Viva-Voce Questions ACCOUNTANCY(858) Class-XII

Transcription

1 Question.1 What is the basic function of financial accounting? To record all business transactions. Viva-Voce Questions ACCOUNTANCY(858) Class-XII Question. 2 What is the last step of accounting as a process of information? Communication of information is the last step of accounting. Question. 3 Who are the internal users of accounting information? Owners and Management are the internal users of accounting. Question. 4 What is the first and last step of an accounting process? Identifying the transactions and communicating the results. Question. 5 What is the basic accounting equation? Basic accounting equation is: Assets = Capital + Liabilities. Question. 6 What is Money Measurement Concept? Transactions expressed in terms of money are recorded in accounts. Question. 7 Closing stock is valued at lower of cost price or market price. Which convention of accounting is applied here? Convention of Conservatism. Question. 8 What do you mean by Accrual Basis of Accounting? Under this system, incomes are recorded when they are earned or accrued, irrespective of the fact whether cash is received or not. Question. 9 Why is the Cash book called a journal as well as ledger? All transactions are primarily recorded in the cash book and therefore, it is called a journal. Cash book is just similar to a cash account and therefore, it is called a ledger. Question. 10 Give two examples of Tangible Assets. Machinery and Stock are the examples of tangible assets. Question. 11 Give two examples of Current Liabilities. Two examples of current liabilities are: Creditors and Bills Payable.

2 Question. 12 Who are Debtors? Persons who owe to an enterprise an amount for buying goods on credit. Question. 13 What is Compound entry? Compound Entries : The entries in which there are at least two accounts are debited and at least one account is credited or vice versa. Question. 14 Define Double Entry System of book keeping. A scientific technique of accounting, according to which every transaction has two-fold aspects,debit and credit where the total of debits and credits are always equal. Question. 15 What is a Journal? Place where all business transactions are originally entered. Question. 16 Give three advantages of Journal. (a) It forms the basis for posting the entries into the ledger. (b) Provides information about business transactions chronologically. (c) Facilitates cross checking of accounts in case a Trial Balance disagrees. Question. 17 What are the three classes of accounts? (a) Personal Account (b) Real Account (c) Nominal Account. Question. 18 What do you mean by contra entry? Entry which includes both cash and bank and is entered in both cash and bank column in opposite sides of a cash book, is known as contra entry. Question. 19 What do you mean by contra entry in a cash book? Entries involving both Cash A/c and Bank A/c are called contra entries. Question. 20 Name the book that records credit purchases and credit sales. Purchase Book and Sales Book. Question. 21 What is a Trial Balance? Trial Balance is a statement which shows the abstract of the debit and the credit balances of Ledger Accounts. Question. 22 Is the preparation of the Trial Balance mandatory for a business? No, the preparation of the Trial Balance is not mandatory.

3 Question. 23 Which types of accounts are considered to prepare the Trial Balance? Personal, Real &Nominal accounts. Question. 24 A Ledger is also called the Book of Original entry. Is it True or False. False, a ledger is the book of Final entry. Question. 25 What do you mean by Journal Proper? Journal Proper is a book maintained to record transactions, which do not find place in special journals. Question. 26 Why there is no ledger posting done in case of a contra entry? There is no ledger posting required in case of a contra entry because double entry is completed in the Cash Book itself. Question. 27 Name the different types of special purpose subsidiary books. (a) Cash Book (b) Purchases Book (c) Sales Book (d) Purchases Return Book (e) Sales Return Book (f) Bills Receivable Book (g) Bills Payable Book. Question. 28 Define Long-term Liabilities with examples. Long-term Liabilities are those liabilities which are payable after a long period, generally after one year. Examples: Long-term loans, Debentures. Question. 29 Mention any two Qualitative Characteristics of Accounting Information 1. Reliability 2. Relevance 3. Understandability 4. Comparability. Question. 30 Give one difference between trade discount and cash discount. The purpose of trade discount is to persuade the buyer to buy more goods and cash discount is to encourage the debtors to pay the dues promptly. Question. 31 Explain the Accounting Entity Concept. According to this principle, business is treated as an entity, which is separate and distinct from its owner and transactions are recorded from the business point of view and not of the owner. Question. 32 What is meant by source document? Provides evidence of the transactions such as Cash memo, Invoice etc. Question. 33 State any two objectives of Trial Balance. Helps in ascertaining the arithmetical accuracy and locating errors.

4 Question. 34 Define Assets. Explain the types of assets. Asset enables a business enterprise to get cash or a benefit in future. Assets are of various types: Fixed Assets: Assets purchased for the purpose of producing goods or providing services and not for resale. Ex: land, building, machinery, etc. Current Assets: Assets which are meant for resale and can be converted into cash within one year. Ex: cash in hand, debtors, stock, etc. Tangible Assets: Assets which have physical existence, i.e., they can be seen and touched. Ex: cash, building, stock, etc. Intangible Assets: Assets which do not have physical existence, i.e., they cannot be seen and touched. Ex: patents, goodwill, etc. Liquid Assets: Assets which are either in the form of Cash or can be quickly converted into cash. Ex: cash, debtors, etc. Wasting Assets: Assets which are natural resources and consumed during the process of it's use. Ex: mines, quarries, etc. Fictitious Assets: Assets which cannot be realised in cash or no further benefit can be derived from these assets. Ex: Deferred Revenue Expenditure. Question. 35 Mention any three objectives of Financial Statement Analysis. Objectives or Purposes of Financial Statement Analysis To measure the Profitability or Earning Capacity of the business. To measure the Financial Strength of the business. To make Comparative Study within the firm and with other firms. To judge the Efficiency of Management. To measure the Short-term and Long-term Solvency of the business. Question. 36 Mention any three Limitations of Financial Statement Analysis. Limitation of Financial Statement Analysis Based on basic financial statement which themselves suffer from certain limitations. Ignores changes in price level. Affected by the personal ability and bias of the analyst. Lack of qualitative analysis as only those transaction and events are recorded which can be measured in terms of money. When different accounting policies are followed by the two firms then comparison between their financial statement becomes unreliable. Analysis of single year s financial statement have limited use. Also affected by the Window dressing

5 Question. 37 How the concept of Financial Analysis is important for Management, Investors, Creditors, Government, Employees & Customers? Significance or Importance of Financial Analysis : For Management : To know the profitability, liquidity and solvency position to measure the effectiveness of its own decisions taken and to take corrective measure in future. For Investors : Investors want to know the earning capacity and future growth prospects of the business which helps in assessing the safety of their investment and reasonable return. For Creditors : Short-term creditors want to know the liquidity position of the business where as long term creditors want to know about the solvency position and ability to pay the interest consistently. For Govt. : To know the profitability position for taking taxation decision and to take decisions about the price regulations. For Employees : To know the progress of the company for assessing bonus, possible increase in wages and ensure stability of their jobs. For Customers : To know about the continuance of the business in future. Question. 38 What are the various tools used for analysis of Financial Statements? The various tools used for analysis of financial statements are : Comparative Statement : Financial Statements of two years are compared and changes in absolute terms and in percentage terms are calculated. It is a form of Horizontal Analysis. Common Size Statement : Figures of Financial Statements are converted in to percentage with respect to some common base. In Comparative Income Statement Sales/Revenue from Operations is taken as base where as in Comparative Balance Sheet Total assets or Total Equity and Liabilities are taken as base. Ratio Analysis : It is a technique of Study of relationship between various items in the Financial Statements. Cash Flow Statement : It is a statement that shows the inflow and outflow of cash and cash equivalents during a particular period which helps in finding out the causes of changes in cash position between the two balance sheet dates. Question. 39 What are the various types of Ratios? Financial ratios can be classified into 4 important categories. a) Liquidity Ratios : help the users in knowing the extent of short term debt paying ability of a firm. b) Solvency Ratios: analyse the long term debt paying capacity of a firm. c) Activity Ratios: help in commenting on the efficiency of the firm in managing its assets. d) Profitability Ratios : to measure the profitability of a business enterprise. Question. 40 State the significance of Current Ratio & Quick Ratio. Significance of Current Ratio: 1. It assesses the ability of a business to pay its short term liability on time. 2. Ideal Ratio : 2:1 is considered as best. Significance of Quick Ratio: 1. It assesses the ability of a business to pay it short term liability promptly. 2. Ideal Ratio : 1: 1 is considered as best.

6 Question. 41 Give the Formula for determining Working Capital of the business. Working Capital = Current Assets - Current Liabilities. Question. 42 What purpose is being served by Solvency Ratios? Specify any three Solvency Ratios. Solvency ratios convey an enterprise s ability to meet its long term obligations as and when they becomes due. Important solvency ratios are : 1. Debt Equity Ratio 2. Total Assets to Debt Ratio 3. Proprietary Ratio 4. Interest Coverage Ratio. Question. 43 State any one significance of Debt Equity Ratio & Total Assets to Debt Ratio. Give it s Formula also. 1. Debt Equity Ratio : It show relationship between Debts (Long term Liabilities and Equity (Shareholders Funds). Debts = Long-term borrowings + Long-term provisions Significance : 1. It assesses the long term soundness of financial position of a business. 2. Ideal Ratio : 2: 1 is considered as best but it should not be more than this. 2.Total Assets to Debt Ratio : It shows the relationship between Total Assets and Debts. Significance : 1. It measures the safety margin available to the providers of long term loans. 2. Ideal Ratio : No ideal ratio but a high ratio indicates higher safety to lenders and low ratio represents risky position. Question. 44 State the significance of Proprietary Ratio & Interest Coverage Ratio. Give it s Formula also. Proprietary Ratio : It shows the relationship between Proprietors Funds/ Shareholders Funds and Total Assets of the business. 1. Significance : It measures the proportion of total assets financed by the Proprietors of the business. It shows the safety margin available to the lenders of the business as they can ascertain the portion of the shareholders in the business. 2. Ideal Ratio: No ideal ratio but a high ratio indicates higher safety to lenders and low ratio represents risky position from lender s point of view. Interest Coverage Ratio : This ratio establishes relationship between the Net Profit before Interest & Tax and interest payable on long term debts (Fixed Interest Charges) 1. Objective & Significance- Objective is to ascertain the amount of profit available to cover the interest charge. It determines ease with which a company can pay interest expense on outstanding debt. 2. High Ratio is better for lenders as it indicates higher safety margin.

7 Question. 45 State the significance of Activity Ratios/Turnover Ratios/Performance Ratios. Give two examples also. Activity Ratios/Turnover Ratios/Performance Ratios These ratios measure the efficiency of asset management and measure the effectiveness with which a concern uses resources at its disposal. 1. Stock Turnover Ratio/Inventory Turnover Ratio 2. Debtor Turnover Ratio/Trade Receivables Turnover Ratio 3. Creditors Turnover Ratio/Trade Payables Turnover Ratio 4. Working Capital Turnover Ratio. Question. 46 State the significance of Inventory Turnover Ratios & Debtors Turnover Ratios. 1. Inventory Turnover Ratio : It is also called as Stock turnover ratio. This ratio is a relationship between the Cost of goods sold i.e, Cost of Revenue from Operations during a particular period of time and the Cost of average inventory during a particular period. It is expressed in number of times. This ratio indicates whether investment in stock is within proper limit or not. This shows how quickly inventory is sold. Generally higher ratio is considered better but very high ratio shows over trading and low ratio means stock is piled up or over investment in stock. 2. Debtors Turnover Ratio/Trade Receivables Turnover Ratio: It shows the relationship between Net Credit Sales i.e., Net Credit Revenue from Operations and Average Debtors/Average Trade Receivables (Debtors + Bills Receivables). This ratio is expressed in TIMES. 1. Net Credit Sales = Total Sales - Sales Return i.e., Returns inwards Cash Sales 2. Receivable are taken before deducting any Provision for Doubtful Debts. This ratio indicates the number of times the trade receivables are turned in relation to credit sales over a year. 3. This shows how quickly cash is realized from trade receivables. Generally higher is the ratio, the more efficient is the management of the trade receivables. Question. 47 State the significance of Creditors Turnover Ratios & Working Capital Turnover Ratios. Creditors Turnover Ratio/Trade Payable Turnover Ratio: It show the relationship between Net Credit Purchases and Average Creditors/Average Trade Payables (Creditors + Bills Payable). This ratio is expressed in TIMES. 1. Net Credit Purchases = Total Purchases Purchases Return/Returns Outwards - Cash Purchases 2. This ratio indicates the number of times the Trade Payables are turned over in relation to credit purchases over a year. 3. This shows how quickly cash is paid to Trade Payables. Generally lower ratio indicates that more credits are available for a longer period.

8 Working Capital Turnover Ratio : It establishes the relationship between Net Working Capital and Revenue from Operations i.e., Net Sales. 1. Net Working Capital = Current Assets excluding Fictitious assets Current liabilities. 2. This ratio can also be calculated on the basis of the Cost of Revenue from Operations i.e., cost of Goods Sold. 3. This Ratio is Calculated in Times This ratio indicates the number of times the working capital has been turned over in relation to revenue from operations over a year. Generally a higher ratio indicates efficient use of working capital. Question. 48 Why are Profitability Ratios Calculated? Give three examples of it. State the Significance of Return on Capital Employed. These ratios are used to assess the profitability or earning capacity of the business. These ratios are very important as profitability is the measurement of the overall performance and efficiency of the management. The important Profitability ratios are: 1. Gross Profit Ratio 2. Operating Ratio 3. Operating Profit Ratio 4. Net Profit Ratio 5. Return on Investment or Return on Capital Employed. All Profitability ratios are shown in percentage form. Return on Investment or Return on Capital Employed: It shows the relationship between Net Profit before interest, Tax and Dividend and Capital Employed of the business. Important Points 1. This Ratio indicates the percentage of Net profits before interest, tax and dividend in relation to Capital Employed of the business. 2. This Ratio is considered as best measurement of the overall performance of the enterprise. 3. Generally a higher ratio indicates better profitability. Question. 49 State any one objective of calculating Gross Profit Ratio & Net Profit Ratio. Gross Profit Ratio : It shows the relationship between Gross Profits and Net Sales i.e., Net Revenue from Operations. Important Points 1. This Ratio indicates the margin of gross profits available on Revenue from Operations. 2. Generally a higher ratio indicates better profitability. Net Profit Ratio : It shows the relationship between Net Profits and Net Sales i.e., Net Revenue from Operations. Important Points 1. This ratio indicates the percentage of net profits in relation to Revenue from Operations. 2. Generally a higher ratio indicate better profitability.

9 Question. 50 State any one objective of calculating Operating Ratio & Operating Profit Ratio. Express the relationship between Operating Ratio & Operating Profit Ratio. Operating Ratio : It shows the relationship between Operating Costs and Net Sales i.e., Net Revenue from Operations. This ratio indicates the percentage of Operating costs to Revenue from Operations. Generally a lower ratio indicates better cost management and profitability. Operating Profit Ratio : It shows the relationship between Operating Profit and Net Sales i.e., Net Revenue from Operations. Important Points 2. Generally a higher ratio indicates better profitability. 3. Operating Ratio + Operating Profit Ratio = 1