawn for ₹ 15,000.

(ix) When a partnership firm is continued even after the expiry of fixed term is called:
(a) Perpetual partnership
(b) Fixed partnership
(c) Contract partnership
(d) Partnership at will (Dec 2015, 1 mark)
Answer:
(d) Partnership at will.

(x) When a partnership firm is continued even after the expiry of fixed term is called:
(a) Perpetual partnership
(b) Fixed partnership
(c) Contract partnership
(d) Partnership at will (Dec 2015, 1 mark)
Answer:
(c) Partner by estoppel

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(xi) A person who is not a partner of a Partnership Firm, but he may liable for firm’s debt as if he was a Partner. Such a person is called:
(a) Nominal Partner
(b) Sleeping Partner
(c) Partner by estoppels
(d) Partner for profit only (Dec 2015, 1 mark)
Answer:
(b) Improve customers’ confidence

(xii) Business ethics are needed to create a faith about the quality, quantity, price, etc, of products. The customers have more trust and faith in the businessmen who follow ethical rules. They feel that such businessmen would not cheat them. Which one of the following is appropriate for it?
(a) Safeguarding consumers’ right
(b) Improve customers’ confidence
(c) Survival of business
(d) Consumer movement (Dec 2015, 1 mark)
Answer:

(xiii) Holders of public office should not place themselves under any financial or other obligation to outside individuals or organizations that might influence them in the performance of their official duties. This principle of public life is called:
(a) Selflessness
(b) Honesty
(c) Objectivity
(d) Integrity (Dec 2015, 1 mark)
Answer:
(d) Integrity

Question 7.
Answer all questions:
(a) Multiple choice questions:
(i) A contract is a combination of
(a) agreement and free consent
(b) agreement and consideration
(c) agreement and enforceability
(d) agreement and competence of parties
Answer:
(c) agreement and enforceability.

(ii) The provisions regarding maximum number of members in a partnership are given in
(a) The Partnership Act
(b) The Companies Act
(c) The Societies Registration Act
(d) The Co-operative Societies Act
Answer:
(b) The Companies Act.

(iii) X and Y agree to divide the profits of a business In equal shares but the loss if any is to be borne by X only. The partnership agreement is
(a) void
(b) avoidable
(c) lawful
(d) illegal
Answer:
(c) Lawful.

(iv) First aid boxes or cupboards equipped with prescribed contents and not less than one in number must be provided and maintained in every factory so as to be accessible during all working hours for
every
(a) 200 workers for any time
(b) 150 workers for any time
(c) 500 workers for any time
(d) 30 workers for any time
Answer:
(b) 150 workers for any time.

(v) When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the
(a) Preceding day
(b) Next preceding business day
(c) Same day of next week
(d) 3 days following the date holiday
Answer:
(b) Next Preceding business day.

(vi) In case of an employee who has not completed 15 years of age at the beginning of the Accounting year, the minimum bonus will be
(a) ₹ 100 or 8.33% of salary or wages whichever is higher.
(b) ₹ 60 or 8.33% of salary or wages whichever is higher.
(c) ₹ 60 or 8.33% of salary or wages whichever is lower. ‘
(d) ₹ 8.33% of salary or wages.
Answer:
(b) ₹ 60 or 8.33% of salary or wages whichever is higher.

(vii) Every LLP firm shall have at least …………………. designated partners who are individuals.
(a) two
(b) three
(c) four
(d) five (June 2016, 1 x 7 = 7 marks)
Answer:
(a) two.

Question 8.
(b) Fill in the blanks.
(i) The maximum number of parties in a contract may be ……………………. .
Answer:
Infinite.

(ii) The Primary role of …………………….. committee is to assist the board In identifying prospective directors.
Answer:
Nomination.

(iii) If gratuity is not paid within 30 days from the date it becomes payable simple interest @ ……………………… p.a. is payable on the expiry of the said period.
Answer:
10%.

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(iv) The appropriate Government may direct that the provision of Minimum Wages Act, 1948 will not be applicable in case of wages payable to a ………………… person. (June 2016, 1 x 4 = 4 marks)
Answer:
Disabled.

Question 9.
State whether the following statements. are True (or) False.
(i) All agreements are contracts but all contracts are not agreements.
Answer:
False.

(ii) In a contract of guarantee two parties are necessary.
Answer:
False.

(iii) Delivery means voluntary transfer of possession of goods from one person to another.
Answer:
True.

(iv) Shareholders and Stakeholders are synonyms.
Answer:
False.

(v) Ethics and Law have the same purpose. (June 2016, 1 x 5 =5 marks)
Answer:
True.

Question 10.
Answer all questions:
(a) Multiple choice questions:
(i) A contract creates
(a) jus in personam.
(b) Just in rem.
(c) only rights and no obligations.
(d) only obligations and no rights.
Answer:
(a) Jus in personam.

(ii) Provisions of EPF & Miscellaneous Provision Act, 1952 are applicable to. Cinema/Theatre employing:
(a) 10 or more persons.
(b) 20 or more persons.
(c) 5 or more persons.
(d) 15 or more persons.
Answer:
(c) 5 or more persons.

(iii) In the absence of Partnership agreement, the Partner has:
(a) right to avail interest on advances paid to partnership firm.
(b) right to avail interest on advances paid to partnership firm provided there is profit.
(c) has no right to avail interest on advances.
(d) has right to avail interest on advances even after dissolution of the firm.
Answer:
(a) Right to avail interest on Advances paid to Partnership Firm.

(iv) A person who is employed by the seller to raise the price by fictitious bids. Such person is known as:
(a) Puffer
(b) By bidder
(c) Decoy Ducks
(d) All of the above.
Answer:
(d) All of the above.

(v) In case of banker’s refusal to honour the cheque in spite of sufficient funds in customer’s account, the banker is:
(a) liable to compensate the drawer.
(b) not liable to compensate the drawer.
(c) criminally liable under section 138.
(d) liable to be delisted.
Answer:
(a) Liable to compensate the drawer.

(vi) Dependants benefit is paid at the rate of:
(a) 60% of wages in the form of monthly payments.
(b) 75% of wages In the form of monthly payments.
(c) 80% of wages in the form of monthly payments.
(d) 90% of wages in the form of monthly payments.
Answer:
(d) 90% of wages in the form of monthly payments.

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(vii) Board of Directors of every listed Company shall constitute an Audit Committee which shall consists of a minimum of:
(a) 2 Directors
(b) 3 Directors
(c) 4 Directors
(d) 5 Directors.
Answer:
(b) 3 Directors.

(viii) The maximum limit of bonus payable to an employee is fixed by way of percentage of salary or wages earned by the employee during the accounting year, the percentage is:
(a) 10%
(b) 15%
(c) 20%
(d) 25%.
Answer:
(c) 20%.

(ix) Who is the head of Central Information Commission?
(a) The State Information Commissioner.
(b) The Chief Information Commissioner
(c) The Chief Information Officer
(d) The Chairman of Information Commission.
Answer:
(b) The Chief Information Commissioner.

(x) Business Ethics also called as Corporate Ethics is a form of:
(a) Positive Ethics
(b) Applied Ethics
(c) Physical Ethics
(d) Practical Ethics. (Dec 2016, 1 x 10 = 10 marks)
Answer:
(b) Applied Ethics.

Question 11.
(b) Fill in the blanks:
(i) No adult worker can be allowed to work more than ……………………….. hours in a day.
Answer:
Nine.

(ii) A Meeting of Board of Directors must be held at least once in every ……………………… months.
Answer:
Three/Four

(iii) Only designated partners are liable to obtain unique identification number called as ……………… .
Answer:
Designated Partner Identification Number (DPIN)

(iv) Where the paid-up share capital of an One Person Company exceeds …………………. or its average annual turnover during the relevant period exceeds, it shall cease to be entitled to continue as a One Person Company. (Dec 2016, 1 x 4 = 4 marks)
Answer:
Fifty lakh rupees. two crore rupees.

Question 12.
(c) State whether the followin9 statements are True ‘(or) False:
(i) Broader definitions of Corporate governance stress a broader level of ‘ accountability to shareholders and other stakeholders.
Answer:
True

(ii) According to the Payment of Wages Act, 1936 other deductions cannot be more than 50% of wages.
Answer:
True

(iii) Limited Liability Partnership should have a minimum paid-up capital of INR 1,00,000.
Answer:
False

(iv) Two-thirds of total directors can be given permanent appointment in the company.
Answer:
False

(v) There is a prescribed Performa for RTI application. (Dec 2016, 1 x 5 = 5 marks)
Answer:
False.

Question 13.
Answer all questions.
(a) Multiple choice questions:
(i) The term ‘sub-agent’ in the business of agency is defined as a person employed by, and acting under the control of the
(a) Principal
(b) Original agent
(c) Lawyer
(d) Third person
Answer:
(b) Original agent.

(ii) The first endorsement of an instrument can be made by the
(a) Banker
(b) Payee
(c) Holder in due course
(d) Agent
Answer:
(b) Payee

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(iii) Which of the following is not the mode of dissolution of a firm under voluntary dissolution?
(a) Dissolution by agreement
(b) Dissolution on the happenings of certain contingencies
(c) Dissolution on becoming a partner of unsound mind
(d) Compulsory dissolution
Answer:
(c) Dissolution on becoming a partner of unsound mind.

(iv) Whitewash or color wash should be carried out at least once In every period of
(a) 14 months
(b) 24 months
(c) 48 months.
(d) 60 months.
Answer:
(a) 14 months

(v) The term family’ as defined in ESI Act, 1948 does not Include
(a) a spouse
(b) a minor adopted child
(c) a dependent unmarried daughter
(d) an independent married sister
Answer:
(d) an independent married sister

(vi) Which one of the following amounts to safety measure?
(a) Artificial humidification
(b) Ventilation
(c) Fencing of factory
(d) First aid appliances.
Answer:
(c) Fencing of factory

(vii) if a company does not have a çommon seal, the share certificate shall be signed by
(a) Two Directors
(b) One Director and Company Secretary
(c) Two Directors and Company Secretary
(d) Company Secretary
Answer:
(b) One Director and Company Secretary.

(viii) In case of e-voting, notice shall be sent as attachment ¡n
(viii) PDF file.
(b) Word file
(c) Excel file
(d) Access file
Answer:
(viii) PDF file.

(ix) A Director may be elected by small shareholders upon a notice by
(a) not less than 1000 small shareholders.
(b) one-tenth of the total number of shareholders.
(c) not less than 1000 small shareholders or one-tenth of such shareholders, whichever is lower.
(d) one-tenth of 1000 small shareholders.
Answer:
(c) not less than 1000 small shareholders or one-tenth of such shareholders, whichever is lower.

(x) Meta ethics deal with the nature of ………………. .
(a) external influences.
(b) Moral judgment.
(c) material facts.
(d) animal rights. (June 2017, 1 mark each)
Answer:
(b) Moral judgment.

Question 14.
(b) Fill in the blanks:
(i) Misrepresentation must relate to some fact which is material to the ……………………. .
Answer:
Contract

(ii) The LLP shall inform the concerned Registrar within ………………. of the date of registration about the conversion and the particulars of LLP.
Answer:
15 days

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(iii) The term of office of a member of the standing committee, constituted under ESI Act, be two years from the date on which his election is ……………….. .
Answer:
notified.

(iv) The registered office shall be opened within 15 days from the date of ……………………. of the company.
Answer:
incorporation

(vi) A company shall send copy of each of the documents such as memorandum etc., to a member within ……………….. days of the request made by him. (June 2017, 5 marks)
Answer:
7 days

Question 15.
(c) True or False:
(i) In an agreement to sale, the buyer is entitled to recover the same from the official liquidator in case of insolvency of the seller.
Answer:
False

(ii) The term employed person’ includes the legal representatives of a deceased employed person.
Answer:
True

(iii) Payment of Gratuity Act, 1972 applies to every shop and establishment 9mploying seven or more persons.
Answer:
False

(iv) Any misstatement in the prospectus would attract the liability on the issuer.
Answer:
True

(v) Continuous improvement or kaizen is a popular theme. (June 2017, 5 marks)
Answer:
True

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 16.
Match and Pair:

Column I Column II
1. Presentment (A) Determines acceptable conduct if business organization
2. Form no. INC – 23 (B) Issue of global depository receipt
3. Continuing guarantee (c) Bill of exchange
4. Business ethics (D) Shifting of registered office within the same state
5. Section 41 of the Companies Act (E) Guarantee which extends to a series of transactions

(June 2017, 5 marks)
Answer:

Column I Column II
1. Presentment (C) Bill of exchange
2. Form no. INC – 23 (D) Shifting of registered office within the same state
3. Continuing guarantee (E) Guarantee which extends to a series of transactions
4. Business ethics (A) Determines acceptable conduct in business organization
5. Section 41 of the Companies Act (B) Issue of global depository receipt

Question 17.
(a) Answer all questions:
Multiple choice questions:
(i) Which one of the following is not the discharge by operation of law?
(a) By merger
(b) By insolvency.
(c) By breach of contract
(d) By the unauthorized alteration of items of a written document
Answer:
(c) By breach of contract

(ii) Which of the following Is a method of discharge form liability?
(a) By endorsement
(b) By promising
(c) By cancellation
(d) By registration
Answer:
(c) By cancellation

(iii) A partner may contribute to the LLP
(a) tangible of intangible property.
(b) moveable or immovable property.
(c) money, promissory note, etc.
(d) Any of the above
Answer:
(d) Any of the above

(iv) Gratuity is payable to an employee after he has rendered continuous service for not less than five years on his
(a) transfer
(b) daughter’s marriage
(c) re-employment
(d) resignation
Answer:
(d) resignation

(v) Who will not be considered as an employee?
(a) Canteen workers
(b) Casual workers
(c) Partners
(d) Part-time employee
Answer:
(c) Partners

(vi) “Individual pension account” means an account of subscriber, executed by a contract setting out the terms and conditions under the
(a) Provident fund scheme
(b) National pension system
(c) Citizen welfare system
(d) Minimum wage payment scheme
Answer:
(b) National pension system

(vii) Which of the following is not a category of company?
(a) Inactive company.
(b) Assistant Company
(c) Dormant Company
(d) Producer Company
Answer:
(b) Assistant Company

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(viii) Section 92 of the Companies Act, 2013 requires a company to prepare and file annual return in form no.
(a) MGT-12
(b) INC-23
(c) MGT-7
(d) SH-10
Answer:
(c) MGT-7

(ix) An instrument of the proxy shall be deposited with the registered office of the company within …………………….. before the conduct of the meeting.
(a) 7 hours
(b) 21 hours
(c) 48 hours
(d) 60 hours
Answer:
(c) 48 hours

(x) A proper foundation of ethics requires a standard of …………………… goals and actions can be compared to. (Dec 2017, 1 x 10 = 10 marks)
(a) value
(b) living
(c) life
(d) speech
Answer:
(a) value

Question 18.
Match and pair:

Column I Column II
1. Hybrid between a company and a partnership (A) Existence from the time of incorporation to winding up
2. Perpetual succession (B) Powers of the controlling authority
3. Red herring prospectus (C) Need for business ethics
4. Requiring the discovery and production of documents (D) A limited liability partnership
5. Smooth functioning (E) Does not include complete particulars of the quantum or price of securities

(Dec 2017, 5 marks)
Answer:

Column I Column II
1. Hybrid between a company and a partnership (D) A limited liability partnership
2. Perpetual succession (A) Existence from the time of incorporation to winding up
3. Red herring prospectus (E) Does not include complete particulars of the quantum or price of securities
4. Requiring the discovery and production of documents (B) Powers of the controlling authority
5. Smooth functioning (C) Need for business ethics

Question 19.
True and False:
(i) The seller of the goods is not bound to deliver them until the buyer applies for the delivery.
Answer:
True

(ii) The partners of a LLP may remove an auditor from office at any time by following the procedure as laid down in the LIP agreement.
Answer:
True

(iii) The certificate of fitness granted by the certifying surgeon shall be valid for a period of 24 months from the date thereof.
Answer:
False

(iv) The e-voting shall remain open for not less than 3 days and shall close at 5.00 P.M. on the date preceding the date of general meeting.
Answer:
True

(v) The term ‘ethics’ derived from French word ‘ethos which means character. (Dec 2017, 5 marks)
Answer:
False

Question 20.
Fill in the blanks:
(i) Remission means ………………….. of a lesser performance that what is actually due under the contract.
Answer:
acceptance

(ii) A promissory note or bill of exchange, in which ho time for payment is specified, and a cheque, are payable on ………………. .
Answer:
demand

(iii) Where a person provides labour or service to another for remuneration which is less than the minimum wage, such labour is called …………………. .
Answer:
forced labour

(iv) The monies received on application shall be kept in a separate bank account in a ……………….. bank.
Answer:
schedule

(v) The seven principles of ………………… were set out by Lord Nolan in 1995. (Dec 2017, 5 marks)
Answer:
public life

Question 21.
Answer all the following questions:
(a) Choose the correct answer from the given alternatives (you may write only the Roman numeral and the alphabet choosen for your answer):
(i) The main feature of e-contract is
(a) Cost and acceptability
(b) Purity and clarity
(c) Speed, accurate and reliable
(d) Perfection and attractive
Answer:
(c) Speed, accurate and reliable

(ii) Which of the following is not an unpaid seer’s right against the goods?
(a) The right of retention
(b) The right of stoppage in transit
(c) The right of seeking claim for damage
(d) The right of resale
Answer:
(c) The right of seeking claim for damage

(iii) Where the endorser does not want that the endorsee or any other holder to incur any expense on his account is called
(a) Restrictive endorsement
(b) Sans frais endorsement
(c) Conditional endorsement
(d) Unwanted endorsement
Answer:
(b) Sans frais endorsement

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(iv) The liability of the partners will continue for the acts done before the dissolution, even after the dissolution, until
(a) ‘Public notice ¡s given of the dissolution
(b) Partners are getting the final payment
(c) Claim is demanded by the creditors
(d) The death of partners
Answer:
(a) ‘Public notice is given of the dissolution

(v) Every employee shall be entitled to receive bonus from his employer in an accounting year if he has worked for not less than
(a) Ten working days
(b) Twenty working days
(c) Thirty working days
(d) Forty working days
Answer:
(c) Thirty working days

(vi) Under Employee’s State Insurance Act, 1948, the term of the office of the members of Medical Benefit Council shall be
(a) 2 Years
(b) 4 Years
(c) 5 Years
(d) 10 Years
Answer:
(b) 4 Years

(v) Which one cannot be transacted through postal ballot?
(a) Appointment of auditor
(b) Election of a Director
(c) Buyback of shares by a company
(d) Change in place of registered office outside the local limits of any city, town or village
Answer:
(c) Buyback of shares by a company

(vi) The appointment of an independent director shall be approved by the …………….. .
(a) Board meeting
(b) General Meeting
(c) Registrar of Companies
(d) Central Government
Answer:
(b) General Meeting

(vii) The sweat equity shares shall be locked in for a period of …………………. years from the date of allotment.
(a) One
(b) Two
(c) Three
(d) Four
Answer:
(a) One

(viii) The following is the disadvantage of business ethics:
(a) Through increasing morale and trust business can increase their market share
(b) Publicity due to well and ethical performance
(c) Acceptance of products of the company by the public
(d) Diversity in achievements (June 2018, 1 x 10 = 10 marks)
Answer:
(b) Publicity due to well and ethical performance

Question 22.
(b) Match the statement in column I with the most appropriate statement in Column II:

Column I Column II
1. Legal Representative of the contractor (A) Welfare measures taken in a factory.
2. Where the seller makes a false representation and buyer relies on it. (B) Certificate of incorporation
3. Creches (C) Extract of the annual return of a company.
4. MGT – 9 (D) Exception to the Doctrine of Caveat Emptor.
5. Form No. INC – 11 (E) He who is not the Principal Employer.

(June 2018, 1 x 5 = 5 marks)
Answer:

Column I Column II
1. Legal Representative of the contractor (E) He who is not the Principal Employer.
2. Where the seller makes a false representation and buyer relies on it. (D) Exception to the Doctrine of Caveat Emptor.
3. Creches (A) Welfare measures taken in a factory.
4. MGT – 9 (C) Extract of the annual return of a company.
5. Form No. INC – 11 (B) Certificate of incorporation

Question 23.
(c) State whether the following statements are True or False (you may write only the Roman numeral and whether True or False without copying the statements into the answer books):
(i) Gratuitous bailment continues even after the death of either of the bailor or bailee.
Answer:
False

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(ii) A holder is not having right to duplicate of lost bill before it is overdue.
Answer:
False

(iii) Fine may be recovered from the employed person by installments
Answer:
False

(iv) Share certificate is a negotiable instrument.
Answer:
False

(v) The businessmen who do not follow business ethics will have short-term success, but they will fail in the long run. (June 2018, 1 x 5 = 5 marks)
Answer:
True.

Question 24.
(d) Fill in the blanks suitably (you may write only the Roman numeral and the content filling the blanks):
(i) The liability of surety arises only when the principal debtor fails to pay the debt to the ………………….. .
Answer:
Creditor

(ii) Goods to be manufactured or produced or acquired by the seller after making of the contract of sale is called ………………………… good.
Answer:
Future

(iii) If there is a dispute as to the amount of gratuity payable to the employee, the employer shall deposit the gratuity with the …………………….. .
Answer:
Controlling authority

(iv) The time limit for registration of charge is …………………… days from the date of creation of charge.
Answer:
30 days

(v) The ethical operation of a company is directly related to ………………….. in both short and long term. (June 2018, 1x 5 = 5 marks)
Answer:
Profitability.

Question 25.
Answer all the following questions:
Choose the correct answer from the given alternatives (you may write only the Roman numeral and the alphabet chosen for your answer):
(a) Multiple Choice Questions:
(i) A proposal may be revoked at any time before
(a) the communication of acceptance
(b) the payment of consideration
(c) signing the agreement.
(d) execution of the proposal
Answer:
(a) The communication of acceptance

(ii) Which of the following is not to be taken care while admitting a new partner?
(a) Computation of new profit-sharing ratio and sacrifice ratio
(b) Accounting treatment of goodwill
(c) Professional qualification of admitting partner
(d) Revaluation of assets and liabilities
Answer:
(c) Professional qualification of admitting partner

(iii) Where goods are delivered to the buyer and he refuses to accept them, the buyer is not bound to
(a) retain them with him
(b) look – after the goods
(c) return them to the seller
(d) store them in his godown
Answer:
(c) Return them to the seller

(iv) No child shall be allowed to work in a factory unless he has completed his
(a) 12th year
(b) 14th year
(c) 16th year
(d) 18th year
Answer:
(b) 14th year

(v) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than
(a) three years
(b) five years
(c) seven years
(d) ten years
Answer:
(b) Five years

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(vi) The Employees’ State Insurance Corporation is
(a) Hindu Undivided Family –
(b) Local Authority
(c) Charitable Institution
(d) Body Corporate
Answer:
(d) Body Corporate

(vii) The annual return of an OPC shall be signed by the company secretary or where there is no company secretary, by the
(a) Senior executive of the company
(b) Auditor of the company
(c) Director of the company
(d) Advocate of the company
Answer:
(c) Director of the company

(viii) If there is any misstatement in the prospectus then it would attract the liability on
(a) The printer
(b) The issuer
(c) The publisher
(d) The proof-reader
Answer:
(b) The issuer

(ix) Every company limited by shares shall keep and maintain the Register of Members in Form No.
(a) MGT-1
(b) MGT-3
(c) MGT-7
(d) MGT-12
Answer:
(a) MGT-1

(x) Ethics are the set of moral principles that guide a person’s
(a) Behaviour
(b) Philosophy
(c) Religion
(d) Profession (Dec 2018, 1 x 10 = marks)
Answer:
(a) Behaviour

Question 26.
(b) Match and Pair:

Column I Column II
(1) Wagering contract (A) Voting through electronics means
(2) Coercion (B) War, animal rights and capital punishment
(3) Consensus ad-idem’ (C) Committing any act forbidden by the Indian Penal Code
(4) Section 108 of Companies Act, 2013 (D) Identity of minds
(5) Applied ethics (E) Promise to pay ₹ 1,000 if it rains today

(Dec 2018, 1 x 5 = 5 marks)
Answer:

Column I Column II
(1) Wagering contract (E) Promise to pay ₹ 1,000 if it rains today
(2) Coercion (C) Committing any act forbidden
(3) by the Indian Penal Code Consensus ad-idem (D) Identity of minds
(4) Section 108 of Companies Act, (A) Voting through Electronics 2013 means
(5) Applied ethics (B) War, animal rights and capital punishment

Question 27.
(c) State whether the following statements are True or False
(i) Goods to be manufactured or produced or acquired by the seller after making of the contract of sale are called future goods.
Answer:
True

(ii) The first endorsement of an instrument can be made by the Banker.
Answer:
False

(iii) Payment of Gratuity Act, 1972 applies to every shop and establishment employing seven or more persons.
Answer:
False

(iv) In case of e-voting, notice shall be sent as attachment in Word file.
Answer:
False

(v) Ethics is a requirement for human life. (Dec 2018, 1 x 5 = 5 marks)
Answer:
True

Question 28.
(d) Fill in the blanks:
(i) The dishonor of the instrument may be due to Non-acceptance and ………………….. .
Answer:
Non-payment

(ii) The term of the office of the representative members of Medical Benefit Council shall be ………………….. years from the date on which the appointment is notified.
Answer:
Four

(iii) The company shall have the ………………….. to specify the lock-in-period for the shares issued in pursuant of exercise such option.
Answer:
Freedom

(iv) A director may resign from his office by giving a notice in writing to the ………………….. .
Answer:
Company

(v) The Seven Principles of Public Life were set out by ………………………….. for the first time in the year 1995. (Dec 2018, 1 x 5 = 5 marks)
Answer:
Lord Nolan

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 29.
(c) Answer all the following questions:
(a) Choose the correct answer from the given alternatives (you may write only the Roman numeral and the alphabet chosen for your answer):
(i) Anu threatens to kidnap Binu’s daughter if she does not sell her house worth ₹ 90 Lakh to her for ₹ 20 Lakh. This Contract is void due to –
(a) inadequacy of Consideration.
(b) absence of Free Consent.
(c) incompetence of Parties.
(d) None of the above.
Answer:
(b) absence of Free Consent.

(ii) The Latin Maxim “Nemo Dat Quod non-Habet” means
(a) no man can pass a better title than he has.
(b) let the Buyer beware.
(c) no consideration – No contract.
(d) ignorance of the law is no excuse.
Answer:
(a) no man can pass a better title than he has.

(iii) As per the RBI Act, which of the following Negotiable Instruments can be payable to the bearer on demand?
(a) Cheque
(b) Hundi
(c) Bank Draft
(d) Promissory Note.
Answer:
(a) Cheque

(iv) When a partnership firm is continued even after the expiry of fixed term, it is called
(a) Partnership at Will
(b) Perpetual Partnership
(c) Fixed Partnership
(d) Particular Partnership
Answer:
(a) Partnership at Will

(v) No female child shall be allowed to work in any factory except between ………………… .
(a) 8 AM to 7 PM
(b) 6 PM to 6 AM
(c) 6 AM to 7 AM
(d) 10 PM to 5 AM
Answer:
(a) 8 AM to 7 PM

(vi) In the case of a private company mention the number of members personally present to form the quorum of a meeting of the company.
(a) One member
(b) Two members
(c) Three members
(d) Four members
Answer:
(b) Two members

(vii) Which of the following is not a valid medium of sending notice to all shareholders?
(a) By registered post or speed post
(b) Through public advertisement
(c) Through registered email-id
(d) Through courier service
Answer:
(b) Through public advertisement

(viii) If any default is made in filing refund of money, the company and every officer, who is in default shall be liable to a penalty maximum up to
(a) ₹ 50,000
(b) ₹ 75000
(c) ₹ 1,00,000
(d) ₹ 1,25,000
Answer:
(c) ₹ 1,00,000

(ix) Value chain as a strategic framework for analysis of competitive advantage was promoted by
(a) Peter Drucker
(b) F. W. Taylor
(c) Michael Porter
(d) Tom Peters (June 2019, 1 x 9 = 9 marks)
Answer:
(c) Michael Porter

Question 30.
(b) Match and Pair:

Column I Column II
1. Occupier A. purchases goods from S, he has no intention of paying for it.
2. Section 92 of the Companies Act, 2013 B. Annual Return.
3. Metaethics C. Person having ultimate control
4. Fraud D. Control of at least 20 percent of total share capital
5. Significant influence E. Nature of moral judgment.

(June 2019, 1 x 5 = 5 marks)
Answer:

Column I Column II
1. Occupier (C) Person having ultimate control
2. Section 92 of the Companies Act, 2013 (b) Annual Return
3. Metaethics (e) Nature of moral judgement
4. Fraud (a) Purchases goods from S, he has no intention of paying for it.
5. Significant influence (d) Control of at least 20 percent of total share capital

Question 31.
(c) State whether the following statements are True or False:-
(i) An agreement which is impossible is void.
Answer:
True

(ii) In case of expulsion of a partner, the provisions of retired partners will be applicable to such expelled partner.
Answer:
True

(iii) Sickness benefit is paid up to a maximum day of 60 days in a year.
Answer:
False

(iv) A director in the whole time employment of the Company is called Whole full-time director.
Answer:
True

(v) Contribution to pension scheme is recoverable when employee crosses 58 years of age. (June 2019, 1 x 5 = 5 marks)
Answer:
False.

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 32.
(d) Fill in the blanks:
(i) When the consent is caused by ……………………….., the agreement is voidable at the option of the party whose consent was so caused.
Answer:
under influence

(ii) All payments of wages shall be made on a …………………. day.
Answer:
working

(iii) Whenever a company makes any allotment of securities, ¡t shall file a return of allotment with the Registrar within ……………………. days of allotment.
Answer:
30

(iv) The application for the purpose of Alteration of Articles ¡s to be filed in Form No. …………………….. .
Answer:
INC – 27

(v) Business ethics must safeguard different rights of the …………………… . (June 2019, 1 x5=5 marks)
Answer:
consumers.

Question 33.
Answer all the following questions:
(a) Choose the correct answer from the given alternatives (you may write only the Roman numeral and the alphabet chosen for your answer):
(i) A person is said to be of sound mind for the purposes of making a contract if, at the time when he makes it, he is capable of
(a) listening to it
(b) hearing it
(c) understanding it
(d) interpreting it
Answer:
(c) understanding it

(ii) Ankit agrees to pay Bina ₹ 1,500 if it rains today, otherwise Bina pays Ankit 2,000. This is a ………………………………….. .
(a) Gambling
(b) Wagering Agreement
(c) Valid agreement
(d) Speculation
Answer:
(b) Wagering Agreement

(iii) Writing of a person’s name on the face or back of an instrument or on a slip of paper attached to it is known as
(a) Endorsement
(b) Transfer
(c) Negotiation
(d) Transmission
Answer:
(a) Endorsement

(iv) Anusua and Shrita formed a partnership to undertake a construction of a shopping complex in New Delhi. This partnership is called
(a) Partnership at will
(b) Particular partnership
(c) Unlimited partnership
(d) Partnership with undefined mission
Answer:
(b) Particular partnership

(v) Every employee shall be entitled to receive bonus from his employer in
(a) a financial year
(b) an accounting year
(c) a calendar year
(d) a manufacturing year
Answer:
(b) an accounting year

(vi) The annual return of an OPC shall be signed by
(a) the company secretary
(b) the director
(c) the chief accountant
(d) the auditor
Answer:
(a) the company secretary

(vii) The minimum age limit for appointment of managing director and the whole time director is
(a) 18 years
(b) 21 years
(c) 25 years
(d) 30 years
Answer:
(b) 21 years

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

(viii) A company cannot remove a director-appointed
(a) at the annual general meeting
(b) at the extraordinary general meeting
(c) by the promoter
(d) by the tribunal
Answer:
(d) by the tribunal

(ix) Moral management requires ethical
(a) producer
(b) leadership
(c) market
(d) customer (Dec 2019, 1 x 9=9 marks)
Answer:
(b) leadership

Question 34.
(b) Match and Pair:

Column I Column II
1. Right of lien (a) Industrial Establishment
2. Certificate of Incorporation (b) Minimum rates of wages have been fixed
3. Lord Nolan (c) Keep the goods in his possession
4. Plantation (d) Seven principles of public life
5. Cost of living index number (e) Form No. INC-11

(Dec 2019, 5 marks)
Answer:

Column I Column II
1. Right of lien (c) Keep the goods in his possession
2. Certificate of Incorporation (e) Form No. INC – 11
3. Lord Nolan (d) Seven principles of public life
4. Plantation (a) Industrial Establishment
5. Cost of living index number (b) Minimum rates of wages have been fixed

Question 35.
(c) State whether the following statements are True or False:
(i) A promise in return for promise means Cross promises.
Answer:
False

(ii) Section 65 provides that me Central Government shall appoint, one or more Inspectors to investigate the affairs of a LLP.
Answer:
False

(iii) The information Memorandum shall be deemed to be a Red herring prospectus.
Answer:
False

(iv) A holder of depository receipts may become a member of the company.
Answer:
True

(v) Value chain as a strategic framework for analysis of competitive advantage was promoted by Peter Drucker. (Dec 2019, 5 marks)
Answer:
False

Question 36.
(d) Fill in the blanks:
(i) Section 92 of the Companies Act provides that every company shall prepare an Annual. Return in Form No …………………. .
Answer:
MGT-7

(ii) No fine shall be imposed on any employed person who is under the age of ……………….. .
Answer:
15 years

(iii) The EST Act, 1948 is the first major legislation on …………………. security for the employees in India.
Answer:
Social

(iv) A company whose principal business is the acquisition of shares, debentures or other securities is termed as …………………… company.
Answer:
Investment

(v) ………………… is the principles and standards that determine acceptable conduct in business organizations. (Dec 2019, 5 marks)
Answer:
Business Ethics

Question 37.
The phrases ‘business ethics and corporate ethics’ are often used to describe the application of ethical values to
(1) Business activities
(2) Make businessmen spiritual
(3) Nation building
(4) Democratize corporate (Dec 2021, 1 mark)
Answer:
(1) Business activities

Question 38.
An individual shall give his consent to become a designated partner in
(1) Form-3
(2) Form- 10
(3) Form-4
(4) Form- 9 (Dec 2021, 1 mark)
Answer:
(4) Form – 9

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 39.
The annual return of an OPC shall be signed by the company secretary or where there is no company secretary, by the
(1) Auditor of the company
(2) Advocate of the company
(3) Director of the company
(4) Senior executive of the company (Dec 2021, 1 mark)
Answer:
(3) Director of the company

Question 40.
Value chain as a strategic framework for analysis of competitive advantage was promoted by
(1) Tom Harrison
(2) Peter Drucker.
(3) Michael Porter
(4) F. W. Taylor (Dec 2021,1 mark)
Answer:
(3) Michael Porter

Question 41.
In case of a sale by auction, the sale may be notified to be subject to a
(1) Recovery price
(2) Cost price
(3) Market price
(4) Reserved price (Dec 2021, 1 mark)
Answer:
(4) Reserved price

Question 42.
In which one of the following cases an agreement without consideration is void
(1) Gift actually made
(2) Saie of property
(3) Creation of agency
(4) Charitable subscription (Dec 2021, 1 mark)
Answer:
(2) Sale of property

Question 43.
In case of a private company, mention the number of members personally present to form the quorum of a meeting of the company.
(1) Two members,
(2) Four members
(3) One member
(4) Three members (Dec 2021, 1 mark)
Answer:
(1) Two members

Question 44.
The registered office shall be opened within ………………… from the date of incorporation of the company.
(1) 15days
(2) 60 days
(3) 90 days
(4) 30 days (Dec 2021, 1 mark)
Answer:
Answer:
(4) 30 days

Question 45.
Every occupier shall ensure the health, safety and welfare of all workers
(1) While employer desires so
(2) Till lifetime
(3) Till they are employed with the factory
(4) While they are at work in the factory (Dec 2021, 1 mark)
Answer:
(4) While they are at work in the factory

Question 46.
A new partner may be admitted in a partnership firm either for the increase of capital of the firm or to strengthen the
(1) Production of the firm
(2) Management of the firm
(3) Profit share of the firm
(4) Manpower of the firm (Dec 2021, 1 mark)
Answer:
(2) Management of the firm.

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 47.
Every employee should be entitled to receive bonus from his employer in an accounting year ¡t he has worked for not less than
(1) Twenty working days
(2) Thirty working days
(3) Ten working days
(4) Forty working days (Dec 2021, 1 mark)
Answer:
(2) Thirty working days

Question 48.
An instrument of the proxy shall be deposited with the registered office of the company before ………………….. hours of the conduct of the meeting.
(1)21 hours
(2) 60 hours
(3) 7 hours
(4) 48 hours (Dec 2021, 1 mark)
Answer:
(4) 48 hours

Question 49.
A general meeting may be called after giving a shorter notice if consent is given by not less than …………………….. of the members entitled to vote at such meeting.
(1) 95%
(2) 45%
(3) 55%
(4) 65% (Dec 2021, 1 mark)
Answer:
(1) 95%

Question 50.
Presentation for acceptance of the bill may not be excused in the following cases
(1) Where the drawee cannot be found with reasonable efforts
(2) Where the drawee is insolvent
(3) Where the drawee is a fictitious person
(4) Where the drawee is in a special economic zone (SEZ) (Dec 2021, 1 mark)
Answer:
(4) Where the drawee is in a special economic zone (SEZ)

Question 51.
The office of a director shall become vacant In case he absents himself from all the meetings of the Board of Directors held during a period of ………………….. with or without seeking leave of absence of the Board.
(1) 6 months
(2) 3 months
(3) 9 months
(4) 12 months (Dec 2021, 1 mark)
Answer:
(4) 12 months

Question 52.
Meaning of the Latin word indorsum’ is
(1) Under the law
(2) Inside the box
(3) Upon the back
(4) With the bearer (Dec 2021, 1 mark)
Answer:
(3) Upon the back

Question 53.
Which of the following is not a valid method of voting in a meeting of a company?
(1) Voting through electronic means
(2) Voting by showing hands
(3) Voting by-poll
(4) Voting by creating sounds  (Dec 2021, 1 mark)
Answer:
(4) Voting by creating sounds

Question 54.
Permanent disablement benefit is paid at the rate of wages.
(1) 90%
(2) 79%
(3) 120%
(4) 100%
Answer: (Dec 2021, 1 mark)
(1) 90%

Question 55.
The particulars of the issue of preference shareholders shall be noted in the ………………… Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Register of members,

Question 56.
Where a person provides labour or service to another for remuneration which is less than the minimum wage, such labour is called Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Forced labour

Question 57.
The seven principles of public life were set out by …………………… Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Lord Nolan

Question 58.
Annual return under the Payment of Bonus Act shall be filed by every employer on or before …………………… Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
1st February in each year.

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 59.
The dishonor of the instrument may be due to ……………….. and ………………… Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Non-payment and non-acceptance

Question 60.
The seller of the goods is deemed to be …………………………. when the whole of the price has not been paid. Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Unpaid seller

Question 61.
Occupier of every factory shall provide and maintain suitable room or rooms for the use of the children under the age of six years of women workers where the number of such women workers exceed. Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
30

Question 62.
A nominal partner can be of two types – Partner by estoppels and Partner by …………………. Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Holding out

Question 63.
When the drawee accepts the bills subject to qualification is known as ……………….. Which word(s) according to you most appropriately fill(s) the above blank? (2021 – Dec 1 mark)
Answer:
2021 – Qualified acceptance

Question 64.
A LLP formed, incorporated, or registered outside India which establishes a place of business within India is called ……………………. Which word(s) according to you most appropriately fill(s) the above blank?
(Dec 2021, 1 mark)
Answer:
Foreign LLP

Question 65.
A proper foundation of ethics requires a standard of ………………… to which all goals and actions can be compared to. Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Value

Question 66.
Section 92 of the Companies Act provides that every company shall prepare an Annual Return in Form No ……………… Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
MGT-7

CMA Inter Business Laws and Ethics MCQs - CMA Inter Law and Ethics Study Material

Question 67.
A shareholder holding shares of nominal value not more than 20,000 is called ………………… Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer: .
Small shareholder

Question 68.
A representation when wrongly made either innocently or unintentionally is a ………………… Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Mis – representation

Question 69.
A company whose principal business is the acquisition of shares, debentures or other securities is called ………………… company. Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Investment

Question 70.
The term of office of a member of the standing committee under the ESI Act shall be ……………. years from the date of election notification. Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
Two

Question 71.
No prospectus shall be valid ¡titis issued more than …………….. days after the date on which a copy thereof is delivered to the Registrar. Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
90

Question 72.
The Regional Director shall communicate the confirmation of shifting of registered office within ………………….. of receipt of the application Which word(s) according to you most appropriately fill(s) the above blank? (Dec 2021, 1 mark)
Answer:
30 days

Question 73.
What should be the maximum time gap between two annual general meetings of a company? (Dec 2021, 1 mark)
Answer:
Not more than 15 months.

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Business Ethics And Emotional Intelligence – CMA Inter Law and Ethics Study Material

Business Ethics and Emotional Intelligence – CMA Inter Business Laws and Ethics Study Material is designed strictly as per the latest syllabus and exam pattern.

Business Ethics and Emotional Intelligence – CMA Inter Law and Ethics Study Material

Short Notes

Question 1.
Write a qualitative note on ‘ethics philosophies’. (Dec 2012, 5 marks)
Answer:
The following are some of the ethics philosophies:
1. Deontological ethical theory
The word ‘deontological’ is derived from the Greek word “Deon” meaning ‘duty’ or ‘obligation’. Deontological theories focus on certain fundamental duties that we have as human being, such as not committing murder or theft. The duties stress that rightness of an act is derived from some feature of the action itself, with reference to its consequences.

The duties upheld by deontological theory may be classified under three headings:

  • Duties to God, including honoring him and praying to him.
  • Duties to Oneself includes preserving ones life and sharing happiness.
  • Duties to others, including family duties, social duties and political duties.

Teleology (Greek : telos: end, purpose) Is the philosophical study of design and purpose. It states that everything that exists in the universe has a particular purpose. A teleological school of thought is one that holds all things to be designed for or directed toward a final result, that there is an inherent purpose or final cause for all that exists.

3. Utilitarianism
The idea that the moral worth of an action is solely determined by its contribution to overall utility, that is, its contribution to happiness or pleasure as summed among all persons. It can be described by the phrase “the greatest good for the greatest number”. For example, one may be tempted to steal from a rich person to give to a starving family.

4. Relativism
This states that everything related to ethics is relative in nature and should be seen with that frame of reference. Something good to somebody may be very bad for somebody else. Killing an enemy on border is good for the nation but it is very bad for the family of the enemy. The idea that some elements or aspects of experience or culture are relative to i.e., dependent on, other elements or aspects. The term often refers to truth relativism, which is the doctrine that there are no absolute truths, i.e., that truth is always relative to some particular frame of reference, such as a language or a culture.

5. Justice
The concept of rare rightness in action or attitude is closely linked to fairness. A conception (means idea, notion or beginning) of justice is one of the key features of society.

Question 2.
Write short note on the following:
Seven principles of Public Life (June 2017, 5 marks)
Answer:
Seven Principles of Public Life
The Seven Principles of Public Life were set out by Lord Nolan for the first time in the year 1995. These principles of public life will apply to anyone who works as a public office holder, including elected and appointed to public office either locally or nationally. These principles apply to civil service, local.

government, the police, the Courts and probation of services, non-departmental public bodies, health, education, social are care services. These principles also apply to other sectors that delivers public services.

The British Government appointed a committee called as Committee on Standards in Public Life to advise the Prime Minister on ethical standards of public life. The Committee was established in October 1994.

The term of reference to the committee is:
to examine current concerns about standards of conduct of all holders of public office, including arrangements relating to financial and commercial activities; and

to make recommendations as to any changes in present arrangements which might be required to ensure the highest standards of propriety in public life.

The Committee submitted its first report in the year 1995 containing the seven principles of public life. The said principles have been amended over year. The seven principles of public life as amended up to and as on 2015 are as follows:

Selflessness – Holders of public office should act solely in terms of the public interest.

Integrity – Holders of public office must avoid placing themselves under any obligation to people or organizations that might try inappropriately to influence them in their work. They should not act or make decisions in order to gain financial or other material benefits for themselves, their family, or their friends. They must declare and resolve any interests and relationships.

Objectivity – Holders of public office must act and make decisions impartially, fairly, and on merit, using the best evidence and without discrimination or bias.

Accountability – Holders of public office are accountable to the public for their decisions and actions and must submit themselves to the scrutiny necessary to ensure this.

Openness – Holders of public office should act and make decisions in an open and transparent manner. Information should not be withheld from the public unless there are clear and lawful reasons for so doing.

Honesty – Holders of public office should be truthful
Leadership – Holders of public office should exhibit these principles in their own behavior. They should actively promote and robustly support the principles and be willing to challenge poor behavior wherever it occurs.

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

Question 3.
Write short note on the following term:
Business Ethics (Dec 2017, 5 marks)
Answer:
Meaning
Business ethics deals with morality in the business. It is a system of moral principles and values applied to business activities. This means the business activities should be conducted according to ethics or moral standards.

Definition
Business ethics is an art or science of maintaining harmonious relationships with society, its various groups and institutions as well as reorganizing for right or wrong of business conduct.

Features of business ethics

  • Code of conduct;
  • Provide protection to social groups;
  • Provide basic framework;
  • Need willing acceptance;
  • Education and guidance;
  • Not against for-profit making.

Principles

  • Avoid exploitation of consumers;
  • Avoid unfair trade practices;
  • Fair treatment to employees.

Importance

  • Improving consumer confidence
  • Business become conscious of social responsibilities;
  • Create good image of business;
  • Goodwill;
  • Profitability;
  • Survival of heated competition
  • Safety from legal perspectives

Question 4.
Write short note on out of the following term:
Consumer movement and Ethics. (June 2018, 5 marks)
Answer:
Consumer movement
Business ethics is gaining importance because of the growth of the consumer movement. Gone are the days when the consumer can be taken for ride by the unscrupulous business by their false propaganda and false claims, unfair trade practices. Today, the consumers are aware of their rights and well informed as well as well organized. Now they are more organized and hence cannot be cheated easily.

They take actions against those businessmen who indulge in bad business practices. They boycott poor quality, harmful, high priced and counterfeit goods. Therefore, the only way to survive in business is to be honest and fair. Consumer forums and consumer associations are more active and vocal now.

Question 5.
Write short notes on:
Improving ethical behaviour in business (Dec 2018, 5 marks)
Answer:
Improving ethical behaviour in business
Understanding how people make ethical choices and what prompts a person to act unethically may reverse the current trend toward unethical behaviour in business.

Ethical decisions in an organization are influenced by three key factors:
individual moral standards, the influence of managers and co-workers, and the opportunity to engage in misconduct.
It is difficult for employees to determine what conduct is acceptable within a company if the firm does not have ethics policies and standards.

And without such policies and standards, employees may base decisions on how their peers and superiors behave. Professional codes of ethics are formalized rules and standards that describe what a company expects of its employees.

Codes of ethics, policies on ethics, and ethics training programs advance ethical behavior because they prescribe which activities are acceptable and which are not, and they limit the opportunity for misconduct by providing punishments for violations of the rules and standards.

The enforcement of such codes and policies through rewards and punishments increases the acceptance of ethical standards by employees.

Question 6.
Write short flotes on:
importance of ethics (June 2019, 5 marks)
Answer: .
Importance of Ethics:
Ethics is a requírernent for human life. It is our means of deciding a course of action. Without it, our actions would be random and aimless.

There would be no way to work towards a goal because there would be no way to pick between a limitless number of goals.

Even with an ethical standard, we may be unable to pursue our goals with the possibility of success.

To the degree which a rational ethical standard is taken, we are able to correctly organize our goals and actions to accomplish our most important values.

Any flaw in our ethics will reduce our ability to be successful in our endeavors.

A proper foundation of ethics requires a standard of value to which all goals and actions can be compared to.

This standard is our own lives and the happiness which makes them liveable. This is our ultimate standard of value, the goal in which an ethical man must always aim.

It is arrived at by an examination of man’s nature, and recognizing his peculiar needs. A system of ethics must further consist of not only emergency situations but the day-to-day choices we make constantly.

It must include our relations to others, and recognize their importance not only to our physical survival, but to our well-being and happiness, It must recognize that our lives are an end in themselves, and that sacrifice is not only not necessary, but destructive.

Question 7.
Write short note on the following term:
Advantages of Business Ethics (Dec 2019, 5 marks)
Answer:
Advantages of Business Ethics:

  • Business ethics deals with morality in the business. It is a system of moral principles and values applied to business activities.
  • This means the business activities should be conducted according to ethics or moral standard.
  • Business ethics is an art or science of maintaining harmonious relationships with society, its various groups and institutions as well as reorganizing for right or wrong of business conduct.

The following are the advantages for following the principles of business ethics:

  • It offers a company a competitive advantage;
  • Goodwill of the firm hikes depending on its responds towards its ethical issues;
  • Productivity through rigid, firm, and sincere workers as well as other business chain members;
  • Through increasing morale and trust business can increase their market share;
  • Publicity due to well and ethical performance;

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

Question 8.
Write Short Notes on Types of Ethics (Dec 2021, 3 marks)
Answer:
Type of ethics
Ethics may be divided into three types as follows:

  1. Metaethics: Meta-ethics deals with the nature of moral judgment. It looks at the origins and meanings of ethical principles.
  2. Normative ethics: Normative ethics is concerned with the content of moral judgments and the criteria for what is right or wrong.
  3. Applied ethics: Applied ethics looks at controversial topics like wàr, animal rights and capital punishment.

Question 9.
Write short note on the following terms:
Improving ethical behaviour in business (Dec 2022, 5 marks)

Distinguish Between

Question 10.
Answer the question:
(i) What is the difference between morals and ethics? (Dec 2016, 7 marks)
Answer:
First of all analysis of the key terms ‘ethics’ and ‘morals’ is to be done. The linguistic use of the terms, they seems as if they are in the plural form, just as ‘economies’ or ‘polities’, but we treat them as singular. Generally, ethics and morals are used as synonyms. There is nothing wrong in such a usage, for, after all, the meanings of all words depend on their common usage.

However, in formal study, we need to understand the meaning of the terms in a qualified way so as to make our subject of study precise and well-defined.

Meaning:
The terms ‘ethics’ and ‘morals are etymological, that is, from their very roots or terms, different. The word moral(s) is derived from the Latin root moralis, which implies custom. In other words, it refers to a behavior that is accepted or rejected due to an accepted social custom. The word ethics stems from the Greek word ethic, which is attributed to a social environment, referred to as ethos or social milieu. This latter meaning embraces much more than mere custom. It refers to everything that is part and parcel of society and not just what is allowed or forbidden. Morality is more concerned with the norms, values, and beliefs embedded in social processes which define what is right or wrong for an individual or community.

Another point of difference between the two refers to their usage in ordinary language. For instance, a lawyer defending an alleged rapist would accuse ‘the victim as ‘morally fallen’ and not as ‘ethically fallen’. On the other hand, a committee that is formed to probe the behavior of the members of Parliament would be called ‘ethics committee’ not ‘moral committee’. The meaning of the word is in its usage. Thus, both these terms have their unique characteristics and applications.

Usage:
However, the terms are intrinsically not different. Both of them refer to the same reality of human actions, which may be characterized as morally or ethically positive or negative as the case may be. It may be true that the terms (ethics and morals) sound different but they refer to the same social reality wherein a certain body of accepted norms forms a code of conduct in society. The actions of the members are described as ‘moral’ or ‘ethical’ depending on the linguistic nuances of the meaning in a particular case as well as on the conventional use of the terms. it is in the use of the words in a given context, that the meaning becomes clear.

In academic usage, however, moral behavior refers to a concrete behavior such as showing respect to elders. Ethics, on the other hand, is used to mean a discipline or a systematic study of moral behavior such as justice.

People’s behavior in a society can be morally characterized in their day-to-day actions. It is in the classroom that we analyse the ethical significance of these actions.

These terms are generally interchanged with one and the same meaning, that is, to determine whether some human action is right or wrong. They deal with the application of a socially accepted code of conduct. This conduct may be termed as either moral conduct or ethical conduct.

Descriptive Questions

Question 11.
(a) “The integrity pact (IP) is a tool aimed at preventing corruption in public contracting.” Discuss.
(Dec 2012, 6 marks)
(b) Discuss briefly the following: .
(iv) Ethics in compliance. (Dec 2012, 3 marks)
Answer:
(a) Developed by Transparency International (TI), the Integrity Pact (IP) is a tool aimed at preventing corruption in public contracting. It consists of a process that includes an agreement between a government or a government department and all bidders for a public contract.

It contains rights and obligations to the effect that neither side will; pay, offer, demand or accept bribes, collude with competitors to obtain the contract; or engage in such abuses while carrying out the contract. The IP also introduces a monitoring system that provides for independent oversight and accountability.

(b) Ethics in compliance:
Compliance is about obeying and adhering rules and authority. The motivation for being compliant could be to do the right thing out of the fear of being caught and punished rather than a desire to be abiding by the law.

An ethical climate in an organization ensures that compliance with law is supported by a desire to abide by the laws. Organizations that value high ethics comply with the laws not only in letter but go beyond what is stipulated or expected of them.

Question 12.
You are the Company Secretary of Innovative Products Ltd. The Board of Directors desires to know the advantages of business ethics. Draft a note for consideration of the Board of Directors. (Dec 2012, 5 marks)
Answer:
Advantages of Business Ethics:
Adherence (means loyalty, faithfulness, observance) to a Code of Conduct offers the following advantages:

  1. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
  2. Full, fair, accurate, timely, and understandable disclosure in reports and documents that a company files with, or submits to the commission and in other public communications made by the company;
  3. Compliance with applicable governmental laws, rules, and regulations;
  4. The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code, and;
  5. Accountability for adherence to the code.

Question 13.
(a) Bhagavad Gita teaches that “without being attached to the fruits of activities, one should act as a matter of duty, by working without attachment one attains the supreme.” In the light of this statement, discuss various ethics philosophies (June 2013, 6 marks)
Answer:

Ethics Philosophies Bhagavad Gita teaches the following: “That, without being attached to the fruits of activities, one should act as a matter of duty, by working without attachment one attains the Supreme. This flows from the concept Karma. The concept of Karma is close to the notion of deontological ethics.
Deontological Ethics Emphasizes on the relationship between duty and the morality of human actions. Deontology (Greek deon, “duty”, and logos, “science”) is, therefore, science of duty. In deontological ethics an action is considered morally good because of some characteristic of the action itself, not because the consequence of the action is good. When we fail to follow our duty, we are behaving immorally.

The other ethical philosophies include:

 Teleological Ethics (Derived from the Greek word ‘telas’ meaning end, purpose) is an ethical theory that holds that the ends or consequences of an act determine whether an act is good or evil. Rightness of actions is determined solely by the good consequences. It is also known as consequential ethics.
Enlightened Egoism (From Latin ego, “la), in philosophy, an ethical theory holding that the good is based on the pursuit of self-interest. This model takes into account harms, benefits and rights for a person’s own welfare. Under this model an action is morally correct if it increases benefits forth individual in a way that does not intentionally hurt others, and if these benefits are believed to counterbalance any unintentinal harms that ensue.
Utilitarianism Is an ethic of welfare. It is the idea that the moral worth of an action is solely determined by its contribution to overall utility, that is, its contribution to happiness or pleasure as summed among all persons. It can be described by the phrase “the greatest good for the greatest number”.
Relativism Holds that there are no absolute truths in ethics and that what is morally right or wrong varies from person to person or from society to society. The term often refers to truth relativism, which is the doctrine that there are no absolute truths, i.e., that truth is always relative to some particular frame of reference, such as a language or a culture.
Virtue Ethics Theory is a branch of moral philosophy that emphasizes character, rather than rules or consequences, as the key element of ethical thinking.
Justice Is the concept of moral rightness in action or attitude;
it is closely linked to fairness. A conception of justice is one or the key features of society.

Question 14.
“Good business ethics promotes good business” – Explain. (Dec 2013, 4 marks)
Answer:
In general the ethics is concerned with doing the right thing. The ethics covers the understanding and analysis of right and wrong, good and bad or evil.

There is a prowing realization all over the world that ethics is vitally important for the survival and growth of any business and for the progress of any society.

Ethics leads to an efficient economy; ethics alone, not government or laws, can protect society; ethics is good in itself; ethics and profits go together in the long-run.

An ethically responsible company is one which has developed a culture of caring for people and for the environment; a culture which flows downwards from the top managers and leaders.

Adopting ethical behaviour in an organization not only increases and enhances its goodwill but also leads to positive consequences in the long run. Business ethics protects the interest of all stakeholders.

Businessman who follows business ethics improves his self-image, gets self-satisfaction and motivates others also to follow the same principles.

So in the era of global economy, for a successful business one has to follow sound ethical practices. Ethics are important not only in business but in all aspects of life because it is an essential part of the foundation on which civilized society is built.

A business or society that lacks ethical principles is bound to fail sooner or later. An organization that has a strong ethical program in place will certainly help in reducing the burden on the employees while deciding on some alternatives, Ethics helps employees in developing a rationale behind the actions that they undertake ¡n the efficient performance of their duties.

It will certainly help in reducing unnecessary tensions and unavoidable thoughts that an individual gets surrounded with when he is faced such kind of problems. This helps him in concentrating more on his work and less on the indecisive thoughts that corrupt his mind.

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

Question 15.
“Ethics and morals are one and the same” – Comment. (Dec 2013, 3 marks)
Answer:
The word ethics is derived from the Greek word ‘ethics’ meaning character is essence of behaviour while the word Moral is derived from Latin ‘mos’ which means customs.

These two words are fundamentally different and provide two very different standards for defining what is right and what is wrong.

Character is a personal attribute while custom relates to a group of people. People have character while societies have customs. Moral refers to a behaviour that is accepted or rejected due to an accepted social custom. The word ethics embraces much more than mere custom.

It refers to everything that is part and parcel of society and not just what is allowed or forbidden.

Morality is more concerned with the norms, values, and beliefs embedded in social processes which define what is right or wrong for an individual or community.

Another point of difference between the two refers to their usage in ordinary language. For instance, a lawyer defending an alleged rapist would accuse the victim as ‘morally fallen’ and not as ‘ethically fallen’.

On the other hand, a committee that is formed to probe the behaviour of the members of Parliament would be called ‘ethics committee’, not moral committee.

The meaning of the world is in its usage.
Thus, both these terms have their unique characteristics and applications.
However, both the terms refer to human actions, which may be characterized as morally or ethically positive or negative as the case may be.

It may be true that the terms (ethics and morals) sound different but they refer to the same social reality wherein a certain body of accepted norms forms a code of conduct in society.

The actions of the members are described as “moral” or “ethical” depending on the context in which the term is used.

Question 16.
“Business Ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed”. Explain. (June 2014, 4 marks)
Answer:
Business Ethics also called Corporate Ethics is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment.

It applies to all aspects of business conduct and is relevant to the conduct of individuals and the entire organisations.

Business ethics takes into account the social principles of the situations in which business takes place. No matter how hard one tries, it is impossible to separate life from business. For a businessman, business is life. Mahatma Gandhi (1948) said, ‘It is difficult but not impossible to conduct strictly honest business.

What is true is that honesty is incompatible with amassing of large fortune’. The business world is an important part of society, as it is concerned with the livelihoods of people.

Business activity too is subjected to the code of conduct without any exception. People expect businessmen to possess the same rationality as any other citizen. Therefore, there is no separate business ethics for businessmen, as ethics applies to all the activities of people. Consequently, we have to keep business within the bounds of ethics.

Question 17.
Explain the interface between Ethics and Laws. (June 2014, 3 marks)
Answer:
Ethics and Law: The Interface Law is application of ethics into social and personal Life. All laws are subordinates to ethical values but all ethics may not be covered by law. Law has a mandatory outside force behind it while ethics has moral force inside the person.

Law is objective while ethics ¡s subjective. What is ethical for one person may not be ethical for some other person where as law has to be same for all the persons.

Perhaps the best way of visualizing ethics and law is in terms of two intersecting domains as depicted in the following figure:
Thus, in one sense, business ethics can be said to begin where law ends. Business Ethics is primarily concerned with those issues not completely covered by law, or where there is no definite consensus on whether something is right or wrong. Hence, it is often remarked, that business ethics is about the ‘grey areas of’ business where values are in conflict.

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

Question 18.
(i) “Ethics are desirable for every business.” Comment. (Dec 2014, 5 marks)
(ii) Explain the concept of value-free ethics. (Dec 2014, 3 marks)
Answer:
(i) Need for Business Ethics:
Business ethics is currently a very prominent business topic and the debates and dilemmas surrounding business ethics have attracted enormous amount of attention from different quarters of organizations and society. Hence, it has emerged as an increasingly important area of study. Some of the major reasons why a good understanding of business ethics is important can be stated as follows:

Stop business malpractices Some unscrupulous businessmen do business malpractices by indulging in unfair trade practices like black-marketing, artificial high pricing, adulteration, cheating in weights and measures, selling of duplicate and harmful products, hoarding, false claims or representations about their products, etc. These business malpractices are harmful to the consumers. Business ethics help to stop these business malpractices.
Improve customers’ confidence: Business ethics are needed to improve the customers’ confidence about the quality, quantity, price, etc. of the products. The customers have more trust and confidence in the businessmen who follow ethical rules. They feel that such businessmen will not cheat them.
Survival of Business ethics are mandatory for the survival of business. The businessman who do not follow it will have short-term success, but they will fail in the long run. This is because they can cheat a consumer only once. After that, the consumer will not buy goods from that businessman. He will also tell others not to buy from that businessman.
Safeguarding Consumer rights sovereignty cannot be either ruled out or consumers’ denied. Business can survive so long it enjoys the patronage of consumers. The consumer has many rights such as right to health and safety, right to be informed, right to choose, right to be heard, right to redress, etc. But many businessmen do not respect and protect these rights. Business ethics are a must to safeguard these rights of the consumers.
Protecting employees and shareholders: Business ethics are required to protect the interests of employees, shareholders, competitors, dealers, suppliers, etc. It protects them from exploitation through unfair trade practices.

(ii) Value-free Ethics:
It would seem that business is an ethically neutral or value-free activity. In other words, the only value business is concerned with is the monetary value.
It is not in the interest of business to mix ethical values. An ancient Arabic wisdom states, ‘Live together like brothers and do business like strangers.’
Businesses should be kept free from other social relationships and obligations.

  • The only successful relationship that exits in business is that of a vendor and a customer.
  • It is also said that ‘for the merchant, even honesty is a financial speculation.’
  • Indeed, for a businessman, every factor in the business is measured in terms of money.
  • The volatility that we see in the stock market is a clear example of the speculative nature of business, which is directly proportional to the prevailing attitude of the people.

Concept of Value-free Ethics:
Nowadays, we are familiar with ‘sugar-free’ soft drinks, ‘caffeine-free’ coffee, and ‘alcohol-free’ beer. The concept of ‘value-free’ business ethics appears to be quite appealing to businessmen. It is as though it may be pursued devoid of all rules within a social vacuum.

The concept of value-free ethics found application in economics in a rather ironic fashion. Ludwig von Mises known as the father of the Austrian School of Economics, proposed the pure theory of economics, stating that economic concepts are a priori, that is, they are not dependent on experience but are purely virtual concepts.

The concept of choice, for instance, is a pure concept. It is immaterial whether one chooses water or wine, but the concept in itself is free of such particular elements.

Hence choice is value-free (wertfrei). Applied to ethics, it would mean that we should be able to study the principles of this discipline, such as goodness, truth, justice, honour, etc. in their pure form.

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

Question 19.
Explain’ Business ethics as professional ethics. (Dec 2014, 4 marks)
Answer:

  • Just as a society functions on the social codes of conduct and a country is governed by its constitution, a business is run on corporate codes.
  • In other words, there is a professional code of conduct for any business.
  • These codes keep evolving as other things around evolve and develop.
  • Therefore, not only should business be defined within the confines of ethics, but it should be practiced strictly under its own professional code of conduct.
  • This distinction helps to orient the general principles of ethics and business to a particular activity.
  • The principles, however, do not change.

Ethical behaviour is particularly important to professions and to business:
It matters to the professions because the complexity of what they do means that there has to be trust by the user in what they do, or they have no purpose.

It matters to business because investors will not back a company that will not report fairly and customers, increasingly, will not buy from a business that is not acting in the wider interests of society. Deciding what is the right thing to do can be challenging.

We all face numerous personal, social, and organizational pressures which influence our decisions and actions. Sometimes it is easy to assume that compliance with legislation, regulations and policies and procedures equates to doing the right thing. By its nature, a compliance approach to decision-making cannot cover all types of situations and eventualities.

Even when a specific circumstance is addressed by a rule, compliance is often with the letter of the rule, not its spirit. What is needed is a principles-based approach to decision-making, which encourages deliberation, judgment, and responsibility.

The character of a true professional remains undivided, whether at work or at home. Our roles may change from time to time and from place to place but the integrity of our character should be maintained.

Business ethics, thus, professionally adheres to a code of conduct that is in accordance with the normative principles
Further, it may be concretely stated that professionals bear the following marked characteristics:

  • competency of educational qualification,
  • professional skills, and
  • compensation (salary/ remuneration, etc.).

Question 20.
Answer the questions:
(a) (i) ‘The ethics of business is the ethics of responsibility. The businessman must promise that he will not harm knowingly’. Explain. (June 2015, 4 marks)
(b) (i) Explain Ethics as a principle. (June 2015, 4 marks)
(c) (i) What are the seven principles of Public life? Explain. (June 2015, 4 marks)
Answer:
(a) (i) Over a period of time, business has developed a code of conduct that creates greatest good and least harm to its pillars of support viz. customers, employees, shareholders and community. Apparently, there is a contradiction between ethics and motive of profit. It is now well accepted a fact that ethical behavior creates a positive reputation that expands the opportunities for profit. A business is not restricted to its various assets viz. Building, Machine, and Working Capital only but is having a vision and a role, present or prospective to play in the society. To achieve such goal it needs to make a number of sacrifices and take responsibilities such as:

  • Creation of awareness within the organization how its products and services are accepted to the consumer, the industry, and the society at large.
  • Sacrifice a part of profit to satisfy legal or other commitments for corporate social responsibility.
  • An organizational culture most likely to encourage high ethical standards of risk tolerance, control, and conflict tolerance.
  • Spend on research and other innovations for protecting environmental needs to carry out business /industrial operations.

(b) (i) Ethics as a Principle:
We have established that social evolution has developed definite principles of civic behaviour, which have attained the status of principles. By principle, we understand that something proceeds and depends on it for its cause. For instance, when one kicks a football, force is the principle that propels it into motion and the ball remains in motion till the force lasts.

In other words, the physical world functions strictly according to the laws of physics.
It is expected that people also submit their behavior, both in thoughts and in actions, to these principles.
An action is valid as long as it reflects the principle, just as the speed of the moving ball depends on the force it receives.

(c) (i) The Seven Principles of Public Life.

Selflessness Holders of public office should take decisions solely in tells of the public interest. They should not do so in order to gain financial or other material benefits for themselves, their family, or their friends.
Integrity Holders of public office should not place themselves under any financial ór other obligation to outside individuals or organizations that might influence them in the performance or their official duties.
Objectivity In carrying out public business including making public appointments, awarding contracts, or recommending individuals for rewards and benefits, holders of public office should make choices on merit.
Accountability Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.
Openness Holders of public office should be as open as possible about all the decisions and actiot that they take. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands.
Honesty Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest.
Leadership Holders of public office should promote and support these principles by sound leadership and prove to be an example in whatever they perform.

Question 21.
Answer the questions:
(a) (i) ‘The terms ethics and morals are etymologically different’. Explain. (Dec 2015, 3 marks)
(b) (i) State the evolution of ethics. (Dec 2015, 3 marks)
(c) (i) ‘Fairness and honesty are the pillars of success in business’. Comment. (Dec 2015,4 marks)
Answer:
(a) (i) Meaning:

  • The terms ‘ethics’ and ‘morals’ are etymologically, that is, from their very roots or terms, different.
  • The word moral(s) is derived from the Latin root moralis, which implies custom.
  • In other words, it refers to a behaviour that is accepted or rejected due to an accepted social custom.
  • The word ethics stems from the Greek word ethikos, which attributes to a social environment, referred to as ethos or social milieu.
  • This latter meaning embraces much more than mere custom.

It refers to everything that is part and parcel of society and not just what is allowed or forbidden.
Morality is more concerned with the norms, values, and beliefs embedded in social processes which define what is right or wrong for an individual or community.

Another point of difference between the two refers to their usage in ordinary language. For instance, a lawyer defending an alleged rapist would accuse the victim as ‘morality fallen’ and not as ‘ethically fallen’.

On the other hand, a committee that is formed to probe the behavior of the members of Parliament would be called ‘ethics committee’, not a ‘moral committee’.

The meaning of the word is in its usage.
Thus, both these terms have their unique characteristics and applications.

(b) (i) Social conduct has evolved along with the evolution of society.

  • When your elders tell you ‘Do not cheat’, they are referring to a social code of conduct. Social conduct has developed in society over hundreds of years.
  • The codes of conduct have been passed down from generation to generation, and there is a pattern to the evolution of such codes.
  • Acceptable behaviour is promoted and elevated as a social value, and unacceptable behaviour is rejected and condemned.
  • In ancient India, there was no moral problem with the custom of sati-immolating the wife on the funeral pyre or the deceased husband.
  • But society has evolved humanely and has condemned the act as unacceptable and morally reprehensible.

The laws of a country are based on the customs or moral codes of its society. Penalties are prescribed for bad actions, actions that contradict the established laws.

The laws are a measure against those people who cross the limits of the code of social conduct, and ensure that good citizens are protected from the negative consequences of the law-breakers.

(c) (i) The success of the business depends very much on fairness and honesty in the business. Fairness and honesty are at the heart of the business ethics and relate to the general values of decision-makers. At a minimum, business professionals and persons are expected to follow all applicable laws and regulation.

even then, they are expected not to harm customers, employees, clients or competitors knowingly through deception, or misrepresentation. coercion or discrimination. One aspect of fairness and honesty is related to disclosure of potential harm caused by product use.

Another aspect of fairness relates to competition. Although numerous laws have been passed to foster competition and make monopolistic practices illegal, companies sometimes gain control over markets by using questionable practices that harm competition.

Rivals of Microsoft, for example, accused the software giants of using unfair and monopolistic practices to maintain market dominance with its Internet Explorer browser. These aforementioned examples show that fairness and honesty pay in the long run; they secure the stability of the business and overall reputation in the business world. Therefore, we may say that fairness and honesty are the pillars of success in the business.

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

Question 22.
Answer the question:
What is ‘Business Ethics’? (June 2016, 7 marks)
Answer:
Business Ethics:
According to Andrew Crane,” Business Ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed.” Raymond C. Baumhart contends – “The ethics of business is the ethics of responsibility. The businessman must promise that he will not harm knowingly”.

Thus, Business Ethics (also called Corporate Ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and the entire organizations.

Business ethics concerns itself with adhering to the social principles of the situations in which business takes place. The analysis of this definition leads us to the following discussion.

Thus, Business Ethics (also called Corporate Ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and the entire organizations.

It deals with morality in business environment, It involves moral judgment based on understanding of the society. It extends beyond the legal questions and involves moral judgment based on understanding of the society. It extends beyond the legal questions and involves goodness and badness of an Act.

1. Business ethics refers to the application of everyday moral or ethical norms to business. It requires an awareness of how the products and services of an organizations and the action of its employees, can affect its stakeholders and society as a whole, either positively or negatively.

2. Ethics in business organization relates to a corporate culture of values, leadership programs and enforcement.

3. It is that set of principles or reasons which governs the conduct of business at the individual or collective level by the application of ethical reasoning to specific business situations and activities.

Question 23.
Answer the question:
Explain in brief the measures to ensure ethics in the workplace. (Dec 2016, 8 marks)
Answer: .
An ethical company may develop certain basic principles which will guide its employees in dealing with ethical issues at the workplace. 4 set of such principles is given below:
1. Codes of ethics and conduct
A code of ethics specifies the company’s rules regarding ethical behavior in the workplace. For e.g., company’s code may prohibit employees from accepting gifts from suppliers and clients. Code becomes more effective when the top management actively supports and applies it.

2. Establish open communication
Most ethical issues in business are ambiguous and uncertain. Therefore, there is need to create work environment in which employees feel free to discuss ethical dilemmas. Management should explain the purpose and contents of ethical policy. Training is required to sensitize employees to potential ethical issues. Necessary resources and support need to be provided to help employees to resolve ethical dilemmas.

3. Appoint an ombudsman
The ombudsman serves as a point of reference. Employees can go to him and discuss ethical issues in confidence.

4. Leadership by example
Ethical behavior is best taught by example. A father who insults his parents cannot expect respect from his children. Top management should themselves follow ethical practices and also create an impression that unethical behavior will not be tolerated.

5. Integrate ethics management with other management practices
When developing the values statement during strategic planning, ethical values should be preferred in the workplace. When developing personnel policies, reflect on what ethical value, you’d like to be most prominent in the organization’s culture and then design policies to produce these behaviours.

6. Group decision making
If ethical issues are decided in groups, diverse interests and perspectives can be considered. The decision process becomes more acceptable.

7. Suggestion system
A suggestion box may be installed so that employees may report suspended unethical activities in an anonymous manner. This will encourage employees to report ethical violations.

8. Grievance procedure
An appropriate grievance redressal system may be created. This will help to resolve disagreements between employees and their supervisors on ethical issues.

9. Regularly update policies and procedure
Policies and procedures concerning ethics at the workplace need to be reviewed and updated on regular basis.

Question 24.
What are the standards of ethical conduct for practitioners fixed by the ICAI? (June 2017, 10 marks)
Answer:
ICAI has promulgated the following standards of ethical conduct for practitioners:
maintain at all times independence of thought and action; not to express an opinion on cost/financial reports or statements without first assessing her or his relationship with her or his client to determine whether such Member might expect her or his opinion to be considered independent, objective, and unbiased by one who has knowledge of all the facts; and

when preparing cost / financial reports or statements or expressing an opinion on cost I financial reports or statements, disclose all material facts known to such member in order not to make such cost / financial reports or statements misleading, acquire sufficient information to warrant an expression of opinion and report all material misstatements or departures from generally accepted accounting principles.

not to disclose or use any confidential information concerning the affairs of such Member’s employer or client unless acting in the course of his or her duties or except when such information is required to be disclosed in the course of any defense of himself or herself or any associate or employee in any lawsuit or other legal proceeding or against alleged professional misconduct by order of lawful authority or any committee of the Society in the proper exercise of their duties but only to the extent necessary for such purpose;

inform his or her employer or client of any business connections or interests of which such Member’s employer or client would reasonably expect to be informed;

not, in the course of exercising his or her duties on behalf of such Member’s employer or client, hold, receive, bargain for or acquire any fee, remuneration or benefit without such employer’s or client’s knowledge and consent; and

take all reasonable steps, in arranging any engagement as a consultant, to establish a clear understanding of the scope and objectives of the work before it is commenced and will furnish the client with an estimate of cost, preferably before the engagement is commenced, but in any event as soon as possible thereafter.

conduct himself or herself toward other Members with courtesy and good faith;
not to accept any engagement to review the work of another member for the same employer except with the knowledge of that member, or except where the connection of that member with the work has been terminated unless the member reviews the work of others as a normal part of his or her responsibilities;

not to attempt to gain an advantage over other members by paying or accepting a commission ri securing management accounting work; not to act maliciously or in any other way which may adversely reflect on the public or professional reputation or business of another member;

at all times maintain the standards of competence expressed by the Institute from time to time; undertake only such work as he or she is competent to perform by virtue of his or her training and experience and will, where it would be in the best interests of an employer or client, engage, or advise the employer or client to engage, other specialists;

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

Question 25.
Why business ethics is more important and immensely needed in the present business environment? Discuss. (Dec 2017, 10 marks)
Answer:
Importance of. Ethics

  • Public expects business to exhibit high levels of ethical performance and social responsibility;
  • Encouraging business firms and their employees to behave ethically is to prevent harm to society;
  • Promoting ethical behavior is to protect businesses from abuse by unethical employees or unethical competitors;
  • High ethical performance also protects the individuals who work in business.

Need for business ethics
The following points discuss the need and importance of business ethics to stop business malpractice;

  • to improve customers’ confidence;
  • for the survival of business;
  • to safeguard consumers’ rights;
  • to protect employees and shareholders;
  • to develop good relations;
  • to create good image;
  • for smooth functioning;
  • consumer movement;
  • consumer satisfaction;
  • importance of labour;
  • healthy competition.

Question 26.
What are the areas in business ethics? Write a note of the same. (June 2018, 10 marks)
Answer:
Areas in business ethics:

  • Corporate Social Responsibility;
  • Fiduciary responsibility to stakeholders;
  • Industrial espionage.
  • Ethical behavior and corporate social responsibility can bring significant benefits to a business.

For example, they may:

  • attract customers to the firm’s products, which means boosting sales and profits
  • make employees want to stay with the business, reduces labor turnover and therefore increases productivity.
  • attract more employees wanting to work for the business, reduce recruitment costs, and enable the company to get the most talented employees.
  • attract investors and keep the company’s share price high, thereby protecting the business from takeover.

Knowing that the company, they deal with, has stated their morals and made a promise to work in an ethical and responsible manner allows investors peace of mind that their money is being used in a way that arranges with their own moral standing. When working for a company with strong business ethics, employees are comfortable in the knowledge that they are not by their own action allowing unethical practices to continue. Customers are at ease buying products or services from a company they know to source their materials and labor in an ethical and responsible way.

A company which sets out to work within its own ethical guidelines is also less at risk of being fined for poor behavior, and less likely to find themselves in breach of one of a large number of laws concerning required behaviour.

Reputation is one of a company’s most important assets, and one of ho most difficult to rebuild should not be lost. Maintaining the promises it is made is crucial to maintaining that reputation. Businesses not following any kind of ethical code or carrying out their social responsibility leads to wider consequences. Unethical behavior may damage a firm’s reputation and make it less appealing to stakeholders. This means that profits could fall as a result.

The natural world can be affected by a lack of business ethics. For example, a business which does not show care for where it disposes its waste products or fails to take a long-term view when buying up land for development is damaging the world in which every human being lives, and damaging the future prospects of all companies.

Question 27.
Discuss the nature and relevance of Ethics to the Business. (Dec 2018, 10 marks)
Answer:
Ethics – Nature and relevance to the business Several factors play a role in the success of a company that is beyond the scope of financial statements alone. Organizational culture, management philosophy, and ethics in business each have an impact on how well a business performs in the long term.

No matter the size, industry or level or profitability of an organization, business ethics are one of the most important aspects of long-term success

The management team sets the tone for how the entire company runs on a day-to-day basis. When the prevailing management philosophy is based on ethical practices and behavior, leaders within an organization can direct employees by example and guide them in making decisions that are not only beneficial to them as individuals but also to the organization as a whole.

Building on a foundation of ethical behaviour helps create long-lasting positive effects for a company, including the ability to attract and retain highly talented individuals and building and maintaining a positive reputation within the community.

Running a business in an ethical manner from the top down builds a stronger bond between individuals on the management team, further creating stability within the company.

When management is leading an organization in an ethical manner, employees follow in those footsteps.

Employees make better decisions in less time with business ethics as a guiding principle; this increases productivity and overall employee morale.

When employees complete work in a way that is based on honesty and integrity, the whole organization benefits.

Employees who work for a corporation that demands a high standard of business ethics in all facets of operations are more likely to perform their job duties at a higher level and are also more inclined to stay loyal to that organization.

The importance of business ethics reaches far beyond employee loyalty and morale or the strength of a management team bond.

As with all business initiatives, the ethical operation of a company is directly related to profitability in both the short and long term.

The reputation of a business from the surrounding community, other businesses and individual investors is paramount in determining whether a company is a worthwhile investment.

If a company’s reputation is less than perfect based on the perception that it does not operate ethically, investors are less inclined to buy stock or otherwise support its operations.

With consistent ethical behaviour comes increasingly positive public image. and there are few other considerations as important to potential investors and current shareholders.

To retain a positive image, businesses must be committed to operating on an ethical foundation as ¡t relates to treatment of employees, respect to the surrounding environment and fair market practices in terms of price and consumer treatment.

Question 28.
‘Ethics is the first line of defense against corruption, while law enforcement is remedial and reactive. However, both fail to achieve the desired aim in the Indian set-up.” Do you agree? Give reasons in support of your answer. (June 2019, 10 marks)
Answer:
It is, absolutely correct to say that ethics is the first line of defense against corruption. What prevents corruption in. the first place ¡s ethics. The enforcement of law is a reaction to the occurrence of the corruption.

While the law can only lay down the do’s and don’ts and the consequences of doing or not doing something.

The compliance to law ¡n letter and spirit can be achieved only through ethical practices being followed. An act may be perfectly legal ‘but totally unethical. Therefore, the statement law enforcement is remedial and reactive is also true.

However, ethics ¡s not absolute and ¡s open to the influence of time, place, and situation. Certain unethical practice on account of the fact that widely prevalent is apparently justified.

The following are some of the factors that have contributed to the prevalence of corruption in India:

  • Cultural ethos: Putting a premium on materialism, profiteering, power play, and casual attitude for ethical value …. Myopic concern overriding long-term considerations and values.
  • Institutional failures: Procedural formalities in-built obstacles, bureaucratic red-tapism, etc.
  • Poor enforcement of law: delay injustice.
  • Erosion of values in politicians, entrepreneurs political lobbying etc.

Question 29.
What is Value Chain? What are the new themes and challenges that managers face currently? (Dec 2019, 9 marks)
Answer:
Value chain is a visualization of complete business as a sequence of activities in which usefulness is added to the products or services produced and sold by an organization. Management accountants provide decision support for managers in each activity of value chain.

The design of management accounting system has to take into consideration the decision needs of the managers. Also it has to take into consideration the new themes and challenges that managers face currently.

  • Customer focus: The challenge for managers it invest sufficient resources to enhance customer satisfaction. But every action of the organization has to result enhanced profitability or maintained profitability for the organization.
  • Key Success Factors: These are nonfinancial factors which have an effect on the economic viability of the organization. Cost, quality, time, and innovation are important key success factors.
  • Continuous Improvement: Continuous improvement or kaizen is a popular theme. Innovation related to this area in costing is kaizen costing.
  • Value Chain and Supply Chain Analysis: Value chain as a strategic framework for analysis of competitive advantage was promoted by Michael Porter.

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

Question 30.
Discuss the importance of ethics. (Dec 2021, 6 marks)
Answer:
Importance of ethics.

  • Ethics is a requirement for human life.
  • It is our means of deciding a course of action.
  • Without it, our actions would be random and aimless.
  • There would be no way to work towards a goal because there would be no way to pick between a limitless number of goals.
  • Even with an ethical standard, we may be unable to pursue our goals with the possibility of success.

no the degree which a rational ethical standard is taken, we are able to correctly organize our goals and actions to accomplish our most important values.

Any flaw in our ethics will reduce our ability to be successful in our endeavors.

A proper foundation of ethics requires a standard of value to which all goals and actions can be compared to.

This standard is our own lives, and the happiness which makes them livable. This is our ultimate standard of value, the goal in which an ethical man must always aim. It is arrived at by an examination of man’s nature, and recognizing his peculiar needs.

A system of ethics must further consist ot not only emergency situations but the day-to-day choices we make constantly.

It must include our relations to others, and recognize their importance not only to our physical survival but to our wellbeing and happiness.

It must recognize that our lives are an end in themselves, and that sacrifice is not only necessary but destructive.

Question 31.
What are the areas in business ethics? Write a note of the same. (Dec 2022, 10 marks)
Answer:

Repeatedly Asked Questions
Question Frequency
1. Seven principles of public life 15 – June, 17 – June 2 Times
2. What are the areas in business ethics? Write a note of the same. 21 – Dec, 22 – Dec 2 Times
3. Improving ethical behaviour in business 18 – Dec, 22 – Dec 2 Times

Business Ethics And Emotional Intelligence CMA Inter Law, and Ethics Notes

1. Genesis of Ethics

  • The question of what is right and what is wrong gave birth to ethical and unethical codes.
  • The word “ethics” is derived from the Greek word “ethos” (character), which means “way of living” and from the Latin word “mores” (customs).
  • Ethics ¡s a branch of philosophy that is concerned with human conduct.
  • It studies what is morally right or wrong, just or unjust.
  • It defines what is good for the individual and for the society.
  • Ethics refers to well-based standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues.
  • It is related to issues of propriety, rightness, and wrongness.
  • What is wrong is unethical and what is right is ethical.
  • If it is ethical, it is right, proper fair, and just.
  • It is also defined as the science of the highest good.
  • Mackenzie defines ethics as, “the study of what is right or good in human conduct or “the science of the ideal involved in human life”.

Applied ethics is the practice of ethics that aims to guide the moral judgement governing the decisions we make in all areas of our lives.
Values are our standards of right and wrong.

2. Background to Ethics
Ethics is the area of philosophy concerned with the evaluation of human conduct.

3. Major branches of ethics

  • Metaethics
  • Political ethics
  • Normative ethics
  • Virtue ethics
  • Practical ethics
  • Rule-based ethics.

(a) Meta-Ethics concerned with meaning of philosophical language, thus focus is on the grounds used to justify moral judgments rather than on making moral judgments.

(b) Political Ethics Consists of:

  • examination of good society,
  • the origins,
  • forms of political power i.e. Government.

(c) Normative Ethics:

  • It is a branch of philosophy.
  • concerned with developing theories that determine which human actions are right or wrong.
  • It is evaluative and constructive.
  • It is not descriptive.
  • e.g. – deontological ethics, utilitarian ethics, virtue ethics etc.

(d) Virtue Ethics:

  • Viewed as a separate branch.
  • It is certainly normative
  • It is concerned with possessing moral traits and living a good life.

(e) Rule-based Ethics:
It seeks to evaluate moral considerations.
Rules are divided into 2 parts:

  1. Consequentialism (or teleology) ⇒ under this it is claimed that action should be judged according to their consequences.
  2. Deontology under this it is assumed that rightness or wrongness is a judgment not dependent on consequences but on the intrinsic goodness of action itself.

(f) Practical(or applied) Ethics:

  • Applies ethical principles and theories to practical disciplines.
  • Its purpose is to give guidance on a specific issue.
  • e.g. – medical ethics, business ethics, environment ethics etc.

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

4. History of Business Ethics
Business Ethics has existed as an academic field since 1970s. Social responsibility has been described as being pyramid with four types of responsibilities:

  • Philanthropic (top-level)
  • Ethical
  • Legal
  • Economic (bottom level)

Business ethics is different from social ethics in following three ways:

  1. Business ethics provide ethical framework for evaluating business.
  2. It allows critical analysis of business and development of new and different methods.
  3. It fuses personal and social responsibility together.
  4. Thus, business ethics is broader than social ethics and is more systematic and constructive.

5. Business Ethics
It refers to application of ethics in business.

It facilitates and promotes:

  • good to society,
  • improves profitability,
  • fosters business relations and
  • employee productivity.
  • Generally it means, coming to know what is right or wrong in the workplace and doing what’s right.
  • Unethical practices are creating problems to businessmen and business units.
  • Business ethics are developed by the passage of time and custom.
  • If a custom is adopted and accepted by businessman and public, that custom will become an ethic.
  • It is applicable to every type of business.
  • It means the behaviour of a businessman while conducting a business, by observing moralîty in his business activities.
    According to Wheeler,
  • “Business Ethics is an art and science for maintaining harmonious relationship with society, its various groups and institutions as well as recognizing the moral responsibility for the rigtness and wrongness of business conduct.

According to Rogene A. Buchholz,

  • “Business Ethics refers to right or wrong behaviour in business decisions.
  • Business Ethics or Ethical Standards are the principles, practices, and philosophies that guide the business people.
  • It can be said to begin where the law ends.
  • It is primarily concerned with those issues that are not covered by law, or where there is no definite consensus on whether something is right or wrong.

6. Importance of Business Ethics

  • Good business ethics promote good business.
  • It helps to understand why power and influence of business in society is increasing, what are is implications and how this issues is to be addressed.

It provides a major contribution to our societies like:

  • producing the products
  • providing services
  • providing employment
  • paying taxes, etc.
  • It helps to create mutual trust and confidence in relationships by helping us understand various causes and consequences of business malpractices.
  • It provides means to appreciate and understand the shareholder’s demand more clearly through which they are able to meet ethical expectations more effectively.
  • It helps to improve ethical decision-making by providing managers with appropriate knowledge and tools.
  • It helps the business to prosper by following good ethical standards.
  • It provides us with the ability to assess the benefits and problems associated with different ways of managing ethics.
  • Good ethical standards helps the business to face challenges.

7. Characteristics of Business Ethics

  • They are the principles, which govern and guide business people to perform business functions and in that sense, it is a discipline.
  • It is both a science and an art.
  • It continuously test the rules and moral standards.
  • It is dynamic in nature.
  • It is based on theological principles like human welfare, good behaviour etc.
  • It is based on reality and social customs prevailing in business environment.
  • It studies activities, decisions and behaviour that are related to human beings.
  • It has a universal application because business exists all over the world.
  • Many ethical principles develop personal dignity.
  • It keeps harmony between different roles of businessmen and every citizen, customer, owner, and investors.

8. Principles of Business Ethics

  • Various principles are developed by Canif, J.S. Nul, Herbert Spencer, Plato, Thomas Garret, Woodrad, Wilson etc.
  • Not to do any evil: Doing evil to oneself or to another, either as a means or an end, is unethical. Co-operation with others: Business should help others only if, other deserves help.
  • Equivalent price: As per Wilson,
  • People are entitled to get goods equivalent to value of money one pays”.
  • Human dignity: Man should not be treated as a factor of production. Human dignity should be maintained.

Sacredness of means and ends: Means and techniques adopted to serve the business ends must be sacred and pure. Thus, good end should not be attained with wrong means even if beneficial to society.

Principle of proportionality: One should make a proper judgment before doing anything so that others do not suffer from any loss or risk of evil.

Publicity: As per W. Wilson,

  • “Anything that is being done or to be done should be brought to the knowledge of everyone”. This way no unethical act can be done.
  • Universal value: Business should be conducted on the basis of universal values.
  • Non co-operation in evils: Business should not cooperate with anyone in any evil acts.

Nonviolence: If businessman hurts the interest or rights of the society or exploits its consumers by overlooking their interests, it is equivalent to violence and unethical act.

9. Elements of Business Ethics Key elements:

  • Formal code of conduct
  • Ethics committee
  • Ethical communication
  • An ethic office with ethical officers
  • Ethics Training Programme
  • A disciplinary system
  • Establishing an ombudsperson
  • Monitoring.

10. Ethics vs Morals
Gene rally, ethics and morals are used as synonyms. There is nothing wrong in such a usage, for after all, the meaning of all words depends on their common usage. However, in formal study, we need to understand the meaning of the terms in a qualified way so as to make our subject of study precise and well-defined.

11. Value-free Ethics
It would seem that business ¡s an ethically neutral or value-free activity. In other words, the only value business ¡s concerned with is the monetary value. It is not ¡n the interest of business to mix ethical values. An ancient Arabic wisdom states, ‘Live together like brothers and do business like strangers.’

Business should be kept free from other social relationships and obligations. The only successful relationship that exists in business is that of a vendor and a customer.

It is also said that ‘for the merchant, even honesty is a financial speculation.’ Indeed, for a businessman every factor in the business is measured in terms of money. The volatility that we see in the stock market is a clear example of the speculative nature of business, which is directly proportional to the prevailing attitude of the people.

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

12. Concept of Value-free Ethics
The concept of ‘value-free’ business ethics appears to be quite appealing to businessmen. It as though it may be pursued devoid of all rules within a social vacuum. The concept of value-free ethics found application in economics in a rather ironical fashion. Ludwig von Mises, known as the father of the Austrian School of Economics, proposed the pure theory of economics, stating that economic concepts are apriori, that is, they are not dependent on experience but are purely virtual concepts. The concept of choice, for instance, is a pure concept.

It is immaterial whether one chooses water or wine, but the concept in itself is free of such particular elements. Hence, choice is value-free (wertfrei). Applied to ethics, it would mean that we should be able to study the principles of this discipline, such as goodness, truth, justice, honour, etc. in their pure form.

13. Ethics as a Principle
We have established that social evolution has developed dot mite principles of civic behaviour, which have attained the status of principles. By principle, we understand that something proceeds and depends on it for its cause. For instance, when one kicks a football, force is the principle that propels it into motion and the ball remains ¡n motion till the force lasts. In other words, the physical world functions strictly according to the laws of physics. It is expected that people also submit their behavior both in thoughts and in actions, to these principles.

14. Business Ethics as Professional Code
Business ethics is not a pure science but a professional practice, and society expects businessmen to abide by the principles of a civil society, just as it expects professionals from other areas such as medicine, bureaucracy, politics, and sports to do so. Thus, instead of a value-free business ethics, we have a value-loaded or value-based business practice.

15. The Seven Principles of Public Life

  • Selflessness: Holders of public office should make decisions solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves, their family, or their friends.
  • Integrity: Holders of public office should not place themselves under any financial or other obligation to outside individuals or organizations that might influence them in the performance or their official duties.
  • Objective: In carrying out public business including making public appointments, awarding contracts, or recommending individuals to rewards and benefits, holders of public office should make choices on merit.
  • accountability: Holders of public office are accountable for the decisions and actions to the public and must submit themselves whatever scrutiny is appropriate to their office.
  • Openness: Holders of public office should be as open as possible about all the decisions and actions that they take. They should give reasons for their decisions and restrict information only when the wide public interest clearly demands.
  • Honesty: Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve an conflicts arising in a way that protects the public interest.
  • Leadership: Holders of public office should promote and support these principles by sound leadership and prove to be an example in whatever they perform.

16. The Relationship between Ethics and Law
Ethics and Law – The Interface: Law is essentially an institutionalization or codification of ethics into specific social rules, regulations, and prescriptions. Perhaps the best way of visualizing ethics and law is in terms of two intersecting drmàins as depicted Thus, in one sense, business ethics can be said to begin where law ends. Business ethics is primarily concerned with those issues not completely covered by law, or where there is no definite consensus on whether something is right or wrong. Hence, it is often remarked, that business ethics is about the “grey areas of business where values are in conflict.

17. Ethics in Business
“Business ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed”
(i) Business for Profit: It would seem that business ethics does not come within the confines of ethics. As Adam Smith (1779), the father of modern economics says: ‘People of the same trade seldom come together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’ People find mechanisms to generate the highest possible returns when conducting business.

(ii) Business and Ethics: No matter how hard one tries, it is impossible to separate life from business. For a businessman, business is life. Mahatma Gandhi (1948) said, ‘It is difficult but not impossible to conduct strictly honest business. What is true is that honesty is incompatible with amassing of large fortune.’ The business world is an important part of society, as it is concerned with the livelihoods of people.

(iii) Character of Business: ‘There are two fools in every market: one asks too little, one asks too much,’ so says a Russian proverb. Is there a concept called balanced profit? The business in a society reflects its character Transparency International, in its corruption perception index, gives Finland, Denmark, and New Zealand the first place with 9.4 points. India is way down at 72, with just 3.5 points on a scale of 10.

We may gloat over, our cultural heritage and religious and ethical glories of the past, but we stand exposed before the world as a corrupt society.

Professional Ethics: The aforementioned discussion may be understood through the following distinctions: ethics and business ethics. We have studied the distinction between normative and practical ethics and have established that business ethics comes under practical ethics and is applied to a particular activity. Just as a society functions on the social codes of conduct and a country is governed by its constitution, a business is run on corporate codes. In other words, there is a professional code of conduct for any business.

18. Need for Business Ethics
1. Stop business malpractices: Sorne unscrupulous businessmen do business malpractices by indulging in unfair trade practices like black-marketing, artificial high pricing, adulteration, cheating in weights and measures, selling of duplicate and harmful products, hoarding, false claims or representations about their products etc.

2. Improve customers’ confidence: Business ethics are needed to improve the customers’ confidence about the quality, quantity, price, etc. of the products. The customers have more trust and confidence in the businessmen who follow ethical rules. They feel that such businessmen will not cheat them.

3. Survival of business: Business ethics are mandatory for the survival of business. The businessmen who do not follow it will have short-term success, but they will fail in the long run. This is because they can cheat a consumer only once. After that, the consumer will not buy goods from that businessman.

4. Safeguarding consumers’ rights: Consumer sovereignty cannot be either ruled out or denied. Business can survive so long it enjoys the patronage of consumer. The consumer has many rights such as right to health and safety, right to be informed, right to choose, right to be heard, right to redress, etc.

Business Ethics And Emotional Intelligence - CMA Inter Law and Ethics Study Material

5. Protecting employees and shareholders: Business ethics are required to protect the interest of employees, shareholders, competitors, dealers, suppliers, etc. It protects them from exploitation through unfair trade practices.

6. Develop good relations: Business ethics are important to develop good and friendly relations between business and society. This will result in a regular supply of good quality goods and services at low prices to the society. It will also result in profits for the businesses thereby resulting in growth of economy.

7. Creates good image: Business ethics create a good image for the business and businessmen. If the businessmen follow all ethical rules, then they will be fully accepted and not criticised by the society.

8. Smooth functioning: If the business follows all the business ethics, then the employees, shareholders, consumers, dealers, and suppliers will all be happy. So they will give full cooperation to the business.

9. Consumer movement: Business ethics are gaining importance because of the growth of the consumer movement. Gone are the days when the consumer can be taken for ride by the unscrupulous business by their false propaganda and false claims, unfair trade practices.

10. Consumer satisfaction: Today, the consumer is the king of the market. Any business simply cannot survive without the consumers. Therefore, the main aim or objective of business is consumer
satisfaction.

11. Importance of labour: Labour, i.e. employees or workers play a very crucial role in the success of a business. Therefore, business must use business ethics while dealing with the employees. The business must give them proper wages and salaries and provide them with better working conditions.

12. Healthy Competition: The business must use business ethics while dealing with the competitors. They must have healthy competition with the competitors. Healthy competition brings about efficiency, breaks compliancy, and leads to optimal utilization of scarce resources, hence is always welcome.

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